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Module 4 - Monetary and Fiscal Policy

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Module 4 - Monetary and Fiscal Policy

Uploaded by

krish vikram
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© © All Rights Reserved
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Economics

DR. BHUPESH CHINTAMANI


ASSISTANT PROFESSOR,
SYMBIOSIS LAW SCHOOL, PUNE

1
Monetary and Fiscal Policy

SESSION OUTLINE

➔Monetary Polic y
➔Monetary Polic y – Objective, Elements and Impor tance
➔Fiscal Polic y
➔Difference Between Fiscal Polic y and Monetary Polic y
➔Fiscal Polic y Objective and Impor tance
➔Limitation in Fiscal Polic y
Monetary Policy

 Monetary Measures
▪ Monetary Policy of India is formulated and executed by Reserve
Bank of India to achieve specific objectives. It refers to that policy
by which central bank of the country controls(i) the supply of
money, and (ii) cost of money or the rate of interest, with a view to
achieve particular objectives.
▪ In the words of D.C. Rowan, “The monetary policy is defined as
discretionary act undertaken by the authorities designed to
influence (a) the supply of money, (b) cost of money or rate of
interest, and (c) the availability of money for achieving specific
objective.”
▪ The main objectives of monetary policy are to achieve price
stability, financial stability and adequate availability of credit for
growth. 3
Monetary Policy

 Following are the main elements of the monetary policy


of India:
▪ It regulates the stocks and the growth rate of money supply.
▪ It regulates the entire banking system of the economy.
▪ It determines the allocation of loans among different sectors.
▪ It provides incentives to promote savings and to raise the savings-
income ratio.
▪ It ensures adequate availability of credit for growth and tries to
achieve price stability.

4
Monetary Policy

 Following are the main objectives of monetary policy:


▪ To Regulate Money Supply in the Economy
▪ To Attain Price Stability
▪ To promote Economic Growth
▪ To Promote saving and Investment
▪ To Control Business Cycles
▪ To Promote Exports and Substitute Imports
▪ To Manage Aggregate Demand
▪ To Ensure more Credit for Priority Sector
▪ To Promote Employment
▪ To Develop Infrastructure
▪ To Regulate and Expand Banking
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Central Bank Credit Control Objectives

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CENTRAL BANK CREDIT CONTROL
POLICIES TOOLS

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Central Bank Credit Control Objectives

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DIFFERENCE BETWEEN MONETARY AND
FISCAL POLICY

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DIFFERENCE BETWEEN MONETARY AND
FISCAL POLICY

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Fiscal Policy

▪ Fiscal policy is one of the important macro-economic policy


▪ 1. Stabilization of the rate of growth of an advanced country.
▪ 2. Profoundly affects national income, employment, output and prices
▪ Definition – “It is the conscious policy of a government so as to achieve
certain pre-determined socio-economic objectives with the help of
public revue, public expenditure and public debt”
▪ Two things are important i.e. Government Revenue and Government
Spending
▪ It can control inflation either through private spending by increasing the
taxes on private sector OR
▪ It can decreasing government expenditure or combining both the
elements
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Fiscal Policy

▪ Definition – According to Culbarston, “By fiscal policy we refer to


government actions affecting its receipts and expenditures which we
ordinarily taken as measured by the government’s receipts, its surplus or
deficit.”

▪ Definition – Arthur defines fiscal policy as “a policy under which the


government uses its expenditure and revenue programmes to produce
desirable effects and avoid undesirable effects on the national income,
production and employment.”

▪ Definition - Otto Eckstein defines fiscal policy as “changes in taxes


and expenditures which aim at short-run goals of full employment and
price-level stability.”
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Fiscal Policy

▪ Government spending on new goods and services directly adds to


aggregate demand and indirectly increases income through secondary
spending which takes place on account of the multiplier effect.

▪ Taxation, on the other hand, operates in reducing the level of private


spending (on both consumption and investment) by reducing the
disposable income and the resulting savings in the community.

▪ Under the budgetary phenomenon, public expenditure and revenue can


be combined in various ways to achieve a desired stimulating or
deflationary effect on aggregate demand.

13
Fiscal Policy

▪ Fiscal policy has a quantitative as well as a qualitative aspect. Changes in


tax rates, the structure of taxation, and its incidence, influence the volume
and direction of private spending in the economy.

▪ It was Keynes who popularized the interest in fiscal policy as a measure


attaining macro-economic goals like increasing the level of employment
and income in an economy.

▪ Prior to Keynes, the classical economists believed in the principle of sound


finance in which small and balanced budget was considered to be the ideal
one.

▪ Keynes, for the first time, stressed the need of State intervention in the
economic field and advocated for an unbalanced budget. 14
Fiscal Policy Objectives

 Following are main objectives of Fiscal Policy


▪ To maintain and achieve full employment.
▪ To stabilize the price level.
▪ To stabilize the growth rate of the economy.
▪ To maintain equilibrium in the balance of payments.
▪ To promote the economic development of underdeveloped countries
▪ An assessment of the requirement of the State’s finances
▪ Works as modalities of raising revenue and supervision and control
over the allocation of revenue and its efficient expenditure to realize
the objectives of the State.

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Fiscal Policy Measures for Inflation

 Following are the measures to control inflation though


fiscal policy:
▪ By reducing government spending on public works programme.
▪ Diverting the government expenditure to the production of consumer
goods and industries having short gestation period.
▪ Financing government spending on certain projects by taxes or
borrowings from public , instead of through deficit financing
▪ Raising the level of direct taxes and widening it’s coverage
▪ Reducing tariffs as much and as fast as possible to increase imports.
▪ Sale of the government debt to the public.
▪ Inducement to save
▪ Overvaluing domestic currency in terms of foreign currencies
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Balance of Payment (BOP)

 The balance of payments of a country is a systematic record of


all its economic transactions with the outside world in a given
year!

 It is a statistical record of the character and dimensions of the


country’s economic relationships with the rest of the world.

 According to Bo Sodersten, The balance of payments is merely a


way of listing receipts and payments in international transactions for
a country.
 B. J. Cohen says, “It shows the country’s trading position, changes
in its net position as foreign lender or borrower, and changes in its
official reser ve holding.” 17
Structure of Balance of Payment

 The balance of payments account of a country is constructed on the


principle of double-entry bookkeeping.

 Each transaction is entered on the credit and debit side of the


balance sheet. But balance of payments accounting differs from
business accounting in one respect.

 In business accounting, debits (-) are shown on the left side and
credits (+) on the right side of the balance sheet.

 But in balance of payments accounting, the practice is to show


credits on the left side and debits on the right side of the balance
sheet.
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Structure of Balance of Payment

 When a payment is received from a foreign country, it is a credit


transaction while payment to a foreign country is a debit transaction.

 The principal items shown on the Credit side (+) are expor ts of
goods and ser vices, unrequited (or transfer) receipts in the form of
gifts, grants, etc. from foreigners, borrowings from abroad,
investments by foreigners in the country, and official sale of reser ve
assets including gold to foreign countries and international agencies.

 The principal items on the Debit side (-) include impor ts of goods
and ser vices, transfer (or unrequited) payments to foreigners as gifts,
grants, etc., lending to foreign countries, investments by residents to
foreign countries, and official purchase of reser ve assets or gold from
foreign countries and international agencies. 19
Structure of Balance of Payment

20
Structure of Balance of Payment

21

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