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Monetary Policy

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Monetary Policy

Monetary policy is how central bank manages the money supply to guide healthy economic growth. The money supply is credit, cash, checks, and money market mutual funds. The most important of these is credit, which includes loans, bonds, mortgages, and other agreements to repay.

Objectives of Monetary Policy

The major objective of central banks, including the U.S. Federal Reserve, is to manage inflation. The second objective is to reduce unemployment, once inflation has been controlled.

Must Read: International Monetary Fund (IMF)

Types of Monetary Policy

Central banks reduce inflation by raising the Fed funds rate, selling securities through its open market operations or other measures to reduce liquidity. The Fed doesn’t worry about inflation until it reaches its target of 2% (for the core inflation rate).

The Fed takes the opposite actions to lower unemployment and avoid recession. In this case, the Fed lowers the Fed funds rate, buys bank securities and otherwise increase the liquidity.

Monetary Policy vs Fiscal Policy

Monetary policy should work in hand in glove with the Federal government’s fiscal policy. That’s because elected officials get re-elected for spending tax dollars, or reducing taxes, on Federal programs that reward voters and campaign contributors (to put it quite bluntly). As a result, fiscal policy is usually expansionary. To avoid inflation, monetary policy must be a little contractionary.

During the Great Recession, politicians became concerned about the U.S. debt, which had exceeded the benchmark debt-to-GDP ratio. As a result, fiscal policy became contractionary just when it needed to be expansionary. To compensate, the Fed injected massive amounts of money into the economy with Quantitative Easing.

Also Read: Economic Cycle

Tools of Monetary Policy

All central banks use at least three tools of monetary policy, but most have many more. They all work by directly impacting the amount of liquidity in an economy. This is done by managing banks’ reserves.

The Fed’s has five such major tools. First, it sets a reserve requirement,which tells banks how much of their money they must have on reserve each night. If it weren’t for the reserve requirement, banks would lend 100% of the money you’ve deposited.

However, the Fed requires that banks (on average) keep 10% of the money deposited on reserve. That way, they have enough cash on hand to meet most demands for redemption. When the Fed wants to restrict liquidity, it raises the reserve requirement. Since it’s difficult to ask banks to change this, the Fed only does this as last resort.

Second, the Fed can easily manage banks’ reserves with the Fed funds rate. This is the interest rate that banks charge each other to store their excess cash overnight. The target for this rate is set at the eight Federal Open Market Committee (FOMC) meetings. The Fed funds rate impacts all other interest rates, including bank loan rates and mortgage rates.

Have a Look at: History of Money

Third, the FOMC usually sets the central bank’s discount rate, which is what it charges banks to borrow funds from the Fed’s fourth tool, the discount window. The discount rate is usually a percentage of a point higher than the Fed funds rate.

Fourth, the Fed uses open market operations to buy and sell Treasuries and other securities from its member banks. This changes the amount of reserves banks actually have on hand to lend, without changing the reserve requirement.

Fifth, many central banks including the Fed use inflation targeting to clearly set expectations that they want some inflation. That’s because people are more likely to buy now if they know prices are rising.

Don’t Miss: Economics: The Basics

Poverty Alleviation Programs in India

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poverty alleviation

Programmes Targeting Poverty Alleviation in India

The history of preparing and implementing programmes targeting poverty alleviation in India has been based on two levels:

  • Programmes for Rural areas
  • Programmes for Urban areas.

However, most of the programmes addressing poverty alleviation are intended to target rural poverty as the Poverty prevails on rural areas. It has been felt and realized by our policy makers that targeting poverty in rural areas is the most challenging task due to many geographic and infrastructure limitations. The programmes concerning alleviation of poverty can be summed up into five categories:

  • Wage employment programmes,
  • Sell-employment programmes,
  • Food security programmes,
  • Social security programmes and,
  • Urban poverty alleviation programmes.

Immediately after acquiring independence the Government of India introduced Five Year Plans, which concentrated on poverty alleviation through sect oral programmes. In order to address poverty the Five Year Plan concentrated on agricultural production whereas through second and third plans the State put its strength behind massive investments for employment generation in public sector. Although these policies could not create a sweeping effect due to lack of strength, they did some policy generation.

Must Read: International Red Cross and Red Crescent Movement

Jawahar Gram Samridhi Yojna (JGSY)

It is a restructured version of the erstwhile Jawahar Rojgar Yojna (JRY). The program’s initiated on 1 April 1999, chief aim was the development of rural areas by creating infrastructures. These included constructing road to connect village to different areas, making villages more accessible, establishing schools and building hospitals.

