Monetary Policy Notes

Monetary Policy Notes 

Monetary policy

Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act. The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

The goal(s) of monetary policy:

The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework. The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified in the Official Gazette 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

The Central Government notified the following as factors that constitute the failure to achieve the inflation target:
(a) The average inflation is more than the upper tolerance level of the inflation target for any three consecutive quarters; or 
(b) The average inflation is less than the lower tolerance level for any three consecutive quarters.
Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting framework was governed by an Agreement on Monetary Policy Framework between the Government and the Reserve Bank of India of February 20, 2015.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides the short-term loan (overnight liquidity) to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

Reverse Repo Rate: The (fixed) interest rate – currently 50 bps below the repo rate – at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of tenors ranging between overnight and 56 days. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated by the market conditions.

Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit [currently two per cent of their net demand and time liabilities deposits (NDTL)] at a penal rate of interest, currently 50 basis points above the repo rate. This provides a safety valve against unanticipated liquidity shocks to the banking system.
The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.

Cash Reserve Ratio (CRR): The average daily balance that a bank shall maintain with the Reserve Bank as a share of such per cent of its NDTL that the Reserve Bank may notify from time to time in the Gazette of India.

Statutory Liquidity Ratio (SLR): The share of NDTL that banks shall maintain in safe and liquid assets, such as unencumbered government securities, cash, and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.

Open Market Operations (OMOs): These include both outright purchase and sale of government securities for injection and absorption of durable liquidity, respectively.

Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through the sale of short-dated government securities and treasury bills. The cash so mobilized is held in a separate government account with the Reserve Bank.

Important Economics Terms

Important Economics Terms 

1. GIFFEN GOOD

The good for which the demand increases as its price increases, rather than falls (opposite to the general theory of demand)-named after Robert Giffen (1837-1910). It applies to the large proportion of the goods belonging to the household budget (as flour, rice, pulses, salt, onion, potato etc. in India)-an increase in their prices produces a large negative income effect completely overcoming the normal substitution effect with, people buying more of the goods. 

2. GINI COEFFICIENT 

An inequality indicator in an economy. The coefficient varies from ‘zero’ to ‘one’. A ‘zero’ Gini coefficient indicates a situation of perfect equality (i.e. every household earning the same level of income) while a ‘one’ signifies a situation of absolute inequality (i.e. a single household earning the entire income in an economy). 

3. GOLDEN HANDSHAKE

A payment (usually generous) made by a company to its employees for quitting the job prior to their service. 

4. GOLDEN HANDCUFF

A royalty/bonus payment by a company to its staff (usually top ranking) to keep them with the company or to save them from poaching by the other companies.  

5. GOODHART’S LAW

The idea of Goodhart which suggests that attempts by a central bank (as RBI in India) to regulate the level of lending by banks imposing certain controls can be circumvented by the banks searching the alternatives out of the regulatory preview. 

6. GRESHAM’S Law

The economic idea that ‘bad’ money forces ‘good’ money out of circulation, named after Sir Thomas Gresham, an adviser to Queen Elizabeth I of England. This law does not apply to the economies where paper currencies are in circulation. The economies which circulate metallic coins (gold, silver, copper, etc.) of proportional intrinsic values face such situations when people start hoarding such coins.  

7. GREY MARKET

The ‘unofficial’ market of the newly issued shares before their formal listing and trading on the stock exchange. 

8. HISTORIC COST

The original cost of purchasing an asset such as land, machine etc., which is shown in the balance sheet of a firm under this title with an adjustment for the replacement cost of the asset. 

9. INDIFFERENCE CURVE

A curve on the graph showing the alternative combinations of two products, each giving the same utility/satisfaction. 

10.INDUCED INVESTMENT

The part of investment (increase or decrease) which takes place due to a change in the level of national income. 

11. IPO

An IPO or initial public offering refers to the issue of shares to the public by the promoters of a company for the first time. The shares may be made available to the investors at face value of the share or with a premium as per the perceived market value of the share by promoters. The IPO can be in the form of a fixed price portion or book building portion. Some companies offer only demat form of shares, other offers both demat and physical shares.

     The performance of an IPO depends on many factors such as the promoter’s track record, experience in running the business, risk factors listed in the offer document, nature of industry, government policies associated with the industry performance of that sector in the previous years, and also any available forecasts for the industry for the near future.   

