Fiscal Policy

The term "fiscal" is derived from the Greek word fiscus, meaning "basket," which symbolized the government treasury.

Definition
Fiscal policy refers to the set of government measures concerning income (taxation) and expenditure (public spending) aimed at achieving and sustaining rapid economic growth. It also encompasses public borrowing and deficit financing. Fiscal policy decisions involve tax revenue, government spending, loans, debt management, and budgetary deficits.

In essence, fiscal policy focuses on managing government expenditure and the tax structure, aligning with the objectives of monetary policy. It uses tools such as taxes, public spending, and public debt to promote economic development.

Objectives of Fiscal Policy in India
The primary objectives of fiscal policy in India include:

• Mobilizing additional resources for socially necessary development projects.
• Achieving and maintaining economic stability.
• Stabilizing price levels.
• Sustaining a steady growth rate in the economy.
• Maintaining equilibrium in the balance of payments.
• Raising the standard of living.
• Reducing income and wealth inequality.
• Providing incentives for private sector growth.

Tools and Techniques of Fiscal Policy

1. Public Expenditure
   This includes subsidies, transfer payments (e.g., welfare programs), public works projects, and government salaries. By increasing or decreasing its spending, the government can directly influence economic activity. For example, increased government spending raises demand, boosting output and employment.

2. Taxation
   Tax policies affect economic activity by influencing disposable income. Tax reductions leave individuals and businesses with more income to spend and invest, stimulating growth. Conversely, tax increases can cool down an overheated economy by curbing disposable income.

3. Public Borrowing
   When government expenditures exceed tax revenues, public borrowing is used to finance the deficit. Funds are raised domestically or internationally through instruments such as bonds, National Savings Certificates (NSC), and Kisan Vikas Patra. These funds are allocated to public services, infrastructure, and welfare programs.

4. Other Measures
   Additional fiscal measures include:

   • Rationing and price controls.
   • Wage regulations.
   • Promoting the production of essential goods and services.

Monetary Policy

Definition
Monetary policy refers to the strategies and actions implemented by a central bank, such as the Reserve Bank of India (RBI), to regulate the money supply, control interest rates, and influence credit conditions in the economy. Its primary objectives are price stability, inflation control, economic growth, and employment promotion. Under the RBI Act, 1934, the central bank employs tools like interest rates (e.g., repo rate), open market operations, and cash reserve ratios to achieve these macroeconomic goals.

Objectives of Monetary Policy

1. Promoting Economic Growth
   The monetary policy aims to promote sustainable economic growth by ensuring an adequate supply of money and credit to fuel economic activities.

2. Price Stability
   Controlling inflation is a key objective of monetary policy, ensuring that price levels remain stable and do not erode purchasing power.

3. Exchange Rate Stability
   A stable exchange rate is important for external trade and investment. The central bank may adjust monetary policy to maintain a balanced and stable exchange rate.

4. Balancing Savings and Investment
   Monetary policy aims to create conditions that encourage savings and direct them toward productive investment, ensuring that the economy has sufficient capital for growth.

5. Employment Generation
   By fostering economic growth and stability, monetary policy also aims to create employment opportunities and reduce unemployment levels.

Tools and Techniques of Monetary Policy

1. Qualitative Tools

   • Marginal Requirements: Regulating the margin (difference between the loan amount and the collateral's market value) to control credit flow.
   • Selective Credit Control (SCC): Directing credit toward priority sectors or restricting it in others to manage economic stability.
   • Moral Suasion: Persuading commercial banks to align their lending behavior with policy goals.

2. Quantitative Tools

   • Liquidity Adjustment Facility (LAF): Allows banks to manage liquidity by borrowing from or parking surplus funds with the RBI using government securities as collateral.

     • Repo Rate: The rate at which the RBI lends to banks (short-term).
     • Reverse Repo Rate: The rate at which the RBI borrows from banks.

   • Open Market Operations (OMO): The buying or selling of government bonds by the RBI to influence the money supply.

     • Buying bonds: Increases the money supply.
     • Selling bonds: Decreases the money supply.
       OMOs include:
     • Outright Operations: Permanent bond transactions.
     • Repo Operations: Temporary bond transactions with repurchase agreements.

   • Marginal Standing Facility (MSF): A penal rate enabling banks to borrow beyond the LAF window, set above the repo rate.

   • Long-Term Repo Operations (LTRO): RBI lending to banks for 1–3 years at the prevailing repo rate to provide long-term liquidity.

   • Bank Rate: The rate at which the RBI lends to banks. A higher bank rate reduces the money supply by making borrowing more expensive.

3. Sterilization Process
   To manage capital flows, the RBI uses OMOs to offset the impact of foreign inflows on the domestic money supply, mitigating inflation or currency appreciation.