Fiscal Policy vs Monetary Policy

Economic policy-makers are said to have two kinds of tools to influence a country's economy: fiscal and monetary. Fiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations. Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.

Fiscal Policy
Definition: Fiscal policy is the use of government expenditure and revenue collection to influence the economy.

Monetary Policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectivesoriented towards the growth and stability of the economy.

Principle:

Manipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.

Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

Policy-maker:

Government (e.g. U.S. Congress, Treasury Secretary)

Central Bank (e.g. U.S. Federal Reserve)

Policy Tools:

Taxes; amount of government spending

Interest rates; reserve requirements; currency peg; discount window; quantitative easing; open market operations; signalling

The Chief objective of planning was defined as initiating "a process of development which will raise living standards and open out for the people new opportunities for a richer and more varied-life." Economic planning had to be viewed as "an integral part of a wider process aiming not merely, at the development of resources in a narrow technical sense, but at the development of human faculties and the building up of an institutional frame-work adequate to the needs and aspirations of the people. Functions of Planning Commission: The main functions of the Planning Commission are: 1. Assessment of the material, capital and human resources of the country, including technical personnel, and formulation of proposals for augmenting such of these resources as are found to be deficient. 2. Formulation of Plans for the most effective and balanced utilization of the country's resources. 3. Definition of stages in which the Plan should be carried out or a determination of priorities and allocation of resources for completion of each stage. 4. Determination of the nature of the machinery necessary for the implementation of the Plan in all its aspects. 5. Appraisal from time to time of the progress achieved in the execution of each stage of the Plan. 6. Public co-operation in national development. 7. Perspective planning. Five Year Plans: Economic planning involves coordination an(, conscious direction of economic activity with a view to achieving pre specified socio-economic objectives such as growth, the self-reliance removal of unemployment, social justice and modernisation. It aims at the optimum utilisation of existing resources. The basic rationale behind planning is that free working of market forces can not guarantee the attainment of desired socio-economic objectives. There are three stages in the process of planning. a 1. Plan formulation 2. Plan implementation 3. Assessment and review of the Plan

Economic planning is of two types: Physical Planning implies allocation of resources in terms of material power and men to accomplish the targets specified in the Plan. Financial Planning implies provision of financial resources. Indian chose a five-year frame for its plans due to many reasons. First, and foremost, it gave a medium-term perspective to planning. It could also be due to the fact that general elections are held every five years. It, therefore, gives the party that comes to power, adequate time to translate its promises into reality. Also, India's first PM Jawaharlal Nehru was impressed by the success of the State directed Five-Year Plans of the Soviet Union. Project undertaken take time to be completed. It may take some time before returns are forthcoming from it. Therefore, it is necessary to assess its performance over a realistic time period. Similarly, implementation of schemes also takes time. Note: First plan total outlay in the 1952 original plan Provision; The Fifth Plan total outlay excludes Rs 450.00 crores of Hill and Tribal Areas; Outlays are at prices at base year of plan; the State Outlay for Ninth Plan includes the figures for UTs Tenth Five-year Plan (2002-07) was approved by National Development Council on 21 December 2002. 11 th Plan (2007-12): Planning Commission in its meeting held on November 8, 2007 under the Chairmanship of Prime Minister Dr. Monmohan Singh cleared the draft of the 11th Plan (2007-12) that seeks to step up economic growth rate to 9%. (NDC also gave its approval to 11th plan on December 19, 2007). The total outlay of the 11th Plan has been placed at Rs 3644718 crore which is more than double of the total outlay of the previous 10th Plan, in this proposed outlay, the contributions of union government and state government will be Rs. 2156571 crore and Rs 1488147 crore respectively (i.e. 59.2% and 40.8% of the total outlay respectively). Gross Budgetary Support (GBS), which is the centre's support to the plan has been fixed at Rs 1421711 crore, up from Rs 810400 crore in the previous Plan. 74-67% of GBS will be for priority sectors and the rest 25033% will be for non-priority sector. In 10th Plan this allocation share was 55.20% and 44.80% respectively. In order to make growth more inclusive, the 11th Plan proposes to increase the agriculture sector growth rate to 4 per cent from 2.13 per cent in the 10th Plan. The growth targets for industry and services sectors have been pegged at 9 to 11 per cent. The industrial growth rate in the 10th Plan was 8.74 per cent, while the services sector grew by 9.28 per cent. The other salient features of the draft of 11th Plan are1. The draft document has envisaged a savings rate of 34.8 per cent, which is substantially higher than 30.8 per cent recorded in the 10th Plan.

