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Monetary & Fiscal

Policies of INDIA
Somya Agrawal (09020541004)
Amish Daniel (09020541008)
Nikhil Girme (09020541022)
Priyesh Agrawal (09020541042)
Siddhartha Das (09020541047)
Sneha Bhadoria (09020541054)
Fiscal Policy???

 Fisc-> State Treasury


 Fiscal Policy-> use of


government finances
Objectives…………..

→To achieve macroeconomic


goals

→Relating to any typical


problem
Macroeconomic
Goals!!!
BUDGET

 “A budget is a detailed plan of


operations for some specific
future period”

 Components of budget
 Revenue receipts
 Capital receipts
 Revenue expenditure
 Capital expenditure
Revenue Receipts
Capital Receipts
Revenue Expenditure
Capital Expenditure
Instruments of Fiscal
Policies
Government Expenditure

 Government spending on the


purchase of goods & services.

 Payment
of wages and salaries of
government servants

 Public investment

 Transfer payments
Government Expenditure
Government Expenditure
Taxation

 Non quid pro quo transfer of


private
 income to public coffers by means
of taxes.

1.
 Direct taxes- Corporate tax, Div.
Distribution Tax, Personal Income
Tax, Fringe Benefit taxes, Banking
Cash Transaction Tax
2. Indirect taxes- Central Sales Tax,
Direct Tax
Indirect Tax
Tax Slabs(09-10)
Table : New Proposed Tax Slabs

Individua Tax Rate Existing Income Slab Proposed Income


ls Nil (Rs)
Up to Rs 1,60,000* Slab
Up to(Rs)
Rs 1,60,000*
10% 1,60,001 – 3,00,000 1,60,001-10,00,000
20% 3,00,001 – 5,00,000 10,00,001-25,00,000

30% Over 5,00,000 Over 25,00,000

* Minimum slab changes to Rs 1.9 lakhs for women and


Rs 2.4 lakhs for senior citizens
Taxation Contd…..

 TheTax system has been


modernized considerably.

 Eliminating exemptions and


loopholes for both direct and
indirect taxes would level the
playing field, reduce distortions
and make the system simpler for
both tax payers and the
administration.
Public Debt

 Internal borrowings
1.Borrowings from the public by means of
treasury bills and govt. bonds
2.Borrowings from the central bank
(monetized deficit financing)

 External borrowings
1.Foreign investments
2.International organizations like World
Bank & IMF
3.Market borrowings

Budgetary Surplus &
Deficit
 Early 1980s:net of depreciation
consistently negative.
 Late 1980s:large deficit averaging
about 8% of GDP
 Post liberalization: Fiscal deficit
decreased.
 LPG effect was till 1996-1997
 2001:Fiscal deficit increased to 10%
of GDP.

Budgetary Surplus &
Deficit
 2003:FRBM was adopted.
 FRBM improved the transparency in
budgetary policy.
 As a result fiscal deficit decreased to
3.7% of GDP.
 In 2007-2008 fiscal deficit was 2.7 %
 Shot up to 6 % in 2008-2009.

Fiscal Deficit(as % of
GDP)
Fiscal Deficit (in crores
of Rs.)
Fiscal Policy Overview
(2009-10)
 Budget 2008-09 presented in the
backdrop of impressive growth.
 Fiscal deficit 2009-10 estimated at 2.5
per cent of GDP
 After presentation of budget Indian
economy was hit by global crisis.
 Fiscal policy shifted from fuelling
growth to containing inflation, which
had reached 12.9 per cent in August,
2008.
 Stimulus package of Rs .1,50,320 crore
was provided
Tax Policy

 Customs:
1.Sharp reduction was effected in the import
duty rates of various food items.
2.Import duties on crude petroleum was
reduced to nil and on petrol and diesel
to 2.5% (earlier 7.5%).

 Excise:
 Reduction of 4 %points in the ad valorem
rates of excise duty on non-petroleum
items.

 Service tax:
1.Service Tax continued at 10%.
2.Tax base widened.
Government Borrowings,
Lending and Investments
 The gross borrowings: Rs 2,40,167
crore

 The net borrowings : Rs 1,68,710

 An Overdraft (OD) for 24 days daily
average of OD was Rs.11,233
crore.

 Government has set up National
Policy Evaluation

 Fiscal consolidation during the FRBM


act.

 2007-08:fiscal deficit was 2.7%.

 Increasein fiscal deficit due to global
meltdown (10.3% of GDP).

 Government steps helped reduce
inflation(7.8%).

 Indiastill growing at the rate of
6.7%(08-09)
Monetary Policy??

 The part of the economic policy which


regulates the level of money in the
economy in order to achieve certain
objectives.

 In INDIA,RBI controls the monetary


policy. It is announced twice a year,
through which RBI,regulate
1.Slack season April-September the price
stability
policy for the economy.
2.Busy season October-March

policy
Central Banks

In d ia R e se rve B a n k o f In d ia .

