Fiscal, investment and monetary policy issues and their impact

MONETARY POLICY TOOL:

There are several direct and indirect instruments that are used for implementing monetary policy.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank term money market, which in turn can set market based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest rate reverse repo auctions, as necessitated under the market conditions.
Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.
Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate government account with the Reserve Bank.

Role of Finance Ministry in Monetary and Fiscal Policy

Fiscal role of ministry of finance

The Ministry of Finance plays a very crucial role in development planning in India. It supervise the financial institution and is responsible for the overall financial management of the country.

The Ministry of Finance is responsible for the fiscal administration of the country. It has three departments, Department of Economic Affairs, Department of Expenditure and Department of Revenue. The Department of Economic Affairs has a Budget Division and it prepares the budget of the Government. The role of the Ministry of Finance is based on ‘Financial Control’ by the Finance Ministry particularly by its Department of Expenditure. It has three main parts, control exercised during the preparation of the budget, control exercised during the execution of the budget and control on miscellaneous matters.

It scrutinises all proposals emanating from the spending department in so far as they have financial implications. This enables the Ministry to have a free hand in the formulation of policies of other departments. Generally, the scrutiny exercised by the Ministry of Finance in very broad and is more concerned with the over-all financial implications of the proposals and its impact on the expenditure”.

The Cabinet attaches considerable weight to the opinion of the Ministry. After all the proposals have been received from the spending ministries, it proceeds to determine the priorities in the larger interests of the nation. It’s main concern is to obtain “Proper balance of expenditure between services, so that greater value could not be obtained for the total expenditure by reducing the money spent on one service and increasing expenditure on another”3 and to secure a uniform standard in the measurement of the financial sacrifice involved in the activities of all departments”.

The Ministry of Finance, thus, plays an important role in development planning in India. It monitors the financial institution, which is responsible for the entire fiscal administration of the country. The focus purpose of these financial institution is on the socio-economic development of the country. The role of Ministry of Finance extents to every department, directly or indirectly and its impact is writ large on the entire administration. It maintains financial discipline in the country. As the economic development of India is linked with the successful implementation of the five year plans, the Ministry of Finance cannot remain aloof from it. It plays a vital role in the formulation of plans. In a word, the Ministry constitutes the backbone of development, financial stability and good governance.

Role of ministry of finance in monetary policy

Monetary Policy is the process by which monetary authority(an authority that controls all matters relating to money) of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability,reduce inflation and achieve high economic growth. A sound monetary policy ensures that various sectors of the economy have sufficient tokens/authority to carry out their transactions. It provides the basis to the fiscal policy and the fiscal policy influences the monetary policy and gives it a direction to proceed in. Monetary policy helps in keeping the money supply and economy of a nation stable whereas the fiscal policy is more involved in development and infrastructural work and policy making and enactment of budget. A monetary policy is changed from time to time to combat inflation,deflation,price rise,imbalance in demand and supply,etc by mopping up excess money or infusing money in the market as the requirement may be. A sound monetary policy helps the government determine its fiscal policy and how much it will collect as revenue and spend as expenditure. The fiscal policy helps bring money into the market whereas the monetary policy helps in managing that money supply and keeping it stable. In India the monetary policy is managed by the RBI which is the central bank as well as monetary authority of the country.

It was an open secret that the Union finance ministry did not see eye to eye with the Reserve Bank of India (RBI) on monetary policy. The rift is now out in the open.

The sequence of recent events is as follows. The finance ministry had summoned the members of the monetary policy committee (MPC) to New Delhi to discuss interest rate policy. The MPC members formally refused to attend the meeting. RBI governor Urjit Patel made this public in an interaction with journalists. The MPC also decided—rightly in our opinion—to not cut interest rates in their policy meeting on . Chief economic adviser Arvind Subramanian put out a statement on why he disagreed with the decision.

Such conflicts between finance ministries and central banks are not uncommon across the world. The question is how well the creative tension is managed. India itself provides starkly different examples.

There was excellent coordination between New Delhi and Mumbai when Manmohan Singh was finance minister and C. Rangarajan was RBI governor, even when the central bank went in for a brutal tightening of policy in response to double-digit inflation. We saw a similar smooth working relationship between Yashwant Sinha and Bimal Jalan.

Matters have been more tense since then. The episodes of friction between the two masters of our financial universe are well known. Some of them were highlighted in the book written by former RBI governor D. Subbarao, Who Moved My Interest Rate?. These years of conflict also saw a concerted campaign from New Delhi to cut the RBI down to size, as when the financial stability and development council was set up in 2010 with the central bank as just one of several regulatory institutions who are its members. The rupee crisis of 2013 did act as a glue, but even here most of the coordination was done by officials rather than the finance minister and the governor.

Institutional coordination is as much an art as a science. The art comes from the ability of people to work together despite conflicting views. The science comes from the institutional rules that set out the specific areas of responsibility. Both need to be nurtured.