The rather secondary objective of the JGSY was to provide sustained wage employment that was catered to only below the poverty line (BPL) families. The fund, under JRSY, was to be disbursed for individual beneficiary scheme for SCs and STs and 3% of the available fund for the establishment of obstruction free infrastructure for the disabled people.

JSGY’s main component was village panchayats as they were one of the chief governing body of this programme. It was done so because village panchayats were able to understand the needs of the people of their areas and thus had the capacity to address them successfully. During 1999-2000 Rs. 1841.80 crore was spent under this programme. Against the target of 8.57 lakh work the programme completed 5.07 lakh works.

National Old Age Pension Scheme (NOAPS)

This scheme was first launched bearing the name as Indira Gandhi National Old Age Pension Scheme (IGNOPAS) that was a non-contributory old age pension scheme. The scheme was meant for Indians, who were 60years or a part of the National Social Assistant Programme (NSAP) and was launched in August 1995.

NOAPS was meant for the persons who could not earn for themselves and had no means of subsistence. The pension of Rs. 200, provided under this scheme was to be given by the Central Government. The responsibilities of the implementation of this scheme in States and Union Territories was imparted to panchayats and municipalities. The amount of pension for the persons aged above 80 years had been revised and fixed at Rs. 500 per month as was declared in 2011-2012 Budget.

Also Read: National Green Tribunal(NGT) and Yamuna Action Plan(YAP)

National Family Benefit Scheme (NFBS)

NFBS, launched in August1995, is sponsored by the state government as it was transferred to the state sector in 2002-03. It tells under the community and rural development. This scheme is for BP families. Under this scheme a sum of Rs. 2000 is provided to a person who, after the death of the primary breadwinner of the family, becomes the head of the family.

The breadwinner has been defined, under the scheme, as a person, who is above 18 years and earns the most for the family and on whose earnings the family survives.

National Maternity Benefit Scheme (NMBS)

This scheme was a part of National Social Assistance Program and was activated in the period of 2002-2007. Under this scheme a pregnant mother is provided a sum of Rs. 500 for the first two births. The women have to be 19 years of age.

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Integrated Rural Development Programme (IRDP)

IRDP in India, it has been ascertained, is among the word’s most ambitious programmes associated with the alleviation of rural poverty. It provides income-generated assets to the poorest of the poor. First introduced in 1978-79 in some selected areas IRDP covered all areas by November 1980.

The main objective of IRDP has been to elevate identified of Below Poverty Line (BPL) by creating sustainable opportunities for self-employment in the rural sector.

This programme is in function in all blocks of the country as a centrally sponsored programme funded on 50:50 basis by the centre and the states.

The target group under IRDP comprises of small and marginal farmers, agricultural laborers and rural artisans earning an annual income below Rs. 11,000; this sum has been defined as poverty line in the Eight Plan.

For the implementation of this programme at the grassroots level, the block staff is responsible. At the state level the IRDP is monitored by the State Level Coordinating Committee (SLCC) and the for the release of the central share of the fund the Ministry of Rural Areas and Employment is responsible.

National Rural Employment Guarantee Act (NREGA)

The NREGA Bill was notified in 2005 and came into force in 2006 and was further modified as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in 2008.

This scheme guarantees 100 day of paid work to people living in rural areas. This programme, without any doubt, has proved to be a major boost in the income of rural population of India.

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Dholakia Committee

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Dholakia Committee
Dholakia Committee

A committee was set up in January to suggest measures to lower the high costs of Air India’s operations and improve utilization of resources in line with the best global practices to help the state-run carrier achieve the goals of its turnaround and financial restructuring plans.

A five-member committee headed by IIM-Ahmedabad’s Prof Ravindra H Dholakia was set up by Civil Aviation Minister Ajit Singh after a review meeting of the ailing national carrier’s functioning.

Must Read: Urjit Patel Committee

The members of Five-member Committee are IIM-Ahmedabad’s Prof Ravindra H Dholakia – Head of Committee; Prabhat Kumar, Joint Secretary in Ministry; Rajesh Agrawal, Director Finance of ICRISAT; S Mukherjee, former Director Commercial and Inflight Services of Air India; Nasir Ali, Joint MD of the airline.

The Government has accepted the recommendations of Prof Dholakia Committee Report on Cost Cutting in Air India and sent to Air India for immediate implementation.

