9 thoughts on “Indian Economy”

  1. Several monetary and fiscal mechanisms are available in India to combat inflation. Monetary tools are operated majorly by the Reserve Bank of India whereas fiscal tools are operated by the government itself.

    The monetary tools available are :

    1. Sale of government securities : In case of excess liquidity chasing the limited commodities the RBI can absorb this excess liquidity by selling securities and asset backed funds. However, this method has limited use since a large consumer base is from the unorganized sector and preferentially does not invest in government securities per se.

    2. Reducing credit availability : The RBI can increase its policy rates so that the availability of credit comes down. This is because all banks have to adjust their rates in accordance with RBI guidelines and hence cannot lend easily. But since the formation of Monetary Policy Committee (MPC) the decision to decide on inflation targeting is not at the sole discretion of RBI. Hence the method has limited use.

    3. Other tools : The RBI also has other methods like sterlization, revision of priority lending domain, regulation of capital adequacy ratios and operating incomes of banks etc. But again these tools have limited utility.

    The fiscal tools available are :

    1. Reduction in expenditure : Inflation rises because the government invests in infrastructure and welfare. This leads to more liquidity in the hands of the consumer. Reduction in expenditure absorbs the liquidity in market by a fall in demand for commodities. This also leads to reduction in fiscal deficit. But this method also slows down the economy.

    2. Taxation : By increasing the rigour of taxation the government can substantially reduce the cash in hand of the consumer and hence reduce their spending. However, this method has limited use since India has very small tax base as compared to the other countries.

    3. Increasing domestic manufacturing capacity also reduces the artificial demand for imported goods and hence reduces inflation.

    3. Miscellaneous measures : Measures such as demonetisation , insuarence provisions and import covers further aid in reducing inflation.

    Some measures to correct the limitations of these tools are :

    1. Increasing the tax base of India.

    2. Prudent decision making of MPC on deciding inflation targets.

    3. Incresing the domestic manufacturing capacity of India.

    4. Rationalization of subsidies on commodities.

  2. Increased money supply in economy results in inflation which becomes a cause of worry if increase is beyond a certain level. Intervention in form of monetary policy and fiscal measures are employed to contain inflation.

    Monetary mechanisms ( Contractionary Monetary Policy ) for controlling inflation
    1.Monetary policy committee – Government of India & RBI have notified ‘Inflation target’ as 4 % ( 2-6 % ) to be achieved till March 2021
    2. Instruments of Monetary Policy – Increase in both bank rate and repo rate increases cost of borrowing by commercial banks who in turn become reluctant to advance money to customers thus reducing money supply in economy.
    3. Open market operations – RBI sells g-securities to control money flow and vice-versa

    Fiscal measures of controlling inflation
    1. Government measures include increased taxation, government expenditure and public borrowings
    2. Government may adopt protectionist measures. E.g banning export of essential commodities to support domestic consumption.
    3. Enacting policies to decrease growth in aggregate demand.

    Limitations of adopting monetary and fiscal mechanisms
    1. Bank’s behavior – Banks may induce customers to take loans in foreign currency from their overseas branch & then converting into indian rupee for investment in india. Above mechanism cannot keep check on individual banks lending details.
    2. Coming up of non banking financial instruments as alternatives who are not subject to conditions put forth by RBI results in continued unchecked lending in economy
    3. Monetary policy is less effective in controlling in controlling cost push variety of inflation.
    4. Monetary policy unapplicable to government run institutions where government provides resources.
    5. Effects of monetary policy are visible only after time has elapsed.
    5. In policy making decision lags and implementation lags can affect effectiveness of fiscal measures

    In light of above limitations wrt both monetary & fiscal policy it is advisable for any economy to employ both mechanisms simultaneously in context of varying economic situations (taking into account factors like foreign exchange, economic growth, financial stability & balance of payments etc.)

  3. Monetary mechanism is in the hands of monetary policy committee and fiscal mechanism is in the hands of government.
    Monetary mechanism for controlling inflation are as follows:
    1) Monetary policy committee:
    Earlier to this committee Reserve Bank of India used to take up decisions regarding interest rates but from 2015 on wards gov’t has formed a committee to look into the rates like CRR, SLR, REPO RATE, REVERSE REPO RATE, BANK RATE etc. Through which credit can be controlled.
    2) Open market operations:
    Although monetary policy committee looks into it, Reserve Bank of India has the final word to say in this regard. Here it sells as well as buys govt securities when ever needed.
    3) Foreign exchange and priority lending:
    Foreign exchange reserves has an indirect link with inflation in India. When the reserves decrease chances of inflation beyond control is possible and vice versa. When it comes to priority lending, the reserve bank directs the banks on how to give advances on priority based.