Economics Notes: Industrial Policy

Economics Notes: Industrial Policy 

Industrial policy resolution 1948:- 
It is considered to be 1st Industrial policy and 1st economic policy.
It decided the model of the economic system i.e. Mixed system. 
Central, state & private Industries were recognized. 


Industrial policy 1956:- 
Reservation of Industries as schedule A, B, C. 
Licensing, Monopolies, License-Quota Permit regime started. 
Emphasis on small Industries.
Expansion of public sector. 

Industrial policy 1969:- 
It was a new licensing policy which aimed at solving the shortcomings of licensing policy 1956. 
MRTP Act was passed 

Industrial policy statement 1973:-
A new classification was added i.e. core Industries. 
Core industries will also be known as basic industries or infrastructure industries. 
The concept of ‘Joint Sector’ was developed which allowed partnership among the centre, state & the private sector while setting up some Industries. 
FERA was passed in 1973 
Limited permission of foreign investment was given with MNCs being allowed to set up their subsidiaries in the country. 

Industrial policy 1977:- 
Foreign investment in the Unnecessary areas was prohibited.
Emphasis on the village industries. 

New Industrial policy 1991 (NIP 1991):-

A. Factors which necessitated NIP
1. Gulf war which increased the oil prices & decreased remittance. 
2. Inflation during the period was 17% 
3. India had a fiscal deficit of 8.4% of GDP 
4. Forex reserves were depleted 

 B. Features of NIP (1991) 
1. De-reservation of Industries 
2. De-licensing 
3. Abolition of MRTP limit 
4. Promotion of foreign Investment 
5. FERA was replaced by FEMA
6. Compulsion of phased production was abolished 
7. Compulsion to convert loans into shares was abolished  
8. Industries were now classified into polluting & non-polluting & this fact decided the location of industries. 
9. Non-Pollution industries might be set up anywhere polluting industries to be set up at least 25 kilometres away from million cities.  

Disinvestment:-
1. It is a process of selling government equities to the investor or other private companies in public sector enterprises. 
2. Disinvestment is a tool of public sector reforms. 
3. It is part of the economic reforms started in mid-1991. It has to be done as a complementary part of the de-reservation of Industries. 
4. Disinvestment is initially motivated by the need to raise resources for the budgetary allocation.  

Types of Disinvestment:- 
(i) Taken Disinvestment (Disinvestment of  5% Equity)
(ii) Strategic Dis-investment

National Investment found:- 
In 2005 the government of India decided to constitute a National investment fund (NIF) 
The proceeds from disinvestment will be channelized into the NIF which to be maintained outside the consolidated fund of India.
NIF are been used in full for funding capital expenditure under the social programme of GOI. 
(i) MGNREGA
(ii) IAY
(ii) RGGVY
(iv) JNNURM
(v) Accelerated Irrigation Benefits programme 
(vi) Accelerated power development reform programme  

Economics Notes: Industrial Policy

Economics Notes: Industrial Policy 

Industrial policy resolution 1948:- 
It is considered to be 1st Industrial policy and 1st economic policy.
It decided the model of the economic system i.e. Mixed system. 
Central, state & private Industries were recognized. 


Industrial policy 1956:- 
Reservation of Industries as schedule A, B, C. 
Licensing, Monopolies, License-Quota Permit regime started. 
Emphasis on small Industries.
Expansion of public sector. 

Industrial policy 1969:- 
It was a new licensing policy which aimed at solving the shortcomings of licensing policy 1956. 
MRTP Act was passed 

Industrial policy statement 1973:-
A new classification was added i.e. core Industries. 
Core industries will also be known as basic industries or infrastructure industries. 
The concept of ‘Joint Sector’ was developed which allowed partnership among the centre, state & the private sector while setting up some Industries. 
FERA was passed in 1973 
Limited permission of foreign investment was given with MNCs being allowed to set up their subsidiaries in the country. 

Industrial policy 1977:- 
Foreign investment in the Unnecessary areas was prohibited.
Emphasis on the village industries. 

New Industrial policy 1991 (NIP 1991):-

A. Factors which necessitated NIP
1. Gulf war which increased the oil prices & decreased remittance. 
2. Inflation during the period was 17% 
3. India had a fiscal deficit of 8.4% of GDP 
4. Forex reserves were depleted 

 B. Features of NIP (1991) 
1. De-reservation of Industries 
2. De-licensing 
3. Abolition of MRTP limit 
4. Promotion of foreign Investment 
5. FERA was replaced by FEMA
6. Compulsion of phased production was abolished 
7. Compulsion to convert loans into shares was abolished  
8. Industries were now classified into polluting & non-polluting & this fact decided the location of industries. 
9. Non-Pollution industries might be set up anywhere polluting industries to be set up at least 25 kilometres away from million cities.  

