FISCAL AND MONETARY POLICIES (GHANA AND INDIA )

1SEIDU Moro Email: [email protected]

FISCAL AND MONETARY POLICIES (GHANA AND INDIA )

By

SEIDU Moro

DEPARTMENT OF AGRICULTURAL ECONOMICS COLLEGE OF AGRICULTURE,

CCS HAU

30th January, 2014

2

Overview of presentation Brief Background of Ghana and India

Fiscal and Monetary Policies Principle

Policy Makers

Policy tools/ Instruments

Objectives

Limitation

Comparison of Policy Impacts of Ghana and India in terms of Economic growth

Price Stability

Unemployment Rate

Effect of tools on output indicators

Major Policies Interventions adopted by Ghana & India

Conclusion

References

SEIDU Moro Email: [email protected]

mailto:[email protected]

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Background -Ghana Ghana, nation in West Africa, a former British colony

known as the Gold Coast until 1957. That year Ghana became the first state in sub-Saharan Africa to gain political independence from European colonial rule.

Following independence, Ghana assumed the leadership role in the African continent’s struggle for national liberation.

Ghana has one of the strongest economies in West Africa, yet the country’s economic base continues to be agriculture

Gold mining, the production of cocoa (used to make chocolate), and tourism are the main sources of revenue.

Major food crops: cassava, yam, maize, millet, rice Area -238500 sq. km. Population- 25.37million (2013) Capital – Accra Currency- Cedi (₵)



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Background -IndiaIndia ranks second only to China among the world’s most populous

countries.

. The Indian economy heavily dependent on agriculture, industry and

services

Economic reforms in 1991 dramatically altered economic policy to

privatize state-owned enterprises and to promote competition and

investment.

The economic focus of the country has since changed from one based

on self-sufficiency to one based on trade with other countries.

India’s most important crops include cotton, tea, rice, wheat, and

sugarcane.

Other important cash crops include jute, groundnuts, coffee, oil seeds,

and spices.

Another central feature of India’s agricultural economy is the raising

of livestock, particularly horned cattle, buffalo, and goats.

Capital: New Delhi Area: 3165596 sq. km Pop:1.27bn



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FISCAL & MONETARY POLICIES


Economic policy-makers are said to have two kinds of tools to influence a country's economy: fiscal and monetary.

When these policies are used to stimulate the economy during a recession, it is said that the government is pursuing expansionary economic policies. And when they are used to contract the economy during an overheated expansion, it is said that the government is pursuing contractionary economic policies.


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Fiscal Policies


Meaning of Fiscal Policy Fiscal policy relates to government spending and revenue collection.

Fiscal policy deals with the taxation and expenditure decisions of the government. These include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management - Kaushik Basu ( Former Chief Economic Adviser )

Principle of Fiscal Policy Manipulating the level of aggregate demand in the economy to achieve

economic objectives of price stability, full employment, and economic growth.


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Fiscal Policies


Policy Makers of Fiscal PolicyThe legislative and executive branches of government control fiscal policy.

In Ghana, this is the President's administration and the Parliament that

passes laws.

Similarly in India the Prime Mister administration is in charge of fiscal

policies.

H.E. JOHN DRAMANI MAHAMAH.E NARENDRA MODI


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Fiscal Policies (Cont.)

Policy ToolsRevenue Budget

Tax RevenueDirect Tax (e.g. Income & Corporate tax) Indirect Tax (central excise, VAT, service & custom tax)

Non Tax Revenue (e.g. revenue from state natural resources) Public Debt

Internal borrowingExternal borrowing

Expenditure Budget Consumption Investment


Revenue Budget

Taxes revenue

Public debt

Non Tax

revenue


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Objectives of fiscal policies To increase capital formation To Improve degree of growth To achieve desirable price level To achieve desirable level of consumption To achieve desirable level of employment To achieve desirable level of income distribution



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Limitations of fiscal policies To increase capital formation

Lack Of accurate Forecasting

Delay in Decision

Poor Tax Administration

Inequality Of income

Failure in Public Sector



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Fiscal Policies of Ghana at a Glance


