Académique Documents
Professionnel Documents
Culture Documents
Course Contents
The invisible hand and market failures
Welfare economics principles
Income distribution issues
Public good, externalities and political economy
Cost-benefit analysis
Health, education, public distribution, environment
Institutions and policy making
Taxes and incentives, social security issues
Coverage
Overview
Public Finance Management
Government Expenditures
Government operations
Income distribution
Coverage (Contd.)
E- Governance
Definition
Scope
Objective
Advantages
Strategies
Coverage (Contd.)
Public Policy
Theoretical aspects of public policy
Implementation in India and in other
countries and effects thereof.
CONCEPTS , TOPICS
Overview
Public Policy:
With the rejection of the exclusive regulatory stand after the 1990s
in favour of a developmental role of the state, the study of public
policy has become a significant discipline in recent times.
Theoretical aspects of public policy, its meaning, significance and
models for public policy analysis.
Emphasis on theory and conceptual premises alongside contextual
analysis of public policy
Analyse its implementation in India, the United States and in a
globalized world.
As the state has proved itself to be a catalyst of development, the
impact of the policy changes on areas such as public life, rural
development, anti-poverty programmes and decentralized planning
is to be analysed.
Overview
Public Finance is the study of
the role of the government in the
economy.
The purview of public finance is
considered to be governmental
effects on:
efficient allocation of resources
distribution of income
macroeconomic stabilization
Overview
The proper role of government provides a starting for the
analysis of public finance.
Overview
Public sector programs should be designed to maximize
social benefits minus costs (cost-benefit analysis), and then
revenues needed to pay for those expenditures should be
raised through a taxation system that creates the fewest
efficiency losses.
Government can pay for spending by borrowing although
borrowing is a method of distributing tax burdens through
time rather than a replacement for taxes.
A deficit is the difference between government spending and
revenues. The accumulation of deficits over time is the total
public debt
Overview
Deficit finance allows governments to smooth
tax burdens over time, and gives governments
an important fiscal policy tool. Deficits can also
narrow the options of successor governments.
Public finance is closely connected to issues of
income distribution and social equity.
Governments can reallocate income through
transfer payments or by designing tax systems
that treat high-income and low-income
households differently.
Overview
Public policy doctrine concerns the body of
principles that strengthen the operation of legal
systems in each state. This addresses the social,
moral and economic values that tie a society
together: values that vary in different cultures
and change over time.
Overview
The fundamental principle in the operation
of a legal system is that ignorantia juris non
excusat (ignorance of the law is no excuse).
Strengthening most social, moral and religious
systems is the policy of sanctity of life.
Similarly, in many branches of law, the
Doctrine of Evasion prevents persons from
evading the application of obligations and
liabilities already attaching to them.
Essential
components of a
Public Financial
Management
system:
Economists classify
government
expenditures into
three main types:
Government Expenditures
Governm
ent
Operatio
ns
Government Expenditures
Income
Distribut
ion
Government Expenditures
Government Revenue:
Taxes
Non-tax revenue
Government borrowing
Printing of Money
Privatization
Government
expenditures are
financed in the
following ways:
Financing of Government
Expenditures
Tax
es
Financing of Government
Expenditures
Financing of Government
Expenditures - Taxes
Direct Tax (which is proportional) , e.g.
Corporate income tax on corporations (incorporated entities)
Wealth tax
Personal income tax (may be levied on individuals, families such
as the Hindu Joint Family in India, unincorporated associations,
etc.)
Gift tax
Debt
Financing of Government
Expenditures
Deb
t
Financing of Government
Expenditures
Deb
t
Financing of Government
Expenditures
Seignior
age
Financing of Government
Expenditures
Public
Finance
through
State
Enterpris
e
Financing of Government
Expenditures
Public
Finance
through
State
Enterprise
Financing of Government
Expenditures
Measuring Govt.
Economic Operations
(Contd.)
Measuring Govt.
Economic Operations
The general government sector has three sub-sectors:
"Central government" consists of all administrative
departments of the state and other central agencies whose
responsibilities cover the whole economic territory of a
country, except for the administration of social security funds.