Disinvestment:-
1. It is a process of selling government equities to the investor or other private companies in public sector enterprises. 
2. Disinvestment is a tool of public sector reforms. 
3. It is part of the economic reforms started in mid-1991. It has to be done as a complementary part of the de-reservation of Industries. 
4. Disinvestment is initially motivated by the need to raise resources for the budgetary allocation.  

Types of Disinvestment:- 
(i) Taken Disinvestment (Disinvestment of  5% Equity)
(ii) Strategic Dis-investment

National Investment found:- 
In 2005 the government of India decided to constitute a National investment fund (NIF) 
The proceeds from disinvestment will be channelized into the NIF which to be maintained outside the consolidated fund of India.
NIF are been used in full for funding capital expenditure under the social programme of GOI. 
(i) MGNREGA
(ii) IAY
(ii) RGGVY
(iv) JNNURM
(v) Accelerated Irrigation Benefits programme 
(vi) Accelerated power development reform programme  

Economics Notes: Public Finance (Part-II)

Economics Notes: Public Finance (Part-II) 

PUBLIC FINANCE

A. Tax revenue – It consists of the proceeds of taxes & other duties levied by the government. The various taxes that are imposed by a government can be categorised into two groups.

1. Direct Taxes

2. Indirect Taxes

1. Direct taxes – Direct Taxes are those taxes which are paid by the same person on whom they have been imposed. Tax burden cannot be shifted on to others.

Example- Income Tax, wealth tax.

2. Indirect taxes – Those taxes whose burden (partial or whole) can be shifted.

Example- Excise duty.

Note- the Basis of classifying taxes into direct tax & Indirect tax is whether the burden of the tax is shiftable to others or not.

B. Non-Tax revenue – It includes receipts from sources other than taxes. The main sources of non-tax revenues are -Interest, Profits & dividends, Fees & fines, Special assessment, Gifts & grants, Escheats

Capital receipts- Capital receipts are defined as any receipt of the government which either creates a liability or leads to the reduction in assets. Capital receipts include the following 3 items.

Recovery of loans

Disinvestment

Small savings

Budget expenditure – It refers to the estimated expenditure of the government under various heads. In India, it is classified into two categories.

1. Revenue expenditure

2. Capital expenditure

Revenue Expenditure – It refers to all those expenditures of the government which

do not result in a creation of physical or financial assets.

do not cause any reduction in liability of the government.

It relates to those expenses incurred for the normal functioning of the Government departments & provision of various services, interest payments on debt incurred by government & grants given to state government & other parties.

Capital expenditure – An expenditure which either creates an Asset or reduces liability is called capital expenditure. It consists mainly of expenditure on Acquisition of Assets like land, buildings, machinery, equipment, investments in shares, etc. & loans and advances granted by the central government to state & union territory government, government companies, corporation & other parties.

Other classifications of Public Expenditure:- 

1. Plan Expenditure and Non-plan expenditure:-Public expenditure is classified as plan expenditure and non-plan expenditure. 

Plan expenditure- Plan expenditure refers to that expenditure which is provided in the budget to be incurred on the programmes. For example, expenditure on agriculture, power, communication, industry, transport, general economic and social services etc.

Non-plan expenditure- It refers to the government expenditure other than the expenditure related to the plan of the government. Such an expenditure is a must for every Country having planning or no planning e.g. expenditure on police, judiciary, military, expenditure on normal running of government departments, expenditure on relief measures for earthquake/flood victims. 

2. Developmental Expenditure and Non-Developmental Expenditure:- Public expenditure is also classified as development expenditure and non-development expenditure. 

Development expenditure- It refers to expenditure on activities which are directly related to the economic and social development of the country. This includes expenditure on education, agricultural and industrial development, rural development, social welfare, scientific research etc. Such expenditure it not a part of the essential functioning of the government. It directly contributes to the development of the economy. It adds to the flow of goods and services. 

