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    Monetary & Fiscal Policies: by Anupriya Sharma (1) Sohaila Sawhney (8) Pratiek Sahu (39) Arnab Roy (47) Kathiresan

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    Kenny Adams
    Monetary and fiscal policies are instruments used by governments to achieve economic objectives like price stability, full employment, and economic growth. Monetary policy operates through controlling money supply and interest rates using tools like repo rates, CRR, and open market operations. Fiscal policy involves manipulating government spending, taxation, and borrowing. Both policies impact aggregate demand and the economy. Currently, India aims for 8-10% GDP growth through expansionary policies while controlling inflation around 5-6%. The budget focuses on development programs and tax benefits for citizens.

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    Monetary & Fiscal Policies: by Anupriya Sharma (1) Sohaila Sawhney (8) Pratiek Sahu (39) Arnab Roy (47) Kathiresan

    Uploaded by

    Kenny Adams
    32 views29 pages
    Monetary and fiscal policies are instruments used by governments to achieve economic objectives like price stability, full employment, and economic growth. Monetary policy operates through controlling money supply and interest rates using tools like repo rates, CRR, and open market operations. Fiscal policy involves manipulating government spending, taxation, and borrowing. Both policies impact aggregate demand and the economy. Currently, India aims for 8-10% GDP growth through expansionary policies while controlling inflation around 5-6%. The budget focuses on development programs and tax benefits for citizens.

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    Monetary and fiscal policies are instruments used by governments to achieve economic objectives like price stability, full employment, and economic growth. Monetary policy operates through controlling money supply and interest rates using tools like repo rates, CRR, and open market operations. Fiscal policy involves manipulating government spending, taxation, and borrowing. Both policies impact aggregate demand and the economy. Currently, India aims for 8-10% GDP growth through expansionary policies while controlling inflation around 5-6%. The budget focuses on development programs and tax benefits for citizens.

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    32 views29 pages

    Monetary & Fiscal Policies: by Anupriya Sharma (1) Sohaila Sawhney (8) Pratiek Sahu (39) Arnab Roy (47) Kathiresan

    Uploaded by

    Kenny Adams
    Monetary and fiscal policies are instruments used by governments to achieve economic objectives like price stability, full employment, and economic growth. Monetary policy operates through controlling money supply and interest rates using tools like repo rates, CRR, and open market operations. Fiscal policy involves manipulating government spending, taxation, and borrowing. Both policies impact aggregate demand and the economy. Currently, India aims for 8-10% GDP growth through expansionary policies while controlling inflation around 5-6%. The budget focuses on development programs and tax benefits for citizens.

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    of 29

    MONETARY & FISCAL

    POLICIES
    By
    ANUPRIYA SHARMA(1)
    SOHAILA SAWHNEY(8)
    PRATIEK SAHU(39)
    ARNAB ROY(47)
    KATHIRESAN(48)
    ECONOMIC POLICY
    •Set of instruments used by the govt. to achieve its
    predetermined set of objectives.
    •It is the second best approach

    •To control market imperfection & Income

    distribution
    •Different kinds are :

    •Monetary Policy

    •Fiscal Policy
    Monetary Policy
     Monetary policy refers to the credit control
    measures adopted by the central bank of a country
    regarding the availability of money and cost of
    money to achieve macro-economic objectives.
     Monetary policy operates through varying the cost
    availability of credit. There variations affect the
    demand and supply of money in the economy.
    Objectives Of Monetary Policy
    1. Price stability
     Prevents unnecessary loss to some and undue

    advantage to others.
     Keeps the value of money stable, eliminates cyclical

    fluctuations in business
     Helps in reducing inequalities of income and wealth

     Attained by counter cyclic monetary policy


    2. Full Employment

     Not achieved due to deficiency in investment


     When ROI decreases, Investment increases and
    Saving decrease
     Now people spend more and consumes more,
    affecting increase in employment
     At full employment , Investment = Savings
    3. ECONOMIC GROWTH

     Raising the standard of living of the people and


    reducing inequalities of income distribution
     When per capita income of a country increases over
    a long period of time.
     Measured by GDP growth (8.8%)
     A growing economy produces more goods and
    services in each successive time period.
     Trade off between Full employment and Economic
    growth !
    4.External Economic Stability

     Also called Exchange rate stability.


