Monetry and fiscal policy union budget state budget and finance commision
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MONETRY AND FISCAL POLICY, UNION BUDGET, STATE BUDGET AND FINANCE COMMISION. CONTENT. MONETRY POLICY.

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MONETRY AND FISCAL POLICY, UNION BUDGET, STATE BUDGET AND FINANCE COMMISION

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Monetry and fiscal policy union budget state budget and finance commision

MONETRY AND FISCAL POLICY, UNION BUDGET, STATE BUDGET AND FINANCE COMMISION


Content

CONTENT


Monetry policy

MONETRY POLICY

  • Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. in India, the central monetary authority is the  RBI.


Measure of money stock

MEASURE OF MONEY STOCK

  • The money supply or money stock, is the total amount of monetary assets available in an economy at a specific time.

  • M1: Usually described as the money supply. (currency with the public - notes & coins in circulation) and deposits – demand deposits with bank & other deposits with RBI.

  • M2:M1+Post office savings bank deposits.

  • M3:M1+Time deposit with the bank. ( i.e. Money Supply + FD with Banks)

  • M4:M3+Total Post office deposits.


Monetary policy and monetary supply

MONETARY POLICY AND MONETARY SUPPLY

  • Money supply comprises currency with the public and demand deposits.

  • The budgetary operation of the government affect money supply. If govt. meets its budgetary deficit by borrowing from RBI , there will be an increase in money supply.

  • Demand deposit are important determinant of money supply which may originate in two ways – active or passive creation. Passive creation takes place when bank opens deposit account against cash or check drawn on other banks. Active creation takes place when banks create deposit by extending credits.

  • Central banking instruments operate by varying the cost and availability of credit and these produce desired changes in patterns of commercial banks. The capacity of banks depends upon their cash reserves , a substantial portion of reserves being generally held in form of balances with RBI.


Instruments of monetary policy

INSTRUMENTS OF MONETARY POLICY

  • General Methods (Quantitative Methods)

    - Affect total quantity of credit and affect economy generally

  • Selective Methods (Qualitative Methods)

    - Affect certain select sectors


Instruments of monetary policy1

INSTRUMENTS OF MONETARY POLICY

  • General credit controls

  • Bank rate policy

  • Open market operation

  • Variable Reserve Ratio

  • SLR

  • Selective Credit Regulation

  • Moral Suasion


Bank rate policy lender of last resort

Bank Rate Policy – Lender of last resort

  • The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for providing funds or loans to the banking system. This banking system involves commercial and co-operative banks, Industrial Development Bank of India, EXIM Bank, and other approved financial institutes. Funds are provided either through lending directly or buying money market instruments like commercial bills and treasury bills. Increase in Bank Rate increases the cost of borrowing by commercial banks which results into the reduction in credit volume to the banks and hence declines the supply of money. Increase in the bank rate is the symbol of tightening of RBI monetary policy. As of 1 January 2013, the bank rate was 8.75% and from August 2013 bank rate is 10.25%


Statutory liquidity ratio

Statutory Liquidity Ratio

  • Every financial institute have to maintain a certain amount of liquid assets from their time and demand liabilities with the RBI. These liquid assets can be cash, precious metals, approved securities like bonds etc.

  • The ratio of the liquid assets to time and demand liabilities is termed as Statutory Liquidity Ratio There was a reduction from 38.5% to 25%.The current SLR is 23%.


Cash reserve ratio or variable reserve ratio

Cash Reserve Ratio or Variable Reserve Ratio

  • Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances .

  • Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa.RBI is empowered to vary CRR between 15 percent and 3 percent.

  • As of January 2013, the CRR is 4.00 percent.[


Repo rate

Repo Rate

  • Repo rate is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive


Reverse repo rate

Reverse Repo Rate

  • Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.

  • As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy. As of October 2011, the repo rate is 8.25 and reverse repo rate is 7.25


Selective credit controls

Selective Credit Controls

  • Selective methods of credit control regulate the use of credit by discriminating between essential and non-essential purposes.

  • The central bank may prohibit or caution banks against particular type of securities.

  • May prescribe margins against secured advances.


Qualitative control measures

Qualitative Control Measures

  • The RBI can issue directives to banks in respect of :

  • 1) Their lending policies – the purpose for which advances may or may not be granted.

  • 2) The margins to be maintained on secured advances

  • 3) The rate of interest charged.


Moral suasion

Moral Suasion

  • Moral persuasion and direct action - When commercial banks pursue an unsound credit policy or borrow excessively, the RBI may refuse to grant loans.

  • The RBI may charge penal rate of interests – direct action

  • Moral persuasion involves persuading the banks not to ask for further loans.


Monetry and fiscal policy union budget state budget and finance commision

FISCAL POLICY

"Fiscal policy is the part of the government policy which is concerned with the raising revenue through taxation and other means to decide on the level and pattern of expenditure“

It operates through budget – which is estimate of government revenue and expenditure for financial year.