The Committee has made total 47 recommendations. Air India expects a saving of about 500 crores in next 6 months by implementing some of the recommendations of the Committee.

Air India has constituted a Committee comprising of the following to implement the recommendation of the Cost Cutting Committee  at a time-bound manner: Shri Nasir Ali, Joint Managing Director;Shri Deepak Brara, Commercial Director; Shri S. Venkat, Director Finance.

Don’t Miss: The Narasimham Committee

The main recommendation which Air India is going to implement is to evolve a model based on an ideal mix of the best practices of the LCC (Low-Cost Carrier) model while retaining the core features of the full-service carrier. The main recommendations are as follows:

Charging for food in the domestic sector and rationalizing it in the international sector;

Unbundling of services to passengers and advertisement space;

0% commission and ticket booking through website;

Shift from full MRO to preventive maintenance and power by the hour concept –technical &   efficiency audit of engineering;

Strict enforcement of simplified excess baggage charges;

Dynamic pricing and passenger upgrade; or surrendered; and underutilized assets like luxury lounges, time slots at

Flights not meeting variable costs need to be restructured or withdrawn to eliminate additional losses and point to point rather than multi-sector operations;

Idle aircraft to be used on most profitable sectors. Busy international airports, land, buildings, floors, hangar space and hotels to be leased out or sold;

Surplus crew to be relocated as per crew pattern requirements and SOD (Special Operations Division) movement curtailed;

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As per DPE instructions, no encashment of SL and lapsable PL – also at foreign stations;

Temporary posting of employees should stop;

Transportation and hotels for pilots and crew and their layover pattern;

Excessive and unjustified allowances to pilots and crew to be stopped;

Extra reimbursements should be merged with allowances within limit of 50% of revised basic as per DPE guidelines: and training should be provided to those with more than three years of service left before retirement;

Free or subsidized transport facility to be stopped and extra transport allowance over and above the normal transport allowance not to be provided;

Canteen services at non-factory areas to be withdrawn and at factory areas to be outsourced with revised rates;

Closure of 18 off-line stations and recall of IBOs;

14 Flight Despatchers plus 10 EMS-QMS staff to be hired.

Strong accountability at all levels, efficiency audit and private investments in the long run.

Also, Read:

Public Accounts Committee (PAC)

Recommendation of the K.C. Chakrabarty Committee on Recapitalisation of RRBs

Narasimham Committee Recommendations on Financial Reforms

Challenges in Agriculture

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Agriculture in India

Agriculture has played a dominant role in the Indian economy. It provides employment to about 65% of the working population.

The share of agriculture sector in the gross domestic product has decreased from 56.5% in 1950-51 to 13.7% in 2012-13.

The performance of this sector depend on numerous factors or agricultural inputs such as farm mechanization, land reforms, organised markets, credit supply, irrigation, pesticides, fertilizers and financing industries. Cotton and Jute textile industries, sugar, vanaspati and plantation – all these depend on agriculture directly.

Agricultural products like tea, sugar, oil seeds, tobacco, spices, etc., constitute major part of exports. Broadly speaking, the proportion of agricultural goods, which are exported, may amount to 50% of exports.

Importance of agricultural sector in the national economy is indicated by many facts, e.g., agriculture is the main support for India’s transport system, since railways and roadways secure bulk of their business from the movement of agricultural goods. Further, good crops imply large purchasing power with the farmers leading to greater demand for industrial products and therefore, better prices. In other words, agriculture forms the backbone of the Indian economy and occupies a place of pride.

Must Read: Useful facts about Agriculture Farming

Challenges in Agriculture

The development of Agriculture in its comprehensive definition is central o all strategies for the socio-economic development of India. Agriculture, being a sate subject, continues to receive the fullest attention of the state government to ensure progress and to minimize regional imbalances. Agricultural production has increased several fold since independence. Indian farmers has brought glory and pride to the nation by substantially increasing the production level to meet the requirements of the growing population and the expanding industry, while contributing to the growth of Indian economy, Indian agriculture faces the following challenges:

