Presented

By

Aprajita Manindra Ridhika Samridhi Sukanya Shikha

Monetary Policy

Monetary Policy"A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy."

• According to Prof. Harry Johnson,

"A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy."According to A.G. Hart,

Rapid Economic Growth

Price Stability Exchange Rate

Stability Balance of

Payments (BOP) Equilibrium

Instruments of Monetary PolicyLiquidity Management

•Cash Reserve RatioThe Cash Reserve Ratio (CRR) refers to this liquid cash that banks have to maintain with the Reserve Bank of India (RBI) as a certain percentage of their demand and time liabilities.

•Open Market OperationsOpen market operations is the buying and selling of government bonds on the open market by a central bank. The usual aim of open market operations is to control the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply.

•Managing Credit ExpansionRBI also controls sector specific expansion of credit by specifying maximum amounts that can be lent, minimum margins to be maintained and higher risk weights.

Interest Rate Management

•Repo RateRepo (Repurchase) rate is the rate at which the RBI lends short-term money to the banks against securities. When the repo rate increases borrowing from RBI becomes more expensive.

•Bank rate or Discount RateIt is the rate at which the central bank rediscounts the bills of exchange presented by the commercial banks. However for all practical purposes bank rate is the rate which the central bank charges on loans and advances to the commercial banks.

•Rates paid on government securitiesRBI, as a banker to the government, helps government to borrow from the market by selling their securities. RBI also determines the timing, size, and rate paid on the issues.

Forex Management

•Market Intervention By intervening in the market by offering to buy any amount of foreign currency at a particular rate, RBI can prevent the sudden strengthening of rupee. RBI seeks to smoothen the movement of rates in either direction so than importers and exporters have time to adjust to the changing exchange rate scenario.

Other instrumenst are:•Moral suasion•Direct Control

RBI Monetary Policy Statement 2011-12

The new policy rates are as under:• Repo rate increased from 6.75% to 7.25%; and • Reverse Repo rate increased from 5.75% to 6.25%

GDP estimate:• Based on the assumption of a normal monsoon and crude oil

prices ,the projection of real GDP growth for fiscal year 2011-12 is estimated at around 8.0%.

• Also,probability range of 7.45% to 8.50%

• The Cash Reserve Ratio (CRR) is kept unchanged at 6.00%.

• Statutory Liquidity Ratio (SLR) has also been kept unchanged at its last reduced level of 24%

• Bank rate too has been left unchanged at 6.00%.

• However, interest rate on savings bank account is raised from 3.5% to 4.0%

Source:http://www.personalfn.com/

Fiscal PolicyThe word fisc means ‘state treasury’ and fiscal policy refers to policy concerning the use of ‘state treasury’ or the govt. finances to achieve the macroeconomic goals.

The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure.

To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue.

Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government.

Fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings.

Objectives of Fiscal Policy1. Development by effective Mobilisation of Resources The central and the state governments in India have used fiscal policy to mobilise

Resources by way of : Taxation, Public savings and Private savings.

2. Efficient allocation of Financial Resources The central and state governments have tried to make efficient allocation of

financial resources by spending on Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc.

3. Reduction in inequalities of Income and Wealth Fiscal policy aims at achieving equity or social justice by reducing income

inequalities among different sections of the society. Taxes are charged more on rich people as compared to lower income groups.

4. Price Stability and Control of Inflation Government always aims to control the inflation by Reducing fiscal deficits,

introducing tax savings schemes, Productive use of financial resources, etc.

5. Employment GenerationThe government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure , Lower taxes and duties on small-scale industrial (SSI) units, self employment scheme is taken to provide employment.

6. Balanced Regional DevelopmentThere are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Capital FormationThe objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth by encouraging savings and discouraging spending.

8. Foreign Exchange EarningsThe foreign exchange is earned by way of exports and saved by way of import substitutes.

Instruments of Fiscal policyThe two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact the following variables in the economy:

•Aggrgated demand and the level of economic activity;•The pattern of resource allocation;•The distribution of income.

