ECONOMIC POLICIES (MONETARY AND FISCAL POLICIES)
Economic policies are the policies which are framed in order to run the economy in an ideal way, to get desired results or to achieve economic goals. These policies are framed by the government to create a balanced economy. Various economic policies used by the government are:
1. MONETARY POLICY
- Monetary policy is a tool used by the governor of the Central Bank to regulate the supply of money in an economy.
- For India, Monetary Policy is announced by the Reserve Bank of India.
- Traditionally, it was announced twice a year. But now, the RBI keeps on modifying as per the requirements of the economy through the practice of announcing it twice still continues.
The Objectives of Monetary Policy are:
- To facilitate growth in the economy.
- To control and regulate inflation.
Measures to control and regulate inflation. Two types of tools are used to control and regulate inflation:
- Quantitative Measures
- Qualitative Measures
Quantitative Measures/Tools are used to control the flow of money in the economy. The various quantitative tools are as follows:
- Repo Rate: This is a rate of interest at which the commercial banks borrow money from the central bank. As we know, the RBI acts as a banker to all commercial banks in the country. (currently at 5.40%)
- Reverse Repo: The rate of interest at which the commercial banks lends money to the central bank, i.e. RBI, is known as reverse Repo. (currently at 5.15%)
- Bank Rate: This is the rate of interest which the RBI charges from the commercial banks for long-term loans. Credit at this rate is allowed only for the long-term. (currently at 5.65%)
- Cash Reserve Ratio (CRR): This is the amount of cash that the commercial banks are required to keep with the Central Bank. The RBI determines this ratio, and no interest is paid by the RBI on this cash. (currently at 4%)
- Statutory Liquidity Ratio (SLR): The Statutory Liquidity Ratio is the ratio of deposits which a commercial bank needs to maintain with itself in cash and gold as prescribed by the government. (currently at 18.75%)
- Open Market Operations (OMO): This is the instrument of RBI used to buy and sell all kinds of government securities in the open market. This is done to increase or decrease the flow of money in the economy.
Qualitative Measures are the measures through which the Reserve Bank of India controls the flow of money or the quality of credit in a few particular sectors. For example, a person cannot take a loan for a lottery, or bidding or for any form of speculative businesses. The tools through which the RBI imposes its checks are:
- Credit Rationing: Under this method, the RBI asks commercial banks to limit their lendings as per the credibility of the customer or the loan seeker. Here RBI also directs the commercial banks to lend money at lower rates to the weaker sections of the society for some specific purposes as and when stated.
- Margin Requirements: Whenever a loan is granted, some collateral security needs to be kept with the commercial banks. The RBI sets a ratio for the percentage that can be given as a loan and the percentage that should be retained for hedging at the time of fluctuations in the market.
- Moral Suasion: The RBI requests in oral and written to the commercial banks not to lend money for any speculative purposes and for unimportant purposes.
- Direct Action: Here, the RBI directly intervenes and takes actions if the commercial banks do not work as per the directions of the Reserve Bank of India.
2. FISCAL POLICY
It is a policy which is regulated by the Ministry of Finance, Government of India.
- The fiscal policy helps in economic growth and also creates price stability in the Economy.
- It also facilitates in Capital formation, resource allocation, revenue generation and redistribution of the income.
The government uses two tools to control economic activities in the country. They are :
- Government Expenditure
- Collections (mainly taxes imposed by the government).
Government Expenditure: Government Expenditure is the expenditure done by the government for the general public. It is also known as public expenditure. Public expenditure is further classified into two types:
- Capital and Revenue Expenditures: The expenditures made on long term assets comes under this category. For example, loans given by the Central Government to the States and Union Territories, Investments and Repayment of liabilities. Whereas, Revenue Expenditures are those expenditures incurred by the government for the day to day functioning or for payments of the Interest on loans taken by the government, Grants given during the time of contingency.
- Plan and Non-Plan Expenditures: Plan expenditures are the expenditures for those items that are mentioned in the plans of Niti Aayog and budget. Example- Construction of Roads and Bridges, Various other development plans. Whereas, Non-Plan Expenditures are those general expenditures incurred by the government on economic and social services of the government. Example- Subsidies, defence services, pensions, etc.
Collections: Government generates revenue from various sources, like PSUs, surplus profits of RBI, Railways, Fees & Penalties, Coinage, mainly from taxes and other duties which are then further spent for different welfare purposes. Taxes, the primary source of revenue for Government can be classified into two types.
- Direct Taxes (Income Tax, Corporate Tax)
- Indirect Taxes (GST)