Government Revenue, Expenditure and deficits/surplus from1978 to 2008

1978 1983 1988 1993 1998 2003 2008 2009 2010 2011 2012

-15

-10

-5

0

5

10

15

20

25

30

35

10.1

5.2

14.114 15

13.114.5

13 14

17.5 17.118

9

1418.6 19.1 20

26.5

22.424.9

23.8

28.6

-7.9

-3.8

0.0999999999999998

-4.6 -4.1

-6.9

-12-9.4

-10.9

-6.3

-11.5

RevenueExpenditureDeficit/Surplus

Gov

ernm

ent R

even

ue, E

xpen

ditu

re a

nd d

efic

its/su

rplu

s (%

G

DP)


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Fiscal Policies of India at a Glance


Government Revenue, Expenditure and deficits/surplus from 1988 to 2011


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MONETARY POLICIESMeaning of Monetary Policy Monetary policy is the process by which the monetary authority of a

country controls the supply of money, often targeting a rate of interest

to attain a set of objectives oriented towards the growth and stability of

the economy.

Principle of Monetary Policy Manipulating the supply of money as well as interest rates to influence

outcomes like economic growth, inflation, exchange rates with other

currencies and unemployment



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MONETARY POLICIES (CONT.)Policy Makers Monetary policy is controlled by the Central Bank. the organization is largely

independent and is free to take any measures to meet its dual mandate: stable prices and low unemployment

Bank of Ghana (BoG) - Ghana Reserve Bank of India (RBI)- India

Policy Making Tools Bank/Discount rate; Cash Reserve Ratio; Repo & Reverse Repo Rate; Statutory Liquidity Ratio; Open market operations; Moral Persuasion


Dr. D. Subbarao Dr. A.K. Henry Wampah


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MONETARY POLICIES (CONT.)Policy Making Tools Bank /Discount ratesIt is the rate at which the central bank of a country lends to the commercial banks. If bank rate is increased, then commercial banks also charge higher rate of interest on loans given by banks to public and vise versa. Higher rate of interest will contract credit in the economy i.e. public will take lesser loans because of higher rate of interest. The bank rate for India is 8.75% (October, 2013) & Ghana is 15.5% (2014)

Cash Reserve RatioIs the percentage of bank deposits which banks are required to keep with Central banks in the form of reserves or balances . By changing the CRR requirement for banks, the Central bank can control the amount of lending in the economy, and therefore the money supply. As of January 2013, the CRR is 4.00 % and 9.00% for Ghana respectively



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MONETARY POLICIES (CONT.)Policy Making Tools Repo RateRepo rate is the rate at which the Central bank lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. As of 2013, the repo rate is 7.25 % (India) and 14.25% (Ghana)

Reverse Repo rateThis is exact opposite of Repo rate. Reverse Repo rate is the rate at which Central bank borrows money from commercial banks. The Central uses this tool when it feels there is too much money floating in the banking system. An increase in Reverse repo rate can cause the banks to transfer more funds to central banks due to these attractive interest rates.As of August 2013, the reverse repo rate is 6.25 (India) and 13.5% (Ghana)



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MONETARY POLICIES (CONT.)Policy Making Tools Statutory Liquidity Ratio; SLR

It is the amount a commercial bank needs to maintain in the form of cash, or gold

or govt. approved securities (Bonds) before providing credit to its customers. SLR

rate is determined and maintained by the Central bank in order to control the

expansion of bank credit. If SLR is more then banks have to keep more part of

deposits in specified securities and banks will have less surplus funds for granting

loans. It will contract credit. RBI usually fix SLR ranging between 24% to 39%.

However, the current SLR is 23% (India) and that of Ghana is 19.5%.



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MONETARY POLICIES (CONT.)Policy Making Tools Marginal Standing Facility (MSF)MSF is the rate at which scheduled banks could borrow funds overnight from the Central bank against approved government securities. The basic difference between Repo and MSF scheme is that in MSF banks can use the securities under SLR to get loans from Central bank and hence MSF rate is 1% more than repo rate.

Open market operationsThe Central bank can create money out of thin air and inject it into the economy by buying government bonds (e.g. treasuries). This raises the level of government debt, increases the money supply and devalues the currency causing inflation. However, the resulting inflation supports asset prices such as real estate and stocks.



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MONETARY POLICIES (CONT.)Policy Making Tools Credit CeilingIn this operation Central bank issues prior information or direction that loans to the commercial banks will be given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors.

Moral PersuasionReserve bank can also exercise moral influence upon the members’ banks with a view to pursue its monetary policy. RBI convinces banks to curb loan to unproductive sectors. From time to time reserve bank holds meetings with the member banks seeking their cooperation in effectively controlling the monetary system of the country. It advices them to extend more credit to priority sector.