Non-development expenditure- It refers to expenditure incurred on essential general services of the Government such expenditure is essential from the administrative point of view. Expenditure on police. Judiciary, defence, general administration, interest, payments tax collection, subsidies on food etc. fall under this category.    

Economics Notes: Public Finance (Part-I)

Economics Notes: Public Finance (Part-I) 

PUBLIC FINANCE

Meaning of Budget – Government budget is an annual statement, showing the item-wise estimation of receipts & expenditure during a fiscal year.

Elements of Budget 

1. It is a statement that shows estimated receipts & estimated expenditure during a fiscal year.

2. It shows estimates of government receipts & expenditure during a fixed period generally in a year.

3. Budget requires the approval by the parliament.

Objectives of Government Budget 

1. Reallocation of resources

2. Redistribution of income & wealth 

3. Economic stability

4. Management of public Enterprises

5. Promotion of economic development

NOTE-In short, a budget is a powerful weapon in the hands of government through which it can affect the generation, distribution & spending of National Income.

Structure of the Budget – The components of budget can also be categorised according to receipts & expenditures. On this basis two broad components are as follows:-

A. Budget receipts

B. Budget expenditure

Budget receipts- It refers of estimated money receipts of the government from all sources during the fiscal year.

Budget receipts are classified as

1. Revenue receipts

2. Capital receipts

Revenue receipts- It refers to those receipts of the government which neither create a liability nor lead to reduction in assets.

For example- revenue from taxes is a revenue receipt as it does involve any corresponding liability for the government.

Tax is a unilateral (one-sided) compulsory payment by people to the government. Taxes do not have to be repaid by the government in future.

ECONOMICS NOTES

ECONOMICS NOTES 

Inflation

Definition: A rise in the general level of price in an economy. That is sustained over time.

• The opposite of Inflation in ‘deflation’.
• Inflation, in general, is just a price rise.When the general level of prices is falling over a period of time it is called deflation.
• The rate of inflation is measured on the basis of price indices which are of two kind WPI & CPI
• WPI - Wholesale Price Index
• CPI - Consumer price Index

Rate of inflation (Year x)

• In the index, the total weight is taken as 100 at particular year of the past i.e. Base year (Year of reference)
• Inflation is measured ‘point to point’. It means that the reference dates for the annual inflation are January to January of two consecutive years. This is similar for even weekly inflation.

Types of Inflation: Broadly there are 2 types of inflation.

(a) Demand - Pull Inflation:

• A mismatch between demand & supply pulls up the price.
• Either demand increases over the same level of supply or the supply decreases the same level of demand.
• This is Keynesian idea.

(b) Cost - Push Inflation:-

• An increase factor input costs (i.e. wage & raw materials) push up the prices.
• A price rise which is the result of the increase in the production cost is cost - push inflation.

A measure of check inflation:-

(1) Supply side:            

• Govt may import.
• Govt may increase production.
• Govt may improve storage. Transportation, hoarding etc

(2) Cost side: 

• Govt may cut down production cost by giving tax breaks, cuts in duties etc.
• By adopting Better production process, technological Innovation etc.
• Increasing Income of people also helps in checking inflation.

(3) Other steps:           

•  Tighter monetary policies can be introduced by RBI, this might help in a short run.
• Increasing production with the help of best production practices is a long term solution.

Other types of inflation: In General there are 3 Broad Categories i.e.

(i) Low inflation:- 

•  It is slow & predictable.
•  Takes place in a longer period.
•  The range of increase is usually in single digit.
•  It is also called CREEPING INFLATION

(ii) Galloping Inflation:- 

• It is very high inflation
• Range of increase is usually in double digit or triple digit 
• It is also known as hopping inflation, jumping inflation & Running Runaway inflation. 

(iii) Hyper-Inflation:-

• This type of inflation is large and Accelerating. 
• (This might have annual rates in Millions or even Trillion.
• (Range of increase is very large but increase takes place in a very short span of time. The price shoots up overnight.

Over variants of inflation:-  
(i) Bottleneck inflation:-

• This inflation takes place when supply falls drastically & the demand remains at the same level. 
• Such situation arises due to supply ride accidents, hazards or Mismanagement.
• It is also known as ‘structural Inflation’
• It can be put Under ‘demand-pull inflation

(ii) Core inflation:-

• This nomenclature is based on the inclusion or Exclusion of the good & services while calculating inflation.  
• In India, it was 1st time used in the financial year 2001-02. 
• In India, it means inflation of Manufactured goods.