fiscal and monetary policy of india
TRANSCRIPT
Monetary & Fiscal Policies of INDIA
Somya Agrawal (09020541004)Amish Daniel (09020541008)Nikhil Girme (09020541022)Priyesh Agrawal (09020541042)Siddhartha Das (09020541047)Sneha Bhadoria (09020541054)
Fiscal Policy???
Fisc-> State Treasury
Fiscal Policy-> use of government finances
Objectives…………..
→ To achieve macroeconomic goals
→ Relating to any typical problem
Macroeconomic Goals!!!
Economic Growth
Employment
Stabilization
Economic stability
Price Stability
BUDGET
“A budget is a detailed plan of operations for some specific future period”
Components of budget Revenue receipts Capital receipts Revenue expenditure Capital expenditure
Revenue Receipts
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a
2008-09 2008-090
100000
200000
300000
400000
500000
600000
700000
Revenue receipts
Revenue receipts
Capital Receipts
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a
2008-09 2008-090
50000
100000
150000
200000
250000
300000
350000
400000
Capital Receipts
Capital Receipts
Revenue Expenditure
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a
2008-09 2008-090
100000
200000
300000
400000
500000
600000
700000
800000
900000
Revenue Expenditure
Revenue Expenditure
Capital Expenditure
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a
2008-09 2008-090
20000
40000
60000
80000
100000
120000
140000
Capital Expenditure
Capital Expenditure
Instruments of Fiscal Policies
Budgetary surplus and
deficit
Government expenditure
Taxation
Public Debt
Government Expenditure
Government spending on the purchase of goods & services.
Payment of wages and salaries of government servants
Public investment
Transfer payments
Government Expenditure
Government Expenditure
Taxation
Non quid pro quo transfer of private income to public coffers by means of taxes.
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.
Direct Tax
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-090
50000
100000
150000
200000
250000
300000
350000
400000
Direct Tax
Direct Tax
Indirect Tax
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-090
50000
100000
150000
200000
250000
300000
350000
Indirect Tax
Indirect Tax
Tax Slabs(09-10)
Table : New Proposed Tax Slabs
Individuals Tax Rate
Existing Income Slab (Rs)
Proposed Income Slab (Rs)
Nil Up to Rs 1,60,000* Up to Rs 1,60,000*
10% 1,60,001 – 3,00,000 1,60,001-10,00,000
20% 3,00,001 – 5,00,000 10,00,001-25,00,000
30% Over 5,00,000 Over 25,00,000* Minimum slab changes to Rs 1.9 lakhs for women and Rs 2.4 lakhs for senior citizens
Taxation Contd…..
The Tax system has been modernized considerably.
Eliminating exemptions and loopholes for both direct and indirect taxes would level the playing field, reduce distortions and make the system simpler for both tax payers and the administration.
Public Debt
Internal borrowings 1. Borrowings from the public by means of
treasury bills and govt. bonds2. Borrowings from the central bank
(monetized deficit financing)
External borrowings 1. Foreign investments2. International organizations like
World Bank & IMF3. Market borrowings
Budgetary Surplus & Deficit
Early 1980s:net of depreciation consistently negative.
Late 1980s:large deficit averaging about 8% of GDP
Post liberalization: Fiscal deficit decreased.
LPG effect was till 1996-1997 2001:Fiscal deficit increased to 10%
of GDP.
Budgetary Surplus & Deficit
2003:FRBM was adopted. FRBM improved the transparency in
budgetary policy. As a result fiscal deficit decreased to
3.7% of GDP. In 2007-2008 fiscal deficit was 2.7 % Shot up to 6 % in 2008-2009.
Fiscal Deficit(as % of GDP)
Fiscal Deficit (in crores of Rs.)
1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-090
50000
100000
150000
200000
250000
300000
350000
Fiscal Deficit
Fiscal Deficit
Fiscal Policy Overview (2009-10) Budget 2008-09 presented in the
backdrop of impressive growth. Fiscal deficit 2009-10 estimated at 2.5
per cent of GDP After presentation of budget Indian
economy was hit by global crisis. Fiscal policy shifted from fuelling growth
to containing inflation, which had reached 12.9 per cent in August, 2008.
Stimulus package of Rs .1,50,320 crore was provided
Tax Policy
Customs:1. Sharp reduction was effected in the import duty
rates of various food items.2. Import duties on crude petroleum was reduced to
nil and on petrol and diesel to 2.5% (earlier 7.5%).
Excise:Reduction of 4 %points in the ad valorem rates of excise duty on non-petroleum items.
Service tax:1. Service Tax continued at 10%.2. Tax base widened.
Government Borrowings, Lending and Investments
The gross borrowings: Rs 2,40,167 crore
The net borrowings : Rs 1,68,710
An Overdraft (OD) for 24 days daily average of OD was Rs.11,233 crore.
Government has set up National Investment fund
Policy Evaluation
Fiscal consolidation during the FRBM act.
2007-08:fiscal deficit was 2.7%.
Increase in fiscal deficit due to global meltdown (10.3% of GDP).
