Tag: #economy

Monetary and Fiscal Policy

Monetary and fiscal policy refer to the policies of the government aimed to solve the economic problems in a country.
A monetary policy is a credit control measure adopted by the central bank of an economy. It deals with the demand and supply of money.
Fiscal policy refers to the use of taxation and public expenditure by the government to stabilise the economy.
A monetary policy aims at achieving full employment. Unemployment leads to wastage of potential and resources. Price stability is another goal of monetary policy. Changes in price levels lead to uncertainty in the economy. Achieving economic growth and maintaining a favourable balance of payments are some of the objectives of this policy.
A fiscal policy aims at achieving full employment, stabilizing the price levels and growth rate of the economy, maintaining equilibrium in the balance of payments. It uses taxation to affect national income, output, prices etc.
Monetary policy uses various instruments to achieve it’s goals. Open market operations, bank rate policy, selective credit controls, changes in reserve ratios are some of the instruments of monetary policy. Open Market Operations refers to sale and purchase of securities in money market by the central bank. Bank rate is the minimum lending rate of the central bank. When there is rise in prices, the central bank raises the bank rate and vice versa. Selective Credit Controls are used to influence specific types of credit for specific purposes.
A monetary policy can be classified as an expansionary or a contractionary policy. In the former case, monetary policy is used to overcome a recession or deflationary gap. It generally happens when there is a reduction in demand for consumer goods or investment goods. To control this central bank starts an expansionary monetary policy that reduces credit market conditions and leads to upward shift in demand. In the later case, monetary policy is used to curtail aggregate demand. When the economy faces inflationary gap due to rise in demand for consumer goods and increase in business investment, the central bank increases the cost of bank credit. This is often done by selling government securities, rising discount rate etc.
Similarly, fiscal policy can be classified as neutral, expansionary and contractionary. Neutral policy is usually undertaken when an economy is in equilibrium. In this instance, government spending is fully funded by tax revenue, which has a neutral effect on the level of economic activity. Expansionary policy is usually undertaken during recessions to increase the level of economic activity. In this instance, the government spends more money than it collects in taxes. Contractionary type of policy is undertaken to pay down government debt and to cap inflation. In this case, government spending is lower than tax revenue.
Monetary and Fiscal policy both have their own advantages and disadvantages. Fiscal policy may sometimes result in a domino effect causing one problem to make another and repeat. Fiscal policy can also have issues with time lags. Although monetary policy is not very effective in a recession, it is flexible and works well to slow down the economy. Most people however, prefer fiscal over monetary because its brings low taxes and low interest rates.
https://www.ukessays.com/essays/economics/fiscal-and-monetary-policy-economics-essay.php


https://courses.lumenlearning.com/boundless-economics/chapter/introduction-to-fiscal-policy/

Trade Cycle

Trade cycle or business cycle refers to cyclical fluctuations in economic activities like employment, income, prices etc. It is a characteristic feature of capitalist system. In a trade cycle, there are alternating waves of expansion and contraction. These waves recur frequently and in similar patterns. It comprises of a period of good trade wherein the prices are high and unemployment is low and a period of bad trade wherein the prices are low and unemployment is high.
A business cycle usually consists of four phases. These phases do not have a definite time intervals or periodicity. The four phases are: recovery, prosperity, recession and depression.
Recovery is the first phase in the trade cycle. It is the revival period. Here entrepreneurs increase the level of investment. This in turn leads to increased employment and income. A increased income level means more purchasing power in the hands of people which leads to more demand for consumer goods. This leads to increase in prices for commodities and eventually leads to profit generation Business expectations improve and optimism prevails.
Prosperity is the second phase in the trade cycle. In this stage, demand, output, employment and income are at the peak levels. Increased profits lead to increased stock market values. There is expansion in economic activities. Demand and prices go up. The production level is very high and known as boom. The economy surpasses the level of full employment to reach the level of over full employment. This leads to inflation and is a sign of end of prosperity.
Recession is the third phase of the trade cycle. It starts when there is a downward descend from the peak. The level of investment declines and consequently the demand for raw materials decline as well. Liquidity preference rises in the economy. The margin of profit declines and a wave of pessimism spreads in the business. Recession can be mild or severe.
Depression is the fourth phase of the trade cycle. It’s characteristic feature is the general fall in all economic activities. Production, employment, income decline. This general decline in economic activities lead to fall in bank deposits. Credit creation declines and bank rate falls. Distribution of national income change and margin of profit declines.

