Monetary and Fiscal Policy

1. Fiscal policy is the means by which a government
adjusts its spending levels and tax rates to
monitor and influence a nation's economy.
Fiscal policy must be designed to be performed in
two ways-
by expanding investment in public and private
enterprises and
by diverting resources from socially less
desirable to more desirable investment channels.

2. The objective of fiscal policy is to maintain the condition of
full employment, economic stability and to stabilize the
rate of growth.
For an under-developed economy, the main purpose of
fiscal policy is to accelerate the rate of capital
formation and investment.
“Arthur Smithies, fiscal policy aims primarily at
controlling aggregate demand and leaves private
enterprise its traditional field- the allocation of
resources among alternative uses.”

3. The objectives of a fiscal policy in a
developing economy:
1. Full employment
2. Price stability
3.Accelerating the rate of economic
development
4. Optimum allocation of resources
5. Equitable distribution of income and wealth
6. Economic stability
7. Capital formation and growth
8. Encouraging investment

4. 1. Full Employment:
The first and foremost objective of fiscal policy in a
developing economy is to achieve and maintain full
employment in an economy.
In such countries, even if full employment is not achieved,
the main motto is to avoid unemployment and to achieve a
state of near full employment.
Therefore, to reduce unemployment and under-
employment, the state should spend sufficiently on
social and economic overheads. These
expenditures would help to create more
employment opportunities and increase the productive
efficiency of the economy.

5. Full employment is a situation in which everyone who wants a
job can have work hours they need on "fair wages“
In macroeconomics, full employment is sometimes defined
as the level of employment at which there is no cyclical
or deficient-demand and unemployment.
In this way, public expenditure and public sector investment
have a special role to play in a modern state.
A properly planned investment will not only expand income,
output and employment but will also step up effective
demand through multiplier process and the economy
will march automatically towards full employment.
Besides public investment, private investment can also be
encouraged through tax holidays, concessions, cheap
loans, subsidies etc.

6. The multiplier effect. ... The multiplier effect refers
to the increase in final income arising from any new
injection of spending.
The size of the multiplier depends upon household's
marginal decisions to spend, called the marginal
propensity to consume (MPC), or to save, called the
marginal propensity to save (MPS).
In economics, effective demand in a market is the
demand for a product or service which occurs when
purchasers are constrained in a different market.

7. In the rural areas attempts can be made to
encourage domestic industries by
providing them training, cheap finance,
equipment and marketing facilities.
Expenditure on all these measures will help in
eradicating unemployment and under-
employment.
2. Price Stability:
There is a general agreement that economic growth and
stability are joint objectives for underdeveloped countries. In a
developing country, economic instability is manifested in
the form of inflation.

8. Prof. Nurkse believed that “inflationary pressures are
inherent in the process of investment but the way to stop
them is not to stop investment.
They can be controlled by various other ways of which the
chief is the powerful method of fiscal policy.”
Therefore, in developing economies, inflation is a
permanent phenomena where there is a tendency
to the rise in prices due to expanding trend of
public expenditure.
As a result of rise in income, aggregate demand exceeds
aggregate supply. Capital goods and consumer goods
fail to keep pace with rising income.

9. Thus, these result in inflationary gap. The price rise
generated by demand pull reinforced by cost push
inflation leads to further widening the gap.
The rise in prices raises demand for more wages. This
further gives rise to repeated wage-price spirals. If this
situation is not effectively controlled, it may turn
into hyper inflation.
In short, fiscal policy should try to remove the
bottlenecks and structural rigidities which cause
imbalance in various sectors of the economy.
Moreover, it should strengthen physical controls of
essential commodities, granting of concessions,
subsidies and protection in the economy

10. 3. To Accelerate the Rate of Economic Growth:
Primarily, fiscal policy in a developing economy, should
aim at achieving an accelerated rate of economic
growth.
But a high rate of economic growth cannot be achieved and
maintained without stability in the economy.
Therefore, fiscal measures such as taxation, public
borrowing and deficit financing etc. should be used
properly so that production, consumption and
distribution may not adversely affect.
It should promote the economy as a whole which in turn helps
to raise national income and per capita income.

11. 4. Optimum Allocation of Resources:
Public expenditure, subsidies and incentives can
favorably influence the allocation of resources in the
desired channels.
Tax exemptions and tax concessions may help a lot in attracting
resources towards the favored industries. On the contrary, high
taxation may draw away resources in a specific sector.
Above all, direct curtailment of consumption and
socially unproductive investment may be helpful in
mobilization of resources and the further check of the
inflationary trends in the economy.
Sometimes, the policy of protection is a useful tool for
the growth of some socially desired industries in an
under-developed country.

12. 5. Equitable Distribution of Income and Wealth:
It is needless to emphasize the significance of equitable
distribution of income and wealth in a growing economy.
Generally, inequality in wealth persists in such countries as
in the early stages of growth, it concentrates in few hands.
It is also because private ownership dominates the
entire structure of the economy. Besides, extreme
inequalities create political and social
discontentment which further generate economic
instability.
For this, suitable fiscal policy of the government can
be devised to bridge the gap between the incomes
of the different sections of the society.

13. To reduce inequalities and to do distributive justice, the
government should invest in those productive channels which
incur benefit to low income groups and are helpful in raising
their productivity and technology.
Therefore, redistributive expenditure should help economic
development and economic development should help
redistribution.
Thus, well-planned fiscal programme, public expenditure
can help development of human capital which in turn
possesses positive effects on income distribution.
Regional disparities can also be removed by providing
incentives to backward regions. A redistributive tax
policy should be highly progressive and aim at
imposing heavy taxation on the richer and exempting
poorer sections of the community. Similarly, luxurious
items, which are consumed by the higher section, may
be subject to heavy taxation.

14. 6. Economic Stability:
Fiscal measures, to a larger extent, promote economic stability in the
face of short-run international cyclical fluctuations. These
fluctuations cause variations in terms of trade, making the
most favorable to the developed and unfavorable to the
developing economies.
So, for the purpose of bringing economic stability, fiscal methods
should incorporate built-in-flexibility in the budgetary system so
that income and expenditure of the government may automatically
provide compensatory effect on the rise or fall of the nation’s income.
Therefore, fiscal policy plays a leading role in maintaining economic
stability in the face of internal and external forces. The instability
caused by external forces is corrected by a policy, popularly
known as ‘tariff policy’ rather than aggregative fiscal policy.
In the period of boom, export and import duties should be
imposed to minimize the impact of international cyclical
fluctuations.

15. To curb the use of additional purchasing power, heavy import duty
on consumer goods and luxury import restrictions are
essential.
During the period of recession, government should undertake public
works programmes through deficit financing. In nut shell, fiscal policy
should be viewed from a larger perspective keeping in view the
balanced growth of various sectors of the economy.
7. Capital Formation and Growth:
Capital assumes a central place in any development activity in a
country and fiscal policy can be adopted as a crucial tool for the
promotion of the highest possible rate of capital formation.
A newly developing economy is encompassed by a ‘vicious circle of
poverty’. Therefore, a balanced growth is needed to
breakdown the vicious circle which is only feasible with
higher rate of capital formation.
Once a country comes out of the clutches of backwardness, it
stimulates investment and encourage capital formation.

16. Prof. Raja J. Chelliah recommends that fiscal policy
must aim at the following for attaining rapid economic
growth:
(i) Raising the ratio of saving (s) to Income (y) by
controlling consumption (c);
(ii) Raising the rate of investment:
(iii) Encouraging the flow of spending into productive
way;
(iv) Reducing glaring inequalities of income and wealth.
Therefore, fiscal policy must be designed to be performed in two
ways-
 by expanding investment in public and private enterprises
and
 by diverting resources from socially less desirable to more
desirable investment channels.

17. This Policy will help to raise the level of aggregate savings in
the economy and create capital for bringing about a
qualitative improvement in it.
Capital formation, however, can also be facilitated
by taxation, deficit spending and foreign
borrowing.
In fact, fiscal measures of the government can induce the
private entrepreneurs to take active participation
for mobilizing resources at least in the long run.

18. 8. To Encourage Investment:
Fiscal policy aims at the acceleration of the rate of
investment in the public as well as in private sectors of the
economy.
Fiscal policy, in the first instance, should encourage
investment in public sector which in turn effect to increase
the volume of investment in private sector.
In other words, fiscal policy should aim at rapid
economic development and must encourage
investment in those channels which are considered
most desirable from the point of view of society.

19. It should aim at curtailing conspicuous consumption
and investment in unproductive channels.
In the early stages of economic development, the
government must try to build up economic and social
overheads such like transport and communication,
irrigation, flood control, power, ports, technical
training, education, hospital and school facilities,
so that they may provide external economies to
induce investment in industrial and agricultural
sectors of the economy.

20. The major instruments of fiscal policy are as
follows:
A. Budget
B. Taxation
C. Public Expenditure
D. Public Works
E. Public Debt.