The MPC members did well to not attend the meeting in the finance ministry. We had argued in these columns earlier that such a meeting was in conflict with the clear provisions of the RBI Act. However, the finance ministry is also empowered under the revised Act to offer its views on interest policy in writing to the MPC. Subramanian has done precisely that, though in the public sphere.

Disagreement is not in itself a bad thing, as long as the legal provision that the MPC gets freedom to pursue the inflation target formally given to it by the government is respected. What matters more right now is the threat of a breakdown in communication. It is not just about interest rate policy. The biggest risks to economic stability right now come from the banking sector. Several policies have been tried out. Several ideas have been floated. The mountain of bad loans has kept getting bigger.

The Government of India has taken significant initiatives to strengthen the economic credentials of the country and make it one of the strongest economies in the world. India is fast becoming home to start-ups focused on high growth areas such as mobility, e-commerce and other vertical specific solutions – creating new markets and driving innovation.

India’s Gross Fixed Capital Formation at constant prices was Rs 40.88 lakh crore (US$ 561.44 billion) in 2017-18. The Government of India forecasts capital expenditure to increase by 30 per cent from Rs 3 lakh crore (US$ 41.2 billion) in 2017-18 to Rs 3.9 lakh crore (US$ 53.6 billion) in 2019-20. Investments by Domestic Institutional Investors (DIIs) reached Rs 97,739.02 crore (US$ 14.00 billion) in 2018. The total number of investor accounts with active mutual fund houses in India rose to a record 81.7 million at the end of February 2019, according to the data from Association of Mutual Funds in India (Amfi). India has emerged as one of the strongest performers in terms of deals related to mergers and acquisitions (M&A). The M&A activity in India reached record US$ 129.4 billion in 2018 while private equity (PE) and venture capital (VC) investments reached US$ 20.5 billion.

Assets under management (AUM) by mutual funds in India reached Rs 23.16 trillion (US$ 334.82 billion) in February 2019.
Indian automobile industry start-ups received investments of US$ 491 million in 2018, led by Essel Green Mobility’s US$ 300 million investment in Zipgo.
As of March 2019, the Oil and Natural Gas Corp (ONGC) is planning to invest over US$ 500 million in its flagship asset, Mumbai High.
In March 2019, the Tata group entered the airports sector in India by agreeing to invest Rs 8,000 crore (US$ 1.16 billion) in the GMR group along with two other investors.
Oyo Rooms will invest about US$ 200 million towards capital expenditure, technology and leadership in its India and South Asia business over 2019.
Proceeds through Initial Public Offers (IPO) in India reached US$ 5.5 billion in 2018 and US$ 0.9 billion in Q1 2018-19.
Reliance Industries Limited (RIL) is planning to invest over Rs 10,000 crore (US$ 1.37 billion) in Uttar Pradesh and Rs 5,000 crore (US$ 687 million) in West Bengal over the next three years.
Vedanta Resources Plc is planning to invest about US$ 9 billion in India over the next few years to expand its hydrocarbons and metals and mining businesses.
In February 2019, the Government of India approved the National Policy on Software Products – 2019, to develop the country as a software hub.
The National Mineral Policy 2019, National Electronics Policy 2019 and Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles (FAME II) have also been approved by the Government of India in 2019.
In November 2018, the Government of India launched a support and outreach programme for the Micro, Small and Medium Enterprises (MSME) sector. It involves 12 key initiatives which will help the growth, expansion and facilitation of MSMEs across the country.
In September 2018, the National Digital Communications Policy (NDCP) has been approved by Government of India with the objectives of attracting US$ 100 billion in investments, improved broadband connectivity and generation of four million jobs in the telecom sector.
Securities and Exchange Board of India (SEBI) doubled the maximum investment by angel funds in venture capital undertakings to Rs 10 crore (US$ 1.37 million).
The Government of India has decided to invest Rs 2.1 trillion (US$ 28.8 billion) to recapitalise public sector banks over the next two years and Rs 7 trillion (US$ 95.9 billion) for construction of new roads and highways over the next five years.
India and Japan have joined hands for infrastructure development in India’s north-eastern states and are also setting up an India-Japan Coordination Forum for Development of North East to undertake strategic infrastructure projects in the northeast.
Union Ministry of Shipping plans to raise US$ 15.8 billion in dollar equivalents at the interest rate of three per cent, for developing ships, building ports and improving inland waterways.
Ministry of environment and forests has granted environment clearance for 35-km coastal road connecting south and north Mumbai. The coastal road project is part of the US$ 9.52 billion transport infrastructure projects being undertaken by the state government and is expected to require an investment of US$ 1.34 billion.
The Government of India will provide soft loan of US$ 1 billion to sugar mills to help them clear part of their US$ 3.33 billion dues to farmers. The money shall be directly credited to the farmer’s bank accounts through the Pradhan Mantri Jan-Dhan Yojana.

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