ECONOMIC POLICY-

MONETARY AND FISCAL

DR. SK LAROIYA
UNIV OF DELHI
AND
AMITY BUSINESS SCHOOL


ECONOMIC POLICY
A SET OF INSTRUMENTS USED BY THE
GOVERNMENT TO ACHIEVE ITS PRE-DETERMINED
SET OF OBJECTIVES (OBJECTIVE FUNCTION) IS
TERMED AS ECONOMIC POLICY
ECONOMIC POLICY..CONTD

THE IMPACT OF ECONOMIC POLICY IS ALWAYS
ANALYZED IN THE FRAMEWORK OF MACRO-
ECONOMIC ENVIRONMENT GENERAL
EQUILIBRIUM
ECONOMIC POLICY..CONTD


ECONOMIC POLICY IS NECESSARILY A
SECOND BEST APPROACH
ECONOMIC POLICY..CONTD
ECONOMIC POLICY IS ALWAYS SUBJECT TO
TWO CONSTRAINTS:

RESOURCE CONSTRAINT

POLITICAL CONSTRAINT
ECONOMIC POLICY..CONTD


THE FIRST CONSTRAINT IS RELAXABLE

THE SECOND ONE IS BINDING


ECONOMIC POLICY..CONTD


THIS LEADS TO CONSTRAINED MAXIMIZATION
OF THE OBJECTIVE FUNCTION OF ECONOMIC
POLICY
WHY ECONOMIC POLICY ?


MARKET IMPERFECTIONS
DISTORTIONS
EXTERNALITIES
INCOME DISTRIBUTION
ANALYSIS
WHILE ANALYZING THE EFFICACY OF ECONOMIC
POLICY, WE MUST FOCUS ON

OBJECTIVES
INSTRUMENTS
MECHANISM
UNDERLYING ASSUMPTIONS AND LIMITATIONS
ANALYSIS..CONTD


AN APPROPRIATE POLICY MIX OPTIMAL
POLICY MIX MUST BE DESIGNED SO THAT
ECONOMY IS MANAGED EFFICIENTLY
VARIANTS OF ECONOMIC POLICY


FISCAL POLICY
MONETARY POLICY
WAGE POLICY
ANALYSIS

MAXIMIZING ECONOMIC GROWTH
FULL EMPLOYMENT
PRICE STABILITY
BALANCE IN BALANCE OF PAYMENTS
SOCIAL JUSTICE
OBJECTIVES OF ECONOMIC POLICY..
CONTD

COMPATIBILITY/INCOMPATIBILITY AMONG
THE POLICY OBJECTIVES

THE CONCEPT OF TRADE OFF

RANGE OF TRADE OFFS
MONETARY POLICY

OBJECTIVES:

TO PROVIDE NECESSARY FINANCE TO VARIOUS
INVESTORS THROUGH EFFICIENT BANKING SYSTEM FOR
ECONOMIC DEVELOPMENT
FULL EMPLOYMENT
PRICE STABILITY
STABILITY OF EXCHANGE


MONETARY POLICY ..CONTD

CONTROL OF BUSINESS CYCLES

ECONOMIC GROWTH

THERE ARE FOUR MAIN CHANNELS WHICH
THE RBI LOOKS AT:
1. QUANTUM CHANNEL:
MONEY SUPPLY AND CREDIT ( AFFECTS REAL
OUTPUT AND PRICE LEVEL THROUGH
CHANGES IN RESERVE MONEY, MONEY
SUPPLY AND CREDIT AGGREGATES

2. INTEREST RATE CHANNEL
3. EXCHANGE RATE CHANNEL 9 LINKED TO
CURRENCY)
4. ASSET PRICE
IMPACT OF MONETARY POLICY:
1. CHANGE IN CRR ON INTEREST RATES
2. CHANGE IN SLR AND GILT PRODUCTS ON
INTEREST RATES
3. ON DOMESTIC INDUSTRY AND EXPORTERS
4. ON STOCK MARKETS AND MONEY SUPPLY
5. ON EMPLOYMENT, WAGES AND OUTPUT
ALTERNATIVE DESIGNS OF MONETARY
POLICY
MONETARY POLICY DESIGN DESCRIPTION OF THE POLICY
RESTRICTIVE MONETARY POLICY SEEKS TO CONTROL AGGREGATE DEMAND
WITH THE BASIC PURPOSE TO CONTROL
INFLATION
EXPANSIONARY MONETARY POLICY SEEKS TO STIMULATE AGGREGATE
DEMAND TO BOOST THE ECONOMY
CONTRA CYCLICAL MONETARY POLICY SEEKS TO EXPAND AND RESTRICT
AGGREGATE DEMAND ALTERNATIVELY TO
CONTROL BUSINESS CYCLES
RULE BASED MONETARY POLICY ACTIONS ARE BASED ON PREDETERMINED
SET OF RULES FOR DIFFERENT SITUATIONS
DISCRETIONARY MONETARY POLICY PROVIDES DISCRETION TO CENTRAL
BANKING AUTHORITIES IN MONETARY
POLICY ACTIONS. ACTION IS TAKEN
ACCORDING TO THE EXIGENCIES OF THE
EMERGING SITUATION
INSTRUMENTS OF MONETARY POLICY