21. A. Budget:
The budget of a nation is a useful instrument to assess the
fluctuations in an economy.
Different budgetary principles have been
formulated by the economists, prominently known
as:
(1) Annual budget,
(2) cyclical balanced budget and
(3) fully managed compensatory budget.

22. 1. Annual Balanced Budget:
The classical economists propounded the principle of annually
balanced budget. They defended it with force till the deep rooted
crisis of 1930’s.
The reasons for their reacceptance of this principle are
as under:
(i) They maintained that there should be balance in income
and expenditure of the government;
(ii) They felt that automatic system is capable to correct the evils;
(iii) Balanced budget will not lead to depression or boom in the
economy;
(iv) It is politically desirable as it checks extravagant
spending of the state;
(v) This type of budget assures full employment without inflation;
(vi) The principle is based on the notion that government
should increase the taxes to get more money and reduce
expenditure to make the budget balanced.

23. 2. Cyclically Balanced Budget:
The cyclical balanced budget is termed as the ‘Swedish budget’.
Such a budget implies budgetary surpluses in prosperous
period and employing the surplus revenue receipts for
the retirement of public debt.
During the period of recession, deficit budgets are
prepared in such a manner that the budget surpluses
during the earlier period of inflation are balanced with
deficits.
The excess of public expenditure over revenues are
financed through public borrowings. The cyclically
balanced budget can stabilize the level of business activity.
During inflation and prosperity, excessive spending
activities are curbed with budgetary surpluses while
budgetary deficits during recession with raising extra
purchasing power.

24. This policy is favored on the following account:
The government can easily adjust its finances according to the needs;
This policy works smoothly in all times like depression, inflation, boom and
recession;
Cyclically balanced budget simply ensures stability but gives no guarantee
that the system will get stabilized at the level of full employment.
3. Fully Managed Compensatory Budget:
This policy implies a deliberate adjustment in taxes, expenditures,
revenues and public borrowings with the motto of achieving full
employment without inflation.
It assigns only a secondary role to the budgetary balance. It lays down the
emphasis on maintenance of full employment and stability in the price level.
With this principle, the growth of public debt and the problem of
interest payment can be easily avoided. Thus, the principle is also
called ‘functional finance.’

25. B. Taxation:
Taxation is a powerful instrument of fiscal policy in the
hands of public authorities which greatly effect the
changes in disposable income, consumption and
investment.
An anti- depression tax policy increases
disposable income of the individual, promotes
consumption and investment.
Obviously, there will be more funds with the people for
consumption and investment purposes at the time of tax
reduction.

26. This will ultimately result in the increase in spending
activities i.e. it will tend to increase effective demand
and reduce the deflationary gap.
In this regard, sometimes, it is suggested to reduce the rates
of commodity taxes like excise duties, sales tax and
import duty. As a result of these tax concessions,
consumption is promoted.
Economists like Hansen and Musgrave, with their eye on
raising private investment, have emphasized upon
the reduction in corporate and personal income
taxation to overcome contractionary tendencies in
the economy.

27. Now, a vital question arises about the extent to which
unemployment is reduced or mitigated if a tax reduction
stimulates consumption and investment expenditure.
In such a case, reduction of unemployment is very
small. If such a policy of tax reduction is repeated,
then consumers and investors both are likely to
postpone their spending in anticipation of a
further fall in taxes.
Furthermore, it will create other complications in the
government budget.

28. Anti-Inflationary Tax Policy:
An anti-inflationary tax policy, on the contrary, must be directed
to plug the inflationary gap.
During inflation, fiscal authorities should not retain the
existing tax structure but also evolve such measures
(new taxes) to wipe off the excessive purchasing power
and consumer demand. To this end, expenditure tax
and excise duty can be raised.
The burden of taxation may be raised to the extent
which may not retard new investment. A steeply
progressive personal income tax and tax on windfall gains is
highly effective to curb the abnormal inflationary pressures.
Export should be restricted and imports of essential
commodities should be liberated.

29. C. Public Expenditure:
The active participation of the government in economic
activity has brought public spending to the front line among
the fiscal tools.
The appropriate variation in public expenditure can have
more direct effect upon the level of economic activity than
even taxes. The increased public spending will have a
multiple effect upon income, output and employment
exactly in the same way as increased investment has its
effect on them.
Similarly, a reduction in public spending, can reduce the
level of economic activity through the reverse operation of
the government expenditure multiplier.

30. (i) Public Expenditure in Inflation:
During the period of inflation, the basic reason of
inflationary pressures is the excessive aggregate spending.
Both private consumption and investment spending are
abnormally high. In these circumstances, public spending
policy must aim at reducing the government spending.
In other words, some schemes should be abandoned and
others be postponed.
It should be carefully noted that government spending
which is of productive nature, should not be shelved, since
that may aggravate the inflationary dangers further.

31. However, reduction in unproductive channels may prove helpful to
curb inflationary pressures in the economy.
But such a decision is really difficult from economic and political
point of view. It is true, yet the fiscal authority can vary its
expenditure to overcome inflationary pressures to some extent.
(ii) Public Expenditure in Depression:
In depression, public spending emerges with greater significance. It
is helpful to lift the economy out of the morass of stagnation.
In this period, deficiency of demand is the result of sluggish private
consumption and investment expenditure. Therefore, it can be met
through the additional doses of public expenditure equivalent to the
deflationary gap.
The multiplier and acceleration effect of public spending will
neutralize the depressing effect of lower private spending’s and
stimulate the path of recovery.

32. D. Public Works:
Keynes General Theory highlighted public works programme
as the most significant anti-depression device. There are two
forms of expenditure i.e., Public Works and ‘Transfer
Payments.
Public Works according to Prof. J.M. Clark, are durable goods,
primarily fixed structure, produced by the government.
They include expenditures on public works as roads, rail tracks,
schools, parks, buildings, airports, post offices, hospitals,
irrigation canals etc.
Transfer payments are the payments such like interest on
public debt, subsidy, pension, relief payment, unemployment,
insurance and social security benefits etc. The expenditure on
capital assets (public works) is called capital expenditure.

33. Public works are supported as an anti-depression device on the
following grounds:
(i) They absorb hitherto unemployed workers.
(ii) They increase the purchasing power of the community and thereby
stimulate the demand for consumption goods.
(iii)They help to create economically and socially useful capital assets as
roads, canals, power plants, buildings, irrigation, training center's and public
parks etc.
(iv) They provide a strong incentive for the growth of industries which are
generally hit by the state of depression.
(v) They help to maintain the moral and self respect of the work force and
make use of the skill of unemployed people.
(vi) The public works do not have an off setting effect upon private
investment because these are started at a time when private investment is
not forthcoming.

34. E. Public Debt:
Public debt is a sound fiscal weapon to fight against inflation
and deflation. It brings about economic stability and full
employment in an economy.
The government borrowing may assume any of the
following forms mentioned as under:
(a) Borrowing from Non-Bank Public:
When the government borrows from non-bank public through
sale of bonds, money may flow either out of consumption or
saving or private investment or hoarding.
As a result, the effect of debt operations on national income will
vary from situation to situation. If the bond selling schemes of
the government are attractive, the people induce to curtail their
consumption, the borrowings are likely to be non inflationary.

35. When the money for the purchase of bonds flows from
already existing savings, the borrowing may again be non-
inflationary.
Has the government not been borrowing, these funds
would have been used for private investment,
with the result that the debt operations by the government
will simply bring about a diversion of funds from one
channel of spending to another with the similar
quantitative effects on national income.

36. If the government bonds are purchased by non bank
individuals and institutions by drawing upon their hoarded
money, there will be net addition to the circular flow of
spending.
Consequently, the inflationary pressures are likely to be
created. But funds from this source are not commonly
available in larger quantity.
Its main implication is that borrowings from non bank
public is more advantageous in an inflationary period and
undesirable in a depression phase.
In short, the borrowing from non bank public are not of
much significant magnitude whether it comes out of
consumption, saving, private investment or hoarding.

37. (b) Borrowing from Banking System:
The government may also borrow from the banking institutions.
During the period of depression, such borrowings are highly
effective.
In this period, banks have excessive cash reserves and the
private business community is not willing to borrow from banks
since they consider it unprofitable.
When unused cash lying with banks is lent out to government, it
causes a net addition to the circular flow and tend to raise
national income and employment.
Therefore, borrowing from banking institution have desirable
and favorable effect specially in the period of depression when
the borrowed money is spend on public works programmes.

38. On the contrary, borrowing from this source dry up almost
completely in times of brisk business activities i.e. boom.
Actually, demand is very high during inflation period, since
profit expectation is high in business.
The banks, being already loaded up and having no excess cash
reserves find it difficult to lend to the government. If it is done, it
is only through reducing their loans somewhere else.
This leads to a fall in private investment. As the government
spending is off-set by a reduction in private investment, there
will be no net effect upon national income and employment.
In nut shell, borrowing from banking institutions have desirable
effect only in depression and is undesirable or with a neutral
effect during inflation period.