Definition

Definition

Fiscal Policy is the main part of Economic Policy and Fiscal Policy's first word Fiscal is taken from French word Fisc  it means treasure of Govt. So we can define fiscal policy as the revenue and expenditure policy of Govt. of India .It is prime duty of Government to make fiscal policy . By making this policy , Govt. collects money from his different resources and utilize it in different expenditure . Thus fiscal policy is related to development policy . All welfare projects are completed under this policy


Objective of fiscal policy

OBJECTIVE OF FISCAL POLICY

  • Development of Country

  • Employment

  • Reduction of Inequality


Techniques of fiscal policy

Techniques of Fiscal Policy

Taxation Policy 

→ If Govt. will increase taxes , more burden will be on the public and it will reduce production and purchasing power of public .→ If Govt. will decrease taxes , then public's purchasing power will increase and it will increase the inflation.


Monetry and fiscal policy union budget state budget and finance commision

  • Govt. Expenditure Policy There are large number of public expenditure like opening of govt schools , colleges and universities , making of bridges , roads and new railway tracks . In all above projects govt has paid large amount for purchasing  and paying wages and salaries all these expenditure are paid after making govt. expenditure policy . Govt. can increase or decrease the amount of public expenditure by changing govt. budget .

    So , govt. expenditure is technique of fiscal policy by using this , govt. use his fund  first on very necessary sector and other will be done after this .


Monetry and fiscal policy union budget state budget and finance commision

  • 3. Deficit Financing Policy If Govt.'s expenditures are more than his revenue , then govt. should have to collect this amount . This amount is deficit and it can be fulfilled by issuing new currency by central bank of country . But , it will reduce the purchasing power of currency . More new currency will increase inflation and after inflation value of currency will  decrease . So, deficit financing is very serious issue in the front of govt. Govt. should use it , if there is no other source of govt. earning .


Monetry and fiscal policy union budget state budget and finance commision

  • Public Debt Policy

  • If Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not use deficit financing , then govt. can take loan from  world bank , or take loan from public by issuing govt. securities and bonds . But it will also increase the cost of debt in the form of interest which govt. has to pay on  the amount of loan . So, govt. has to make strong budget for this and after this amount is fixed which is taken as debt. This policy  can also use as the technique of fiscal policy for increase the treasure of govt.


Stances of fiscal policy

Stances of fiscal policy

The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows:

  • A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.

  • An expansionary stance of fiscal policy involves government spending exceeding tax revenue.

  • A contractionary fiscal policy occurs when government spending is lower than tax revenue.


Limitation of fiscal policy

Limitation of Fiscal Policy 

  • After issuing new notes for payment of govt. of expenses , inflation of India is increasing rapidly and in this inflation , prices of necessary goods are increasing at a high rate. Living of poor person has become difficult . So , these sign shows the failure of Indian fiscal policy.

  • Govt. fiscal policy has failed to reduce the black money . Even large amount of  money of past minister is in the form of black money which is deposited in Swiss Bank.


Fiscal deficit

FISCAL DEFICIT

  • "TOTAL REVENUE SHOULD BE GREATER THAN THE EXPENDITURE“


Borrowing

BORROWING

  • Issue of bonds

    • Bonds refer to debt instruments bearing interest on maturity.

  • Treasury Bills

    • They are the instrument of short-term borrowing by the Government of India , issued as promissory notes under discount.

  • Gilt-edged securities

    •  A constituent account maintained by a custodian bank for maintenance and servicing of dematerialized government securities owned by a retail customer.


Budget

Budget

  • The budget is the annual announcement of the government’s fiscal policy changes. It announces the tax changes proposed for the following tax year and also how the government plan to spend the revenue.It is an instrument for fulfilling the obligations of the states It is a political statement of the priorities set by the government. It shows the financial transaction of the year.


Budget1

BUDGET

  • The union budget

    • The union budget which is yearly affair comprehensive display of govt. finance

  • The structure of the budget

  • State budgets

    • Estimate of the receipt and expenditures are presented by state govt.

  • Finances of the union and states

  • Sources of revenue union

    • Taxes on income other than agriculture income


Budget cont

BUDGET CONT….

  • Sources of revenue for the state

    • Land revenue including the assessment collection revenue

    • Duties respect of suction of agriculture land

  • Concurrent list

    • Stamp duties other than duties or fees collected by judicial stamp

  • The finance commission


Importance of budget

IMPORTANCE OF BUDGET

  • Accelerate the phase of economy

  • Effective improvement in production in private sector

  • Effective improvement in income distribution

  • Promote exports and encourage imports substitution

  • Achieve economic stabilization


Components of budget

COMPONENTS OF BUDGET

  • Revenue receipts

  • Capital receipts

  • Revenue expenditure

  • Capital expenditure

    THUS A BUDGET HAS TWO MAIN COMPONENTS :[A] RECEIPTS ,[B] EXPENDITURE.