https://www.yourarticlelibrary.com/trade-2/trade-cycle-4-phases-of-trade-cycle-discussed/23414


There are several factors responsible for the existence of fluctuations and trade cycles. External factors like political events, growth rate of population, migrations, discoveries, innovations etc are responsible for the cyclical fluctuations in the economy. As far as internal factors are concerned, mechanisms within the economy give rise to repetitive fluctuations. Over investment is one such factor. It is the credit availability by the banks which leads to over investment in capital goods rather than consumer goods. This eventually brings depression in the economy. Competition may be another reason for fluctuations. The profit motive causes firms to anticipate demand and subsequently do excess production. For this, firms hire more workforce and cost of production increases. This raises the prices of the commodities and decline in the demand for them. This ultimately leads to depression.

https://www.investopedia.com/terms/b/businesscycle.asp

Land Reforms in India

Land reforms refer to the efforts made by the government to reform the ownership and regulation of land. Land reforms play a great role in the rural agrarian economy.
During the pre independence period, there were three types of land tenure systems in India.

  1. The Zamindari System– This system was created by the East India Company as a result of the permanent settlement between Lord Cornwallis and landlords. In this system revenue was collected from farmers by the zamindars or the landlords.
  2. The Mahalwari System– This system was introduced by William Bentinck in Oudh and Agra and was latter extended to Madhya Pradesh. In this system the revenue was collected by village headman on behalf of whole village and here whole village was treated as a unit.
  3. The Ryotwari System– This system was introduced in Tamil Nadu and was extended to Maharashtra, East Punjab, Assam, Coorg and Baar. In this system the land revenue was collected was paid directly by the farmers to the state.

In all three systems, there was exploitation and deprivation. Zamindari system created a class of zamindars who did not work and took away surplus from the cultivators. The lives of tenants and sub tenants was miserable. In the post independent India, land reforms were introduced to stop the exploitation that had been prevailing in the land tenure systems.
https://www.indiaagronet.com/indiaagronet/agri_economics/CONTENTS/Land%20Tenure.htm
The first and foremost step in doing so was abolition of intermediaries. The main reason of exploitation was zamindars. The Zamindari Abolition Act took four and a half years to become a law. Official documents state that zamindari has been abolished now and zamindars are now the big landowners. This has lead to a decline in the exploitation of tenants and the feudal rural structure has crumbled down.
Another step taken was the tenancy reforms. Under this, regulation of rent was done. Security of tenure was provided as well. This was done to protect tenants and grant them permanent rights in land. Ownership rights for tenants were also given.
Reorganisation of Agriculture was another land reform. Here ceilings on agricultural holdings were provided. Ceiling refers to the legal limit on the amount of land which an individual can hold. However, in rural India, implementing ceiling laws is rather difficult because of the balance of power is weighted against the landless.
Another land reform was the consolidation of holdings. This reform was done to solve the problem of fragmented land holdings. In this method one consolidated holding is provided equal to the total of scattered plots. The problem that arises in this reform is the fertility and location of the new land which is provided.
Cooperative farming is another land reform which has been advocated to solve the problems created by subdivision of holdings. In this method, farmers who have small land holdings work together for cultivation. It has many advantages. Expensive implements can be bought by clubbing money together. Market surplus of food grain can be obtained more easily. It also encourage the spirit of cooperation.
https://www.rauias.com/daily-current-affairs-for-upsc-ias/land-reforms-in-india-an-analysis-upsc/

Why Human Development?

