Impact of Monetary and Fiscal Policy on Business

Hey folks! TallyDekho is back with another business weekly story. For a stable economy, it’s very important to balance the economic policies altogether. Therefore, there are two major policies in our country, i.e monetary policy and fiscal policy that shape and give direction to every business sector and a country’s economy as well. In today’s blog, we’ll see what are these policies and how they affect the business world.

What is Fiscal Policy?

It is the economic policy of government wherein the government uses taxation and expenditure instruments to balance the overall market supply and demand of goods and services, rate of employment, inflation level, and the extent of economic growth.

Thus, it is the fiscal policy of the country that defines the economic structure and controls how the economic conditions should go thereby keeping the business cycle in balance.

Objectives of Fiscal Policy

• To maintain and attain the full employment rate
• To maintain a high rate of economic growth
• To keep the internal price level stable
• To curtail the inflationary trend
• To resolve and regulate macroeconomic issues
• To maintain the productivity level in the economy

Components of Fiscal Policy

Well, basically there are four major components of fiscal policy. Let us discuss them as follows:

Public Revenue

It is the source of income or revenue collected by the government and state in the form of taxes, customs and duties, fines, and other public charges.

Public Expenditure

The expenditure incurred by the government to improve and accelerate the economic growth and economic conditions of the country is known as public expenditure. It’s basically development expenditure done for the upliftment and betterment of the economy.

Public Debt

The loan or the advances that government undertakes to stimulate and revive the economy and therefore, becomes liable to pay back the taken amount is known as public debt.

Budgetary Policy

A country’s budgetary policy is formulated to create a balance between the surplus funds and deficit to eliminate any fiscal gap in the economic structure.

What is Monetary Policy?

On the contrary, monetary policy is the government control measure that regulates the money supply and credit control in the economy. The government and the central financial authorities use several monetary instruments to attain the economic objectives and regulate the credit and money supply in the market.

Thus, the policy that regulates the credit control and money supply in the economy is known as monetary policy.

Objectives of Monetary policy

• To bring price stability in the general price level
• To attain and maintain a full-employment level
• To sustain economic growth and bring economic stability
• To regulate the money supply and improve the economic activity
• To create a balance between production and consumption level
• To provide and regulate the cost of credit

Instruments of Monetary Policy

There are certain instruments that are broadly classified into two categories, namely, qualitative and quantitative methods. Let us discuss them more precisely.

✓ Quantitative Methods

•Bank Rate

It is the rate at which the commercial banks lend loans and advances to the general public. The rate of interest varies and keeps on changing as per the changing market scenario.

•Cash Reserve Ratio (CRR)

All the commercial banks need to keep some amount of funds with the central bank in the account maintained with the central bank and thus, that fund limit also keeps on changing as per the market conditions.

•Statutory Liquidity Ratio (SLR)

There is a liquid asset limit that every commercial bank needs to compile with. Thus, the SLR rate keeps on varying as per the economic phases.

•Open Market Operations (OMO)

The purchasing and selling of the securities in the market to and from people by the government in order to maintain the required liquidity and money supply in the economy are referred to as open market operations.

•Repo Rate

It is the rate at which the central bank lends money to the commercial banks who are in need of money for some duration.

•Reverse Repo Rate

It is the rate at which the central bank makes loans or advances from the commercial banks in the time of any emergency or contingency.

✓Qualitative Methods

•Fixation of Margin Requirements

This is another qualitative measure wherein some margin is fixed for the collateral security that is considered and some percentage of its value is granted as a loan to the borrower.

•Advise

It is the other way wherein the government or central authority advises the commercial banks to do so and so and the commercial banks take that advice into consideration.

•Moral Suasion

It is also a kind of advice but with some moral values and moral terms attached to it.

•Direct Action

Sometimes, the central bank or government directs or commands directly to take action and take an initiative to perform some task.

Role of economic policies in the business world

A country’s economic structure is incomplete without these two economic policies and thus, both hold a vital place in the business world. Some important points are as follows:

Help in augmenting the productivity level of the industry

The economic policies are responsible for whatever is happening in the market and thus, it also helps in augmenting the productivity level of the economy and the business industries as well.

Accelerate the economic growth and increase per capita income

Also, economic policies help in accelerating the overall economic growth of the country and also contribute towards the increment in overall per capita income.

Help the businesses to adjust the inputs according to economic conditions

The other important role is that the economic policies also help the businesses to adjust and regulate the business inputs as per the prevailing economic conditions.

Create a balance in demand and supply of the products and services

Also, these policies are responsible to regulate the demand and supply of the products and services and create a sink in all the determinants.

Help to boost overall economic growth and contribute to the national economy

The economic policies help the businesses to work in the right way and thus, help in boosting the overall growth of the economy and thus, contribute towards the national economy thereof.

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