"State government" is defined as the separate institutional
units that exercise some government functions below those
units at central government level and above those units at
local government level, excluding the administration of social
security funds.
"Local government" consists of all types of public
administration whose responsibility covers only a local part of
the economic territory, apart from local agencies of social
security funds.
Measuring Govt.
Economic Operations
(Contd.)
Measuring Govt.
Economic Operations
(Contd.)
Measuring Govt.
Economic Operations
The statement of operations (income
statement) contains the revenue and expense
accounts of the government.
The revenue accounts are divided into
subaccounts, including the different types of
taxes, social contributions, dividends from the
public sector, and royalties from natural
resources.
Finally, the interest expense account is one
of the necessary inputs to estimate the cost of
servicing the debt.
E- Governance
Definition
Scope
Objective
Advantages
Strategies
E- Governance
Definition:
The term E-government is misleading, as it implies an
electronic substitute for the physical government. Electronic
substitution of a government is not possible as Government
is a unit of people coming together to administer a
country.
A Government is a group of people responsible for the
administration and control of a Country/State. It involves
people like the Heads of States, Ministers, Government
Employees, etc. It also involves public participation. So
electronic substitution for a Government is not possible.
E- Governance
Definition:
Electronic Governance means using Information and
Communications Technology (ICT) to transform functioning
of the Government/ to run or carry on the business of the
Government of a Country.
It differs from E-Government as Governance is wider
than Governance. E-governance may refer to governance
of a Country, or the governance of an institution and also
governance of a Household by a housewife.
E-Governance in the popular parlance refers only to the
governing of a Country/State using ICT
E- Governance
Definition:
E-Governance therefore means the application of
ICT to transform the efficiency, effectiveness,
transparency and accountability of exchange
of information and transaction:
between Governments,
between Government agencies,
between Government and Citizens
between Government and businesses.
E-governance also aims to empower people
through giving them access to information.
E- Governance
Scope:
Governance is all about flow of information
between the Government and Citizens,
Government and Businesses and
Government and Government. E-Governance
also covers all these relationships as follows:
A. Government to Citizen
(G2C)
B. Citizen
to Government (C2G)
C. Government to Government (G2G)
D. Government to Business
(G2B)
E- Governance
Scope:
A.Government to Citizen (G2C):
In modern times, Government deals
with many aspects of the life of a
citizen. The relation of a citizen with
the Government starts with the birth
and ends with the death of the citizen.
E- Governance
Scope:
Government to Citizen (G2C):
The G2C relation will include the services provided by the
Government to the Citizens. These services include the
public utility services i.e. Telecommunication,
Transportation, Post, Medical facilities, Electricity,
Education and also some of the democratic services
relating to the citizenship such as Certification,
Registration, Licensing, Taxation, Passports, ID Cards etc.
Therefore E-Governance in G2C relationship will involve
facilitation of the services flowing from Government
towards Citizens with the use of Information and
Communications Technology (ICT).
E- Governance
Scope:
Government to Citizen (G2C):
Therefore E-Governance in G2C relationship will involve
facilitation of the services flowing from Government
towards Citizens with the use of Information and
Communications Technology (ICT).
E-Citizenship
E-Registration
E-Transportation
E-Health
E-Help
E-Taxation
E- Governance
Scope:
Government to Citizen (G2C):
E-Citizenship:
Includes the implementation of ICT for facilitation of Government Services
relating to citizenship of an individual. It involves online transactions
relating to issue and renewal of documents like Ration Cards, Passports,
Election Cards, Identity Cards, etc. It will require the Government to create a
virtual identity of every citizen so as to enable them to access the
Government services online. For the same, Government would need to
create a Citizen Database which is a huge task.
E-Registration:
E-Registration will cover the online registration of various contracts. An
individual enters into several contracts during his life. Many of these
contracts and transactions require registration for giving it legality and
enforceability. Such registration may also be made ICT enabled. Eregistration will help to reduce a significant amount of paperwork.