2. The investment rate has been proposed to be raised to 36.7 per cent from 30.8 per cent in the previous plan. 3. Important targets include reducing poverty by 10 percentage points, generating 7 crore new employment opportunities reduce unemployment among educated persons to less than 5% and ensuring electricity connection to all villages. 4. The major thrust of the Plan will be on social sector, including agriculture and rural development. 5. More stress on education with the draft proposing to increase the allocation to 19.36 per cent of the GBS from 7.68 per cent in the previous Plan. In absolute terms, the Central Government will be spending Rs 275000 crore on education during the 11th Plan as compared to Rs 62238 crore in the previous Plan. 6. More investment on infrastructure sector including irrigation, drinking water and sewage from 5 per cent of Gross Domestic Product (GDP) in 2005-06 to 9 per cent by 2011-

What are the essential Objectives of Planning in India? The basic objectives of planning in India, according to the Planning Commission, can be grouped under the heads of growth, modernization, self-reliance and growth by raising national income, full employment and social justice. Now, let us detail out the main objectives of Indian Plan. 1. High Rate of Growth: Increase in national income as well as per capita income, is the first and foremost aim of Indian planning. On looking plan-wise objectives of various plans, it is evident that the First five year plan had envisaged a target of 11 per cent increase in national income while it rose by 18 per cent. The Second Plan fixed the target of 25 per cent increase in national income over the plan period. Again, Third Five Year plan aimed to secure an increase in national income of 5 per cent per annum. During the Third Plan, the national income increased only by 11.2 per cent. The Fourth Plan had visualised to attain the growth rate at 5.7 per cent per annum but it remained at 3.4 per cent per annum. The new Sixth Five Year Plan achieved the growth rate of 5.2 per cent. Similarly, Seventh Plan has achieved an annual growth rate of 5 per cent. Eighth plan had fixed the target of 5.6 per cent. Similarly, Ninth Plan aims at achieving a growth rate of 7 per cent per annum. 2. Raising Investment Income Ratio:

Achieving a planned rate of investment within a given period to bring the actual investment as proportion of national income to a higher level has been regarded significant due to two reasons. Firstly, such an increase in output capacity is deemed to be needed to increase the output. Secondly it is needed to bring the capital stock of the economy to ensure the growth of future output capacity. 3. Social Justice: Another major objective of Indian Five Year Plans is to provide social justice to the common folks and weaker sections of the society. However, this social justice implies reducing the income inequalities and removal of poverty. These two aspects have been well dealt in various drafts of five year plans in our country. 4. Removal of Poverty: Up to the end of the Fourth Five Year Plan, it was felt that the benefits of development have received a raw deal to tackle the problem of poverty. In the Fifth Plan, there was a visible shift in the approach which resulted in the Minimum Needs Programme. Earlier to it, there was 20 Point Economic Programme to uplift village community, The Sixth Plan (1980-85) document mentioned that the incidence of poverty in the country is still very high and necessary measures need to be adopted to combat poverty. Similarly, seventh, Eighth and Ninth Plan Stressed for the removal of poverty in the country. 5. Full Employment: Unemployment problem is a chronic problem in undeveloped countries. Though, India has emerged as a new developing country, yet it is in the grip of acute problem of disguised unemployment. Thus, the crucial objective of Indian Planning is the creation of conditions for attaining full employment and the elimination of unemployment, underemployment and disguised unemployment. 6. Alleviating Three Main Bottlenecks: Another objective of planning is the adoption of various measures to alleviate the three 'bottlenecks' viz., agricultural production, the manufacturing capacity for producer goods and the balance of payments. The various plans have in one way or other been concerned with the removal of these three principal barriers for achieving stability-both internal and external-in the economy. 7. Self-Reliance: Another objective of Indian Plans is self-reliance. The earlier two plans could not give emphasis to it because they were formulated for rehabilitating and establishing basic key industries in the country.

Thus in the Third Five Year Plan, for the first time, the idea of self-reliance was clearly mentioned, " dependence on foreign aid, will be greatly reduced in the course of the Fourth Plan. It was planned to do away with confessional imports of food grains under PL-480. Foreign aid, net of debt charges and interest-payments will be reduced to about half by the end of the Fourth Plan compared to the current level". 8. Modernization: For the First time, the idea of modernization was floated in the Sixth Five Year Plan. In a common sense, it implies up-to dating the technology. But Sixth Plan draft denotes the term modernization, a change in the structural and institutional set up of an economic activity, shift in the sectoral composition of production, diversification of farm activities, an advancement of technology and innovations are the part and parcel to a change from feudal system into a modern independent entity. In agricultural sector, considerable achievement has been made. The total area under high yielding varieties has been raised from 5.6 million hectares to 27.4 million hectares during the period of 1970-71 to 1990-91. It further increased to 32.6 million hectares in 2000-01. Total area under food grains was 115.6 million hectares in 1960-61 which increased to 121.9 million hectares in 2001-02. The consumption of chemical fertilizer also rose from 2.18 million tonnes to 17.3 million tonnes from 1970-71 to 2000-01. Similarly, irrigated area rose from 38 million hectares in 1970-71 to 84.7 million hectares in 2000-01. The distribution of quality seeds seems to be highly erratic in the various plan periods. By the end of 2000-01, about 80 per cent of villages were electrified and the consumption of electricity in the agricultural sector rose by about 12.3 per cent per annum.