QUANTITATIVE CONTROLS
BANK RATE
OPEN MARKET OPERATIONS
CASH RESERVE RATIO
SLR- BANKS IN INDIA ARE REQUIRED TO MAINTAIN 25% OF THEIR DEMAND AND TIME
LIABILITIES IN GOVERNMENT SECURITIES AND CERTAIN APPROVED SECURITIES. THESE ARE COLLECTIVELY
KNOWN AS SLR SECURITIES. THE BUYING AND SELLING OF THESE SECURITIES LAID THE FOUNDATIONS OF
HARSHAD MEHTA SECURITY SCAM OF 1992
INSTRUMENTS OF MONETARY POLICY
.. CONTD

SELECTIVE OR QUALITATIVE CONTROLS:
MARGIN REQUIREMENTS
CONTROL THROUGH DIRECTIVES
REGULATION OF CONSUMER CREDIT
RATIONING OF CREDIT
DIRECT ACTIONS
FISCAL POLICY


ECONOMIC DEVELOPMENT ISSUES AND
FISCAL POLICY-
AN INDIAN EXPERIENCE
OBJECTIVES OF FISCAL POLICY:

1. TO MOBILIZE ADEQUATE RESOURCES FOR FINANCING
VARIOUS PROGRAMS AND PROJECTS FOR ACHIEVING
TARGET RATE OF ECONOMIC GROWTH/ DEVELOPMENT
2. TO RAISE THE SAVINGS AND INVESTMENT FOR INCREASING
THE RATE OF CAPITAL FORMATION
3. TO PROMOTE NECESSARY DEVELOPMENT IN THE PRIVATE
SECTOR THROUGH FISCAL INCENTIVE


4. TO ARRANGE OPTIMUM UTILIZATION OF RESOURCES
5. TO CONTROL INFLATIONARY PRESSURE IN THE ECONOMY IN
ORDER TO ATTAIN ECONOMIC STABILITY
6. TO REDUCE REGIONAL DISPARITIES
7. TO REDUCE THE DEGREE OF INEQUALITY IN THE DISTRIBUTION
OF INCOME AND WEALTH
COMPONENTS OF FISCAL POLICY
GOVERNMENT EXPENDITURE
GOVERNMENT REVENUE
DIRECT TAXES
INDIRECT TAXES
SUBSIDIES
DEFICIT
DEBT MANAGEMENT
DIRECT TAXES
PERSONAL INCOME TAX:

TAX IMPOSED ON THE INCOME OF AN
INDIVIDUAL WHICH IS DERIVED FROM
VARIETY OF SOURCES
IT COULD BE REGRESSIVE, PROGRESSIVE OR
PROPORTIONAL
CORPORATION TAX:

THE TAX IMPOSED ON THE ASSESSABLE
PROFITS OF THE COMPANIES AND
UNINCORPORATED ASSOCIATIONS
GENERALLY CALCULATED AFTER INTEREST
BUT BEFORE DIVIDEND DISTRIBUTION
COMPANIES ALSO LIABLE TO PAY CAPITAL
GAINS TAX
INHERITANCE TAX:
THE TAX ON THE TRANSFER OF WEALTH ON THE
DEATH OF THE DECEASED INDIVIDUAL TO THE
OTHERS LIVING

ALSO CALLED AS DEATH DUTY OR ESTATE DUTY
WEALTH TAX:
TAX PAID ON THE SPECIFIED STOCK OF ASSETS
HELD BY AN ECONOMIC UNIT THAT YIELDS OR
HAS POTENTIAL TO YIELD INCOME IN SOME
FORM
INDIRECT TAXES
EXCISE DUTY:

THE TAX LEVIED ON THE PRODUCTION OF
GOODS
LEVIED BY CENTRAL GOVERNMENT IN INDIA

VAT- VALUE ADDED TAX:
A GENERAL TAX APPLIED AT EACH POINT OF EXCHANGE FROM PRIMARY
PRODUCTION TO FINAL CONSUMPTION
ASSESSED AND IMPOSED ON THE DIFFERENCE BETWEEN THE SALE PRICE
OF GOODS OR SERVICES (OUTPUTS) TO WHICH THE TAX IS APPLIED AND
THE COST OF GOODS AND SERVICES (INPUTS) BOUGHT IN ITS
PRODUCTION

THE COST OF THE INPUTS INCLUDE ALL THE CHARGES INCLUDING THE
TAXES (EXCEPT VAT ITSELF)


CUSTOM DUTY
SALES TAX
SERVICE TAX
NECESSARY REFORMS IN FISCAL POLICY- A FEW RELEVANT ISSUES

1. PROGRESSIVE TAXES
2. AGRICULTURAL TAXATION
3. BROAD BASED TAX NET
4. CHECKING TAX EVASION
5. INCREASING RELIANCE ON DIRECT TAXES
6. SIMPLIFICATION OF TAX STRUCTURE
7. REDUCTION IN NON-DEVELOPMENTAL EXPENDITURE
8. CHECKING BLACK MONEY
9. RAISING PROFITABILITY OF PSUs

9. RATIONALIZATION OF DIRECT TAX RATES
10. REFORMS IN INDIRECT TAXES GST ETC.
11. CONTROL OF GOVERNMENT EXPENDITURE
12. RATIONALIZATION AND REDUCTION IN GOVERNMENT
SUBSIDIES
13. REDUCTION IN FISCAL DEFICIT
14.REDUCTION IN PUBLIC DEBT
15. DISINVESTMENTS IN THE PUBLIC SECTOR