Jammu and Kashmir v Rest of India

 

Economics Essay 104: Monetary Policy Transmission Mechanism

 Explain how the monetary policy transmission mechanism works when the Monetary Policy Committee (MPC) raises Bank Rate.

When the Monetary Policy Committee (MPC) decides to raise the Bank Rate, it aims to tighten monetary policy and control inflation. The transmission mechanism explains how this policy action affects the broader economy. Here's an overview of the monetary policy transmission mechanism when the MPC raises the Bank Rate:

1. Commercial Banks: The change in the Bank Rate directly affects the interest rates commercial banks charge on loans and pay on deposits. When the Bank Rate increases, commercial banks are likely to raise their lending rates, making borrowing more expensive for businesses and individuals. This reduces the demand for loans and can slow down investment and consumption.

2. Borrowing Costs: Higher lending rates have an impact on various forms of borrowing, including mortgages, personal loans, and corporate borrowing. As interest rates rise, the cost of servicing existing debt increases, which can put financial strain on borrowers and reduce their spending capacity.

3. Consumption and Investment: Higher borrowing costs and reduced access to credit can discourage consumer spending and business investment. Individuals may cut back on discretionary purchases, leading to lower retail sales. Similarly, businesses may delay or reduce their investment plans, which can have a negative impact on economic growth.

4. Aggregate Demand: The decline in consumer spending and business investment, resulting from higher borrowing costs, can lead to a decrease in aggregate demand. This reduction in demand can contribute to a slowdown in economic activity and potentially dampen inflationary pressures.

5. Price Levels: The tightening of monetary policy through an increase in the Bank Rate aims to control inflation. Higher borrowing costs can reduce consumer spending, which may moderate price increases and help keep inflation in check. By curbing demand, the policy action can alleviate inflationary pressures in the economy.

6. Exchange Rates: A change in interest rates can also affect exchange rates. If the Bank Rate increases, it can make the currency more attractive to investors seeking higher returns. This increased demand for the currency can lead to an appreciation, making exports relatively more expensive and imports cheaper. This, in turn, can impact the trade balance and competitiveness of domestic industries.

It's important to note that the transmission mechanism is not instantaneous, and the full effects of a change in the Bank Rate take time to filter through the economy. The responsiveness of the transmission mechanism can vary depending on factors such as the financial system's health, the level of household and corporate debt, and the overall economic conditions.

In summary, when the MPC raises the Bank Rate, it influences borrowing costs, which can affect consumption, investment, aggregate demand, price levels, and exchange rates. The overall impact on the economy depends on how businesses, households, and financial markets respond to the change in interest rates.

CAG rips into famed Gujarat growth model

TNN | Apr 1, 2015, 01.00 AM IST

The Comptroller & Auditor General (CAG) of India report tabled in the state assembly on Tuesday raised several question marks on the much-famed Gujarat Model. 

The report tore apart the tall claims of the state government led by former chief minister Narendra Modi on agricultural growth, social indicators and spent on social infrastructure, fiscal discipline, right to education, and law and order situation. 

The report observed that Gujarat's average annual agriculture growth rate during the 11th five-year plan (2007-12) was 5.49% — better than the all India average of 4.06%. However, GDP in agriculture clocked a negative growth (-6.96%) in 2012-13, the first year of 12th plan, as compared to the previous years — 21.64% in 2010-11 and 5.02% in 2011-12. 

Failure in social sector schemes like State Child Protection Policy is also highlighted. The report notes that as per 2011 census, while the all-India sex ratio improved from 933 to 943, it worsened from 922 to 919 in Gujarat. The state hasn't performed well in implementing the Pre-Conception and Pre-Natal Diagnostic Techniques Act, only six out of total 181 offenders were convicted. 

Also highlighted are the government's failure in preventing child marriages, poor implementation of the Right to Education Act, delay in road projects and failure in the execution of mid-day meal scheme, besides taking note of poor pupil-teacher ratio, and poor implementation of water supply scheme among others. 

The CAG has also slammed the Gujarat government for the high level of financial indiscipline and poor spending. "The fiscal deficit increased from Rs 15,513 crore in 2009-10 to Rs 18,422 crore in 2013-14." It also highlighted non-submission of utilization certificates of Rs 7420.40 crore indicating lack of proper monitoring by departments. CAG observed lapses in tax collection also. It noted that more than Rs 300 crore non-recovery of Value Added Tax (VAT). 

Public sector undertakings, too, posted an unimpressive return on investment according to the report. "During the last five years, the state government invested Rs 24,007 crore, the average return by way of dividend on the investments in government companies and statutory corporations etc., was 0.31% only," the report noted.