Government steps helped reduce inflation(7.8%).
India still growing at the rate of 6.7%(08-09)
Monetary Policy??
The part of the economic policy which regulates the level of money in the economy in order to achieve certain objectives.
In INDIA,RBI controls the monetary policy. It is announced twice a year, through which RBI,regulate the price stability for the economy.
1.Slack season policy
April-September
2.Busy season policy
October-March
Central Banks
India Reserve Bank of India.
U.S.A. Federal Reserve bank.
U.K. Bank of England.
Pakistan Bank of Pakistan.
Establishment of RBI
Established in April 1935 with a share capital of Rs. 5 crores.
Nationalized in the year 1949. Initially established in Calcutta but
permanently moved to Mumbai in 1937.
Governor of RBI : D. Subbarao
Objectives of monetary policy
Maximum feasible output. High rate of growth. Growth in employment & income Price stability. Stability of Forex & national currency Inflation Control Greater equality in the distribution of income
and wealth. Healthy balance in balance of payments(BOP).
Types of control
MONETARYPOLICY
QUALITATIVECONTROL
QUANTITATIVE
CONTROL
Quantitative control Tools
Open market operations: The open market operations is sale and purchase of
government securities and Treasury Bills by the central bank of the country.
When the central bank decides to pump money into circulation, it buys back the government securities, bills and bonds.
When it decides to reduce money in circulation it sells the government bonds and securities.
The central bank carries out its open market operations through the commercial banks.
2000
2002
2004
2006
2008
0
2
4
6
8
10
12
OMO’s Tools
Repo rate: A repurchase agreement or ready forward deal
is a secured short-term (usually 15 days) loan by one bank to another against government securities.
Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest.
Reverse repo rate is the rate that RBI offers the banks for parking their funds with it. Reverse repo operations suck out liquidity from the system.
Bank Rate Policy
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.
Dear money policy: Bank rate inc interest rate inc borrowing will
be less profitable results contraction of credit.
Near money policy: Bank rate dec interest rate low borrowing will
be more profitable results expansion of credit.
1940
1952
1953
1981
1990
1991
1997
2001
2007
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00 Chart Title
Years
in %
Trends of Bank Rate
In 1940’s BR was at low 3% and remained unchanged till 1953.In 1953 RBI adopted policy controlled expansion BR raised to 3.5%.It reached at max. level in 1991 to 12%. Presently it is 6 %
Reserve Requirements Changes:
The central bank of a country is empowered to determine within statutory limits, the cash reserve requirements of the commercial banks.
Statutory liquid ratio: Bank has to keep portion of
total deposits with itself in liquid assets. Cash reserve ratio: The percentage of bank’s
deposits which they must keep as cash with RBI.
SLR Trend
It was 25% in 1949 after that it increased continuously 32%(1972)--- 35% (1981)---36%(1984)--- 38%(1988). From 1997 it is
constant at 25%
CRR Trend
• In beginning it was 5% of demand deposit & 2% of time deposits.
•Reached max. in 1991,92 after 1993 it followed Narsimham report & decreased.
• But from dec.06 it raised 7 times, 250bp to cool credit growth & supply.
•Currently, it is 5 %
Qualitative Control Tools:
o Selective credit control
o They are distinguishable from quantitative tools by the fact that they are directed towards particular uses of credit and merely to total volume outstanding.
Important selective control measures are:• Rationing of credit.• Changes in margin requirements.• Moral suasion.
When there is a shortage of institutional credit available for the business sector, the large and financially strong sectors or industries tend to capture the lion’s share in the total institutional credit.
As a result the priority sectors and essential industries are of necessary funds.
Below two measures are generally adopted: Imposition of upper limits on the credit available to
large industries and firms Charging a higher or progressive interest rate on
the bank loans beyond a certain limit.
Credit Rationing
The banks provide loans only up to a certain percentage of the value of the mortgaged property.
The gap between the value of the mortgaged property and amount advanced is called Lending Margin.
The central bank is empowered to increase the lending margin with a view to decrease the bank credit.
Change in Lending Margins
The moral suasion is a method of persuading and convincing the commercial banks to advance credit in accordance with the directives of the central bank in overall economic interest of the country.
Under this method the central bank writes letter to hold meetings with the banks on money and
credit matters.
Moral Suasion
EXPANSIONARY MONETARY POLICY
Problem: Recession and unemployment Measures: (1) Central bank buys securities through open market operation (2) It reduces cash reserves ratio (3) It lowers the bank rate Money supply increases Investment increases
Aggregate demand increases Aggregate output increases by a multiple of the increase in investment
CONTRACTIONARY MONETARY POLICY
Problem: Inflation Measures: (1) Central bank sells securities through open market operation (2) It raises cash reserve ratio and statutory liquidity (3) It raises bank rate (4) It raises maximum margin against holding of stocks of goods Money supply decreases
Interest rate raises Investment expenditure declines Aggregate demand declines Price level falls
Recommendation of Narshimham Committee Nov.1991
• SLR should not be used for directed investment in PSUs. It should be lower down to minimum limit of 25%
• CRR should be lower than the present rate. As an instrument it should be used less & Govt. should depend upon OMOs.
