Justification Along With Economy of India

1. Justification Along With Economy of India

3. Reserve Bank of India states that,
Monetary policy refers to the use of instruments under the control of the
central bank to regulate the availability, cost and use of money and credit.

4. • Maintaining Price Stability
• Rapid Economic Growth
• Balance Of Payment Equilibrium
• Full Employment
• Equal Income Distribution
• Ensuring Adequate Flow Of Credit To The Productive Sectors Of The Economy To
Support Economic Growth

5. Rates – Data Overview

6. Trends
2004-2007
• There is gradual increase in CRR, Repo Rate, Reverse Repo Rate.
• Thus it shows that inflation was growing gradually, this was cost push inflation
• GDP per year grows gradually. Thus the money in our country increases thus shows a little
increase in the income of the people.
• Increase in GDP should have resulted in decrease in unemployment, and increase in inflation.
2008-2009
• Rapid increase of CRR, repo rate , reverse repo
• Showing A very high indication of growing inflation.
• Inflation was due to the rise in oil prices leading to cost push inflation

7. 2009-2010:
• The depression originated in America had brought about depression in the Indian economy.
thus to equalise its effects, the CRR, Repo Rate, Reverse Repo Rates were decreased so that the
money can be more supplied in the market, so that India may rise from the depression.
• GDP of India was greatly hampered, Unemployment all increased during this time but due to
better measures India didn’t incur huge losses
2011-2014:
• Gradually decreasing the CRR,repo rate ,reverse repo rate signs of weaker economy
• Our GDP decreased drastically hence decreased CRR would help us recover our GDP and thus
creating more jobs and may decrease unemployment.
• Thus it was important to create more money supply

8. Analysis

9. FDI:
2003-2007
Between flow of FDI increased 4 times thus showing trust in the Indian market
2008-2009:
Flow decreased due to
1. Global depression
2. Flow decreased due to the deterioration in the credit market
3. Due to fragile and uncertain economy
Its effect on the market:
Investment decreased,
People lost hope in Indian market, thus people of India stopped investing money

10. After 2010:
It remain stagnant for uncertain economy
After 2014 elections:
• FDI flow increased due to new government and positive feedback
• Indian people also started investing more
Sectors affecting/invested by FDI
• Manufacturing sector got continuous flow of FDI, be it inflation or depression
• IT sector got blow by depression, as most of their customers were from outside India,
depression or deflation leads to losing their customers

11. Land:
Prices of land in major cities increased manifold during 2008-2009. This was due to a effect of
inflation and nice GDP ,growing economy that many companies got into the major cities
providing job opportunities and due to nice economy, people came for better prospects,
increasing the price of land.
This in turn led to more inflation, because most of the money acquires form land, real estate
doesn't go for taxation, thus a high flow of black money prevails, and in turn leads to more
demand for goods, increasing inflation.

12. FACTORS AFFECTING MONETARY POLICY
 There exist a non-monetized sector
 Excess of non-banking financial institutions (NBFI)
 Existence of unorganized financial market
 Money not appearing in an economy
 Time lag affects success of monetary policy
 Monetary policy and fiscal policy lacks coordination

14. Meaning
• Fiscal policy deals with the taxation and expenditure decisions of the
government. These include, tax policy, expenditure policy, investment
or disinvestment strategies and debt or surplus management.
- Kaushik Basu ( Former Chief Economic Adviser )

15. OBJECTIVES OF FISCAL POLICY
• Increase In Capital Formation.
• Degree Of Growth.
• To Achieve Desirable Price Level.
• To Achieve Desirable Consumption Level.
• To Achieve Desirable Employment Level.
• To Achieve Desirable Income Distribution.

16. Government Expenditure

17. Overview
• India is a developing country having high unemployment rate. Thus, to incorporate
majority of its population into employment, it goes on amass public expenditure whenever
possible.
• The above fact can be noted from above graph, showing linear increase in the various
government expenditure till 2008-2009.
• Due to Global Crisis of 2008-2009, many of the people loose their job and economy began
to be in the period of recession.

18. • To bring the economy out of recession, government increased its spending tremendously to
increase the flow of money into the market. Thus, the graph shows the peak during the year
2009-2011.
•
• This increased flow of money increased the money supply in the great extent, leading to a
rocket growth in inflation and to curtain that government reduced its spending for year 2011
-2013.
• With inflation under control it again began its normal expenditure policy thereon.
• Thus we see that the global crisis of 2008 actually affected government expenditure policy
till 2013.

19. Government Revenue - Tax

20. Overview
• Total Tax Revenue has increased linearly every year. Showing that each year there is
growth in the economic and there is increment in the salary of people and that is
transferred in terms of tax in the economy.
• Similarly service tax has also incremented with year. Only, because of Global Crisis of
2008-2009 there was need to bring economy out of recession and for the same to
increase the flow of money in the market, tax rates were reduced which directly
resulted in more disposable income with the normal residents of India.

21. • It is important to note that there has been an decrease in the corporate tax-rates over
the year. This, basically indicates that government is making its easy for the business to
operate within the countries by reducing tax burdens on the company. The lesser the
taxes, the more affordable it is for company to operate and thus more employment.
• Customs too has been increased to check limits on import and by doing so it aims at
increasing the money supply into the domestic market.

22. Major Changes in Budget(2013-14) to curb Deficit…
• One year surcharge of 10 % on the Superrich.
• Increased Duties on Imported or domestic luxury vehicles such as SUV’s, Mobiles
(>Rs.2000), set top boxes, A/c restaurants and Cigarettes.( bring in Rs.18,000 crores)
• Disinvestment Proceedings to be around Rs.55,000 Crore for this fiscal.
• No additional subsidy for fuel, food and fertilizer prices.
• Buyers of immovable property other than agriculture land will have to pay a tax of 1% of the
sale where the value exceeds Rs.50 lakh.

23. Coordination between Monetary Policy and Fiscal Policy
Together in Crisis:
During the times of global crisis they work in tandem with each other in 2008-2009 crisis.
For 2009-2010
RBI slashed:
CRR from 9.0 percent to 5.0 percent,
SLR 25.0 percent to 24.0 percent,
Repo-Rate 9.0 percent to 4.75 percent and
Reverse Repo Rate 5.0 percent to 3.25 percent from July 2008 to July 2009

24. Governments Reaction:
In the same time, cuts the excise duty, customs duty and service tax to increase the demand of
industrial goods. Doing so, it aims at incrementing supply of money in the market.
Governments borrowing requirement is catered by RBI:
Whenever borrowing demand is increased RBI tries to absorb the liquidity from the market by
increasing CRR.
For example in 2010-2011 CRR was increased from 5.75 to 6 to absorb Rs12,500 crore of liquidity from
the market. This, was done to cater to government’s borrowing requirements.
RBI changing rates depending upon governments policy:
When Governments focuses/device policy of infrastructure or other sector then RBI makes it easier
to get loans in that sector.

25. To satisfy all the above needs and relation among the activities we witness that over the
years both Government and RBI have worked parallel with each other decreasing CRR
and monetary rates at same time when there is decrease in the taxes by government.
Summary

26. Un-Coordination
In 2008 and 2009 there was an indifference of opinion on the amount of stimulus
to be given to the people.
-> RBI demanded more stimulus but Government provided an underfunded budget. As
a result its net market borrowings more than doubled from the initial estimates.