    Fiscal mechanism for controlling inflation are as follows:
    1)Increase in tax net and taxation
    If the tax payers in the country increase it is always a positive thing for govt. As the number increases the more revenue the gov’t gets. When gov’t increases tax the liquidity in the market reduces thus the inflation can come down.
    2)Protection measure:
    Include encouraging domestic industry, banning export and import of certain goods.
    Introducing policies which not only arrest inflation but also diversify the flow of credit.

    In General fiscal policy and monetary policy must go hand in hand, but there are certain limitations in respective spheres which contradict the main objective.
    Limitations of monetary policy:
    1)Critics point out that there is restricted scope of monetary policy committee. The functioning of committee is not in independent. Gov’t interference in committee can do harm according to them.
    2)In controlling inflation certain govt schemes are acting as a negative force, I.e, although they are implemented for greater good, but it might push the level of inflation.
    3)Banks mainly public sector banks and various gov’t financial institutions always prefer to go by commercial business rather than priority based system of giving advances, it wrong to blame banks, but sometimes it is necessary.

    Limitations of fiscal policy:
    1)Critics point out that taxation should not increase but tax net must be wider. More and more people must come under tax net rather than increasing tax on few. Gov’t although tries to do the same but due to external risks and unforseen situations it has to increase the both.
    2) Protection at all times is not possible for govt, external influence and pressure on govt is not seen in this regard.
    3)Lag of policies due to pressure groups and interest groups is always present. It is a dark force which stops the good intention of gov’t.

    1. It could be simpler but effective. Why did you over emphasize the role of monertary policy committee rather than emphasizesing monetary instruments?

  4. There are 2 major mechanisms for controlling inflation in india monetary policy and fiscal policy. Monetary policy involves 2 methods qualitative and quantitative. In qualitative methods focus is on reducing cash flow to certain areas while flow is maintained to other areas or sometimes as a whole various methods are : increased marginal requirements I.e security required for loans this discourages businesses from seeking loans reducing inflationary pressure. Credit rationing is another method here a ceiling is put on certain types of loans and banks cannot exceed the limit it helps to reduce cash flows in selected sectors. Other methods are moral suasion , awareness building and information being provided about economy and direct action where defaulters and banks that don’t follow orders are penalised. Quantitative credit control means controlling the quantity of credit here instead of certain areas the target is commercial banks and as such the entire economy methods used are increasing the bank rate , increasing the cash reserve ratio , increasing the rate of interest in lending , increasing payable interest on deposits , purchase of securities and promisory notes by central bank etc all these methods decrease flow of money into the economy thus easing inflation. Fiscal policy has 2 main components govt revenue and expenditure . Govt uses 2 important methods for controlling inflation it can reduce spending to reduce money flow and to have a low deficit or it can apply a host of levys duties taxes etc to reduce profit of private sector and thus reduce money supply reducing inflation. Some of the major limitations in reducing inflation in india are : monetary policy is not synced with fis called policy thus monetary methods are only partially successful. A large part of the economy is still informal thus monetary measures are not entirely successful. Black money can easily bypass regulations. Poor control over other monetary sources like deficit financing and foreign funding. Contrasting goals I. e high growth and low inflation are very difficult to achive.

  5. Inflation means increase in the general level of prices of goods and services in a country. It can be checked by two mechanisms.
    1. Monetary policy which is controlled by central bank, in India it’s RBI.
    a During inflation RBI stops printing new notes. This decreases supply of notes in market thus purchasing power of people decreases which further decreases demands thus inflation gets controlled.
    b. RBI can also issue new currency notes replacing many old notes. This will also reduce supply of money in the economy thus inflation would be under control.
    2. Fiscal policy which is under control of government.
    a. Reducing unnecessary expenditure on non development activities.
    b. Increase in taxes this would cause cut in personal expenditure. Moreover government also penalises tax evaders by imposing heavy fines.
    c. Increase in savings on part of people. This would cause people reduce their expenditure and increase their savings. This will help in checking inflation.

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