E- Governance
Scope:
Government to Citizen (G2C):
E-Transportation:
E-Transportation services would include ICT enablement of
services of Government relating to Transport by Road, Rail, Water
or Air. This may involve online
booking and cancellation of tickets,
status of vehicles, railways, boats and flights,
issue and renewal of Driving Licences,
registration and renewal of vehicles,
transfer of vehicles,
payment of the fees of licences,
payment of fees and taxes for vehicle registration.
E- Governance
Scope:
Government to Citizen (G2C):
E-Health:
E-Health services would be ICT enablement of the health services
of the Government. Under this interconnection of all hospitals may
take place. A patient database may be created. A local pharmacy
database may also be created. All this can be done.
E-Education - E-Education would cover the implementation of ICT
in imparting of education and conducting of Courses. Distant as
will as classroom education will be facilitated with the use of ICT.
Use of internet can reduce the communication time required in
Distance education; Internet may also help in conducting online
classes.
E- Governance
Scope:
Government to Citizen (G2C):
E-Help:
E-Help refers to facilitation of disaster and crisis management
using ICT. It includes the use of technologies like internet, SMS,
etc. for the purpose of reducing the response time of the
Government agencies to the disasters. NGOs help Government in
providing help in situations of disasters. Online information relating
to disasters, warnings and calls for help can help the Government
and the NGOs coordinate their work and facilitate and speed up
the rescue work.
E-Taxation - E-Taxation will facilitate the taxing process by
implementing ICT in the taxing process. Online tax due alerts and
online payment of taxes would help transact faster.
E- Governance
Scope:
Citizen to Government (C2G):
Citizen to Government relationship will include the communication
of citizens with the Government arising in the Democratic process
like voting, campaigning, feedback, etc.
E-Democracy - The true concept of Democracy includes the
participation of the citizens in the democratic and governing
process. Today due to the increased population the active
participation of the citizens in governing process is not possible. The
ICT can help enable the true democratic process including voting,
public opinion, feedback and Government accountability.
E-Feedback includes the use of ICT for the purpose of giving
feedback to the Government. Lobbying is pursuing the Government
to take a certain decision. Use of ICT can enable online feedback to
the Government, online debates as to the Government services.
E- Governance
Scope:
Government to Government (G2G):
G2G relationship would include the relationships between Central
and State Government and also the relationship between two or
more Government departments.
E-administration - E-administration would include the
implementation of ICT in the functioning of the Government,
internally and externally. Implementation of ICT can reduce the
communication time between the Government Departments and
Governments. It can substantially reduce paperwork if properly
used. E-administration will also bring morality and transparency
to the administration of Government Departments.
E- Governance
Scope:
Government to Government (G2G):
E-police - The concept of E-police is little different from CyberPolice. Cyber Police require technology experts to curb the
electronic/cyber crimes. E-police refers to the use of ICT for the
purpose of facilitating the work of the Police department in
investigation and administration. The concept of E-police includes
databases of Police Officers, their performances, Criminal
databases wanted as well as in custody, the trends in crimes and
much more. ICT can help reduce the response time of the Police
department and also reduce cost by reducing paperwork.
3. E-courts - The concept of E-Court will include the ICT
enablement of the judicial process. Technology may help distant
hearing, online summons and warrants and online publication of
Judgments and Decrees.
E- Governance
Scope:
E- Governance
Objectives:
The object of E-Governance is to provide a SMARRT Government. The Acronym SMART refers to
Simple, Moral, Accountable, Responsive, Responsible and Transparent Government.
S - The use of ICT brings simplicity in governance through electronic documentation, online
submission, online service delivery, etc.
M - It brings Morality to governance as immoralities like bribing, red-tapism, etc. are eliminated.
A - It makes the Government accountable as all the data and information of Government is
available online for consideration of every citizen, the NGOs and the media.
R - Due to reduced paperwork and increased communication speeds and decreased
communication time, the Government agencies become responsive.
R - Technology can help convert an irresponsible Government Responsible. Increased access to
information makes more informed citizens. And these empowered citizens make a responsible
Government.
T - With increased morality, online availability of information and reduced red-tapism the
process of governance becomes transparent leaving no room for the Government to conceal any
information from the citizens.