     It is required so that:
     People don’t lose confidence in home currency
     To maintain Balance of payments
     Stabilization of Import and export rates
    Monetary policies and Money flow
     Contractionary monetary policy
     In case of inflation
     Government decrease liquidity

     Expansionary monetary policy


     In case of deflation
     Government increase liquidity
    Instruments of Monetary policy

     Tools with help of which government achieves its


    objectives of monetary policy.
     Two Types:
    1. Qualitative instruments
    2. Quantitative instruments
    1.QUALITATIVE INSTRUMENTS

     Margin requirements-
    A certain amount set as margin while giving loans
    Central bank increases it during inflation.
     Regulation of consumer credit
    -any transaction above 2 lakh monitored by govt.
     Rationing of credit
    -inorder to control credit
    -Has 4 variants
    Banks become cautious
     Direct actions
    -central bank initiates direct actions against commercial banks
    2.QUANTITATIVE INSTRUMENTS

     Bank Rate Policy


    -important instrument of credit control
    -minimum rate of interest
     Repo rate
    -rate at which other banks borrow money -
     Reverse Repo rate
    -rate at which RBI borrows money
     Open Market operations
    -buy or sell securities in the open market
     Changing CRR of banks
    -amount of funds banks keep with RBI
     Statutory Liquidity Ratio
    -amount a commercial bank needs to maintain in form of cash or gold.
    FISCAL
    POLICY
    •The pattern of resource allocation;
    •The distribution of income.

    INTRODUCTION

     In economics, fiscal policy is the use of government


    expenditure and revenue collection to influence the
    economy. Fiscal policy can be contrasted with the other
    main type of macroeconomic policy.
     Changes in the level and composition of taxation and
    government spending can impact on the following
    variables in the economy:
     Aggregate demand and the level of economic activity
     The pattern of resource allocation
     The distribution of income.
    TYPES OF FISCAL POLICY

     Automatic Stabilization
     Compensatory
     Discretionary
    INSTRUMENTS OF FISCAL POLICY

     Taxation
     Government Expenditure
     Public debt
    METHODS OF FISCAL POLICY

     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
     The benefit from printing money
     Borrowing money from the population or from abroad- A fiscal
    deficit is often funded by issuing bonds, like treasury bills or
    consol.
     Consumption of fiscal reserves- A fiscal surplus is often saved for
    future use, and may be invested in local (same currency) financial
    instruments, until needed
     Sale of fixed assets (e.g., land).
    EFFECTS OF FISCAL POLICY

     Governments use fiscal policy to influence the level of aggregate


    demand in the economy, in an effort to achieve economic objectives
    of price stability, full employment, and economic growth.
     When the government runs a budget deficit, funds will need to
    come from public borrowing (the issue of government bonds),
    overseas borrowing, or monetizing the debt.
      
     When government borrowing increases interest rates it attracts
    foreign capital from foreign investors.
     This can be used in times of recession or low economic activity as an
    essential tool for strong economic growth and working towards full
    employment

    .
    CURRENT
    SCENARIO
    MONETARY MEASURES

    Measures 2009-10 2010-11


    Bank rate 6.0% 6.0%
    Repo rate 4.75% 5.25%(with immediate
    effect)
    Reverse repo rate 3.25% 3.75%(with immediate
    effect)
    Cash reserve ratio 5.0-5.75% 6.0%(effective from April
    24)
    Statutory Liquidity ratio 25% 25%
    MID QUARTER REVIEW 2010-11
    KEY RATES JULY 3RD 2010 JULY 27TH 2010 SEPTEMBER 16TH
    2010
    CRR 6.0% 6.0% 6.0%
    REPO RATE 5.50% 5.75% 6.0%
    REVERSE REPO 4.00% 4.50% 5.00%
    RATE
    BANK RATE 6.00% 6.00% 6.00%
    STANCE OF MONETARY POLICY
    2009-10 2010-11
    GDP GROWTH 6.0% 8.0%
    PROJECTION
    INFLATION 4.0% 5.5%
    PROJECTION