Componernts of budget

COMPONERNTS OF BUDGET

RECEIPTS

A. REVENUE RECEIPTS [1+2 ]

  • 1. TAX REVENUE

  • 2. NON –TAX REVENUE

    B. CAPITAL RECEIPTS [3+5]

  • 3.RECOVERY LOANS

  • 4.OTHER RECEIPTS

  • 5.BORROWING & OTHER LIABILITIES

  • TOTAL RECEIPTS = A+B


Receipt items of the budget

RECEIPT ITEMS OF THE BUDGET


Revenue receipts

REVENUE RECEIPTS


Tax revenue

TAX REVENUE

  • TAX REVENUE INCLUDES ALL THE REVENUES EARNED THROUGH VARIOUS KINDS OF TAXES.TAXES ARE BROADLY DIVIDED INTO DIRECT & INDIRECT TAXES.


Direct taxes

DIRECT TAXES

  • CORPORATION TAX

  • INCOME TAX

  • INTEREST TAX

  • WEALTH TAX

  • GIFT TAX

  • EXPENDITURE TAX


Indirect tax

INDIRECT TAX

  • CUSTOM DUTIES

  • EXCISE DUTIES

  • SALES TAX

  • SERVICE TAX


Non tax revenue

NON TAX REVENUE

  • IT INCLUDES THE REVENUE ACCRUING TO THE GOVERNMENT FROM SOURCES OTHER THAN TAX.THESE ARE ;

  • INTEREST RECEIPTS

  • DIVIDENDS

  • GRANTS

  • FINES


Capital receipts

CAPITAL RECEIPTS

  • THESE INCLUDE BORROWING OF THE GOVERNMENT.SINCE THESE RECEIPTS HAVE TO BE REPAID BY THE GOVERNMENT ,THE CAPITAL RECEIPTS ARE LIABILITIES.CAPITAL RECEIPTS INCLUDE PUBLIC BORROWING ,RECOVERY OF LOANS AND RESALE OF SHARES AND BONDS HELD BY THE GOVERNMENT.


Expenditure items

EXPENDITURE ITEMS


Revenue expenditure

REVENUE EXPENDITURE

  • IT IS THE EXPENDITURE INCURRED FOR THE DAY-TO-DAY FUNCTIONONG OF THE GOVERNMENT DEPARTMENTS AND VARIOUS SERVICES OFFERED TO THE PEOPLE, PAYMENT OF INTEREST ON BORROWINGS,SUBSIDIES ETC.

  • REVENUE EXPENDITURE WILL NOT RESULT IN THE CREATION OF ASSETS


Revenue expenditure1

REVENUE EXPENDITURE

  • IT IS THE EXPENDITURE INCURRED FOR THE DAY-TO-DAY FUNCTIONONG OF THE GOVERNMENT DEPARTMENTS AND VARIOUS SERVICES OFFERED TO THE PEOPLE, PAYMENT OF INTEREST ON BORROWINGS,SUBSIDIES ETC.

  • REVENUE EXPENDITURE WILL NOT RESULT IN THE CREATION OF ASSETS


Capital expenditure

CAPITAL EXPENDITURE

  • CAPITAL EXPENDITURE IS THE EXPENDITURE INCURRED ON CREATING PERMANENT ASSETS.SUCH EXPENDITURE IS INCURRED ON ITEMS LIKE CONSTRUCTION OF BUILDINGS,ROADS,BRIDGES,CANALS,POWER PLANTS,CAPITAL EQUIPMENTS


Revenue receipts1

REVENUE RECEIPTS

  • It is revenue without any liability. Revenue receipts of government includes earning from tax incomes(like corporation tax, income tax, custom) and non tax income(like interest from bond,dividend from PSU). where as capital receipt include borrowing of the government like market loan and short term borrowing.


Taxation

Taxation

  • Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes.

  • Classified into

    1. Direct taxes- Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax

    2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.


Government expenditure

Government Expenditure

  • It includes :

  • Government spending on the purchase of goods & services.

  • Payment of wages and salaries of government servants

  • Public investment

  • Transfer payments


Finance commission

Finance Commission

  • the Finance Commission, which came into existence in 1951, under Article 280 of the Indian Constitution, which states:

  • The President will constitute a Finance Commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.

  • Parliament may by law determine the requisite qualifications for appointment as members of the Commission and the procedure of selection.

  • The Commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same amongst the States themselves. It is also under the ambit of the Finance Commission to define the financial relations between the Union and the States.


Functions of finance commission

Functions of Finance Commission

  • Distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes.

  • Determine factors governing Grants-in Aid to the states and the magnitude of the same.

  • to make recommendations to president as to the measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the Finance Commission of the state.


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