These objects of E-Governance are achievable with the use of ICT and therefore the concept is
very alluring and desirable.
E- Governance
Objectives/Aims of E Governance :
To build an informed society: An informed society is an
empowered society. Only informed people can make a Government
responsible. So providing access to all to every piece of
information of the Government and of public importance is
one of the basic objective of E-Governance.
To increase Government and Citizen interaction: In the
physical world, the Government and Citizens hardly interact. The
amount of feedback from and to the citizens is very negligible. EGovernance to aims at build a feedback framework, to get
feedback from the people and make the Government aware
of people's problems.
E- Governance
Objectives/Aims of E Governance :
To encourage citizen participation - True democracy requires participation
of each individual citizen. Increased population has led to representative
democracy, which is not democracy in the true sense. E-governance aims to
restore democracy to its true meaning by improving citizen participation in
the Governing process, by improving the feedback, access to information and
overall participation of the citizens in the decision making.
To bring transparency in the governing process - E-governance carries
an objective to make the Governing process transparent by making all the
Government data and information available to the people for access. It is to
make people know the decisions, and policies of the Government.
E- Governance
Objectives/Aims of E Governance :
To make the Government accountable: Government is responsible and answerable for
every act decision taken by it. E-Governance aims and will help make the Government more
accountable than now by bringing transparency's and making the citizens more
informed.
To reduce the cost of Governance - E-Governance also aims to reduce cost of
governance by cutting down on expenditure on physical delivery of information and
services. It aims to do this by cutting down on stationary, which amounts to the most
of the government's expenditure. It also does away with the physical communication
thereby reducing the time required for communication while reducing cost.
To reduce the reaction time of the Government Normally due to red-tapism and
other reasons, the Government takes long to reply to people's queries and problems. EGovernance aims to reduce the reaction time of the Government to the people's
queries and problems,.
E- Governance
Advantages:
Speed: Technology makes communication
speedier. Internet, Phones, Cell Phones have
reduced the time taken in normal communication.
Cost Reduction: Most of the Government
expenditure is appropriated towards the cost of
stationary. Paper-based communication needs lots
of stationary, printers, computers, etc. which calls
for continuous heavy expenditure. Internet and
Phones makes communication cheaper saving
valuable money for the Government.
E- Governance
Advantages:
Transparency: Use of ICT makes governing profess transparent.
All the information of the Government would be made available
on the internet. The citizens can see the information whenever
they want to see. But this is only possible when every piece of
information of the Government is uploaded on the internet and is
available for the public to peruse. Current governing process
leaves many ways to conceal the information from all the people.
ICT helps make the information available online eliminating all the
possibilities of concealing of information.
Accountability : Once the governing process is made
transparent the Government is automatically made accountable.
Accountability is answerability of the Government to the people. It
is the answerability for the deeds of the Government. An
accountable Government is a responsible Government.
E- Governance
Strategies:
To build technical
infrastructure/framework across
India.
To build institutional capacity
To build legal infrastructure
To build judicial infrastructure
E- Governance
Strategies:
To make all information available
online
To popularise E-governance
Centre-State Partnership
To set standards
E-Governance
Example:
The Central Vigilance Commission (CVC) in India started an initiative
to create a website with the objective of reducing corruption and
increasing transparency by sharing a large amount of information
related to corruption with citizens. The CVC website communicates
directly with the public through messages and speeches to bolster
confidence in the institution, informs the public about its efforts in
fighting corruption, and makes public
the names of officers from the elite administrative and revenue
services against whom investigations have been ordered or penalties
imposed for corruption. Members of the public are highly encouraged
(mainly by rewards) to make their complaints and to provide
information against a public servant about taking of bribes in order
for the commission to undertake the necessary anticorruption actions
to eliminate bribery and to increase the transparency of rules,
procedures and service delivery.