    GDP GROWTH PROJECTION-RBI placed it with the assumption of a


    normal monsoon and good performance of the industrial and services
    sectors for both the years.
    INFLATION PROJECTION-Keeping in view domestic demand-supply
    balance and the global trend in commodity prices.
    MONETARY PROJECTIONS
    2009-10 2010-11
    MONEY SUPPLY GROWTH 17.0 % 17.0%
    SCHEDULED COMMERCIAL
    BANKS(SCB’S)
    a. Aggregate Deposits
    18.0% 18.0%
    b. Non-food credit
    20.0% 20.0%

    • Numbers are provided by RBI as indicative projections not targets.

    • Projections kept constant keeping in view need to balance resource demand


    to meet credit off-take by private sector & government borrowings.
    • The much awaited paper on bank licenses for the private companies will be
    placed on RBIs website by end July 2010.

    •Consumer finance loans may rise marginally but it will not affect much of the
    growth, as demand for consumer goods is very strong and may not be impacted
    by a 25 basis point hike in key policy rates.
    BUDGET 2010
     Additional Rs 1,65,000 Crores for bank re-
    capitalization
     Rs 3000 Crores for agricultural impetus
     Interest subvention of 2% to be extended for
    handicrafts and SMEs
     Economy can achieve GDP growth of 10%
     Interest subvention for housing loans up to 1 lacs
     Allocation to defence raised to Rs 1.47 lac Crs
     Hope to implement Direct Tax Code from April
    2011
    BUDGET 2009
     Fiscal deficit up from 6.2% to 6.8% of GDP
     ‘Aam admi’ is focus of all programmes and schemes .
     IT exemption limit raised; Rs 15,000 for Sr.citizens
     Limit raised by Rs 10,000 for tax payers, including women
     10% surcharge on personal income tax scrapped
     Fringe Benefit Tax abolished
     No change in corporate tax
     Commodity Transaction Tax abolished
     Minimum Alternate Tax hiked to 15% from 10%Rs 500 cr for
    rehabilitation of Sri Lankan Tamils
     Total expenditure crosses Rs 10 lakh crore in history of India for
    first time.
    (cont.)
     100% tax deduction on political donation
     Rs 100 cr one-time grant to expand banks in unbanked areas
     Rs 2,000 cr rural housing fund under National Housing Bank
     Full interest subsidy for students in select institutions. Five lakh
    students to benefit
     Rs 2,113 crore allocated for IITs and new IITs
     Rs 3472 cr for Commonwealth Games from Rs 2112 cr
     Income Tax returns to be made simpler
     Share of direct taxes in revenue increased to 56% in FY’09
    Budget 2009 Modifications

     According to Union Budget 2010-11, a few changes have been


    made in Income Tax structure. Here is a glimpse to new Income
    Tax calculation procedure :
     Modifications
     The relaxation limit under section 80C has been increased to Rs. 2
    lakhs.
     Surcharge has also been withdrawn
     Surcharge on companies has also been reduced to 7.5%.
     The presumptive tax limit has also been raised to Rs 60 lacs.
     Announcement of a deduction of Rs 20000 on investment in infra
    bonds
    NEW SLAB

    Income Tax Slab (in Rs.) Tax


    0 to 1,60,000(M) / 1,90,00(W) /
    2,40,000(S) No Tax

    1,60,001 to 5,00,000 10%


    5,00,001 to 8,00,000 20%

    Above 8,00,000 30%


    The above modifications will be
    applicable to Tax
     Reintroduces wealth tax and capital gains tax, albeit at lower levels
     Removal of most exemptions
     The code proposes to abolish STT.
     Capital gains on shares and securities to be taxed as income.
     Hike in tax deduction limit on savings to Rupees 3 lakhs
     Proposes highest tax rate of 30% on income of over Rs 25 lakh
     Tax breaks on housing to be removed
     Effective corporate tax rate at 25% with no surcharge or cess
     Business losses to be carried forward indefinitely
     No tax deduction on interest payable to banking firms and insurers
    THANK YOU

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