FISCAL AND MONETARY POLICIES OF INDIA

FISCAL POLICY

Fiscal policy refers to the overall effect of the budget outcome on economic activity. It is concerned with the raising of government revenue and incurring of government expenditure. The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s. Three possible stances of fiscal policy are:Neutral stance: it implies a balanced budget where government spending is equal to tax revenue. (G=T) Expansionary stance: Government spending is greater than tax revenue. (G>T) Contractionary stance: Government spending is lesser than tax revenue. (G<T)

OBJECTIVES OF FISCAL POLICY

Development by effective Mobilisation of Resources. Efficient allocation of Financial Resources Reduction in inequalities of Income and Wealth Price Stability and Control of Inflation Employment Generation Balanced Regional Development Capital Formation Increasing National Income Development of Infrastructure Foreign Exchange Earnings

TOOLS OF FISCAL POLICY

Budgetary surplus and deficit Government expenditure Taxation- direct and indirect Public debt Deficit financing

LIMITATIONS OF FISCAL POLICY

Rapid increase in inflation results in failure of fiscal policy. Govt. fiscal policy has failed to reduce the black money. After taking loan from World Bank under the fiscal policy's debt technique, govt. has to obey the rules and regulations of World Bank and IMF. These rules are more harmful for developing small domestic business of India. After expending large amount for generating new employment under fiscal policy, rate of unemployment is increasing rapidly.

MONETARY POLICY

Monetary policy is the management of money supply and interest rates by central banks to inuence prices and employment. Monetary policy works through expansion or contraction of investment and consumption expenditure. "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy. By:- Prof. Harry Johnson. A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy. By:- A.G. Hart.

OBJECTIVES OF MONETARY POLICY

Rapid Economic Growth Price Stability Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Neutrality of Money Equal Income Distribution

TOOLS OF MONETARY POLICY

Bank rate Open market operations. Discount loans. Changes in reserve requirements. Regulation of consumer credit

LIMITATIONS OF MONETARY POLICY

Non-Banking Financial Institutions do not come under the purview of monetary policy and thus nullify its effect. Higher liquidity due to high deposit base hinders the monetary policy. The success of the monetary policy depends on timely implementation of it so, time lag affects success of monetary policy. Monetary policy lacks coordination.

RELATIONSHIP BETWEEN BOTH THE POLICIES

Both the policies are interdependent on each other. Fiscal policies pursued by the government determine the general directions of monetary policy. The fiscal policies have to be devised depending upon the monetary control exercised in the monetary policy. In Indian economy, the monetary policy is brought into play only to correct the adverse effects of fiscal policy.

EFFECTIVENESS OF THE POLICIES

Monetary policies affect all sectors of the economy although in different ways and with a variable impact. Fiscal policy changes can be targeted to affect certain groups only. When the economy is in a recession, monetary policy may be ineffective in increasing current national spending and income but fiscal policy might be more effective in stimulating demand. The biggest challenge facing the conduct of fiscal and monetary policy in India is to continue the accelerated growth process while maintaining price and financial stability.

THANK YOU !!
Anand Rana Anamika Ankita Sharma