E-Governance
Example:
In India, the Gyandoot project is a government-to-citizen intranet
project which offers numerous benefits to the region, to citizens and
to the community in general. The goal of the project has been to
establish community owned technologically innovative and
sustainable information kiosks in a poverty-stricken rural area of
Madhya Pradesh. The benefits assured by this intranet system have
increased the awareness of ICT importance and have spin off other
IT initiatives and programs, such as: the creation of new private ICT
training institutions; a high level of student enrolment about 60%;
parliament has allocated resources to set up other kiosks in schools
and to develop new models for e-education; Indira Gandhi National
Open University has opened a study center for undergraduate and
postgraduate courses on computer applications; the government
has instituted a cash award to motivate ICT projects.
IS-LM MODEL
Since this is a non-dynamic model, there is a fixed
relationship between the nominal interest rate and the
real interest rate (the former equals the latter plus the expected
inflation rate which is exogenous in the short run); therefore
variables such as money demand which actually depend on the
nominal interest rate can equivalently be expressed as
depending on the real interest rate.
The point where these schedules intersect represents a shortrun equilibrium in the real and monetary sectors (though not
necessarily in other sectors, such as labor markets): both the
product market and the money market are in equilibrium. This
equilibrium yields a unique combination of the interest rate and
real GDP.
IS MODEL
The IS curve is defined by the equation:
Y = C(Y-T(Y))+ I(i)+G+(X-M(Y))
where Y represents income, C represents consumer spending as an
increasing function of disposable income (income, Y, minus taxes,
T(Y), which themselves depend positively on income), represents
investment as a decreasing function of the real interest rate, G
represents government spending, and X-M represents net exports
(exports minus imports) as a decreasing function of income
(decreasing because imports are an increasing function of income).
In this equation, the level of G (government spending) is presumed
to be exogenous, meaning that it is taken as a given.
IS MODEL
The IS curve is a locus of points of equilibrium in the "real" (non-financial)
economy. Given expectations about returns on fixed investment, every level
of the real interest rate (i) will generate a certain level of planned fixed
investment and other interest-sensitive spending: lower interest rates
encourage higher fixed investment and the like. Income is at the equilibrium
level for a given interest rate when the saving that consumers and other
economic participants choose to do out of this income equals investment .
The multiplier effect of an increase in fixed investment resulting from a lower
interest rate raises real GDP. This explains the downward slope of the IS
curve.
In summary, this line represents the causation from falling interest rates to
rising planned fixed investment (etc.) to rising national income and output.
LM MODEL
For the Liquidity preference and Money supply curve, the independent variable is
"income" and the dependent variable is "the interest rate." The LM curve shows the
combinations of interest rates and levels of real income for which the money
market is in equilibrium. It is an upward-sloping curve representing the role of
finance and money.
The LM function is the set of equilibrium points between the liquidity preference (or
Demand for Money) function and the money supply function (as determined by
banks and central banks).
Each point on the LM curve reflects a particular equilibrium situation in the money
market equilibrium diagram, based on a particular level of income. In the money
market equilibrium diagram, the liquidity preference function is simply the
willingness to hold cash balances instead of securities. For this function, the
nominal interest rate (on the vertical axis) is plotted against the quantity of cash
balances (or liquidity), on the horizontal. The liquidity preference function is
downward sloping. Two basic elements determine the quantity of cash balances
demanded (liquidity preference) and therefore the position and slope of the
function:
LM MODEL
DEMAND FOR MONEY:
- willingness to hold cash for everyday transactions and
- a precautionary measure (money demand in case of emergencies).
1) Transactions demand for money:
Transactions demand is positively related to real GDP (represented by Y,
Income). This is simply explained - as GDP increases, so does spending and
therefore transactions. As GDP is considered exogenous to the liquidity
preference function, changes in GDP shift the curve. For example, an
increase in the demand for money for transactions will increase interest rates
through the money market, and cause the LM curve to shift to up and to the
left.
2) Speculative demand for money:
- willingness to hold cash instead of securities as an asset for investment
purposes. Speculative demand is inversely related to the interest rate. As the
interest rate rises, the opportunity cost of holding cash increases - the
incentive will be to move into securities.
LM MODEL
Money supply is determined by the central bank decisions and willingness of commercial banks
to loan money. Though the money supply is related indirectly to interest rates in the very
short run, the money supply in effect is perfectly inelastic with respect to nominal interest rates
(assuming the central bank chooses to control the money supply rather than focusing directly
on the interest rate). Thus the money supply function is represented as a vertical line - money
supply is a constant, independent of the interest rate, GDP, and other factors.
