FISCAL POLICIES &

MONETARY POLICIES

Fiscal Policy▪ Fiscal policy is the means by which a government

adjusts its spending levels and tax rates to monitor and influence a nation's economy. ▪ Government spending policies that influence

macroeconomic conditions.▪ Government’s plan for expenditure, revenues and

borrowing to finance fiscal deficits if any.▪ Involves

1. Designing Tax Structure2. Determining Tax Revenue3. Handling Public Expenditure4. Maintain equilibrium between effective demand & supply

Objectives of Fiscal Policy

• Mobilization of Resources• Economic Development and Growth• Reduction in Disparities of Income• Expansion of Employment• Price Stability

Constituents of Fiscal Policy

1. Public Expenditure2. Taxation

i. Direct Taxesii. Indirect Taxes

3. Public Borrowing

New Fiscal Policy in India

1. Systematic effort to simplify tax structures2. Reasonable direct tax rates, better administration

and enforcement3. Stable and predictable tax policy environment4. Greater weight given to resource allocation and

equity consequences of taxation5. More reliance on non-discretionary fiscal and financial

instruments6. Improve tax administration7. Growing appreciation of links between fiscal and

monetary policies8. Strengthen methods of expenditure control

Limitations of Fiscal PolicyFiscal Policies has been successful in developed countries but not so successful in developing countries. o Lags in Fiscal Policyo Problems in Tax Policyo Burden of Public Debt

Monetary Policy- Definition :▪ Monetary policy is the process by which monetary

authority of a country controls the supply of money in the economy by its control over interest rates in order to maintain price stability and achieve high economic growth.▪ Control over prices and employment.▪ In India, the central monetary authority is the

Reserve Bank of India (RBI). ▪ In India, monetary policy of the RBI is aimed at

managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.

Objectives of Monetary Policy ▪ Price Stability▪ Controlled expansion of Bank Credit▪ Promotion of Fixed Investment▪ Restriction of Inventories and Stocks▪ Promote Efficiency▪ Reducing Rigidity

Monetary Policies - Types

1. Expansionary monetary policy

2. Contractionary monetary policy

Instruments of Monetary Policy :

Open Market Operations CRR SLR Bank Rate Policy Credit Ceiling Credit Authorization Scheme Moral Sudation Repo Rate & Reverse Repo Rate

Monetary Policy Committee (MPC)

Objective of (MPC) ▪ To maintain price stability, while keeping in mind the

objective of growth, and to meet the challenge of an increasingly complex economy.▪ MPC is entrusted the task of fixing the benchmark

policy interest rate (repo rate) to contain inflation within the specified target level.▪ RBI & Govt. signed  ”Monetary Policy Framework

Agreement”, 20 Feb 2015.▪ Proposed to amend the Reserve Bank of India (RBI)

Act, 1934 , Monetary Policy Committee (MPC) ▪ Head : Governor (RBI)

Functions of the MPCMPC takes decisions based on majority vote 1. Inflation targets at 4% (with a standard deviation of 2%) 2. Explanation in the form of a report to the Central Government, if it failed to reach the specified inflation targets.–Reasons for failure–Remedial & Estimated time

3. RBI is mandated to publish a Monetary Policy Report every six months.– Sources & Forecasting inflation for next 6 -8 months.

4. Publish Minutes of meeting , reasons for voting.5. Document explaining the steps in implementing the decisions of MPC & changes

Composition of MPCSix members : I. RBI Governor (Chairperson), II. RBI Deputy Governor in charge of

monetary policyIII. 1 official nominated by the RBI Board IV. Remaining 3 members would represent

the Government of India.

Link between Fiscal and Monetary Policy

Fiscal Policy▪ Instrument of Government to manage financial requirements▪ Devised depending on monetary control required▪ RBI has no say in Fiscal Policies

Monetary Policy

▪ Policies pursued by RBI to regulate growth of money and credit in the economy▪ Direction is determined by the fiscal policies ▪ Correct adverse effects of government’s Fiscal Policies

Conclusion of Fiscal & Monetary Policies

▪ The Fiscal and Monetary policies are interdependent.▪ They deal with regulatory mechanisms and in maneuvering economy in periods of inflation and recession.▪ It is necessary that the government subjects itself to certain fiscal discipline so that the monetary authority of the country may pursue effective and meaningful monetary policies.THANKYOU