39. (c) Drawing from Treasury:
The government may draw upon the cash balances held in
the treasury for financing budgetary deficit.
It demonstrates dishoarding resulting in a net addition in
the supply of money. It is likely to be inflationary in
nature.
But, generally, there are small balances over and above
what is required for normal day to day requirements. Thus,
such borrowings from treasury do not have any significant
result.

40. (d) Printing of Money:
Printing of money i.e. deficit financing is another method of
public expenditure for mobilizing additional resources in the
hands of government.
As new money is printed, it results in a net addition to the
circular flow. Thus, this form of public borrowing is said to be
highly inflationary.
Deficit financing has a desirable effect during depression as it
helps to raise the level of income and employment but
objection is often raised against its use at the time of inflation
or boom.
Here, it must be added that through this device, the
government not only gets additional resources at minimum
cost but can also create appropriate monetary effects like low
interest rates and easy money supply and consequently
economic system is likely to register a quick revival.

41. MEDIUM TERM FISCAL POLICY CUM FISCAL POLICY STRATEGY STATEMENT

42. The table provides the estimates of fiscal performance
against specified fiscal indicators during RE 2018-19 and BE
2019-20 and projections for 2020- 21 and 2021-22.
The table indicates that the fiscal deficit shall be 3.4 per
cent in both RE 2018-19 and BE 2019-20.
The Fiscal Responsibility Budgetary Management
targets for the year were 3.3 per cent in 2018-19 to be
brought down to 3.1 per cent in 2019-20.
The Gross tax Revenue as a % of GDP is expected to
increase to 12.1% of GDP in 2019- 20 and stabilize at that
level in 2020-21 before climbing up to a level of 12.2% of
GDP.

43. Central government debt, reduced by cash balance, shows a
declining trend.
The Central Government Debt, which was estimated at 48.8
per cent as a percentage of GDP for 2018-19 has been revised
upwards to 48.9 per cent.
It is expected that Central Government liabilities will come
down to 47.3 per cent of GDP in 2019-20.
The declining path of central government debt is expected to
continue with debt reaching 45.4 per cent of GDP and 43.4 per
cent of GDP in 2020-21 and 2021-22 respectively.
The main reason for the decline in debt is the sharp reduction in
fiscal deficit projected in the medium term and is in line with the
overall objective of bringing central government debt within
40 per cent as per the FRBM Act.

44. Though revenue deficit is no longer a parameter for
measuring fiscal outcomes in the FRBM Act, it is shown as a
reference indicator in MTFP Statement.
In 2018-19 revenue deficit was projected at 2.2 per cent of
GDP which has been kept at the same level in RE.
Revenue deficit creates a preference for capital
expenditure over revenue expenditure which may lead to a
situation where funds are allotted for creation of capital
assets but not for their subsequent maintenance.
It is also pertinent to note that even those transfers from
Union Government to State Government agencies that create
tangible assets under schemes are categorized as revenue
expenditure in Union Budget as Grants in aid .

45. Non-Tax Revenue as a percentage of GDP has also been included
as an indicator in the MTFP statement.
Biggest contributors to Non-tax Revenue of the Government
are interest receipt on loans and dividend receipts. Both
work out to be 1.3 percent of GDP.
Primary Deficit is another indicator which has been included in
the Medium term fiscal policy statement from 2019-20. Primary
deficit refers to the deficit left after subtracting interest payments
from fiscal deficit.
In BE 2018-19, primary deficit was calculated to be `48,481 crore
which is 0.3 per cent of GDP. Primary deficit in RE 2018-19 is
expected to be `46,828 crore which works out to be 0.2 per
cent of the GDP. The reduction of primary deficit is a positive
sign as it shows reduced usage of borrowed funds to pay for
existing liabilities.

46. GDP Growth
The growth rate of GDP saw a slight dip in 2017- 18 due to structural
adjustments in the economy caused due to the introduction of GST.
The revival in growth momentum in GDP, which was assumed in the
short to medium term is already being felt. It is expected that the
nominal Gross Domestic Product will grow at the rate of 12.3 per
cent in 2018-19 in comparison to a growth rate of 10 per cent in
2017- 18.
The GDP growth in the short to medium term is expected to hold steady
and stabilize at current levels. In 2019-20, the nominal GDP is expected
to grow at a rate of 11.5 per cent and attain the level of `2,10,07,439 crore.
The slight dip of 0.8 per cent in GDP growth is anticipated on account of
the inflation stabilizing at the targeted rate of 4 per cent. The
nominal gross domestic product is projected to growth at 12.1 percent
and 12.3 percent respectively in 2020- 21 and 2021-22.

47. Indirect Tax Policy.
GST Policy: Significant measures for rationalization of GST rate
structure are discussed below:
Multiple reliefs from GST taxation have been provided to
(i) agriculture, farming and food processing industry,
(ii) education, training and skill development,
(iii) Pension, social security and old age support,
(iv) Banking/ Finance/ Insurance services,
(v) Government Services,
(vi) Tourism and hospitality services,
(vii) Construction and works contract services,
and (viii) Transportation services.

48. GST on services – Measures taken for MSME during 2017-19
To bring relief to medium, small and micro enterprises, GST
rate on supply of goods, being food or any other article for
human consumption or any drink, by the Indian Railways or Indian
Railways Catering and Tourism Corporation Ltd. or their licensees,
whether in trains or at platforms has been reduced to 5%.
Services supplied by agent of Business correspondent (BC),
Business facilitator (BF), supply of security personnel to a
registered person by any person other than body corporate have
been kept under RCM, thereby shifting the compliance burden on
the recipient of service.
GST rate on third party insurance premium of goods carrying
vehicles has been reduced from 18% to 12%. GST rate on supply
consisting only of e-book has been reduced to 5%.

49. Direct Tax Policy:
The legislative measures for expansion of tax base require to
be supplemented by administrative measures to prevent
leakage of tax and erosion of tax base.
This being the interim budget, no legislative measures for
expansion of tax base are proposed at present.
However, on the administrative front, a number of
initiatives have been taken to improve compliance,
augment revenue collections and streamline tax payer
services, some of which are as under:

50. The Permanent Account Number (PAN) issued by the
Income-tax Department has now taken on the role of
“identifier” beyond the Income-tax Department as it is now
required for various activities like
 opening of a bank account,
 opening of a demat account, for the financial
transactions
 prescribed in Rule 114B of the Income-tax Rules, 1962,
 for registration for Goods and Services Tax (GST) etc.
Thus, PAN is leveraged to become Common Business
Identification Number (CBIN) or simply Business
Identification Number (BIN) for providing registration to
a number of government departments and services.

51. The progressive number of PANs allotted up to 31st August, 2018 (cumulative) is
40,70,37,543. During the current year (up to 31st August, 2018) 2,67,73,508
PANs have been allotted.
Under Project Insight, an integrated data warehousing and business intelligence
platform is being rolled out in phased manner to enable
the Income-tax Department to achieve three goals,
 viz. promoting voluntary compliance,
 deterring non-compliance,
 imparting confidence that all eligible persons pay appropriate tax and
promoting a fair and judicious tax administration.
Various initiatives have also been taken in the direction of citizen-centric
governance, some of which are as under:
A total of 400 Aaykar Sewa Kendras (ASKs), a single window system
for implementation of Citizen’s Charter of the Income Tax Department
and a mechanism for achieving excellence in public service delivery,
have been set up across all buildings of the Income Tax Department upto 31-03-
2018, with 50 more being set up in FY 2018-19.

52. Expenditure Policy:
Total expenditure in BE 2019-20 is pegged at `27,84,200 crore which is
13.3 percent higher than the revised estimates of total expenditure in 2018-
19 (`24,57,235 crore).
The estimates of total expenditure in BE 2019-20 and RE 2018-19 include
GST compensation cess.
GST is a destination-based tax, which means that taxes from products
you sell go to the buyer's state. ... This is a levy that is charged on certain
types of goods and you must pay it in addition to any required GST.
This cess applies to interstate sales, intrastate sales, and imports
Total expenditure in RE 2018-19 and BE 2018-19 has been estimates after
considering all requirements of Ministries/ Departments along with
factors such as pace of expenditure, unspent balances

53. DIRECT BENEFIT TRANSFER (DBT):
Direct Benefit Transfer (DBT) is a landmark initiative of the
Government to ensure that benefits promised under
various welfare and subsidy programmes of the country
reach eligible and rightful beneficiaries and are delivered to
them at their doorstep or in their bank accounts.
Cash schemes: This category includes 302 schemes or
components of schemes where subsidies/benefits are
transferred directly into the bank accounts of the
beneficiaries.
For example under PAHAL, beneficiaries buy LPG cylinders
at market price and receive subsidy directly in their bank
accounts.
In MGNREGS, all wage payments to workers are directly
transferred into their bank accounts.