U.S.A. Federal Reserve bank.
U.K. Bank of England.
Pakistan Bank of Pakistan.
Establishment of RBI

Established in April 1935 with a share capital
of Rs. 5 crores.
Nationalized in the year 1949.
Initially established in Calcutta but
permanently moved to Mumbai in 1937.


Governor of RBI : D. Subbarao

Objectives of monetary
policy
 Maximum feasible output.
 High rate of growth.
 Growth in employment & income
 Price stability.
 Stability of Forex & national currency
 Inflation Control
 Greater equality in the distribution of income
and wealth.
 Healthy balance in balance of
payments(BOP).

Types of control
Quantitative control
Tools
 Open market operations:
 The open market operations is sale and
purchase of government securities and
Treasury Bills by the central bank of
the country.
 When the central bank decides to pump
money into circulation, it buys back the
government securities, bills and bonds.
 When it decides to reduce money in
circulation it sells the government
bonds and securities.
 The central bank carries out its open
market operations through the commercial
banks.
OMO ’ s Tools
Repo rate:

 A repurchase agreement or ready forward


deal is a secured short-term (usually 15
days) loan by one bank to another
against government securities.
 Legally, the borrower sells the securities to
the lending bank for cash, with the
stipulation that at the end of the
borrowing term, it will buy back the
securities at a slightly higher price, the
difference in price representing the
interest.

 Reverse repo rate is the rate that RBI
offers the banks for parking their funds
with it. Reverse repo operations suck
out liquidity from the system.

Bank Rate Policy
 Bank rate is the minimum rate at which the central
bank provides loans to the commercial banks. It is
also called the discount rate.

 Dear money policy:


 Bank rate inc interest rate inc borrowing
will be less profitable results contraction of
credit.

 Near money policy:


 Bank rate dec interest rate low borrowing
will be more profitable results expansion of
credit.


Trends of Bank Rate

In 1940 ’ s BR was at low 3 % and


remained unchanged till 1953 . In
1953 RBI adopted policy
controlled expansion BR raised
to 3 . 5 %. It reached at max . level
in 1991 to 12 %. Presently it is
Reserve Requirements
Changes:
 The central bank of a country is
empowered to determine within
statutory limits, the cash reserve
requirements of the commercial banks.

 Statutory
liquid ratio:
 Bank has to keep
portion of total deposits with itself in
liquid assets.
 Cash reserve ratio:
 The percentage of
bank’s deposits which they must keep
SLR Trend

It was 25% in
1949 after that it
increased
continuously
32%(1972)--- 35%
(1981)---36%(1984)---
38%(1988).
From 1997 it is
constant at 25%
CRR Trend
In beginning it
was 5% of demand
deposit & 2% of
time deposits.
Reached max. in
1991,92 after 1993
it followed
Narsimham report &
decreased.
But from dec.06 it
raised 7 times,
250bp to cool
credit growth &
supply.
Currently, it is
5 %
Qualitative Control Tools:
o Selective credit control
o
o They are distinguishable from quantitative
tools by the fact that they are directed
towards particular uses of credit and merely
to total volume outstanding.
o
Important selective control measures are:

 Rationing of credit.
 Changes in margin requirements.
 Moral suasion.
o
Credit Rationing
When there is a shortage of institutional credit
available for the business sector, the large and
financially strong sectors or industries tend to
capture the lion’s share in the total institutional
credit.
As a result the priority sectors and essential
industries are of necessary funds.

Below two measures are generally adopted:
Imposition of upper limits on the credit available
to large industries and firms
Charging a higher or progressive interest rate on
the bank loans beyond a certain limit.


Change in Lending Margins

§The banks provide loans only up to a certain
percentage of the value of the mortgaged property.
§
§The gap between the value of the mortgaged property
and amount advanced is called Lending Margin.
§
§The central bank is empowered to increase the
lending margin with a view to decrease the bank
credit.
Moral Suasion


The moral suasion is a method of persuading and
convincing the commercial banks to advance credit
in accordance with the directives of the central
bank in overall economic interest of the country.

Under this method the central bank writes letter
to hold meetings with the banks on money and
credit matters.
EXPANSIONARY MONETARY
POLICY
Problem: Recession and
unemployment
Measures: (1) Central bank buys
securities
through
open market operation
(2) It reduces
cash reserves ratio
(3) It lowers
the bank rate
 
Money
supply increases
 
Investment increases
 
CONTRACTIONARY MONETARY
POLICY
Problem: Inflation
Measures: (1) Central bank sells securities
through
open market operation
(2) It raises cash
reserve ratio
and
statutory liquidity
(3) It raises bank
rate
(4) It raises
maximum margin against
holding of
stocks of goods
Money supply
decreases
Interest rate
raises
 
Investment
expenditure declines
Recommendation of
Narshimham Committee
Nov.1991
SLR should not be used for directed investment
in PSUs. It should be lower down to minimum
limit of 25%

CRR should be lower than the present rate. As


an instrument it should be used less & Govt.
should depend upon OMOs.

Selective credit control should be slowly
phased out
§Prime lending rate of commercial bank should
be independent of RBI control
How Monetary Policy Controls Inflation?