Human development refers to the process of widening people’s choices, freedom and opportunities as well as raising the level of their well being. Human development focusses on the enlargement of all human choices whether economic, social, cultural or political.
Economic growth or development alone cannot guarantee human development. This is because these two terms pertain to economic advancement which is usually expressed in monetary terms. Accumulation of wealth does not necessarily mean the fulfilment of several kinds of human choices. For instance, a society does not have to be rich to afford democracy or equality. It is the how we use the wealth and not the wealth itself that is decisive in attaining human development. The real wealth of a society is its people and development of those people can transform that society.
In recent times, an alternative to GNP as a measure of economic development has lead to computation of the Human Development Index. This measure has been enlarged and many related indices like gender development index, gender inequality index, human poverty index, etc. have been developed as well. Human development is necessary for several reasons.
Human development leads to higher productivity. A healthy and skilled labour is a very important productive asset for any economy. Improvement in education not only enhances skills but also helps in lowering family sizes. Education makes people aware of the benefits of smaller families.
Human development also leads to a better physical and social environment. Population growth effects the environment. Deforestation, desertification etc decline with a decline in poverty. Reduced poverty also contributes to a healthy civil society, increased democracy and greater social stability.
Human development embraces the entire society and not just the economy. The political, cultural and social factors are given much importance as the economic factors.
Some of the important components of human development are equity, empowerment, sustainability and productivity. People must enjoy equitable access to opportunities. They must be empowered so that they are in a position to exercise choices of their own free will. The development should be sustainable i.e. needs of future generations should also be under consideration. Productivity is an essential part of human development as therefore should always be a priority.
In the recent years, economists have shifted their concern from economic growth to human development. This has lead to the creation of Human Development Index (HDI). HDI is a measure of human development done on the basis of three dimensions: long and healthy life, access to education and decent standard of living. Long and healthy life can be measured through life expectancy while literacy rate shows access to knowledge. For measuring standard of living, GNP is often used.
Since human development is so closely linked to economic growth, it is important that planning in economic growth should coincide with human development. It means that equal emphasis should be laid on production and distribution objectives. Human beings should be declared the ultimate objective of economic planning. There are enormous difficulties in doing so but it is worthwhile.

PRIVATISATION : PROS AND CONS

Privatisation refers to the process by which the government transfers the productive activity from the public sector to the private sector. It is basically the transfer of ownership from the central government to the private sector. A vast majority of economies have been supporting privatisation and have launched massive privatisation programmes during the last two-three decades ago. The supporters believe that privatisation and disinvestment has many advantages.
The first and foremost being improvement in efficiency and performance. Since private sector is profit oriented, the decision making is inclined more towards efficiency. Moreover, privatisation establishes a market for managers which improves the quality of management. Here fixing responsibility is much easier. Public enterprises cannot be held responsible for any lapse i their responsibilities but this is not the case with private sector. That is way the performance of private sector is better.
Decision making is faster in private sector in comparison to public sector. Delayed decision making is often equivalent to making no decision at all. The problem of red tapism which is present in public sector is absent in the private sector. In the contemporary businesses environment, it has become important to take spot decisions without wasting time. Remedial measures are also taken early in private sector. Because private sector faces threats of takeover, liquidation, loss of assets etc., the likelihood of taking remedial measures in advance is very common which is not quite often observed in the public sector.
The succession is well planned out in private sector. The public sector enterprises however, remain headless for long periods of time. This causes confusion and delayed decision making. Such a situation does not exist in private sector.
Privatisation leads to better customer service. This is due to the fact that the survival of a private sector enterprise depends on customer satisfaction, since it is the satisfaction that insures repeated buying and profit generation. For creating sustained markets for themselves, the quality of services offered by private sectors for their customers are quite good.
The critiques have however, criticised privatisation and disinvestment on the following grounds.
There has been undervaluation of assets. The performance on disinvestment front has been dismal. The main reason for this is the fact that disinvestment was carried out in a hasty, unplanned and hesitant way. It was launched without a required condition of its take off. Adequate efforts were not made for the much needed linkage between public enterprise and capital market. Considerable under pricing of public enterprises shares results in considerable loss to the government.
Critiques argue that privatisation leads to unemployment. Supporters call it marginal retrenchment of labour but still, the future employment scenario for labour is a cause of worry. Having low productivity jobs in public sector is a better alternative to unemployment as the later does not increase a nation’s income definitely does not increase welfare of workers.
Privatisation of PSUs is more risky. Since private sector is more interested in profit generation, critiques argue they won’t worry much about local labours and the costs would be borne by customers.

PUBLIC DEBT

Public debt refers to the accumulation of annual budget deficits. It is basically the amount a country owes to lenders inside or outside of itself. Public debt is the sum of internal or external debt. The former refers to the public loans floated within the country while the later refers to public loans taken from other countries.

