State the main functions of the Reserve Bank of India.
- In our country the Reserve Bank is the Central Bank and it was set up in 1935. The functions of the Reserve Bank of India are as follows:-
1) The Reserve Bank acts as the banker's bank. In this capacity it performs 3 main functions:-
a) It acts as the custodian of cash reserves of the commercial banks.
b) It acts as the lender of the last resort.
c) It is the bank of central clearance, settlements and transfers.
2) The Reserve Bank enjoys the monopoly of note issue. It estimates the requirement of cash and in this way the central bank can increase or decrease the supply of notes.
3) The Reserve Bank acts as the banker of the government. As the government's banker, the reserve bank keeps the accounts of various government departments and institutions.
4) The Reserve Bank is the custodian of the nation's gopld and foreign exchange reserve. This is an important function of the central bank.
5) The Reserve Bank publishes economic statistics about the various aspects of the government. It also publishes the monthly bulletins for various sections of the indian economy.
6) It acts as the controller of credit. The Reserve Bank is in a position to control credit in its capacity as the bank of issue and as the custodian of cash reserves of the commercial banks.
What is deficit financing?
-when the government plans its budget, it first of all determines its target expenditure. Both administrative expenditure and developmental expenditure are included in it. After determining the level of expenditure, the government tries to raise an equal amount of revenue in the form of taxes,duties, income from Public sector units and Public borrowings. If the revenue expected to be collected from these sources falls short of the target expenditure,the gap is called deficit. The government finances this deficit through- a)running down its cash balance with RBI
b)borrowing from the RBI
c)Printing new money by the government itself.
This is called Deficit financing.It is 4 different types:-
a) Revenue deficit:- Total revenue receipts-Total revenue expenditure
b)Fiscal deficit:- Revenue receipts + capital receipt - total expenditure
c)Primary fiscal deficit:- Fiscal deficit- interest payments
d) Budget deficits:- (revenue receipts + capital receipts ) - (revenue expenditure + capital expenditure )
What is public debt?
-If government's payments are greater than government's receipts, then there is defeicit in government's budget. In order to overcome this deficit, the government takes loans.This loan is known as public debt or public borrowings.
If the govt. borrowings from within the country, then this deficit is known as internal debt.Internal sources of govt. borrowing are - individuals, commercial banks, non-banking financial institutions and the central bank.
When the govt. takes loans from the governments of other countries or international institutions,then it is called external debt. Sources of External debt are- IMF , World Bank, ADB, foreign governments etc.
Public debt has two types of burdens-money burden and real burden. When the government borrows money, this money will have to be repaid in future nd interest on this amount will have to be paid regularly. This is known as the direct money burden of the public debt.
On the other hand ther real burden of public debt refers to the loss of economic welfare as a result of the repayment of public debt.
- We can divide the public income to the Central government under two parameters:-
a) Tax revenue b) Non-tax revenue
1. income tax 1. Profits of the RBI
2. Wealth tax 2. Profits earned by state enterprises controlled by Indian government
3. Gift tax 3. Public borrowings.
4. Estate duty
5. Capital gains tax
6. Corporation tax
7. Central excise duty.
8. Customs duty.
-Functions of WTO
1. To provide facilities for implementation, administration and operation of multilateral and bilateral agreements of the world trade.
2. To provide a platform to member countries to decide future strategies related to trade and tariff.
3. To administer the rules and processes related to dispute settlement.
4. To implement rules and provisions related to trade policy review mechanism.
5. To assist IMF and IBRD for establishment coherence in universal economic policy determination.
6. To improve standard of living of people in the member countries.
7. To ensure full employment and broad increase in effective demand.
8. To enlarge production and trade of goods.
9. The above three objectives were also included in GATT, but WTO also included some other objectives which are :
10. To enlarge production and trade of services.
11. To ensure optimum utilisation of world resources.
12. To accept the concept of sustainable development.
13. To protect environment.
Functions of the IMF:-
1. To promote international monetary co-operation
2. To provide monetary help to the member countries to remove maladjustment in their balance of payments.
3. To promote exchange stability.
4. To direct the member countries to avoid competitive exchange rate depreciation.
5. To aim at reducing tariff and carries on a surveillance of the policies being adopted by the member states.
6 To provide technical advice to its member countries on monetary and fiscal policies.
7. To conduct short training courses on fiscal, monetary and balance of payments policy
8. To provide technical experts to member nations suffering from balance of payments difficulties.
9. To conduct many research studies and publishes their results.
What is fiscal policy? Explain the various instruments of fiscal policy.
-In economics and political science, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables in an economy:
Aggregate demand and the level of economic activity;
The distribution of income;
The pattern of resource allocation within the government sector and relative to the private sector.
Fiscal policy refers to the use of the government budget to influence economic activity.
The three main stances of fiscal policy are:
1.Neutral fiscal policy is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
2.Expansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.
3.Contractionary fiscal policy occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt.
By instruments of fiscal policy we mean the policies that the govt. of country tries to control through its revenue-esxpenditure process. The instruments are:-
- The budget of a nation is a useful instrument to assess the fluctuations in an economy. Different budgetary principles have been formulated which are known as (1) annual balanced budget. (2) Cyclical balanced budget (3) fully managed compensatory budget.
- Taxation is a powerful instrument of fiscal policy. It greatly affects a change in disposable income, consumption and investment. An anti-depression tax policy increases disposable income of the individual, promotes consumption and investment. Obviously, there will be more funds with the people for consumption and investment purposes at the time of tax reduction . This will ultimately result in the increase in spending activities
c) PUBLIC EXPENDITURE
- The active participation of the government in economic activity has brought public spending to the front line among the fiscal tools. The appropiate variation in public expenditure can have more direct effect upon the level of economic activity than even taxes.
Public Expenditure can be of two types :-
1. Puclic expenditure in inflation.
2. Public expenditure in depression.
d) PUBLIC WORKS
- Keynes "General theory" highlighted public programme as the most significant anti-depression device. There are two forms of expenditure ,i.e, Public Works and Transfer payments. Public Works according to Prof. J.M.Clark are durable goods, primarily fixed structure, produced by the Government. They include expenditure on public works as roads, rail tracks, schools, parks, buildings, airports wtc. The expenditure on capital assets is called capital expenditure.
e) PUBLIC DEBT
- Public debt is a sound fiscal weapon to fight against inflation and deflation .It brings about economic stability and full employment in the economy.
The government borrowing may assume any of the following forms mentioned as under:-
1. Borrowing from Non-bank public
2. Borrowing from the Banking system.
3. Drawing from treasury.
4. Printing of money.