Business Environment

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Presentation Transcript

Monetary & Fiscal Policy : 

Monetary & Fiscal Policy Module - 5 12/14/2008 1 manavazhaganr@bsnl.in

Monetary Policy : 

Monetary Policy Monetary policy is a policy statement through which the central bank ( RBI ) targets key set of indicators to ensure price stability in the economy. These indicators include Money supply ( M3) Interest rate Inflation This policy is announce d twice in a year during April & October Extent of Money: The central bank measures the extent of money & credit available in the economy using the indices like M0,M1,M2,M3. The sources of M3 are : Bank credits, Govt.’s currency liability to public , net foreign exchange reserves of banks. Expansion of Money Supply: Money supply in the economy will be increased by RBI through issue of currency, budgetary operations and borrowings by govt. from foreign countries. Growth in money supply should be more than the growth in real national income. If money supply is exorbitantly more will result in inflation. 12/14/2008 2 manavazhaganr@bsnl.in

Monetary Policy : 

Monetary Policy Contraction of Money: Unlimited supply of money results in hyper-inflation, which hits all sections of economy. Hence RBI use ‘Credit Control Measures’ to reduce the money supply. Credit Control Measures are: 1. General controls 2. Selective controls General controls are: Bank Rate, Cash Reserve Requirement , Statutory Liquidity Ratio , and Refinance policy. Open market Operations Special facility to some groups Liberalisation of Bill Market Scheme Selective Controls are: Insisting minimum margin for lending against certain securities Fixing ceiling on certain credits Charging discriminatory interest on certain credits Moral suasion Bank Rate: The rate at which RBI lends money to other banks . During Inflation time RBI will increase the bank rate . This will affect the borrowers. During the period of falling prices this rate will be reduced. Cash Reserve Requirement ( CRR ): All commercial banks have to keep certain percentage of demand & time deposits with RBI. This is called CRR. During Inflation time RBI will increase the CRR . This will reduce the fund available for issuing credit. During the period of falling prices this rate will be reduced. 12/14/2008 3 manavazhaganr@bsnl.in

Monetary Policy : 

Monetary Policy Statutory Liquidity Ratio ( SLR ): All commercial banks in addition to CRR have to keep certain percentage of demand & Time deposits with RBI in the form of liquid assets like Cash , Gold or approved securities. It will be increased to reduce the money supply & vice versa Present rate is 30% Refinance Policy: Based on the liquidity position of commercial banks RBI provides fund . This is used by RBI to control the credit issued by banks. Open market operations: Based on the money supply in the economy RBI will buy gold and securities from public to expand money supply and sells gold and securities to contract money supply. Bank Rate: The rate at which RBI lends money to other banks . During Inflation time RBI will increase the bank rate . This will affect the borrowers. During the period of falling prices this rate will be reduced. Cash Reserve Requirement ( CRR ): All commercial banks have to keep certain percentage of demand & time deposits with RBI. This is called CRR. During Inflation time RBI will increase the CRR . This will reduce the fund available for issuing credit. During the period of falling prices this rate will be reduced. Present rate is 9% 12/14/2008 4 manavazhaganr@bsnl.in

Monetary Policy : 

Monetary Policy Special facilities to some groups: RBI advise banks to liberally issue credit facility to Small scale industries, self employed etc. . This will increase money supply and vice versa to reduce the money supply Commercialisation of Bill Market Scheme : Under this commercial banks get additional fund from RBI to advance credit further. This will increase money supply. Moral Suasion: Under moral suasion RBI issues letters to banks to exercise control over credit or advance against particular commodity or unsecured advances to increase or decrease money supply Objectives of Monetary Policy: To reduce inflation by contracting money supply To print new currency with a view to reduce the trade deficit Boosting export to reduce huge external payment deficit. 12/14/2008 5 manavazhaganr@bsnl.in

Fiscal Policy : 

Fiscal Policy Fiscal policy is the policy of government concerned with raising of revenue through taxation and other means and deciding on the level and pattern of expenditure Objectives of Fiscal Policy: To accelerate rate of investment Achieving rapid economic development Achieving full employment Promoting foreign trade Establishing welfare state Fiscal policy is operated through Budget Fiscal policy also called ‘Budgetary Policy’ Instruments of Fiscal Policy Taxation Public Expenditure Public Debt Taxation: Direct Tax – Personal Income tax,Corporation tax,Inheritance tax,Wealth tax 2. Indirect tax – Excise duty, VAT, Customs duty,Sales tax To modify the revenue the govt will increase/Decrease tax rate or tax base 12/14/2008 6 manavazhaganr@bsnl.in

Fiscal Policy : 

Fiscal Policy Instruments of Fiscal Policy Taxation Public Expenditure Public Debt Public Expenditure: Rise in public expenditure will increase the standard of living Public expenditure is done through Budget The govt. will make following changes on Public expenditure Size of public expenditure Combination of expenditure Direction of expenditure Public Debt: 12/14/2008 7 manavazhaganr@bsnl.in

The Budget : 

The Budget Budget means an estimate of Revenue and Expenditure Importance: In India , the total budgetary expenditure of both Centre & States is 50% of GDP It accelerates economic development Improves production in private sector Improves income distribution Promote export & import substitution Union Budget- The anticipated revenue & expenditure of Central govt. It is presented to Parliament on the last day of February. All receipts & disbursements are kept under two headings namely Consolidated Fund and Public Account of India These two accounts are formed under Annual Appropriation Act. Consolidated Fund – It contains all revenues received, loans raised and repayment of loans by the central govt - No money can be withdrawn except under the authority of parliament - The estimate of expenditure from Consolidated Fund are place before Parliament - All withdrawals from this fund are passed as Finance Act seperately. Public Account – All the revenues not included in consolidated fund like deposits, remittances, service funds go in to this account. - To withdraw money approval of parliament is not required Contingency Fund – To meet unforseen expenditure , established under Article 267(I) of Constitution State Budget- The anticipated revenue & expenditure of State & UTs govt. Placed before Legislature at the begning of Financial year . It also contains Consolidated Fund, Public Account & Contingency Fund 12/14/2008 8 manavazhaganr@bsnl.in

The Budget : 

The Budget Sources of Union Revenue Income Tax Customs & Export Duties Corporation Tax Excise duties on tobacco & other goods manufactured in India Estate duty on property Taxes on Railway, air, Passenger goods Stamp duty on transactions in Stock exchange Taxes on sale or purchase of news paper & advertisement Tax not included in State list Sources of State Revenue Land revenue Tax on agriculture income Estate duty on agriculture land Taxes on land & buildings Taxes on liquor produced in India Taxes on entry of goods Tax on consumption or sale of electricity Tax on sale or purchase of goods except news paper Tax on advertisement other than news paper Tax on goods & passengers by road and inland water ways Tax on animal,boat,profession,vehicles,entertainment, gambling 12/14/2008 9 manavazhaganr@bsnl.in

The Budget : 

The Budget Finance Commissions: Under the Constitution of India Finance Commission has to be constituted every five years to make necessary recommendations to President on Modalities for distribution of tax between centre and state and among states Principle for payment of Grant-in-aids to states Recommendation on continuation or not of the agreements between Centre & State Recommend on any other isue referred to it. 12/14/2008 10 manavazhaganr@bsnl.in

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