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MONETARY POLICIES (CONT.)Table 1: Summary of Policy tools (2013-…)

Interest ratesInterest rate is the cost of borrowing or, essentially, the price of money. By manipulating interest rates, the central bank can make it easier or harder to borrow money. When money is cheap, there is more borrowing and more economic activity. NB: ALMOST ALL THE MONETARY POLICY MAKING TOOLS HAVE DIRECT OR INDIRECT IMPACT ON INTEREST RATE


Rates / Reserve Ratios India Ghana

Bank Rate 8.75 % 15.5%

Repo Rate 8 % 14.25%

Reverse Repo Rate 7 % 13.5%

Cash Reserve Ratio (CRR) 4.00% 9%

Statutory Liquidity Ratio (SLR) 23% 19.5%

Marginal Standing Facility (MSF) 9% 15.25%


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MONETARY POLICIES (CONT.)

Objectives of Monetary Policies To achieve price stability

To enhance adequate flow of credit to the productive Sectors of the

economy to support economic growth

To encourage rapid growth

To achieve full employment

Balance of payment equilibrium

Equal income distribution



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MONETARY POLICIES (CONT.)

Limitation of Monetary Policies

Poor Banking Habit

Underdeveloped Money Market

Existence of Black Money

Conflicting Objectives

Lack of Coordination with Fiscal Policy

Lack of Banking Facilities

Limitations of Monetary Instruments



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Basic Concept of Fiscal & Monetary Policies

Fiscal Policies +

Monetary Policies


Economic growth +Stable Prices

+Full Employment



Comparison of F&M Policies Impacts on The Economies of

Ghana and India



1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

35.5 37.4 39.4 42.5 44.44 48.2754.86

60 31.13 34.2 35.99 61.97

75.9

1,805

2,2002,400

2,660

3,033

3,319

3,666

4,156

2,966

3,297

3,680

4,060

4,515

GDP (purchasing power parity) of India vrs Ghana

GhanaIndia

Period/years

GD

P (P

UR

CH

ASI

NG

PO

WE

R P

AR

ITY

)/BIL

LIO

N$



1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

14

16GROWTH RATE OF INDIA AGAINST GHANA

GhanaIndia

TIME/YEARS

GD

P-R

EA

L G

RO

WT

H R

AT

E/%



1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

3

6

9

12

15

18

21

24

27

30

12.8

22.8

25

14.5

26.7

13

15.1

10.9 10.7

16.5

19.3

10.9

8.77.9 7.4

0.47

3.48

5.16

3.2 3.72 3.78

5.576.53

5.51

9.7

14.97

9.47

6.49

11.1711.08

Inflation rate of India vrs Ghana

GhanaIndia

Period/ Years

Infla

tion

rate

(con

sum

er p

rice

s) (%

)


28

.


2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

14Unemployment rate of India vrs Ghana

IndiaGhana

Period/years

Une

mpl

oym

entr

ate

(%of

Lab

our

Forc

e)



2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

5

10

15

20

25

30

14.5

6.2 6.2 5.74.4

6 6.27 7

4.25 4.28

6.1

8.3 8 7.75

24

27.5

22

18

12.5 1213

17.118

1312

1516

Interest Rates of India vrs Ghana

IndiaGhana

Period/Years

Inte

rest

rat

e/%



Effect of Policy tools on output

indicators



Low savings Borrowing increases Increase in money supply Increase in Demand of goods Increase in business activities Increase in GDP Growth Rate Increase in the Average

income of people and corporate

Increase in Tax Revenue of the government

Decrease in fiscal deficit of the government for the period

Decrease in Value of domestic currency

Inflation Increases

Increase in Exchange Rate

Increase in Export of goods Increase in inflow of foreign

currency Decrease in Current Account

Deficit

Interest rate effect on Economy (Decrease)


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.


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

10

12

14

16Interest Rate againt output indicator of India Economy (%)

Interest rateInflationUnemploymentGDP


33

.