STANCES OF FISCAL POLICYThe three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows:•A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.•An expansionary stance of fiscal policy involves government spending exceeding tax revenue.•A contractionary fiscal policy occurs when government spending is lower than tax revenue

Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as

well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways:

• Taxation- direct and indirect 1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal

Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise

duty.

• Seigniorage, the benefit from printing money• Public debtInternal borrowings1.Borrowings from the public by means of treasury bills and govt.

bonds2.Borrowings from the central bank (monetized deficit financing)External borrowings1. Foreign investments2.international organizations like World Bank & IMF3. market borrowings

• Consuming prior surpluses A fiscal surplus is often saved for future use, and may be invested in either

local currency or any financial instrument that may be traded later once resources are needed; notice, additional debt is not needed. For this to happen, the marginal propensity to save needs to be strictly positive.

• Sale of fixed asset(e.g., land).

HOWEVER IT HAS ITS OWN REPERCUSSIONS

With an attitude like With a feeling like

Fiscal Policy (2011-12)

TAXES • Standard rate of excise duty held at 10 percent; no change in CENVAT

rates • For senior citizens, the qualifying age reduced to 60 years and exemption

limit raised to Rs 2.50 lakh.• Peak rate of customs duty maintained at 10 per cent in view of the

global economic situation.• Service tax rate kept at 10 percent

GROWTH, INFLATION EXPECTATIONS • Economy expected to grow at 9 percent in 2012, plus or minus 0.25

percent • Inflation seen lower in the financial year 2011-12

REVENUE • Corporate tax receipts seen at 3.6 trillion rupees in 2011-12 • Tax-to-GDP ratio seen at 10.4 percent in 2011-12; seen at 10.8 percent

in 2012-13 • Customs revenue seen at 1.52 trillion rupees in 2011-12 • Service tax receipts seen at 820 billion rupees in 2011-12

POLICY REFORMS• FDI policy being liberalised. • Food security bill to be introduced this year • To permit SEBI registered mutual funds to access subscriptions from

foreign investments

DISINVESTMENT • Disinvestment in 2011-12 seen at 400 billion rupees • Government committed to retaining 51 percent stake in public sector

enterprises.

BORROWING• Net market borrowing for 2011-12 seen at 3.43 trillion rupees, down

from 3.45 trillion rupees in 2010-11 • Gross market borrowing for 2011-12 seen at 4.17 trillion rupees

NATIONAL INCOME

National Income can be defined as the labour and capital of a country acting on its natural resources that produces annually a certain net aggregate of commodities material an immaterial including services of all kinds.

National income is the money value of all the final goods and services produced in a country during a period of one year.

The level of national income determines the level of aggregate demand for goods and services and its distribution pattern determines the pattern of demand for goods and services.

GROSS DOMESTIC PRODUCT

Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period plus income earned locally by the foreigners minus incomes earned abroad by the nationals.

GDP per capita is often considered an indicator of a country's standard of living.

GROSS NATIONAL PRODUCT

Gross National Product (GNP) is the market value of all products and services produced in one year by labor and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership.

USE:- The United States used GNP as its primary measure of total economic activity before 1991, when it began to use GDP. In making the switch, the Bureau of Economic Analysis (BEA) noted both that GDP provided an easier comparison of other measures of economic activity in the United States and that "virtually all other countries have already adopted GDP as their primary measure of production."

NET NATIONAL PRODUCT

Net national product (NNP) is the total market value of all the final goods and services produced by residents in a country during a given time period (gross national product or GNP) minus depreciation. The net domestic product (NDP) is the equivalent application of NNP within macroeconomics, and NDP is equal to gross domestic product (GDP) minus depreciation: NDP = GDP – DEPRICIATION.

Depreciation (also known as consumption of fixed capital) measures the amount of GNP that must be spent on new capital goods to maintain the existing physical capital stock. NNP also equals : NNP = total compensation of employees + net indirect tax paid on

current production + operating surplus.