In India, public debt has increased tremendously over the years. This is mainly due to the fact that India is a developing economy the government requires massive investments in infrastructure and capital goods industries. For these purposes, they have to resort to borrowing. Development projects also involve a lot of raw materials. In the past few years the prices of petroleum products have increased significantly and so has it’s import bill in India. The exports however, have not increased in the same proportion. Consequently, the obligations of external debt has increased in India.
The total public debt of India in 2016-17 has been 50.3 per cent as a proportion of GDP. The external debt has to be paid in terms of foreign currency and it’s repayment creates serious problems.

A criteria of assessing the burden of public debt should not be the amount but how the funds are actually used. If public debt is wasted is becomes a problem rather than the debt which is used productively. It has been observed that in India a vast amount of external debt has been used for maintenance imports and has not really increased productive capacity. This shows that burden of external debt is quite heavy. Internal debt however, has been used more productively. A significant amount of it has been utilized for development of industries, railways, projects, services etc.
Just like the central government, the state government also faces problems of public debt. Over the years, the expenditures of state governments have increased more than the revenue they get. This is mainly because tax potential is not at its fullest. Large investments made in projects like electricity, irrigation etc. have not generated expected returns.
Since the burden of public debt is so heavy, economists have come up with different strategies to tackle it.
One way can be the reduction of interest rates. This is specifically for internal debt. Reducing the interest rate can bring down debt-GDP ratio. Interest rate can be reduced directly or indirectly by making debt less risky. A monetary policy which reduces risk and real interest rate can aid in doing so.
Selling a part of vast real estate can also help in raising resources. Government of India hold s a vast majority of real estate especially railways which hold a large amount of land along its rail tracks. Some economists have suggested the government to sell some part of this real estate to generate necessary funds.
Another way to curb public debt is to reduce public expenditure and increase revenues. Reducing public expenditure is not easy especially for India which is a developing economy. As far as rising revenues are concerned, suggestions have been made for increasing taxation. This is however, not feasible. A substitute for this can be building ways to reduce loopholes that allow tax avoidance.

Income Inequality in India

Income inequality refers to the unevenness in the distribution of income throughout the population. In India, income inequality has emerged as one of the major economic problem and is increasing. According to World Inequality Report 2018, inequality in India has increased substantially from the 1980s onwards. The top 0.1 per cent earners have captured more growth than bottom 50 per cent all combined.
There are several reasons for this inequality. Firstly there is an extreme concentration of wealth and economic power in the hands of large industrialists. They have acquired massive assets over time. This can be due to easy availability of money in form of loans from banks. Secondly, inequalities have existed for a very long time, since the time of colonialization. The zamindari system was responsible for inequalities in land ownership which resulted in concentration of tangible wealth. Even though zamindari system was abolished, the damage had been done. The concentration of land ownership could not be broken. Even today, the main reason for income inequalities in rural areas is the concentration of ownership of lands.

Another reason for income inequality is the rising capital intensity of technology. Over the years, due to digital tsunami and consecutive rise of IT sectors, the demand for labour have significantly reduced over the demand for capital. Reduction in wages and unemployment has increased. More skilled workers have a higher demand and wage in comparison to low skilled workers. This has contributed towards increasing gap in income levels. Furthermore, there exists urban bias in private investments. Mostly rural people are the ones who are not very advanced with the technology. Majority of population in India belongs to rural sector and therefore a pattern of urban bias is observed in private investments. It can be seen as the use of highly mechanised projects. Here the share of wages added is relatively low. This naturally leads to inequality in income distribution and wealth accumulations.
Inflation has also greatly contributed in rising income inequality. It has affected the real incomes of working class while benefited traders, farmers, industrialists. Not much has been done to prevent this effect of inflation and hence the result is income inequality. Even the credit facilities are responsible for income inequalities. Large business frims or individuals have an easy access to loans and financial supply on favourable and supporting terms. They have an access to formal capital market but the vast majority of small marginal farmers, labours etc. do not have this. They depend largely on moneylenders who exploit them by charging high interest rates.
The government has desperately tried to curb these inequalities by taking various measures. Various land reforms and redistribution of agricultural land has taken place and the government has even tried to control monopolies and restrictive trade practices. Several employment and wage policies and social security measures have been undertaken and special programmes for the upliftment of rural population have been taken up. Even then, income inequality exists. All of these measures have little impact on poverty and thus inequality continues to grow.