MONETARY POLICY AND FISCAL
POLICY
By Dr.Neerja sharma

MONETARY POLICY
 Monetary policy is the macroeconomic policy
laid down by the central bank. It involves
management of money supply and interest rate and
is the demand side economic policy used by the
government of a country to achieve macroeconomic
objectives like inflation, consumption, growth and
liquidity.

Rapid Economic Growth : It is the most important objective of a monetary
policy. The monetary policy can influence economic growth by controlling real
interest rate and its resultant impact on the investment. If the RBI opts for a
cheap or easy credit policy by reducing interest rates, the investment level in the
economy can be encouraged. This increased investment can speed up
economic growth. Faster economic growth is possible if the monetary policy
succeeds in maintaining income and price stability.
Price Stability : All the economics suffer from inflation and deflation. It can also
be called as Price Instability. Both inflation are harmful to the economy. Thus,
the monetary policy having an objective of price stability tries to keep the value
of money stable. It helps in reducing the income and wealth inequalities. When
the economy suffers from recession the monetary policy should be an 'easy
money policy' but when there is inflationary situation there should be a 'dear
money policy'.

Exchange Rate Stability : Exchange rate is the price of a home currency
expressed in terms of any foreign currency. If this exchange rate is very volatile
leading to frequent ups and downs in the exchange rate, the international
community might lose confidence in our economy. The monetary policy aims at
maintaining the relative stability in the exchange rate. The RBI by altering the
foreign exchange reserves tries to influence the demand for foreign exchange
and tries to maintain the exchange rate stability.
Balance of Payments (BOP) Equilibrium : Many developing countries like
India suffers from the Disequilibrium in the BOP. The Reserve Bank of India
through its monetary policy tries to maintain equilibrium in the balance of
payments. The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP
Deficit'. The former reflects an excess money supply in the domestic economy,
while the later stands for stringency of money. If the monetary policy succeeds
in maintaining monetary equilibrium, then the BOP equilibrium can be
achieved.

Full Employment : The concept of full employment was much discussed after
Keynes's publication of the "General Theory" in 1936. It refers to absence of
involuntary unemployment. In simple words 'Full Employment' stands for a
situation in which everybody who wants jobs get jobs. However it does not
mean that there is a Zero unemployment. In that senses the full employment is
never full. Monetary policy can be used for achieving full employment. If the
monetary policy is expansionary then credit supply can be encouraged.

Neutrality of Money : Economist such as Wicksted, Robertson have always
considered money as a passive factor. According to them, money should play
only a role of medium of exchange and not more than that. Therefore, the
monetary policy should regulate the supply of money. The change in money
supply creates monetary disequilibrium. Thus monetary policy has to regulate
the supply of money and neutralize the effect of money expansion. However
this objective of a monetary policy is always criticized on the ground that if
money supply is kept constant then it would be difficult to attain price stability.
The neutrality of money theory is based on the idea that money is a
“neutral” factor that has no real effect on economic equilibrium. Printing
more money cannot change the fundamental nature of the economy, even if it
drives up demand and leads to an increase in the prices of goods, services,
and wages.
Neutrality can be used broadly to describe individuals or organizations in
relationship to any kind of dispute, but it most often refers to countries that
don't engage in war. For example, Sweden has a long and famous tradition
of neutrality, as it has not gone to war since 1814.

Neutrality of money is the idea that a change in the stock of money affects only
nominal variables in the economy such as prices, wages, and exchange rates,
with no effect on real variables, like employment, real GDP, and real
consumption.

Equal Income Distribution : Many economists used to justify the role of the
fiscal policy is maintaining economic equality. However in resent years
economists have given the opinion that the monetary policy can help and play
a supplementary role in attainting an economic equality. monetary policy can
make special provisions for the neglect supply such as agriculture, small-scale
industries, village industries, etc. and provide them with cheaper credit for
longer term. This can prove fruitful for these sectors to come up. Thus in
recent period, monetary policy can help in reducing economic inequalities
among different sections of society.
Control business cycle:- Boom and depression are main phases of
business cycle, monetary policy puts a check on boom and depression.
Promote export and substitute imports:- By providing concessional loans to
export oriented and import substitution units, monetary policy encourages
such industries and helps to improve the position of balance of payments.

Improvement in Standard of Living :- Monetary policy is also the major
objective of the monetary policy that it should improve the quality of life in the
country. Control of Inflation and Deflation:- Inflation and deflation both are not
suitable for the economy. If the price level is reasonable and there is an
adjustment between the price and cost, rate of out put can increase. Monetary
policy is used to coordinate the cost and price. So price stability is achieved
through the monetary policy.
CONCLUSION:- Through all this points and references I concluded that the
monetary policy is framed for the economic as well as for the control over the
flow of money under different conditions that may cause by inflation or
deflation in an economy there are many objectives of monetary policy as
stated above which deals with how monetary policy affects the price and other
factors,

What are the instruments of monetary policy?
Some of the following instruments are used by RBI as a part of their monetary policies.
Open Market Operations: An open market operation is an instrument which
involves buying/selling of securities like government bond from or to the public
and banks. The RBI sells government securities to control the flow of credit
and buys government securities to increase credit flow.
Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified amount of bank
deposits which banks are required to keep with the RBI in the form of reserves
or balances. The higher the CRR with the RBI, the lower will be the liquidity in
the system and vice versa. The CRR was reduced from 15% in 1990 to 5 % in
2002. As of 31st December 2019, the CRR is at 4%.
Statutory Liquidity Ratio (SLR): All financial institutions have to maintain a
certain quantity of liquid assets with themselves at any point in time of their total
time and demand liabilities. This is known as the Statutory Liquidity Ratio. The
assets are kept in non-cash forms such as precious metals, bonds, etc. As of
December 2019, SLR stands at 18.25%.