• Selective credit control should be slowly phased out
Prime lending rate of commercial bank should be independent of RBI control
How Monetary Policy Controls Inflation?
CENTRAL BANK
SECURITIES AND TRESURY BILLS
BANK RATE
COMMERCIAL BANKS
CORPORATES INDIVIDUALS
SOLDC
ASH
INCREA
SE
LEND
ING
RATE
CASH RESERVE RATIO
REDUCED BORROWING OF LOANS
INC
REA
SE IN
C
RR
%
REDUCE LIQUIDITY IN MARKET
STATUTORY LIQUID RATIO
The Monetary Policy aims to maintain price stability, full employment and economic growth.
Emphasis on these objectives have been changing time to time depending on prevailing circumstances.
For explanation of monetary policy, the whole period has been divided into 4 sub periods:
a) Monetary policy of controlled expansion (1951 to 1972)
b) Monetary Policy during Pre Reform period (1972 to 1991)
c) Monetary Policy in the Post-Reforms (1991 to 1996)
d) Easing of Monetary policy since Nov 1996
Monetary Policy of India - Overview
To regulate the expansion of money supply and bank credit to promote growth.To restrict the excessive supply of credit to the private sector so as to control inflationary pressures.
Following steps were taken:1. Changes in Bank Rate from 3% in 1951 to 6% in 1965
and it remained the same till 1971.
2. Changes in SLR from 20% in 1956 to 28% in 1971.
3. Select Credit Control: In order to reduce the credit or bank loans against essential commodities, margin was increased.
Monetary policy of controlled expansion (1951 to 1972)
Monetary Policy during Pre Reform period (1972 to 1991)
Also known as the Tight Monetary policy: Price situation worsened during 1972 to 1974.
Following Monetary Policy was adopted in 70’s and 80’s which were mainly concerned with the task neutralizing the impact of fiscal deficit and inflationary pressure.
1) Changes in CRR to the maximum limit of 25%2) Changes in SLR also to the maximum limit of 38.5%
Monetary Policy in the Post-Reforms – 1991 to 1996
The year 1991-1992 saw a fundamental change in the institutional framework It had twin objectives which were Price stability and economic growth. 1) Continuing the same maximum CRR and SLR of 25%
and 38.5%, mopped up bank deposits to the extent of 63.5%
2) In order to ensure profitability of banks, Monetary Reforms Committee headed by late Prof. S Chakravarty, recommended raising of interest rate on Government Securities which activated Open Market Operations (OMO).
3) Bank rate was raised from 10% in Apr 1991 to 12% in Oct 1991 to control the inflationary pressures.
Easing of Monetary policy since Nov 1996:
In 1996-97, the rate of inflation sharply declined. In the later half 1996-97, industrial recession gripped the Indian economy. To encourage the economic growth and to tackle the recessionary trend, the RBI eased its monetary policy.
1. Introduction of Repo rate. Repo rate increased from 3% in 1998 to 6.5% in 2005. This instrument was consistently used in the monitory policy as a result of rapid industrial growth during 2005-06.
2. Reverse Repo rate –Through RRR, the RBI mops up liquidity from the banking system. The Repo rate was cut from 3.50% to 3.25%.
Easing of Monetary policy since Nov 1996: (Contd)
3. Flow of credit to Agriculture – The flow of credit to agriculture has increased from 34,013 (9.2% of overall credit) in 2008 to 52,742 (13% in overall credit) in 2009 – (Rs. in crore).
4. Reduction in Cash Reserve Ratio – The CRR which was at 15% until 1995 gradually reduced to 5% in 2005. The CRR remained unchanged in the current monetary policy.
5. Lowering Bank rate – The Bank rate was gradually reduced from 12% in 1997 to 6% in 2003.
RBI In Recession
CRR cut to 5% Repo rate cut to 5.5% Reverse Repo rate cut to 4% Short-term lending and borrowing rates
cut Slashed tax rates Injection of Money Opening up new borrowing channels for
banks Government hikes its spending
Review of 2009/10 Monetary Policy GDP growth at 7.9% for Q2 2009 which was predicted
to be 6.3
WPI-currently at 4.78%. Food Inflation touched 19% because of easy monetary policies & decreasing agricultural production
Bank Rate has been retained unchanged at 6.0 per cent
Repo Rate has been retained unchanged at 4.75 per cent
Reverse Repo Rate has been retained unchanged at 3.25 per cent
CRR- 5 per cent & SLR to 25 per cent of their NDTL Planning to tighten liquidity scenario from January
IS CURVE
LM CURVE
IS/LM CURVE
Expansionary Fiscal Policy - shifts IS right: will tend to increase Y and also increase the interest rate (r)
Contractionary Fiscal Policy - shifts IS left: will tend to reduce both Y and r
Expansionary Monetary Policy - shifts LM right - reduces r and increases Y Contractionary Monetary Policy - shifts LM left increases r and reduces Y
Shifts in Curve
Shifts in Curve
Thank You…….