54. In-kind schemes: This category includes 74 schemes
or components of schemes where beneficiaries
receive subsidies in the form of goods,
commodities, etc. after Aadhaar authentication at
Point of Sale (PoS).
For instance, under PDS, foodgrains are distributed at
subsidized rates via Fair Price Shops to
authenticated beneficiaries. Under Fertilizer
Subsidy scheme, fertilizer companies release
fertilizers to farmers at subsidized rates after Aadhaar
authentication at PoS. The remaining schemes are
composite schemes which have both cash and in-kind
components.

55. One such scheme is ‘Swacch Bharat Mission-
Grameen’ of M/o Drinking Water & Sanitation,
wherein funds for constructing household latrines
are transferred into the bank accounts of
identified beneficiaries in certain areas while in
others, latrines are constructed for beneficiaries
without involving any fund transfer.

56. The National Scholarship Portal (NSP), launched by
Hon’ble Prime Minister on 1st July 2015, is a key
initiative under Digital India programme aimed at
providing one-stop solution for scholarships.
It facilitates a gamut of activities ranging from student
registration to application submission, verification,
national level de-duplication, merit list generation,
sanction and electronic transfer of funds;
thereby providing an end-to-end comprehensive
solution towards enabling effective disbursal of
scholarships.

57. Fertilizer:
New Urea Policy- 2015, effective from 1st June, 2015,
with the objectives of
 maximizing indigenous urea production;
 promoting energy efficiency in urea production; and
 rationalizing subsidy burden on the government.
NUP – 2015 has resulted in additional production over
the years without adding any capacity.

58. Fiscal policy describes two governmental actions by the
government. The first is taxation. By levying taxes the
government receives revenue from the populace.
Taxes come in many varieties and serve different specific
purposes, but the key concept is that taxation is a transfer
of assets from the people to the government.

59. The second action is government spending. This may
take the form of wages to government employees,
social security benefits, smooth roads, or fancy
weapons.
When the government spends, it transfers assets
from itself to the public (although in the case of
weaponry, it is not always so obvious that the
population holds the assets).
Since taxation and government spending represent
reversed asset flows, we can think of them as
opposite policies.

60. National income, can be described by the equation
Y = C + I + G + NX where Y is output, or national income, C is
consumption spending, I is investment spending, G is
government spending, and NX is net exports.
This equation can be expanded to represent taxes by the
equation Y = C(Y - T) + I + G + NX. In this case, C(Y - T)
captures the idea that consumption spending is based on
both income and taxes.
Disposable income is the amount of money that can be spent
on consumption after taxes are removed from total income.
The new form of the output, or national income, equation
reflects both elements of fiscal policy and is most useful
for analysis of the effects of fiscal policy changes.

61. Types of Fiscal Policy
The government has control over both
taxes and government spending.
Examples of this include increasing taxes
and lowering government spending.

62. There is another way to interpret the terms
expansionary and contractionary when discussing
fiscal policy.
If we look at the effects of fiscal policy on the
economy as a whole rather than on the individual,
we see that expansionary fiscal policy increases
the output, or national income, while
contractionary fiscal policy decreases the
output, or national income.
Thus, there are two basic classes of effects of fiscal
policy, those that deal with the individual and those
that deal with the economy at large.

63. Let us first work through how expansionary fiscal
policy functions. Recall that lowering taxes and
raising government spending are both forms of
expansionary fiscal policy.
In terms of the economy as a whole, this is
represented in the output equation
Y = C(Y - T) + I + G + NX,

64. where a decrease in T,
given a stable Y,
leads to an increase in C,
and ultimately to an increase in Y.
Raising government spending has similar effects.
When the government spends more on goods and
services, the population, which provides those goods
and services, receives more money.

65. In terms of the economy as a whole, this is
again
represented by Y = C(Y - T) + I + G + NX,
where an increase in G leads to an increase
in Y.
Thus, expansionary fiscal policy makes
the populace wealthier and increases
output, or national income.

66. Monetary policy is how central
banks manage liquidity to create economic
growth. Liquidity is how much there is in
the money supply.
That includes credit, cash, checks, and money
market mutual funds.
Monetary policy is defined as the central bank’s use of
control of money supply or interest rates (i.e., the
price of money) or the rationing of credit sanctioned by
banks to influence the level of economic activity.

67. Monetary authority employs monetary
policy to influence aggregate demand in
order to achieve higher levels of income
and employment.
The mechanism—called money
transmission mechanism—that
influences aggregate demand
follows the following course.

68. An increase in money supply by the
central bank will mean more money in the
pockets of firms and households. Faced with
more money, people will buy more financial
assets, such as bonds.
Consequently, bond prices will go up and
interest rates will decline. This will stimulate
consumption and investment spending,
thereby raising aggregate demand and,
hence, level of income and employment.

69. An appropriate monetary policy should
have the following objectives since
monetary policy is, strictly speaking,
part of the broader sphere of economic
policy:
(i) Maintaining internal and external stability;
(ii) High employment;
(iii) Economic growth;
(iv) Fiscal objectives; and
(v) Social objectives.

70. (i) Maintaining Price Stability:
By price stability, we mean both internal and external
stability in the price level. Price fluctuations of a larger
degree are always unwelcome.
Sustained increase in price level has a destabilizing
effect on the economy. A falling price level has more
destabilizing influence on the economy.
In other words, both inflation and deflation must
be controlled so that benefits of economic
development are reaped.
Price stability prevents not only economic
fluctuations but also helps in the attainment of
a steady growth of an economy.

71. Monetary policy also has the objective of upholding
external stability in prices.
External instability hampers the smooth flow of trade
between nations. It also erodes the confidence of the
currency. Thus, what is needed is a
(ii) High Employment:
A country must aim at attaining at least near full
employment situation.
By pushing up aggregate demand (C + I + G), a
country can prevent wastes of labour.
And, aggregate demand gets to be stimulated by
applying appropriate monetary policy
instruments. stable exchange rate.

72. ”The goal for high employment should therefore be
not to seek an
 unemployment level of zero but rather a level of
above zero consistent with full employment at which
the
 demand for labour equals the supply of labour. This
level is called the natural rate of unemployment.”

73. (iii) Economic Growth:
Growth should be the predominant aim of
monetary policy.
An appropriate monetary policy
 by adjusting money supply to the needs of
growth,
 directing the flow of funds in keeping with the
overall economic priorities,
 and providing institutional facilities for
credit in specific areas of economic activity—
 all combined creates a favourable climate for
economic growth.

74. Economic growth requires an increase in saving and
investment. Monetary policy can contribute towards
economic growth by raising saving-income ratio.
But monetary policy can boost aggregate
saving rate by expanding banking
facilities in under-banked and unbanked
areas.
Commercial banks can mobilize savings of the
people in such a way that savings are
channelized into productive investment.

75. For productive investment, bank funds are invested
in government securities so that the government can
finance its planned investment programme.
Banks also provide a great deal of monetary funds to
meet the credit needs of various economic sectors of
the economy.
However, generation of savings and its
investment is not enough for boosting
economic growth.
What is needed is the allocation of funds in proper
direction. Monetary policy has to be designed
in such a way that scarce resources are
invested only in productive lines.

76. (iv) Fiscal Objectives:
The most important fiscal objective which
monetary policy has to pursue is that of
facilitating government borrowing and the
management of public debt.
In the interest of a sound debt management
policy, monetary policy is employed so that an
orderly condition in the security market is
established.

77. (v) Social Objectives:
Monetary policy is often used to attain some social
ends or social welfare.
By raising or lowering price level, monetary
policy can produce far-reaching social
effects of redistribution of wealth.
One of the most important objectives of the pursuit
of monetary stability is to maintain the social
status quo.

78. The term money should be used to include anything which
performs the functions of money,
 medium of exchange,
 measure of value,
 unit of account, etc.
Since general acceptability is the fundamental characteristic
of money,
Therefore, money may be defined as ‘anything which is
generally acceptable by the people in exchange of goods
and services or in repayment of debts.’

79. 1. Money as the Medium of Exchange:
Money came into use to remove the
inconveniences of barter as money has separated
the act of purchase from sale.
Medium of exchange is the basic or primary
function of money. People exchange goods
and services through the medium of
money.
Money acts as a medium of exchange or as a
medium of payments. Money by itself has no
utility (except perhaps to the miser). It is only an
intermediary.

80. The use of money facilitates exchange,
exchange promotes specialization
Increases productivity and efficiency.
A good monetary system is, therefore, of
immense utility to human society.
Money is also called a bearer of options or
generalized purchasing power because it
provides freedom of choice to buy things he
wants most from those who offer best
bargain.

81. 2. Money as a Unit of Account or
Measure of Value:
Money serves as a unit of account or a
measure of value.
Money is the measuring rod, i.e., it is the units
in terms of which the values of other goods
and services are measured in money terms
and expressed accordingly.
Different goods produced in the country are
measured in different units like cloth
meters, milk in liters and sugar in
kilograms.

82. Without a common unit, exchange of goods
becomes very difficult Values of all goods
and services can be expressed easily in a
single unit called money.
Again without a measure of value, there
can be no pricing process. Without a
pricing process organized marketing
and production is not possible.
Thus, the use of money as a measure of
value is the basis of specialized production.