CENTRAL BANK

SECURITIES AND TRESURY BILLSBANK RATE INC CASH RESERVE RATIOSTATUTORY LIQUID RATIO

RR
CASH

N C
REA RATE

SO
LD
SE

SE I
%
LEN

EA
DIN

INCR
G

COMMERCIAL BANKS

REDUCED BORROWING OF LOANS

REDUCE LIQUIDITY IN
CORPORATES MARKET INDIVIDUALS
Monetary Policy of India - Overview
The Monetary Policy aims to maintain price stability, full
employment and economic growth.

Emphasis on these objectives have been changing time to


time depending on prevailing circumstances.

For explanation of monetary policy, the whole period has


been divided into 4 sub periods:
a) Monetary policy of controlled expansion (1951 to
1972)
b) Monetary Policy during Pre Reform period (1972 to
1991)
c) Monetary Policy in the Post-Reforms (1991 to 1996)
d) Easing of Monetary policy since Nov 1996
Monetary policy of controlled expansion
(1951 to 1972)
To regulate the expansion of money supply and bank credit
to promote growth.
To restrict the excessive supply of credit to the private
sector so as to control inflationary pressures.

Following steps were taken:


1.Changes in Bank Rate from 3% in 1951 to 6% in 1965 and
it remained the same till 1971.
2.
3.Changes in SLR from 20% in 1956 to 28% in 1971.
4.
5.Select Credit Control: In order to reduce the credit or
bank loans against essential commodities, margin was
increased.
Monetary Policy during Pre Reform period
(1972 to 1991)
Also known as the Tight Monetary policy: Price
situation worsened during 1972 to 1974.

Following Monetary Policy was adopted in 70’s and


80’s which were mainly concerned with the task
neutralizing the impact of fiscal deficit and
inflationary pressure.

1)Changes in CRR to the maximum limit of 25%


2)Changes in SLR also to the maximum limit of
38.5%
Monetary Policy in the Post-Reforms –
1991 to 1996
The year 1991-1992 saw a fundamental change in the
institutional framework It had twin objectives which were
Price stability and economic growth.
1)Continuing the same maximum CRR and SLR of 25% and
38.5%, mopped up bank deposits to the extent of 63.5%
2)
2) In order to ensure profitability of banks, Monetary
Reforms Committee headed by late Prof. S Chakravarty,
recommended raising of interest rate on Government
Securities which activated Open Market Operations (OMO).

3) Bank rate was raised from 10% in Apr 1991 to 12% in


Oct 1991 to control the inflationary pressures.
Easing of Monetary policy since Nov
1996:
In 1996-97, the rate of inflation sharply declined. In the
later half 1996-97, industrial recession gripped the
Indian economy. To encourage the economic growth and to
tackle the recessionary trend, the RBI eased its monetary
policy.

1.Introduction of Repo rate. Repo rate increased from 3%


in 1998 to 6.5% in 2005. This instrument was
consistently used in the monitory policy as a result
of rapid industrial growth during 2005-06.
2.
3.Reverse Repo rate –Through RRR, the RBI mops up
liquidity from the banking system. The Repo rate was
cut from 3.50% to 3.25%.
Easing of Monetary policy
since Nov 1996 : ( Contd )
3.
4.Flow of credit to Agriculture – The flow of credit to
agriculture has increased from 34,013 (9.2% of overall
credit) in 2008 to 52,742 (13% in overall credit) in
2009 – (Rs. in crore).
5.
6.Reduction in Cash Reserve Ratio – The CRR which was at
15% until 1995 gradually reduced to 5% in 2005. The
CRR remained unchanged in the current monetary policy.
7.
8.Lowering Bank rate – The Bank rate was gradually reduced
from 12% in 1997 to 6% in 2003.
RBI In Recession

CRR cut to 5%
Repo rate cut to 5.5%
Reverse Repo rate cut to 4%
Short-term lending and borrowing rates
cut
Slashed tax rates
Injection of Money
Opening up new borrowing channels for
banks
Government hikes its spending

Review of 2009/10 Monetary
Policy
§GDP growth at 7.9% for Q2 2009 which was predicted to be
6.3
§
§WPI-currently at 4.78%. Food Inflation touched 19%
because of easy monetary policies & decreasing
agricultural production
§Bank Rate has been retained unchanged at 6.0 per cent
§
§Repo Rate has been retained unchanged at 4.75 per cent
§
§Reverse Repo Rate has been retained unchanged at 3.25 per
cent
§
§CRR- 5 per cent & SLR to 25 per cent of their NDTL
§
§Planning to tighten liquidity scenario from January
IS CURVE
LM CURVE
IS/LM CURVE
Shifts in Curve

ØExpansionary Fiscal Policy - shifts IS right: will tend to increase


Y and also increase the interest rate (r)
Ø
ØContractionary Fiscal Policy - shifts IS left: will tend to reduce
both Y and r
Ø
ØExpansionary Monetary Policy - shifts LM right - reduces r
and increases Y
ØContractionary Monetary Policy - shifts LM left
increases r and reduces Y
Shifts in Curve

Thank
You…….

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