Module V MONETARY AND FISCAL To regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in Country and generally to operate the currency and credit system of the country to its advantage. Maintaining price stability and ensuring an adequate flow of credit to the productive sectors (to maintain the economic growth) of the economy have been the major objectives of monetary policy in India.

(1) to maintain a reasonable degree of price stability and (2) to help accelerate the rate of economic growth. “ the set of procedures and measures taken by monetary authorities to manage money supply, interest and exchange rates and to influence credit conditions to achieve certain economic objectives”. Monetary policy as one of the central bank’s functions RBI

Monetary policy is the process by which the government, central bank (RBI in India), or monetary authority of a country controls (i) the supply of money (ii) availability of money (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy.

Goals of Monetary policy Price stability and high employment rates Enhancing economic growth rates and controlling imbalances in external payments Including the protection of the external purchasing power of the currency through maintaining relatively stable levels of exchange rates. Increasing the efficiency of the financial system and maintaining the soundness of the banking system.

Fiscal policy Arthur Smithees: "Fiscal policy under which the government uses its expenditure and revenue programmes to produce desirable effects and to avoid undesirable effects on the national income, production and employment“. Roger defines fiscal policy as: "Changes in taxes and expenditure which aim at short run goals of full employment and price level stability".

Fiscal policy thus is the deliberate change in government spending and taxes to stimulate or slow down the economy. In the words of F.R. Glahe: "By fiscal policy is meant the regulation of the level of government expenditure and taxation to achieve full employment without inflation in the economy". J. M. Keynes describes fiscal policy as the steering wheel for the aggregate economy.

Goals of Fiscal Policy Achieve maximum level of employment Reduction in economic inequalities. Lifting the economy out of depression and closing the deflationary gap Fiscal measures to bring down the excess demand in the economy are: (a) Reduction in government expenditure, (b) Increase in taxes and (c) Creating a budget surplus To minimize the fluctuations in aggregate demand (so that the economy is always at its target and potential level of income)

(i)To mobilize resources for financing development. (ii) To promote economic growth in the private sector. (iii) To control inflationary pressure in the economy. (iv) To promote economic stability with employment opportunities. (v) To ensure equitable distribution of income and wealth.

UNION BUDGET Derived from French Word “ Bougette” Meaning Sack or Pouch Present term was used form the year 1873 First Budget Presented by Finance Minister S.K.Shanmugam Chetty on 26 th Nov In the year 1921 separation of Rly Budget from General Budget By the recommendation of Acworth Committee. Major Players in the Budget M/O Finance, Legislative Ministries, Planning Commission, C&AG

STATE BUDGET Forecast of governmental expenditures and revenues for the subsequent fiscal year. The budget is the key instrument for the execution of government economic policies. It has to be approved by the Legislative Council before presented / Implemented State Budget comprises of three parts: 1. Consolidated Fund 2. Public Account 3. Contingency Fund

The Consolidated Fund is the source for all the “usual” budgetary transactions whether of capital, revenue or loan nature. State Tax and Non-Tax revenues are entered into the Consolidated Fund. The Public Account includes those funds which do not rightly belong to the State but which the State holds in trust for other entities such items as deposits from Municipal Corporations, pension fund accumulations of the employees’ provident fund, and reserve and depreciation funds. The Contingency Fund, as its name implies, is a fund for emergency use / unforeseen emergent expenditures

STATE / UNION FINANCE COMMISSION State Finance Commissions have been set up in the various states of the country according to the guidelines that have been laid down in the Constitution of India, Article 243 (I). According to this article, the governor of the state shall set up the Finance Commission within the period of one year that begins with the seventy- third amendment act of the Indian Constitution, 1992 and after that at the end of every five years.

The Finance Commissions in the States usually consist of The chairman, Member secretary, and Other members. State Finance Commissions accumulate grants from the Finance Commission that is set up by the central government.

The various functions of State Finance Commissions To review the economic condition of the various Panchayatraj institutions and municipal bodies that are there in the state To take such steps that help in boosting the financial condition of the various municipal bodies and Panchayatraj institutions in the state To allot funds to the various Panchayatraj institutions and municipal bodies in the state from the Consolidated Fund of the State To act as an arbiter between the central and the state governments with regard to issues that are of financial nature

To transfer funds that are granted by the central government to the state government To distribute between the various municipal bodies and Panchayatiraj institutions that are there within the state and the state government the total proceeds of taxes, fees, tolls, and duties that are charged by the state government To determine the taxes, tolls, duties, and fees that may be levied by the various Panchayatraj institutions and municipal bodies that are there within the state