Mathematically, the LM curve is defined by the equation:
Ms/P=Md(i, Y)
where the supply of money is represented as the real amount M/P (as opposed to the nominal
amount M), with P representing the price level, and L being the real demand for money, which
is some function of the interest rate i and the level Y of real income. The LM curve shows the
combinations of interest rates and levels of real income for which money supply equals
money demandthat is, for which the money market is in equilibrium.
For a given level of income, the intersection point between the liquidity preference and money
supply functions implies a single point on the LM curve: specifically, the point giving the level of
the interest rate which equilibrates the money market at the given level of income.
An increase in GDP shifts the liquidity preference function rightward and hence raises the
interest rate. Thus the LM function is positively sloped.
By the above hypothesis, the graph indicates one of the major criticisms of
deficit spending as a way to stimulate the economy: rising interest rates lead to
crowding out i.e., discouragement of private fixed investment, which in turn may
hurt long-term growth of the supply side (potential output).
Keynesians respond that deficit spending may actually "crowd in" (encourage)
private fixed investment via the accelerator effect, which helps long-term growth.
Further, if government deficits are spent on productive public investment (e.g.,
infrastructure or public health) that directly and eventually raises potential output,
although not necessarily more (or less) than the lost private investment might have.
The extent of any crowding out depends on the shape of the LM curve. A shift in the
IS curve along a relatively flat LM curve can increase output substantially with little
change in the interest rate. On the other hand, an upward shift in the IS curve along
a vertical LM curve will lead to higher interest rates, but no change in output.
IS-LM MODEL
The IS/LM model also allows for the role of monetary policy. If the money
supply is increased, that shifts the LM curve downward and to the right,
lowering interest rates and raising equilibrium national income. Further,
exogenous decreases in liquidity preference, perhaps due to improved
transactions technologies, lead to downward shifts of the LM curve and
thus increases in income and decreases in interest rates. Changes in these
variables in the opposite direction shift the LM curve in the opposite
direction.
Thus, with vertical LM curve, an increase in government spending cannot change the
equilibrium income and only raises the equilibrium interest rates. But if government
spending is higher and the output is unchanged, there must be an offsetting reduction
in private spending. In this case, the increase in interest rates crowds out an amount of
private spending equal to increase in government spending. Thus, there is full
crowding out if LM is vertical.
BACKGROUND:
Broadly, during the first 30 years of independence, between 1950 and 1980,
the
fiscal deficits of both the central and the state governments were not
excessive.
This was a period of revenue surplus in general. However, automatic
monetisation of government deficit by the RBI, which started as an exception
during the mid 1950s, became a regular practice thereafter.
Simultaneously, there was also a distinct shift in the management of the financial
sector with the nationalisation of major commercial banks in 1969 and
1980. These two developments had a significant bearing on the relationship
between the monetary authority (RBI) and the fiscal authority (Government).
There was a significant deterioration in the fiscal situation in the 1980s,
accompanied by large and automatic monetisation of government deficits.
RBI entered into the first agreement with the government in 1994 to place a
limit on automatic monetisation.
The First Supplemental Agreement between the RBI and the Government of
India was signed in 1994 setting out a system of limits for creation of ad
hoc treasury bills during the three-year period ending 1996-97.
In 1997, RBI signed the second agreement with the government for the same.
These features placed the Central Government on par with the State governments
which were brought under an Overdraft Regulation Scheme since 1985.
Furthermore, it was agreed that the RBI would trigger fresh floatation of
Government securities whenever 75 percent of the WMA limit was reached.
It was also agreed that the governments surplus cash balances with the RBI,
beyond an agreed level, would be invested by it in government securities.
While the transition to a full-fledged WMA and overdraft mechanism was gradual,
non-disruptive and consensual, the successful implementation of this mechanism
made it possible to incorporate some of these practices into a law the Fiscal
Responsibility and Budget Management Act (FRBM Act).
