Government in the Macroeconomy

There are three kinds of policy that the government has used to influence the macroeconomy: Fiscal policy Monetary policy Growth or supply-side policies

Fiscal policy refers to government policies concerning taxes and spending. Monetary policy consists of tools used by the Federal Reserve to control the quantity of money in the economy. Growth policies are government policies that focus on stimulating aggregate supply instead of aggregate demand.

The Three Market Arenas Households, firms, the government, and the rest of the world all interact in three different market arenas: Goods-and-services market Labor market Money (financial) market

Households and the government purchase goods and services (demand) from firms in the goods-and services market, and firms supply to the goods and services market. In the labor market, firms and government purchase (demand) labor from households (supply). The total supply of labor in the economy depends on the sum of decisions made by households.

Aggregate Supply and Aggregate Demand Aggregate demand is the total demand for goods and services in an economy. Aggregate supply is the total supply of goods and services in an economy. Aggregate supply and demand curves are more complex than simple market supply and demand curves.

Indias Geography India has one-third the land mass of the United States; and nearly four times its population. India therefore must develop strategies for sustainable growth and livelihood which suits its requirements, while continuing to integrate with the world economy and moving towards a knowledge-based society Economic efficiency in the use of scarce resources, growth and social cohesion promoting institutions, socio-political norms are therefore imperatives.

Indias Share in World GDP

India constitutes nearly 17 percent of the worlds population, but even in PPP terms its GDP share is only 5 percent.

In all good things (eg, agricultural production, GDP, patents, tourists, FDI) Indias share is at least one-sixth of the worlds total.

Major Challenges Ensuring that good economics is good politics (this will require a shift from ruling to governing mindset, and administrative and civil service reforms). Environmental challenges.

Energy and Food Security. Managing Urbanization. Accelerating physical and social infrastructure investments. Developing human capital for sustainable livelihoods through application of knowledge economy . Coping with demographic challenges.

Strengths

sustained growth at 6.4 for over a decade (but recent slowdown) strong export potential, current a/c deficit low healthy forex reserves low external debt low inflation regime political consensus on reforms deepening financial sector knowledge base advantage, demographic surge

Weaknesses

fiscal deficit high, debt gdp ratio high fiscal situation of states worse inadequate infrastructure, huge funding need unsatisfactory investment climate rising gap between rich and poor states dependence on oil imports, monsoons slowing of reforms, coalition compulsions social indicators below world average

FDI in India FDI is investment made by a foreign individual or company in productive capacity of another country. It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. India is considered a stable country for investing in by corporate overseas. India has displaced US as the second-most favored destination for (FDI) in the world after China according to an AT Kearney's FDI FDI is a tool for jump-starting economic growth through its bolstering of domestic capital, productivity and employment.

FDI has an impact on Country's trade balance Increasing labour standards and skills Transfer of new technology and innovative ideas Improving infrastructure, skills and the general business climate.

US INVESTMENT IN INDIA U.S. is one of the largest foreign direct investors in India. The stock of actual FDI Inflow increased from U.S. $11.3 million in 1991 to US $4132.8 million as on August 2004 recording an increase at a compound rate of 57.5 percent per annum. The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.

Indian Financial System Functions Saving Function Liquidity Function Payment Function Risk Function Policy Function

Financial Markets

Defined as the market in which financial assets are created or transferred.

These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

Classification

Money market (Short term instrument)

Capital markets (Long term instrument)

The most important distinction between the two: The difference in the period of maturity.

Money Market Main Function To channelize savings into short term productive investments like working capital .

Instruments in Money Market Call money market Treasury bills market

Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note

Call Money Market

Part of the national money market

Day-to day surplus funds mainly of banks are traded

Short term in nature

Maturity of these loans vary from 1 to 15 days

Lent for 1 day: Call money

Lent for more than 1 day but less than 15 days: Notice money

Convenient interest rate

Highly liquid loan repayable on demand

Commercial Papers

Unsecured Promissory note.

Issued by well known companies with strong and high credit rating.

Sold directly by the issuers to investors or through agents like merchant banks and security houses.

Flexible Maturity

Low interest rates with compared to banks.

Imparts a degree of financial stability to the system.

Promissory Note Referred as note payable in accounting

It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee).

The obligation may arise from the repayment of a loan or from another form of debt.

For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Certificates of deposits Defined as short term deposit by way of usance promissory notes.

Greater flexibility to investors in the deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto 1 year.

Transferable in nature

Free negotiability and limited flexibility

Money market mutual funds

Invest primarily in money market instruments of very high quality.

RBI and public financial institution can set it either directly or through its existing subsidiaries.

MMMF Open Ended Close Ended

Capital Markets

Provided resources needed by medium and large scale industries.

Purpose for these resources Expansion Capacity Expansion Investments

Mergers and Acquisitions

Deals in long term instruments and sources of funds

Main Activity

Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.

Provides opportunities to various class of individuals and entities.

Structure of Capital Markets

Primary n Secondary mrkt When companies need financial resources for its expansion, they borrow money from investors through issue of securities. The place where such securities are traded by these investors is known as the secondary market.

Budget Process and Politics To budget is to fight over money There will always be friction among congressional committees and between those who make tax policy and control spending The budget process is the means by which this conflict is channeled to enable agreement each year