83. The measuring rod of money is also
indispensable to all forms of economic
planning.
Consumers compare the values of
alternative purchases in terms of money
Producers also compare the values of
alternative purchases in terms of
money.
Producers compare the relative costliness of
the factors of production in terms of money
and also plan their output on the basis of the
money yield. It is, therefore, highly important
that the value of money should be stable.

84. 3. Money as the Standard of
Deferred Payments:
Deferred payments are payments which
are made some time in the future.
Debts are usually expressed in terms of the
money of account. Loans are taken and
repaid in terms of money.

85. The use of money as the standard of deterred
or delayed payments immensely simplifies
borrowing and lending operations because
money generally maintains a constant value
through time.
Thus, money facilitates the formation of
capital markets and the work of financial
intermediaries like Stock Exchange,
Investment Trust and Banks.
Money is the link which connects the
values of today with those of the future.

86. 4. Money as a Store of Value:
Wealth can be stored in terms of money for
future. It serves as a store value of goods in
liquid form.
By spending it, we can get any commodity
in future. Keynes places great emphasis on
this function of money.
Holding money is equivalent to
keeping a reserve of liquid assets
because it can be easily converted
into other things.

87. People therefore normally wish to
keep a part of their wealth in the
form of money because savings in
terms of goods is very difficult.
This desire is known as liquidity
preference. Clearly money is the best
form of store of value.
Wheat or any other product which
will command a value cannot be
stored for a long period.

88. Another Function ‘Liquidity of Money’ is
added these days. Money is perfectly
liquid.
Liquidity means convertibility into
cash. Thus, the ability to convert an
asset into money quickly and
without loss of value is called
liquidity of asset.
Modern economists are laying stress on
liquidity of money.

89. Since, by definition, money is the most
generally accepted commodity, it is also the
most liquid of all resources.
Possession of money enables one to get hold
of almost any commodity in any place and
money never locks a buyer.
It is this peculiarity which distinguishes
money from all other commodities. A
preference for liquidity is preference
for money.

90. The supply of money means the total stock of
money (paper notes, coins and demand
deposits of bank) in circulation which is held by
the public at any particular point of time.
The two components of money supply are
(i) currency (Paper notes and coins)
(ii) Demand deposits of commercial
banks.

91. Again it needs to be noted that (like
difference between stock and supply of a
commodity) total stock of money is
different from total supply of money.
Supply of money is only that part of
total stock of money which is held by
the public at a particular point of time.
In other words, money held by its users (and
not producers) in spendable form at a point
of time is termed as money supply.

92. The stock of money held by government and the
banking system are not included because
they are suppliers or producers of money and
cash balances held by them are not in actual
circulation.
In short, money supply includes currency
held by public and net demand deposits
in banks.

93. Sources of Money Supply:
(i) Government (which Issues one-rupee notes and all
other coins)
(ii) RBI (which issues paper currency)
(iii) commercial banks (which create credit on the basis
of demand deposits).
(b) Alternative measures of Money Supply
(money stock):
In India Reserve Bank of India uses four alternative
measures of money supply called M1, M2, M3 and M4.
Among these measures M1 is the most commonly
used measure of money supply because its
components are regarded most liquid assets.

94. M1 = C + DD + OD.
Here C denotes currency (paper notes and coins)
held by public,
DD stands for demand deposits in banks and
OD stands for other deposits in RBI. Demand
deposits are deposits which can be withdrawn at any
time by the account holders. Current account
deposits are included in demand deposits.

95. But savings account deposits are not
included in DD because certain conditions are
imposed on the amount of withdrawals and
number of withdrawals.
OD stands for other deposits with the RBI which
includes demand deposits of public financial
institutions, demand deposits of foreign
central banks and international financial
institutions like IMF, World Bank, etc.

96. (ii) M2 = M1 (detailed above) + saving deposits
with Post Office Saving Banks
(iii) M3= M1 + Net Time-deposits of Banks
(iv) M4 = M3 + Total deposits with Post Office
Saving Organization (excluding NSC)

97. Savings deposits of post offices are not
a part of money supply because they
do not serve as medium of exchange
due to lack of cheque facility.
Similarly, fixed deposits in commercial
banks are not counted as money.
Therefore, M1 and M2 may be treated as
measures of narrow money whereas
M3 and M4 as measures of broad money.

98. In practice, M1 is widely used as measure of
money supply which is also called aggregate
monetary resources of the society.
All the above four measures represent different
degrees of liquidity, with M4 being the most
liquid and M4 is being the least liquid.
It may be noted that liquidity means ability to
convert an asset into money quickly and
without loss of value.

99. Internal Features of India’s Present Monetary
System:
1. Unit of Money:
The unit of money in India is the rupee, it is not only a
medium of exchange but also a unit of value which
facilitates accounting.
As a unit of account, the rupee helps in the estimation of
costs and prices and revenues of firms and projects, and
the gross national product.

100. 2. Monetary Standard:
The present monetary standard of India is the
managed paper currency standard. According to
this, the paper currency is in circulation which is
non-convertible into gold.
It is managed paper standard because the issue of
notes and coins is managed by the Reserve Bank of
India
3. Types of Coins and Notes (or Currency):
The following types of coins and notes are
included in India’s present monetary system:

101. (i) Coins:
The Rupee-coin in India is a standard token coin
whose intrinsic value of the metal is less than its
face value. If the Rupee-coin is melted, its metal
will not be sold worth one rupee.
The Rupee-coin is an unlimited legal tender in
which payment of any amount can be made. There
are also 2-Rupee coin and 5-Rupee coins in
circulation since 1990.

102. (ii) Subsidiary Coins:
There are also subsidiary coins in India to assist the token
money.
At present, coins of the denominations of 1 paisa and 3, 5,
10, 20, 25 and 50 paisa are in circulation. The 50-paise
coin like the Indian rupee-coin is unlimited legal tender.
But all coins from 1 paisa to 25 paise are limited legal
tender for which payment can be made only up to Rs. 25.
The minting of 1, 3, 5, 9 and 10 paisa coins has been
stopped since 1996 but they will remain in circulation till
their transactions are stopped by the public themselves.

103. (iii) Notes or Paper Currency:
Paper currency in India consists of notes of various
denominations which are issued by the Reserve
Bank of India and the Government of India.
The one-rupee note is issued by the Ministry of
Finance of the Government of India and bears the
signature of the Secretary.

104. It is inconvertible paper money which is
also known as fiat money or representative
or token money. But it is unlimited legal
tender.
The other notes of the denominations of
Rs. 2, 5, 10, 20, 50, 100 and 500 are
issued by the Reserve Bank of India.
They are inconvertible into gold but are
unlimited legal tender. They are convertible
into coins and notes. They are fiduciary
money.

105. (iv) System of Note Issue:
The present system of note issue in India is the
Minimum Reserve System.
Under this system, the RBI is authorized to issue
notes up to any extent but it must keep a
statutory minimum reserve of gold and foreign
securities.
Accordingly, the RBI is required to keep a
minimum reserve of Rs.200 crores. Of this,
Rs.115 crores must be in gold and Rs.85
crores in foreign securities.

106. 4. Money Supply:
In India, the money supply consists .of both
narrow money (M1) and broad money (M3).
M1 consists of currency notes and coins with
the public, demand deposits with commercial
and cooperative banks and other deposits with
RBI.
M3 consists of M1 plus time deposits with
banks and is also known as aggregate
monetary resources.

107. Money Supply M3 in India increased to
154301.05 INR Billion in April from 150535.59
INR Billion in March of 2019.
Money Supply M3 in India averaged 26592.12
INR Billion from 1972 until 2019, reaching an all
time high of 154301.05 INR Billion in April of
2019 and a record low of 123.52 INR Billion in
January of 1972.
India’s Money Supply M1 was reported at
516.710 USD bn in Apr 2019.
This records a decrease from the previous
number of 533.928 USD bn for Mar 2019.

109. External Features of India’s Monetary System:
1. Foreign Exchange Rate:
Since January 1976 with the signing of Jamaica
Agreement, India is following the policy of floating
exchange rates.
According to this, the external value of Indian rupee is
linked to a ‘basket’ of currencies of those countries
with which India has large trade.
This is the Nominal Effective Exchange Rate (NEER) of the
rupee which is a weighted average of exchange rates vis-
a-vis the currencies of India’s major trading partners.

110. Up to February 1993, India followed a dual exchange
rate regime. According to it, the RBI fixed the exchange
rates in terms of the various currencies
such as dollar, pound, mark, yen, franc, rouble, etc.
from time to time and all legal exchange transactions
took place at the announced official rates.
In March 1993, India moved to a single market-
determined exchange rate system.
Under it, there is no officially fixed exchange rate of
the rupee. Instead, the exchange rate is determined
by the demand and supply conditions in the foreign
exchange market.
But the RBI intervenes only to maintain orderly market
conditions and to curb excessive speculation.