  1. Increasing agricultural productivity and production to ensure food and nutritional security for the rising population and gathering surplus for export.
  2. Addressing problems of underemployment, poverty and malnutrition in the rural areas.
  3. Diversification of agriculture and accelerating the development of horticulture, sericulture, animal husbandry, poultry and agriculture with necessary processing and marketing backup.
  4. Encouraging efficient use of marginal land and augmentation of bio-mass production through agro and farm forestry.
  5. Focusing the agricultural research system on the development of economically viable and location specified cost technologies in rain fed, drought prone and irrigated areas and harnessing research in frontier, areas and advanced technology for all sections of the farming community.
  6. Developing areas of untapped potential, thereby correcting uneven development of agriculture in hilly and rain fed areas including hot and cold deserts and reducing regional imbalances.
  7. Addressing technology transfer and training needs of farmers, specially women, small and marginal farmers, other disadvantaged section of the rural society and farmers, other disadvantaged sections of the rural society and farmers living in tribal areas with a view to increasing their productivity levels and augmenting their income.
  8. Increasing the utilization of irrigation potential, promoting water conservation and efficient water management and expansion of irrigation facilities specially in the drought prone areas.
  9. Providing critical inputs to the farmers in or near their villages.
  10. Revitalizing and democratizing the cooperatives for providing credit, input, extension, super marketing and processing facilities.
  11. Increasing the involvement of panchayati raj bodies, cooperatives and local institutions of farming community, and legitimate instruments of decentralized agricultural planning with full participation of the local community.
  12. Increasing involvement of non-governmental organisations in agricultural development and villages upliftment programs.
  13. Reducing post harvest losses and promoting values addition in agriculture and providing market support for efficient disposal and better return to the producer.
  14. Correcting the terms of trade to make them favorable for agriculture, thereby increasing the flow of resources and augmenting the rate of capital formation in agriculture.
  15. Checking fragmentation of land and redressing the ecological imbalances resulting from increasing biotic pressure on land.
  16. Creating quality consciousness among farmers and agro-processors and promoting standardization of agricultural products.

Also, Read:

National Bank for Agriculture and Rural Development (NABARD)

Food and Agriculture Organisation (FAO)

GM Seeds: A Solution to Food Security

Balance of Payments

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balance of payments

The balance of payments is an accounting statement that records transactions (trade in goods, services, and financial assets) between a country’s residents and the rest of the world. Those transactions consist of receipts and payments—credits (entries that bring foreign exchange into the country) and debits (entries that record a loss of foreign exchange), respectively—that are recorded through the use of double-entry bookkeeping. Balance-of-payments data are reported quarterly in national publications and also are published by the International Monetary Fund.

The balance of payments consists of the current account, the capital account, and the financial account.

Current Account

The current account includes trade in merchandise (raw materials and final goods), services (transportation, tourism, business services, and royalties), income (from salaries and direct, portfolio, and other types of investment), and current transfers (workers’ remittances, donations, grants, and aid).

The current account is related to the national income accounts because the trade balance corresponds broadly to the net export value recorded in the national income accounts as one of the four components of the gross national product (GNP), along with consumption, investment, and government expenditures.

Read Also: Current account convertibility Vs Capital account convertibility?

Capital Account

The capital account records all international capital transfers. Those transfers include the monetary flows associated with inheritances, migrants’ transfers, debt forgiveness, the transfer of funds received for the sale or acquisition of fixed assets, and the acquisition or disposal of intangible assets.

Financial Account

The financial account records government-owned international reserve assets (foreign exchange reserves, gold, and special drawing rights with the International Monetary Fund), foreign direct investment, private sector assets held abroad, assets owned by foreigners, and international monetary flows associated with investment in business, real estate, bonds, and stocks.

Equilibrium

The balance of payments should always be in equilibrium. The current account should balance with the sum of the capital and financial accounts. However, because in practice the transactions do not offset each other exactly as a result of statistical discrepancies.

If the current account is in equilibrium, the country will find its net creditor or debtor position unchanging because there will be no need for net financing. Equilibrium in the capital and financial accounts means no change in the capital held by foreign monetary agencies and reserve assets. In the case of disequilibrium arising when a country buys more goods than it sells (i.e., a current account deficit), the country must finance the difference through borrowing or sale of assets (i.e., there is an inflow of capital and thus a capital and financial account surplus).

Must Read: Capital Account Convertibility (CAC)

The current account and the capital account add up to the total account, which is necessarily balanced, a deficit in the current account is always accompanied by an equal surplus in the capital account and vice versa. A deficit or surplus in the current account cannot be explained or evaluated without simultaneous explanation and evaluation of an equal surplus or deficit in the capital account.

Don’t Miss:

The Balance of payment on current and capital accounts.

Balance of Trade

Discuss the PROs AND CONS of Capital Account Convertibility?