eco ppt spot

8/8/2019 Eco Ppt Spot

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Current Monetary and FiscalPolicies in India

Submitted by:Devang Rathi

Rima Agarwal

Shivani Agarwal


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` Monetary policy is the process by which the

monetary authority of a country controls and

regulates the supply of money with the public and theinterest rates(cost of money) to achieve the pre-

determined macroeconomic goals.

` The central bank manages the money supply by

adjusting the interest rates in the economy.` Monetary policy works through expansion and

contraction of investment and consumption

expenditure by decreasing or increasing the interest

rates.


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` The main objective of monetary policy is

macroeconomic stability i.e.

-full employment

-price stability

-exchange stability

-maximum output

-economic growth

-balance of external payments.


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` There are two measures of monetary control-

-Qualitative

-Quantitative

` The quantitative measures manages the quantityof money in circulation through the buying and

selling of various financial instruments, such as

treasury bills, company bonds, or foreign

currencies.


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` The quantitative measures are:

-Open Market Operations

-Bank Rate

-Cash Reserve Ratio(CRR)

-Statutory Liquidity Ratio

`

The qualitative measures are:-Credit Rationing

-Changing in Lending Margins

-Moral Suasion


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` The Monetary Policy for 2010-11 is set against a

rather complex economic backdrop.

` The economy is recovering rapidly from the

growth slowdown but inflationary pressures, whichwere triggered by supply side factors, are now

developing into a wider inflationary process.

` The economic recovery, which began around the

second quarter of 2009-10, has since shownsustained improvement.


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` The inflation trends have been negative. Theheadline inflation, as measured by year-on-year

variation in Wholesale Price Index (WPI),accelerated from 0.5 per cent in September 2009to 9.9 per cent in March 2010.

` Reserve Banks estimates show that the total flowof financial resources from banks, domestic non-bank and external sources to the commercialsector during 2009-10 was higher than the amountin the previous year.

` Scheduled commercial banks(SCBs) raised their

deposit rates by 25-50 basis points betweenFebruary and April 2010 signalling a reversal inthe trend of reduction in deposit rates.


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2009-10

(Actual numbers)

2010-11

(April 2010 Policy

targets)

GDP 7.2 8

(with an upward bias)

Inflation

(Based on WPI for

March-end)

9.9 5.5

Money supply

(March end)

17.3 17

Credit

(March end)

17 20

Deposit

(March end)

17.1 18


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` RBI has increased the projections of monetaryaggregates for 2010-11 in consistence with the

higher expected growth in 2010-11.

` Higher growth will lead to more demand for credit.

This will increase the need for higher financialresources. Therefore, projections for money

supply(M3), credit and deposit are raised to 17%,

20% and 18% respectively.

` However, higher growth in money supply would alsolead to build up of higher inflation and inflationary

expectations.


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` There is a substantial uncertainty about the pace andshape of global recovery.

` If the global recovery does gain momentum,commodity and energy prices, which have been on the

rise during the last one year, may harden further. Thiswill add to inflationary pressures.

` Monsoon will continue to be a critical factor.Unfavourable rainfall may lead to food inflation andimpose a fiscal burden.

` High liquidity in global markets coupled with highergrowth in emerging economies foreign capital flowsare expected to remain higher. This will put pressureon exchange rate policy.


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The stance of Monetary Policy of the RBI isintended to:

` Anchor inflation expectations, while being

prepared to respond effectively to further build-up

of inflationary pressures.

` Actively manage liquidity to ensure that the growth

in demand for credit by both the private and public

sectors is satisfied in a non-disruptive way.

` Maintain an interest rate regime consistent with

price, output and financial stability.


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` The bank rate ahs been retained at 6%.

` The repo rate is now 5.25% which has 5% in

2009-10.

` The reverse repo rate has increased from 3.5% to3.75%

` The cash reserve ratio of scheduled banks has

increased from 5.75% to 6%.


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The expected outcomes of the actions are:

` Inflation will be contained and inflationary

expectations will be anchored.` The recovery process will be sustained.

` Government borrowing requirements and the

private credit demand will be met.

` Policy instruments will be further aligned in a

manner consistent with the evolving state of the

economy.


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` Given the economic outlook, policy ahead is goingto remain challenging.

` It needs to manage high inflation withoutimpacting the growth process.

` The recent inflation numbers show rising demandside pressures on inflation.

` The higher interest rates would make it difficult tomanage the government borrowing program and

also invite more capital flows. High interest ratescould also lead to higher lending costs for thecorporate sector.


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FISCAL POLICY


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` Fiscal policy is the use of government expenditure

and revenue collection to influence the economy.

` It attempts to make better tax system and managepublic loans and expenditures to stabilize the

economy.

` The two main instruments of fiscal policy are

government expenditure and taxation.` Fiscal policy can be:

-expansionary(expenditure>revenue)

-contractionary (revenue>expenditure)


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` The techniques of fiscal policy are:

1.Taxation policy

2.Public expenditure policy

3.Deficit financing policy

4.Seigniorage

5.Public debt policy.


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` To achieve desirable price level

` To achieve desirable consumption level

` To achieve desirable employment level

` To achieve desirable income distribution` Increase in capital formation

` To control degree of inflation


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` Tax policy

` Direct taxes The last decade has witnessed a substantial growth in

direct taxes.

The direct tax has gone up from 2.97% in 1999-2000 to6.36% in 2008-2009.

The tax henceforth collected has increased from 33.8%

to 55.5% during the same period.

The above has been done by maintaining moderate taxrates but by expanding the tax base.


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` Indirect taxes Central excise duty

x

After 2 successive reductions in December 2008 andfebruary 2009, the standard rate if excise duty (cenvat) of

8% has been increased to 10%.

x Duty on petrol & diesel has been increased from re. 1 per

litre.

x

Duty on automobiles has been increased from 20% to 22%.x Duty on cement has been increased from 8% to 10%.

x Full or partial excise duty exemptions have been removed

and now suffer either 4% or 10% of duty.


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Custom duty

x Agricultural items still remain at 10%.

x Custom duty on serially numbered bullion has beenincreased from re. 200 per 10 gm. To rs. 300 per 10 gm.

x On some form of golds, duty per 10 gms. Have been

increased from rs. 500 to rs. 750. Whereas in case of silver,

duty has been increased from rs. 1000 to rs. 1500 per kg.

x Also in petroleum sector, duty on crude has been increasedfrom nil to 5%, in petrol & diesel 2.5% to 7.5% and some

other specified products from 5% to 10%.


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Service tax

x The rate of service tax of 10% has still been constinued

without any modifications.x Eight new services have been brought under the service tax

act.


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` The process of fiscal consolidation is being restartedin 2010-2011.

` It is the 12th finance commission.` Though the revenue based has not yet increased to

the level of 2007-2008,still many expenditure reformsare being made and by the dis-investment proceeds,the goverment is trying to bring down the fiscal deficitto earlier estimated level of 5.5% ofGDP in 2010-

11011.` With the introduction of direct tax code in 2011-2012

and also likely introduction ofGST in 2011-2012, thegoverment expects to bring down the fiscal deficit by2011-2012 and 2012-2013. It would be in line with therecommendations of 13th finance commission.

` The reduction in fiscal deficit would help in reducingthe debt to GDP ratio from 51.1% in re 2009.2010 to48.2% in 2012-2013.


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THANK YOU

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