1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

5

10

15

20

25

30Interest Rate against output indicators of Ghana Economy (%)

Interest rateInflationUnemploymentGDP


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Some Fiscal and Monetary Policies Intervention being adopted by India and Ghana to arrest their current situation



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India (Some F&M Policy Interventions) Stepping up Public Investment Reduction of repo rate under liquidity adjusted facility to 7.5% to 7.25% Reverse repo rate reduced from 7.0% to 6.25% MSF reduce from 9% to 8.25 Bank rates still stands at 8.5% (used to be 9.0%) Cash Reserve Ratio (CRR) of scheduled banks retained at 4% (used to be

4.75%)of their net demand and time liabilities Allows FIIs to hedge their currency risk by using exchange traded currency

futures in the domestic exchanges Efforts to reduce supply bottle necks Introducing a long- term fixed interest rate loan products by banks Improving governance Improving government revenue collection Managing government expenditure



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Ghana (Some F&M Policy Interventions) Achieving and maintaining inflation at single digits and maintaining

it for long period of time

Reducing unemployment rate in the country

Reducing Budget deficit By Increasing revenue collection

to strengthen tax collection Widen the tax net

Reducing government Expenditure


Cont…


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Ghana (Some F&M Policy Interventions)Increasing revenue collection (By Strengthening its Collection)Increase in the corporate tax rate from 25 % to 35 % on specified subsectors,

mostly in the Services sector (National Stabilization Levy)

Restructuring of revenue administration. E.g. integrating revenue services (IRS, VAT, CEPS) under the Ghana Revenue Authority;

Streamlined tax exemption. The budget also limited the tax exemptions for real estate developers to projects which provide affordable housing in partnership with the Ministry of Water Resources, Works and Housing.

Reinforcing tax collection at the port and other key customs location using computerized valuation systems and other automated procedures that limit administrative discretion

Reinforcing the taxation of the self-employed.


Cont…


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Ghana (Some F&M Policy Interventions)Increasing revenue collection (By Widening Tax net)

Review of the salary structure to bring down wage pressure

Introduction of profit tax of 10 % for the mining sector

Introduction of capital allowance of 20 % for five years in

the mining and oil and gas sectors.

Extending the coverage of the communication service tax,

Implementing new measures to tax the informal sector

amongst others


Cont…


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Ghana (Some F&M Policy Interventions)Reducing government Expenditure

Developing more realistic and strategic expenditure budgets, and the reinstatement of quarterly ceilings for managing spending

E orts to address payment of arrears with the re-instatement of commitment ffcontrols thus regularisation of the informal Debt

Establishment of a comprehensive database to facilitate monitoring of commitments.

The O ce of the President (in October 2010) mandating all MDAs to seek ffiauthorisation through Commencement Certificates before committing government to contractual obligations

Government has also put in place a strategy for regularising payment arrears by 2015 using a mix of bonds and cash

Restructuring of the salary system to Single Spine Structure


Cont…


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ConclusionRelatively comparing the F & M Policies of India to Ghana the following are Identified: The policy actions taken are expected to:

India Stabilise growth around its

current post-crisis trend Contain risks of inflation and

inflation expectations re-surging

Enhance the liquidity cushion available to the system.

Stepping up Public Investment Try to recover an economic shock

or crisis

Ghana Reduce deficits and if possible

create surplus Ruduce inflation to achieve

single digit (price and currency stabilty)

Encourage savings of the public to curtail the high money supply

Still finding means to boost the economy



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Conclusion


Fiscal and Monetary policies are dynamic process and occasionally adjusted to reflect prevailing conditions.

Fiscal and Monetary policies can be effective in managing economic growth both in the short run and the long run.


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References


Afonso, Antonio and Alegre, Juan G. (2008). Economic Growth and Budgetary Components: A Panel Assessment for the EU. Working Paper series, European Central Bank, No 848. http://www.iseg.utl.pt/departamentos/economia/wp/wp0292007deuece.pdf

Aryeetey E., Harrigan J. And Nissanke M. (2000). Economic Reforms in Ghana: The Miracle and the Mirage. Woeli Publishing Service, Accra; James Currey, Oxford and; Africa World Press, Trenton, NJ.

http://www.global-rates.com http://www.hindustantimes.com http://www.indexmundi.com http://data.worldbank.org http://currentaffairs-businessnews.com http://trak.in http://www.inflation.eu http://www.tradingeconomics.com http://en.wikipedia.org http://www.riksbank.se http://in.reuters.com http://www.business-standard.com http://www.bankofghana.gh http://www.reservebankofindia.in


http://www.iseg.utl.pt/departamentos/economia/wp/wp0292007deuece.pdf

http://www.bankofghana.gh/

http://www.reservebankofindia.in/

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THANK YOU



FISCAL AND MONETARY POLICIES (GHANA AND INDIA )

Economy & Finance

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