53321384 Monetary and Fiscal Policy Grp II Ppt

ECONOMICSCURRENT MONETARY AND FISCAL POLICYBY : CHARUL, KUSHALA,JOFFY, SHOBAL, SANGEETH

BASIC TERMINOLOGIES

MONETARY POLICY: It is the process by which the monetary

authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

These goals usually include stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy.

BASIC TERMINOLOGIES

FISCAL POLICY: In economics, fiscal policy is the use of

government expenditure and revenue collection to influence the economy

Fiscal policy refers to the use of the government budget to influence on economic activity like:

Aggregated demand The pattern of resource allocation; The distribution of income.

BASIC TERMINOLOGIES

CASH RESERVE RATIO: A reserve requirement (or cash reserve

ratio) is a state bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. It would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank.

Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the Central Bank

BASIC TERMINOLOGIES

STATUTORY LIQUIDITY RATIO: Statutory Liquidity Ratio is the amount of

liquid assets, such as cash, precious metals or other short-term securities, that a financial institution must maintain in its reserves.

The statutory liquidity ratio is a term most commonly used in India

BASIC TERMINOLOGIES

o LIQUIDITY ADJUSTMENT FACILITIES Liquidity adjustment facilities are used to aid

banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control.

Various banks will use eligible securities as collateral through a repo agreement and will use the funds to alleviate their short-term requirements, thus remaining stable.

This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.

BASIC TERMINOLOGIES

REPO RATE: The rate at which the RBI lends money to

commercial banks is called repo rate, a short term for repurchase agreement.

A reduction in the repo rate will help banks to get money at a cheaper rate.

When the repo rate increases borrowing from RBI becomes more expensive.

The repo rate in India is analogous (similar) to the discount rate in the US.

BASIC TERMINOLOGIES

REVERSE REPO RATE: It is the rate at which Reserve Bank of India

(RBI) borrows money from banks. Banks are always happy to lend money to

RBI since their money are in safe hands with a good interest.

An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.

MONETARY POLICY:

Bank Rate The Bank Rate has been retained at 6.0 per

cent. Repo Rate It has been decided to increase the repo rate

under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect.

Reverse Repo Rate It has been decided to increase the reverse

repo rate under the LAF by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect.

MONETARY POLICY:

Cash Reserve Ratio It has been decided to increase the cash

reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.

As a result of the increase in the CRR, about Rs. 12,500 crore of excess liquidity will be absorbed from the system.

MONETARY POLICY: Statutory Liquidity Ratio :

If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India.

The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day.

But, according to the Circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate...

MONETARY POLICY:

This restriction is imposed by RBI on banks to make funds available to customers on demand as soon as possible

Gold and Government Securities (or Gilts) are included along with cash because they are highly liquid and safe assets

The maximum limit of SLR is 40% and minimum limit of SLR is 24%.

At present, the minimum limit of Statutory Liquidity Ratio that can be set by the Reserve Bank is 25%.

MONETARY POLICY:

The expected outcomes of the actions are: Inflation will be contained and inflationary

expectations will be anchored. The recovery process will be sustained. Government borrowing requirements and the

private credit demand will be met. Policy instruments will be further aligned in a

manner consistent with the evolving state of the economy.

FISCAL POLICYTAX POLICY: INDIRECT TAX

Central Excise: To provide continued fillip to the

manufacturing sector and accelerate its recovery, the reduction in ad valorem excise duty rates to 8%, effected in two phases as part of the fiscal stimulus packages announced on 7.12.2008 and 24.2.2009, is being continued.

To mitigate the problem of credit accumulation excise duty rate has been increased from 4%to 8% in the following cases:-

FISCAL POLICYTAX POLICY:INDIRECT TAX

♦ Manmade filament yarn and fibre (polyester, nylon, acrylic and viscose)

♦ Textile intermediates (DMT, PTA, acrylonitrile and polyester chips)

♦ Natural fibres and yarns such as silk, wool, coconut etc on optional basis

♦ Spun yarn, woven man made or blended fabrics, and industrial fabrics on optional basis


In order to converge towards a mean cenvat rate, excise duty rate has been increased from 4% to

8% on certain finished goods and consumer goods

To provide some relief to automobile manufacturers, who are careworn owing to falling demand in

domestic and export markets, the specific excise duty component on large cars and utility vehicles

of engine capacity 2000 cc and above has been reduced from Rs.20,000 to Rs.15,000.


Customs:

In the wake of global slowdown, to provide a level playing field to domestically produced goods against imports, the peak rate of customs duty on non-agricultural goods has been retained at 10%.

Customs duty concessions have been provided on specified inputs and capital goods for exporters in sectors such as leather, textiles, and synthetic footwear.


To promote indigenous manufacture of LCD televisions, customs duty has been reduced on ‘panels’, which is a primary cost-contributing component for LCD TVs.

To provide a level playing field to domestic manufacturers of set top boxes, customs duty exemption has been withdrawn, and 5% duty imposed.

To mobilize some revenues, the specific rates of Customs duty on gold and silver have been increased.


Service Tax:

To widen the tax base, service tax has been imposed on the following services:-

♦ Transportation of non-essential goods through railways.

♦ Transportation of specified goods through coastal shipping and inland shipping.

♦ Legal consulting, advice and technical assistance provided by a corporate law firm to a

corporate. ♦ Cosmetic or plastic surgery, excluding restorative

surgery The service tax rate is being continued at 10 per cent.

FISCAL POLICYTAX POLICY:DIRECT TAX

The medium term strategy for direct taxes is to consolidate the achievements of the past and accelerate this process of change. The policy proposals in the Union Budget 2009-10, are intended to achieve this objective.

The important policy initiatives are:- Partly neutralizing the erosion in the tax base

on account of various tax incentives by increasing the Minimum Alternate Tax (MAT) rate to 15 per cent from the existing level of 10 per cent. Also expanding the MAT base by plugging leakages on account of innovative accounting practices.


Further rationalization of the Personal Income Tax (PIT) rate structure by enhancing the threshold exemption limits and removing the surcharge on PIT

Introducing a new package of presumptive taxation to encourage voluntary compliance by small businesses

Reducing the distortionary impact of profit-linked tax incentives by introducing investment-linked tax incentives for specified new businesses by allowing full expensing for capital expenditure;


Rationalization of various tax incentives to ensure better targetting and also preventing any misuse

Removing uncertainty in tax liability of foreign Investors by providing for a fast-track alternate dispute resolution mechanism;

Streamlining the provisions relating to tax deduction at source for improving compliance and efficiency

Rationalizing the tax treatment of the New Pension System (NPS) for enabling the establishment of a much needed social security system in India


Enabling the tax administration to communicate with the taxpayers by making use of latest information technology tools;

Enhancing levels of transparency in the functioning of the tax administration by introducing the system of allotting and quoting a unique computer based Document Identification Number (DIN) in respect of all correspondence sent from or received by the Income-tax Department.

This will help in proper record management and in tracking taxpayer grievances.

These Initiatives will enable us to sustain the healthy buoyancy in direct taxes.

THANK-YOU

53321384 Monetary and Fiscal Policy Grp II Ppt

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