Bank Rate Policy: Also known as the discount rate, bank rates are
interest charged by the RBI for providing funds and loans to the
banking system. An increase in bank rate increases the cost of
borrowing by commercial banks which results in the reduction in credit
volume to the banks and hence the supply of money declines. An
increase in the bank rate is the symbol of the tightening of the RBI
monetary policy. As of 31 December 2019, the bank rate is 5.40%.
Credit Ceiling: With this instrument, RBI issues prior information or
direction that loans to the commercial bank will be given up to a
certain limit. In this case, a commercial bank will be tight in advancing
loans to the public. They will allocate loans to limited sectors. A few
examples of credit ceiling are agriculture sector advances and priority
sector lending.

FISCAL POLICY
 Fiscal policy is defined as the policy under which the
government uses the instrument of taxation, public
spending and public borrowing to achieve various
objectives of economic policy. Simply put, it is the policy of
government spending and taxation to achieve sustainable
growth.
 The major purpose of these measures is to stabilize the
economy.
 Fiscal policy measures are frequently used in tandem with
monetary policy to achieve these macroeconomic goals.

Objectives of Fiscal Policy
The following are the objectives of the Fiscal Policy:
Higher Economic Growth
Price Stability
Reduction in Inequality
The above objectives are met in the following ways:
Consumption Control – This way, the ratio of savings to
income is raised.
Raising the rate of investment.
Infrastructural development.
Imposition of progressive taxes.
Exemption from the taxes provided to the vulnerable
classes.
Heavy taxation on luxury goods.
Discouraging unearned income.

What are the components of Fiscal Policy?
There are three components of the Fiscal
Policy of India:
Government Receipts
Government Expenditure
Public Debt

Government Receipts
The government's income in the form of Taxes, interests,
and earnings on investments and other receipts for
services rendered are altogether known as government
receipts. This is the total amount of money received by the
government from all sources. The government's revenue is
what enables it to spend money.
Government receipts are divided into two groups
— Revenue Receipts & Capital Receipts.
All Government receipts that either create liability or
reduce assets are treated as capital receipts whereas
receipts that neither create liability nor reduce assets of the
Government are called revenue receipts.
Sale of fixed assets, capital contribution and Profit on sale
of assets, sale of goods. interest loans taken, etc., are
some example of capital receipts. received on loans
(advanced), royalty, etc., are some examples of revenue
receipts.

Revenue Receipts
Receipts that neither create liabilities nor reduce
assets are called revenue receipts.
Revenue Receipts can be subdivided into two:
Tax and non-tax revenues.
Tax revenues are of two types:
direct and indirect taxes
Nontax revenue sources are interest and dividend
on government investment, cess and other
receipts for services rendered by the government,
income through licenses, permits, fines, penalties,
etc.

Capital Receipts
The government raises funds for its functioning in different ways
which are known as capital receipts. These ways could either incur
liabilities to the government or could be by disposing of its
assets. Incoming cash flows is another term used for capital
receipts.
All kinds of borrowings, loans, etc. are treated as debt receipts as
the government has to repay this money and, with its interests in
some cases.
There are non-debt receipts as well for the government which do
not incur any future repayment burden for the government.
Almost 75 percent of the total budget receipts are non-debt
receipts.
Loans from the general public, foreign governments, and the
Reserve Bank of India (RBI) form a crucial part of capital receipts.

Government Expenditure
The government’s expenditure can be classified into two:
Revenue expenditures
They are short-term expenses used in the current period or
typically within one year.
Revenue expenditures include the expenses required to meet the ongoing
operational costs of the government, and thus are essentially the same
as operating expenses (OPEX).
Revenue expenditures also include the ordinary repair and maintenance
costs that are necessary to keep an asset in working order without
substantially improving or extending the useful life of the asset.
Revenue expenditures can be considered to be recurring expenses in
contrast to the one-off nature of most capital expenditures.
Example: Salaries and employee wages, utilities, rents, property taxes
on government-owned properties, etc.

Capital Expenditure
Capital expenditures constitute investments made by the government
in the capital, and more often, to maintain or to expand its business
and generate additional revenue.
Capital expenditures consist of the purchase of long-term assets,
which are assets that last for more than one year but typically have a
useful life of many years.
Capital expenditures are often used for buying fixed assets, which
are physical assets such as equipment. As a result, capital
expenditures are typically for larger amounts than revenue
expenditures. However, there are exceptions when large asset
purchases are consumed in the short term or the current accounting
period.
Example: purchase of factory equipment, purchases for business,
other government purchases like furniture, spending on
infrastructure, etc.

Public Accounts of India (Public Debt)
The Public Account of India accounts for flows for those
transactions where the government is merely acting as a
banker.
This fund was constituted under Article 266 (2) of the
Constitution. It accounts for flows for those transactions
where the government is merely acting as a banker.
Examples: provident funds, small savings, etc.
These funds do not belong to the government, but rather
have to be paid back at some time to their rightful owners.
Therefore expenditures from the public account are not
required to be approved by the Parliament.

Conclusion
In this section, we learned about the components
of fiscal policy. These components together
function to affect the budget allocations,
government spending, and key economic policy
formulations for a financial year. The government
expenditure and the government receipts must
match while presenting a budget. Any shortfall in
the receipts is raised through borrowing which
results in a Fiscal Deficit.