111. 2. Exchange Control:
In order to conserve foreign exchange, the RBI
controls all foreign receipts and payments in the form
of foreign currencies.
It has an Exchange Control Department for this
purpose. Foreign currencies coming into India are
required to be sold and exchanged for the rupee
either direct to the RBI or to its authorized dealers
(ADs).
Its authorized dealers include certain commercial
banks, hotels, firms, shops, etc. which deal in
foreign currencies and foreign travelers' cheques.

112. They are also authorized to lend and borrow foreign
currency among themselves in the inter-bank market
locally.
The actual lending limit for each AD is fixed by the RBI
depending upon the size of its operations and other
relevant factors.
In March 1992, the RBI introduced the partial convertibility
of the rupee in 60:40 ratio. This was the Liberalized
Exchange Rate Management System (LERMS).
Under this system, all foreign exchange receipts on
current account transactions (i.e. exports,
remittances, etc.) were required to be surrendered to
the authorized dealers (ADs) in full.

113. The rate of exchange for these transactions was the
free market rate quoted by the ADs.
The ADs, in turn, surrendered to the RBI 40 per
cent of their purchase of foreign currencies at the
exchange rate announced by the RBI.
They were free to sell the balance of 60 per cent of
foreign exchange in the free market.
All importers of goods and services and persons
travelling abroad bought foreign exchange at
market- determined rates from the ADs subject to
liberalized exchange control rules.

114. In March 1994, full convertibility of the rupee on the entire
current account transactions was introduced.
Consequently, the RBI announced further relaxations in the
exchange control regulations up to a specified limit relating
to:
(a) Exchange earners foreign currency accounts;
(b) Basic travel quota;
(c) Studies abroad;
(d) Gift remittances;
(e) Donations;
(f) 100% export oriented units; and
(g) Payments of certain services rendered by foreign
parties.
Further relaxations in them are made from time to time
in keeping with the foreign exchange position of the
country.

115. 3. Foreign Exchange Reserves:
Foreign exchange reserves with the RBI show the
quantity of foreign currencies which can be utilized by
the country for trade and other foreign transactions.
The variations in foreign exchange reserves also show
the balance of payments position of the country.
India’s foreign exchange reserves comprising
foreign currency assets of the RBI, gold held by it,
and SDR balances held by the Government stood
at Rs. 3, 58, 280 crores at the end of March 2003.

116. Foreign Exchange Reserves in India increased to
418690 USD Million in the week 2019 ended May 3rd
from 418520 USD Million in the previous week.
Foreign Exchange Reserves in India averaged
222243.80 USD Million from 1998 until 2019,
reaching an all time high of 426080 USD Million in
April of 2018 and a record low of 29048 USD Million
in September of 1998.

119. I. Quantitative or General Methods:
1. Bank Rate Policy:
The bank rate is the rate at which the Central Bank of a
country is prepared to re-discount the first class
securities.
It means the bank is prepared to advance loans on
approved securities to its member banks.
As the Central Bank is only the lender of the last
resort the bank rate is normally higher than the
market rate.

120. For example:
If the Central Bank wants to control credit, it will raise the
bank rate.
As a result, the market rate and other lending rates
in the money-market will go up.
Borrowing will be discouraged. The raising of bank rate will
lead to contraction of credit.
Similarly, a fall in bank rate will lower the lending
rates in the money market which in turn will
stimulate commercial and industrial activity, for
which more credit will be required from the banks. Thus,
there will be expansion of the volume of bank Credit.

121. 2. Open Market Operations:
This method of credit control is used in two senses:
(i) In the narrow sense, and
(ii) In broad sense.
In narrow sense—the Central Bank starts the purchase and
sale of Government securities in the money market.
But in the Broad Sense—the Central Bank purchases
and sale not only Government securities but also of
other proper and eligible securities like bills and
securities of private concerns.
When the banks and the private individuals purchase these
securities they have to make payments for these
securities to the Central Bank.

122. This gives result in the fall in the cash reserves of the
Commercial Banks, which in turn reduces the ability of
create credit.
Through this way of working the Central Bank is able
to exercise a check on the expansion of credit.
Further, if there is deflationary situation and the
Commercial Banks are not creating as much credit as is
desirable in the interest of the economy.
Then in such situation the Central Bank will start
purchasing securities in the open market from
Commercial Banks and private individuals.

123. With this activity the cash will now move from
the Central Bank to the Commercial Banks.
With this increased cash reserves the
Commercial Banks will be in a position to
create more credit with the result that the
volume of bank credit will expand in the
economy.
3. Variable Cash Reserve Ratio:
Under this system the Central Bank controls
credit by changing the Cash Reserves Ratio.

124. For example—If the Commercial Banks have excessive
cash reserves on the basis of which they are creating too
much of credit which is harmful for the larger interest of
the economy.
So it will raise the cash reserve ratio which the
Commercial Banks are required to maintain with the
Central Bank.
This activity of the Central Bank will force the
Commercial Banks to curtail the creation of credit in the
economy.
In this way by raising the cash reserve ratio of the
Commercial Banks the Central Bank will be able
to put an effective check on the inflationary
expansion of credit in the economy.

125. Similarly, when the Central Bank desires that the
Commercial Banks should increase the volume of
credit in order to bring about an economic revival
in the country.
The Central Bank will lower down the Cash
Reserve ratio with a view to expand the cash
reserves of the Commercial Banks.
With this, the Commercial Banks will now be in a
position to create more credit than what they were
doing before.
Thus, by varying the cash reserve ratio, the
Central Bank can influence the creation of
credit.

126. Qualitative or Selective Method of Credit Control:
1. Rationing of Credit.
2. Direct Action.
3. Moral Persuasion.
4. Method of Publicity.
5. Regulation of Consumer’s Credit.
6. Regulating the Marginal Requirements on
Security Loans.

127. 1. Rationing of Credit:
Under this method the credit is rationed by limiting
the amount available to each applicant.
The Central Bank puts restrictions on demands for
accommodations made upon it during times of
monetary stringency.

128. In this the Central Bank discourages the
granting of loans to stock exchanges by
refusing to re-discount the papers of the
bank which have extended liberal loans
to the speculators.
This is an important method of credit control
and this policy has been adopted by a number
of countries like Russia and Germany.

129. 2. Direct Action:
Under this method if the Commercial Banks do
not follow the policy of the Central Bank, then the
Central Bank has the only recourse to direct
action.
This method can be used to enforce both
quantitatively and qualitatively credit
controls by the Central Banks.
This method is not used in isolation; it is used
as a supplement to other methods of credit
control.

130. Direct action may take the form either of a refusal on
the part of the Central Bank to re-discount for banks
whose credit policy is regarded as being inconsistent
with the maintenance of sound credit conditions.
Even then the Commercial Banks do not fall in
line, the Central Bank has the constitutional
power to order for their closure.
This method can be successful only when the Central
Bank is powerful enough and has cordial relations with
the Commercial Banks.
Mostly such circumstances are rare when the Central
Bank is forced to resist to such measures.

131. 3. Moral Persuasion:
This method is frequently adopted by the Central Bank to
exercise control over the Commercial Banks.
Under this method Central Bank gives advice, then
request and persuasion to the Commercial Banks to co-
operate with the Central Bank is implementing its credit
policies.
If the Commercial Banks do not follow or do not abide by
the advice or request of the Central Bank no gross action is
taken against them.
The Central Bank merely was its moral influence and
pressure with the Commercial Banks to prevail
upon them to accept and follow the policies.

132. 4. Method of Publicity:
In modern times, Central Bank in order to make
their policies successful, take the course of the
medium of publicity.
A policy can be effectively successful only when an
effective public opinion is created in its favour.
Its officials through news-papers, journals,
conferences and seminar’s present a correct
picture of the economic conditions of the
country before the public and give a
prospective economic policies.

133. 5. Regulation of Consumer’s Credit:
Under this method consumers are given credit in a
little quantity and this period is fixed for 18
months; consequently credit creation expanded
within the limit.
This method was originally adopted by the U.S.A. as a
protective and defensive measure, there after it has been
used and adopted by various other countries.

134. 6. Changes in the Marginal Requirements on Security
Loans:
This system is mostly followed in U.S.A. Under this system, the
Board of Governors of the Federal Reserve System has been
given the power to prescribe margin requirements for the
purpose of preventing an excessive use of credit for
stock exchange speculation.
This system is specially intended to help the Central Bank in
controlling the volume of credit used for speculation in
securities under the Securities Exchange Act, 1934.

135. The Reserve Bank of India (RBI) is India’s central bank, also
known as the banker’s bank. The RBI controls monetary and
other banking policies of the Indian government.
The Reserve Bank of India (RBI) was established on April 1,
1935, in accordance with the Reserve Bank of India Act, 1934.
Act, 1934. The Reserve Bank is permanently situated in
in Mumbai since 1937.