It is noteworthy that this law also practically prohibited RBI from participating in
primary issues of all government securities.
As a result of the concerted efforts to restore fiscal balance through tax reforms,
expenditure management, institutional reforms and financial sector reforms in the
first half of the 1990s, there was significant reduction in the magnitude of fiscal deficit
and the proportion of debt relative to GDP during the period 1991 to 1997.
However, during the period 1997 to 2003, there was a reversal in the trend of fiscal
consolidation, and the cumulative impact of industrial slowdown, fifth pay commission
award, and a lower than expected revenue buoyancy culminated in fiscal
deterioration.
This deterioration in the Indian fiscal position happened at an inopportune time
when there was fiscal improvement the world over and India was trying to
globalize. It is important to remember that Indias fiscal situation has been
significantly divergent from the global fiscal situation and continues to be so even
now.
This is the background we have to keep in view whenever we discuss the
pace and the content of economic reforms in India.
The coming into force of the FRBM Act, 2003 on July 5, 2004, which established a
framework for a rule based fiscal consolidation, should be viewed in this
background.
The Reserve Bank of India (RBI) Act implicitly prescribed the CRR originally at a
minimum of 3 % of any banks net demand and time liabilities. This restriction
was removed by an amendment in 2006. While the RBI is now free to prescribe
this rate, and any CRR above 3% can still be viewed as a monetary tool to
contain expansion of money supply by influencing the money multiplier.
But the way in which the CRR was operated historically made it serve a much
wider role. During the 1990s, when there was infux of foreign funds through
non-resident Indian (NRI) deposits, a differential CRR was prescribed on such
deposits to restrict their inflows.
In the more recent period after 2004, when there was a huge influx of foreign
capital through varied forms of debt and non-debt flows, and the RBI ended up
accumulating large forex reserves, the CRR became an optional instrument to
sterilise the rupee resources released from such dollar purchases. This was
particularly enabled by not paying any interest on CRR balances
maintained by banks with the RBI. The other options of sterilisation was
through open market operations and the repo operations through the
liquidity adjustment window (LAF) which is a cost to the central bank, just as the
market stabilisation scheme cost the Government fiscally in terms of interest
payments.
Fifth, one of the factors imparting rigidity to the interest rate structure in
India is the administered interest rates, particularly on small savings
instruments. In this context, administered interest rates fixed by the
Government on a number of small saving schemes and provident funds are
of special relevance as they have generally offered a rate different from
those on corresponding instruments available in the market, in some cases
along with tax incentives. The administered interest rates significantly
impact the level and allocation of savings. On the lending side also, there
are some administrative prescriptions for banks. Depending on how it is
calculated, on both the savings and the lending sides, the administered
structure of interest rate would apply to about 25 to 40 percent. In this
context, it is pertinent to note that the monetary policy mainly operates
through interest rates and interest rate signals, and constraints posed by
administered interest rates have to be duly recognized while dealing with
issues relating to monetary policy transmission mechanisms.
The RBIs approach to fiscal reforms is that while we agree on the need to
eliminate the revenue deficit, and agree on a nominal limit for fiscal deficit,
what is even more important is the mode of financing the fiscal deficit and
the use that the resources so raised are put to.
Exclusive focus on fiscal deficit may tend to reduce the role of the
Government, and consequently, it will not be in a position to aid the
process of growth, in particular, inclusive growth. Re-prioritisation of
expenditure may be achieved through reduction or elimination of subsidies
and deployment of resources thus released to the more needy sectors.
Higher level of resources may also be available through reduction in tax
exemption.
In the light of financial turbulence across the world in the recent period, the
relevance of the fiscal in the management of the macro economy has
become even more important.
He said the realty sector has been under pressure for quite some time now and the
government should incentivise investments into the sector, which will go a long way
in helping the economy.
On deductions for medical expenses, which currently stand at Rs 15,000 per annum,
an increase to Rs 50,000 is being demanded, more so considering that revision has
not happened in the past 14 years, but medical cost has surged manifold since then.
There is also a demand for the government to revisit standard deduction for the next
fiscal, which has been called off since 2006.