Economic Policies
The governments of all countries are expected to promote the economic growth and economic welfare to improve the standard of living of the citizens. Governments are also expected to maintain law and order and ensure security of the country. Economic growth is generally measured in terms of GDP – Gross Domestic Product. GDP is the total value of goods and services produced in a country. An increasing GDP indicates increasing economic activity, which in turn generates more income. When employment and income of the citizens increases, their standard of living also increases.
The policies that governments pursue to encourage economic growth and welfare are called economic policies. These policies can be broadly classified into:
- Fiscal Policy
- Monetary Policy
Fiscal Policy
This policy seeks to promote the economic growth and to offset fluctuations in employment and income through proactive management of public expenditure, investments, taxation, and borrowings. The sources of funds of the government are tax receipts and borrowings. The major expenditures of the government are salary and administrative expenses on maintaining the government machinery for tax collection, law and order, and defence of the country.
Payment of interest and repayments of the existing borrowings are major outflows incase of governments, that have been spending more than their tax income or running deficit budgets. Progressive governments, therefore, try to limit the preceding outflows and invest the surplus in augmenting infrastructure and other facilitators of economic growth.
The governments also try to directly influence the growth of certain regions, industries, or vulnerable sections of citizens by providing incentives in the form of tax concessions and subsidies. In addition, governments also enlarge the welfare initiatives like health care and education.
Governments draft relevant policies and implement them through various ministries. However, these policies are coordinated by the Finance ministry, which is responsible for raising resources and allocating the required resources to the various ministries. The policies formulated by various ministries and coordinated by the Finance ministry through the budgeting process are called Fiscal policies.
Monetary Policy
Prices of goods and services are influenced primarily by factors of demand and supply. These keep fluctuating on a constant basis. The changes in price level are measured by the government by average prices of a basket of goods and services both at the wholesale level and individual consumer level. Price indicators are known as Wholesale Price Index and Consumer Price Index.
Wild fluctuations in prices can be very disruptive as it will affect the fortunes of industries and, therefore, impact the life of those engaged by the industries. It is the responsibility of the government to ensure reasonable stability of prices.
Similarly, ensuring stability of exchange rate of the country vis-à-vis the international currencies such as US dollar and Euro is also essential to ensure orderly growth of industries. Fluctuations in exchange rates can cause fluctuation in the general price level, which in turn could destabilize the economy. Hence, an important goal of the government is to ensure reasonable stability of exchange rate of the currency of the country.
The policies pursued for managing liquidity, interest rates, and prices are together known as the Monetary policy. This policy is shaped and administered by the Reserve Bank of India [RBI]
RBI announces policy stance every 6 months. The policy statements of RBI cover more than liquidity and interest management. It covers all functions of RBI, such as, monetary management, regulation of banking system, exchange rate management, and their role as bankers to the government, namely, managing the finances and borrowing programmes of the government.
- Objectives of Monetary Policy
- Instruments of Monetary Policy
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