Today we are going to discuss Monetary policy and fiscal policy specifically from UPSC point of view.
In End, I am going to discuss a question which was
asked in the UPSC pre-exam.
Monetary
policy vs Fiscal policy
The main difference between Monetary policy and Fiscal
policy is that
Monetary policy is decided by central bank[eg. RBI]
Fiscal policy is decided by Government.
Let's discuss the topic in Detail.
What is
Monetary policy?
It is a macroeconomic policy designed by the central bank of a country,
to manage money supply & interest rates.
It helps shaping variables such as inflation, consumption, savings, investment, and capital formation
It plays an important role in
price stability [inflation control],
economic growth,
job creation and
social justice
in any economy.
Milton Friedman
[American economist]-
whose research on monetary policy made this
subject more popular, he also won a Nobel in Economics
in this regard (1976).
Monetary policy
tool
Quantitative
Reserves: CRR, SLR
Key Rates (Repo, MSF, Bank Rate)
Market Ops (OMO, MSS)
Qualitative
Moral Suasion /Direct Action
Selective CreditControl / Priority Sector Lending(PSL)
Margin Req. / Loan to Value (LTV)---Increase e.g.
Gold-LTV: 60% → 90%- i.e loan of upto 90% of
value can be given
Why is Inflation good for the Economy?
Philip
Curve: Inflation ↑ = unemployment ↓ (and vice versa).
Therefore, stable & moderate inflation is good for the economy.
So, RBI tries to keep inflation with 2-6% CPI (All
India) using its bi-monthly monetary policy made by its 6- member statutory
Monetary Policy Committee.
What is Fiscal policy?
‘Fiscal’ is a word derived from Greek. Means ‘basket’
and symbolizes the public purse.
Fiscal policy is the set of Govt. decisions regarding
taxation,
expenditure,
subsidies and
other financial operations.
Fiscal policy Use of taxation, public borrowing [Government borrowing] and public expenditure by the Government for purposes of stabilisation [eg. Exchange rate]or development.
Using fiscal policy, Govt influences
savings,
investment and
consumption in an economy,
to accomplish certain national goals such as
income redistribution [Taxation],
socio-economic welfare [welfare schemes- PM garib kalyan
yojana],
economic development[MUDRA Yojana] and
inclusive growth.
I have discussed the importance of fiscal policy above
but I am repeating it to help you in Pre exam because when you read the
same concept in different words then it will be helpful to eliminate the option in
pre exam.
Why
Fiscal policy is important?
1. Employment: through schemes like MGNREGA
2. Fight Inflation: Higher Income tax will decrease disposable income and decrease demand in the market,
3. To fight deflation: direct and indirect taxes decreased to boost demand.
4. To Boost Economic Growth: Provide income tax benefits on household savings in LIC/Mutual Fund etc.
This household financial saving is used by LIC/ Mutual funds to buy bonds, and shares so industries get new capital investment which leads to factory expansion, jobs, and GDP growth.
5. To Boost Inclusive Growth: Higher taxes on the rich and
use that money for
Health[PM JAY],
Education[Article 21A],
women[Pradhan mantri ujjawala yojana, Stand up India],
poverty removal programs[MGNREGA, Mission Antyodaya].
6. To Boost Regionally Balanced Growth :
Give tax benefits to industrialists for setting up
factories in North East, Left-wing Extremism (LWE) & other backward areas.
7. Exchange Rate Stability:
Give tax benefits to exporters to boost exports and impose
higher taxes on imported items to reduce imports.
It will control our Current Account Deficit (CAD)
which reduces Exchange rate
volatility.
Which of them is/are part of Monetary Policy? (Pre-2015)
1) Bank rate
2)Open market operations
3) Public debt
4) Public Revenue
(a) 1 only
(b) 2, 3 and 4
(c) 1 and 2
(d) 1, 3 and 4
Solution(c)
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