138. Objectives
The primary objectives of RBI are to supervise and
initiatives for the financial sector consisting of
banks, financial institutions and non-banking
companies (NBFCs).
Some key initiatives are:
i. Restructuring bank inspections
Ii Fortifying the role of statutory auditors in the

139. Legal Framework
The Reserve Bank of India comes under the
following Acts:
•Reserve Bank of India Act, 1934
•Public Debt Act, 1944
•Government Securities Regulations, 2007
•Banking Regulation Act, 1949
•Foreign Exchange Management Act, 1999
•Securitization and Reconstruction of Financial
Enforcement of Security Interest Act, 2002
•Credit Information Companies(Regulation) Act,
•Payment and Settlement Systems Act, 2007

140. Function # 1. Monopoly of Note Issue:
Like any other central bank, the RBI acts as a sole
currency authority of the country.
It issues notes of every denomination, except one-
rupee note and coins and small coins, through the
Issue Department of the Bank.
One- rupee notes and coins and small coins are issued
by the Government of India.
In actuality, the RBI also issues these coins on behalf
of the Government of India.

142. Prior to 1956, the principle of note issue of the RBI
was based on proportional reserve system.
This system was replaced by the minimum reserve sys-
tem in 1956 under which the RBI was required to
hold at least Rs. 115 crores worth of gold as back-
ing against the currency issued.
The rest (Rs. 85 crores) should be in foreign
securities, so that together with gold and foreign
exchange reserve the minimum value of these
assets is Rs. 200 crores.

143. Function # 2. Banker’s Bank:
As bankers’ bank, the RBI holds a part of the cash
reserves of commercial banks and lends them funds
for short periods.
All banks are required to maintain a certain
percentage (lying between 3 per cent and 15 per cent)
of their total liabilities.
The main objective of changing this cash reserve ratio by the
RBI is to control credit.
The RBI provides financial assistance to commercial
banks and State cooperative banks through
rediscounting of bills of exchange.
As the RBI meets the need of funds of commercial banks, the
RBI functions as the Lender of the last resort’.

144. The RBI has been empowered by law to supervise,
regulate and control the activities of commercial and
cooperative banks.
The RBI periodically inspects banks and asks them for
returns and necessary information.
Function # 3. Banker to the Government:
The RBI acts as the banker to the government of
India and State Governments (except Jammu and
Kashmir).
As such it transacts all banking business of these Govern-
ments.

145. These are the following:
The RBI:
(i) Accepts and pays money on behalf of the Government.
(ii) It carries out exchange remittances and other banking
operations.
As the Government’s banker, the RBI provides short-term
credit to the Government of India. This short-term
credit is obtainable through the sale of treasury bills.
Not only this, the RBI also provides ways and means of
advances (repayable with 90- days) to State Government.
It may be noted that the Central Government is
empowered to borrow any amount it likes from the
RBI.

146. The RBI also acts as the agent of the Government in respect of
membership of the IMF and World Bank.
Furthermore, the RBI acts as the adviser of the Government
not only on banking and financial matters but also on a wide
range of economic issues like
 financing patterns,
 mobilization of resources,
 institutional arrangements with regard to banking and
credit matters,
 arrangements with regard to banking and credit matters,
international finance) etc.

147. Function # 4. Controller of Credit:
The RBI controls the total supply of money and bank credit
to sub serve the country’s interest.
The RBI controls credit to ensure price and
exchange rate stability.
To achieve this, the RBI uses all types of credit control
instruments, quantitative, qualitative and selective.
The most extensively used credit instrument of the RBI is
the bank rate.
The RBI also relies greatly on the selective methods of
credit control. This function is so important that it requires
special treatment.

148. Function # 5. Exchange Management and Control:
One of the essential central banking functions
performed by the Bank is that of maintaining the
external value of rupee.
The external stability of the currency is closely related
to its internal stability the inherent economic strength
of the country and the way it conducts its economic
and monetary affairs.
Domestic, fiscal and monetary policies have, therefore,
an important role in maintaining the external value of
the currency.
Reserve Bank of India has a very important role to play
in this area.

149. The RBI has the authority to enter into foreign
exchange transactions both on its own account and
on behalf of the Government.
The official external reserves of the country consist of
monetary gold and foreign assets of the Reserve Bank,
besides Special Drawing Rights (SDR) holdings.
The Reserve Bank, as the custodian of the country’s foreign
ex- change reserves, is vested with the duty of managing
the investment and utilization of the reserves in the , most
advantageous manner.

150. Function # 6. Miscellaneous Functions:
The RBI collects, collates and publishes all monetary and
banking data regularly in its weekly statements in the RBI
Bulletin (monthly) and in the Report on Currency and
Finance (annually).
Function # 7. Promotional and Developmental
Functions:
Apart from these traditional function, the RBI performs
various activities of promotional and developmental
nature.
It attempts to mobilize savings for productive
purposes. This is done in various ways. For
instance, RBI has helped a lot in building the huge
financial infrastructure

151. ‘This consists of such institutions as the Deposit Insurance
Corporation
 (to safeguard the interests of depositors against bank
failure),
 the Agricultural Refinance and Development
Corporation (to meet the needs of
agriculturists),
 IFCI, SFCs, IDBI, UTI (to meet the long and
medium term needs of industry), etc.
As for cooperative credit movement, the RBI’s performance
in really commendable. This has resulted in curbing the
activities of moneylenders in the rural economy.

152. The main recommendations of Narasimham Committee
(1991) on the Financial (Banking) System are as follows;
(i) Statutory Liquidity Ratio (SLR) is brought down in a
phased manner
to 25 percent (the minimum prescribed under the law) over
a period of about five years to give banks more funds to
carry business and to curtail easy and captive finance.
(ii) The RBI should reduce Cash Reserve Ratio (CRR) from
its present high level.

153. (iii) Directed Credit Programme i.e., credit allocation
under government direction, not by commercial judgement
of banks under a free market competitive system, should
be phased out.
The priority sector should be scaled down from
present high level of 40 percent of aggregate credit
to 10 percent. Also the priority sector should be
redefined.
(iv) Interest rates to be deregulated to reflect emerging
market conditions.

154. (v) Banks whose operations have been profitable is given
permission to raise fresh capital from the public through the
capital market.
(vi) Balance sheets of banks and financial institutions are made
more transparent.
(vii) Set up special tribunals to help banks recover their
debt speedily.
(viii) Changes be introduced in the bank structure
 3-4 large banks with international character,
 8- 10 national banks with branches throughout the country,
 local banks confined to specific region of the country, rural
banks confined to rural areas.

155. (ix) Greater emphasis is laid on internal audit and
internal inspection in the banks.
(x) Government should indicate that there would be no
further nationalization of banks,
 the new banks in the private sector should be welcome
subject to normal requirements of the RBI,
 branch licensing should be abolished and policy towards
foreign banks should be more liberal.
(xi) Quality of control over the banking system by the RBI
and the Banking Division or the Ministry of Finance should
be ended and the RBI should be made primary agency for
regulation of banking system.

156. (xii) A new financial institution called the Assets
Reconstruction Fund (ARF).
Should be established which would take over from banks
and financial institutions a portion of their bad and
doubtful debts at a discount (based on realizable value of
assets),
and subsequently follow up on the recovery of the dues
owed to them from the primary borrowers.

157. Policies enacted by the government sector of a domestic
economy to discourage imports from, and encourage
exports to, the foreign sector.
The three most common foreign trade policies are
 tariffs,
 import quotas,
 and export subsidies.

158. Objectives of Foreign Trade Policy (2015-20)
The FTP for 2015-20 seeks to achieve the following:-
1) To provide a stable and sustainable policy
environment for foreign trade in merchandise and
services;
ii) To link rules, procedures and incentives for exports
and imports with other initiatives such as
"Make in India",
Digital India and
Skill India to create an ‘Export Promotion Mission’
for India;

159. iii) To promote the diversification of India’s export by
helping various sectors of the Indian economy to gain
global competitiveness with a view to promote exports;
iv) To create an architecture for India’s global trade
engagement with a view to expanding its markets and better
integrating with major regions, thereby increasing the
demand for India’s product and contributing to the
government’s flagship "Make in India" initiative;
v) To provide a mechanism for regular appraisal in order to
rationalize imports and reduce the trade imbalance.

160. The Indian Government announced the mid-term review of Foreign Trade
Policy 2015-20 on December 5, 2017.
 Overall, the policy is expected to make Indian exports more
competitive and thus give them a boost.
 By diversifying the export basket, it will try and explore new
markets and products, besides increasing India's share in its existing
traditional domains.
 Further, the export of agricultural products will also be encouraged
for increasing farmers’ incomes.
The mid-term review of FTP is aimed at mid-course correction. It was to
be announced on July 1, together with the implementation of the GST
regime. But the announcement was postponed to take into account
feedback from the export sector regarding GST-related issues.

161. Importance of foreign trade to Indian economy can be gauged
from the fact that it constitutes 45 percent Indian economy,
thereby deserving a special focus.
The foreign trade policy will continue to provide a stable and
sustainable policy environment for foreign trade in merchandise
and services and
 to link rules,
 procedures and incentives for exports and imports with other
initiatives
 such as ‘Make in India’, ‘Digital India’, ‘Skill India’, ‘Startup
India’, Smart City’, `Swachh Bharat’ and ‘Goods and Services
Tax’ (GST).

162. The five-year FTP, which was announced on April 1, 2015, has
set a target of India’s goods and services exports touching $900
billion by 2020. It also aims at increasing the country's share in
the global market.
The review was released by Indian Minister of Commerce and
Industry, Mr. Suresh Prabhu in the presence of the Minister of
State for Commerce and Industry, Mr. C R Chaudhary, Finance
Secretary, Mr. Hasmukh Adhia, Commerce Secretary, Ms. Rita
Teaotia, Secretary Department of Industrial Policy & Promotion,
Mr. Ramesh Abhishek and the Director General of Foreign Trade,
Mr. Alok Chaturvedi.

163. Proactively taking a 360 degree view on the exports front, the Finance
Secretary Hasmukh Adhia said, “in view of the GST implementation,
the government is working on accelerating the processing of refunds
for exporters.
Later, the process will be made completely automated, thereby
lowering the processing and time required for the refund”.
Ms. Teotia stated that the foreign trade policy will continue with
‘Whole of Government’ approach involving all Ministries and State
Governments.
The reason for this is that given the diverse elements which
contribute towards a conducive foreign trade environment, the
foreign trade policy can neither be formulated nor implemented by
any one department in isolation.

164. •The policy has restored the benefits under the export promotion
schemes of duty free imports under Advanced Authorization, Export
Promotion Capital Goods and 100 percent Export Oriented Units.
•This will be resolving the problem of blocked working capital for
exporters following the roll out of GST.
•Merchandise Exports from India Scheme (MEIS) incentive rate
will be raised by 2 percent worth INR 80 Billion across the board
for labour intensive/MSME sectors.
• The Indian industry body FICCI welcomes the move. “It was a
much-needed step", says FICCI Secretary General Dr. Sanjaya
Baru.

165. •Some of the major sectors benefited are these:INR 27
Billion for Ready-made Garments and Made Ups in
Textiles Sector
•INR 8 Billion for Leather and Footwear Articles
•INR 9 Billion for handmade carpets of silk, handloom
and coir and Jute products
•INR 14 Billion for Agriculture and related products
•INR 11 Billion for Services including Hotel &
Restaurant, Hospital, Educational services etc.
•INR 8 Billion for Marine products
•INR 4 Billion for Telecom and Electronics Components
•INR 2 Billion for Medical and Surgical Equipment

166. •The validity period of Duty Credit Scrips has been raised
from 18 to 24 months and GST rates on transfer/sale of
scrips has been reduced to zero.
•Issue of Gold availability for exporters has been resolved
by allowing Specified Nominated Agencies to import Gold
without payment of IGST.
•Support to Export Credit Guarantee Corporation is also
being enhanced to increase insurance cover to exporters
particularly MSME’s exploring new or difficult markets.

167. •Ease of doing business is being facilitated for exporters by
introduction of a new scheme. It allows for self-assessment
based duty free procurement of inputs required for exports.
•There will be no need of Standard Input Output Norms in such
cases and this will eliminate delays. It is based on trust.
Exporters will self-certify the requirement of duty free raw
materials/ inputs.
• The scheme would initially be available to the Authorized
Economic Operators (AEOs) and will get expanded as more
exporters join the AEO program. "We welcome the trust-based
approach as reflected in the new self-ratification scheme for
duty-free import of raw materials.
• It will greatly help in expediting export of a number of
important products such as engineering, pharmaceuticals,
chemicals, textiles and high-tech products" observes Dr. Baru
of FICCI.

168. •A new service named Contact@DGFT has been launched on
the Directorate General of Foreign Trade (DGFT) website i.e.
www.dgft.gov.in.
•It will be a single window contact point for exporters and
importers to resolve all foreign trade related issues.
•Exporters/Importers can also track status of their queries
through the assigned reference number. Feedback mechanism
has also been provided.
•A State-of-the-Art Trade Analytics division has been set up in
DGFT for data based policy actions.
•The initiative envisages processing trade information from
DGCIS and other national and international databases related
to India’s key export markets and identify specific policy
interventions.

169. •Gold availability process has been expedited for exporters by
allowing Specified Nominated Agency to import gold without
payment of IGST.
•PAN card will now be used as IEC (Import Export Code) to
simplify procedures and processes.
•Indian Government will set up a National Trade
Facilitation Committee to facilitate ease of trade
across borders.
•It shall cover provisions related to transparency,
technology, simplification of procedures, risk based
assessment and infrastructure augmentation.

170. •A new Logistics Division has been created in the Department of
Commerce to develop and co- ordinate integrated development
of the logistics sector,
• by way of policy changes,
• improvement in existing procedures,
• identification of bottlenecks and gaps, and introduction of
technology based interventions in this sector.
•These steps will improve India’s ranking in the Logistics
Performance Index (LPI) apart from promoting exports.
•Focus will be given to Ease of Trading across borders. A
professional team to handhold, assist and support
exporters in their export related problems, accessing
export market and meeting regulatory requirements.
•The team will also examine the procedures and processes in
clearances related to trading across borders for their
simplification and rationalization and track progress. Dwell time
at ICDs, ports and airports is being closely monitored in
coordination with Customs, and infrastructure Ministries.

171. •India’s newer bilateral/regional trade engagements will be
with regions and countries that are not only promising
markets but also major suppliers of critical inputs and have
complementarities with the Indian economy.
•The focus of India’s future trade relationship with its
traditional markets in the developed world would be on
exporting products with a higher value addition,
supplying high quality inputs for the manufacturing
sector in these markets and continued optimization of
applied customs duties on inputs for India’s
manufacturing sector. In particular, the policy promises to
promote India’s trade with specific partner regions in the
following ways:

172. •US - being one of India’s top trading partner and with the
US economy on recovery mode, the future bilateral trade
prospects are promising.
•Government plans to focus on strengthening exports to
US from employment-generating sectors like textiles,
pharmaceuticals, agriculture, leather and gems &
jewellery.
•Indo-US economic relationship gets further strengthened
with the access of India’s high skilled Services Sector and
increased investment to the US market.
•Canada and Mexico are other important trading partners
in North America with which institutionalized high level
dialogues have been established and strengthened.

173. •EU - it remains a significant market for India’s Information
Technology (IT) services.
•Through the revised foreign trade policy, India is now
targeting its trade promotion activities on new
products with higher value addition mainly in the
product baskets of medical equipment, chemicals,
processed foods, as well as services.
•The EU has introduced a self certification mechanism
for exports under the Generalized System of
Preferences (GSP), which India has accepted and
implemented from 1st January 2017 onwards.
•This is likely to sufficiently lower transaction costs for
Indian exporters under the GSP.

174. •South Asia - India’s foreign trade relations with its
close proximities in South Asia is a notable center of
attention for the Indian government.
• It now aims of building a regional economic zone
including value chains in different sectors namely the
textiles, engineering goods, chemicals, pharmaceuticals,
auto components, plastic and leather products.
• Here, the improvement in physical and digital
connectivity is the main goal of the government. Further,
a superiorly connected south Asia will smoothly link to
onward routes to South East Asia as well as Central Asia.
•South-East Asia - One of the top priorities of the
policy in this region is India’s trade integration with the
CLMV (Cambodia, Lao PDR, Myanmar and Vietnam)
countries.
•A Project Development Fund has also been launched to
encourage the Indian private sector to set up
manufacturing hubs in this region.

175. •China – it remains India’s most important trading partner
in the North East Asia region.
•One of the agendas of the revised foreign trade policy of
India is to continue to pursue market access issues
and removal of Non-tariff Barriers on India’s exports
of pharmaceuticals and agro commodities, IT
services and other service sectors such as tourism,
films and entertainment.
• India also plan to encourage Chinese investment in
boosting India’s manufacturing capacities while remaining
vigilant against any unfair trade
practices.

176. •Africa - there is tremendous untapped potential
for enhancing India’s economic relations with
this fast growing region.
•Agro-processing, manufacturing, mining, textiles,
pharmaceutical, engineering, infrastructure
development and construction are highly promising
areas where Indian foreign trade policy will be
focusing.
•India is also engaging actively with countries
and regional groupings in Africa for trade
agreements, project exports and capacity
building initiatives.

177. Planned roadmap for increasing India’s trade
Indian vision is far-fetched and its planning to promote foreign
trade is on a solid footing.
Recently, the Department of Commerce has step by step
mainstreamed State and Union Territory (UT) Governments and
various Departments and Ministries of Government of India in the
promotion of India’s trade globally, resulting in significant
outcomes.
Twenty eight State Governments have nominated Export
Commissioners. They have also prepared their export strategies
focusing on sectors of their strength and adopted suitable
policies for promoting exports.
A Council for Trade Development and Promotion has been
constituted with representation of all States to provide an
institutional framework to work with the State Governments for
boosting India’s exports. Senior officials have been appointed as
designated focal points for exports and imports in several Central
Ministries and Departments.

178. THANKYOU