UNIT II MONETARY, FISCAL AND TRADE POLICY

MONETARY & FISCALPOLICY

Meaning and Definition of Monetary Policy: Monetary policy is defined as the policy of
Central Bank where the cost, availability and use of money are controlled by using monetary
methods so as to attain predetermined objectives. It uses various instruments to determine the
level of aggregate demand for goods and services or to analyze the trends in the economic
sectors. The level of economic activities and the demand and supply of credit flow are affected by
the variations in the economy. These variations occur due to the changes made in the monetary
policy. In turn the monetary policy changes due to varying cost and availability of credits. This
change affects the asset pattern of financial institutions and commercial banks.

Monetary policy is the attitude of the political authority towards the

monetary system of the community under its control

OBJECTIVES OF MONETARY POLICY:

The objectives of monetary policy in India are as follows:

1) To Support Economic Growth: Supporting economic growth is the core objective of

the monetary policy. If income and price stability is maintained by the monetary policy of the
country, it adds to the economic growth.
2) To Maintain Price Stability: Price instability is common for all the economies. It is

implemented by the monetary policy of the country in case of recessionand inflation,respectively.

3) Maintain Exchange Rate Stability: The value of home currency in terms of any
attracting the foreign
investors in the country.
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4) To Achieve Balance of Payment (BOP) Equilibrium: Monetary policy is also
focused towards achieving balance of payment equilibrium.
5) To Achieve Full Employment: Another objective of monetary policy is to achieve full
employment level in the country. The meaning of full employment here is everybody requiring
job gets the job. It does not guarantee zero unemployment.
6) To Reduce Economic Inequalities: Monetary policy is also useful for attaining the
economic equality in the system. It focuses on designing policies for agriculture, village
businesses, small-scale businesses, etc.

TYPES OF MONETARY POLICY

The types of monetary policy are as follows:

1) Expansionary Monetary Policy: Expansionary monetary policy refers to the

reduction of policy rates (i.e., bank rate or repo rate), reserve ratios and procurement of
government securities. This increases encouragement over the spending on goods
and services and the expansion of credit and money supply.
2) Contractionary (Tight) Monetary Policy: The prime objective of this policy is to
control inflationary conditions by contracting the supply of money. This can be achieved by
selling government securities, increasing policy rates and reserverequirements of themarket.
3) Countercyclical Monetary Policy: This policy is the combined implementation of
expansionary and contractionary monetary policy. By applying countercyclical measure, the
cyclical situation can be handled.

4) Rule Based Monetary Policy: In this policy, certain predefined set of laws, principles
and regulations are followed to manage the money supply and related variables. This policy
cannot even be altered by any authority under Central Bank. Monetary policy also becomes
inactive in this rule based policy.
5) Discretionary Monetary Policy: The discretionary monetary policy, allows the
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consumer durables with high prices having excess demand, the Central Bank can increase down
payment, and reduce the number of repayment installments to reduce the consumer credit.
5) Moral Suasion: Bank
uses this tool of credit control over commercial banks by the way of persuasion and request. In
case of inflationary situations, the commercial banks avoid giving loans for provisional and non-
essential purposes on the persuasion and request of Central Bank.
6) Direct Action: The Central Bank reserves the right to take any action against commercial
banks which violate the guidelines of Banking Regulation Act. It maintains the follow-up of
guidelines and directions of central bank.

FISCAL POLICY
Meaning and Definition of Fiscal Policy:
Fiscal policy represents the government policy related to tax and expenditure. It is a type of
economic policy which controls and regulates the tax system, expenditure,borrowings and public
debt management within a country.

The main focus of fiscal policy is on the flow of money in a particular economy. The process of
monetary flow is initiated by the private sector which is generally transferred to the government.
The government utilizes these funds in the welfare of the economy. Private sector uses taxation
as a channel for diverting funds to government, and these funds go back to the economy through
the public expenditure. Another important concern in fiscal policy is public debt management.
Government loans, interest payment and retirement of matured debts, all come under public debt
management. Fiscal policy, thus, proved to be very crucial for the national economy.

According to Buehler, By fiscal policy is meant the use of public finance or expenditure, taxes,
borrowing and financial administration to further our national economic objective

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OBJECTIVES OF FISCAL POLICY
The main objectives behind the determination of various fiscal policies are explained as below:

1) Effective Mobilisation of Resources for Development: Accomplishing the high

developmental and economic growth is the main purpose of fiscal policies. Effective mobilization
of financial resources is an essential requirement for ensuring high economic and
developmentgrowth.

2) Taxation: Both direct taxes and indirect taxes can be used by the government for the
mobilization of resources with the help of effective fiscal policies. Taxation is considered as the
most effective method of resources mobilization inIndia.
3) Public Savings: By controlling the public expenditures and giving a push to the surpluses
of public sector firms, resource mobilization can be achieved with the help of publicsavings.
4) Private Savings: Different types of financial resources can be raised from private sectors
and households through the government with the help of efficient fiscal policies such as
taxbenefits.
5) Effective allocation of Financial Resources: Lot of efforts have been made from the
Central and State Governments towards the achievements of effective allocation of financial
resources. The allocation of these activities takes place for both development as well as non-

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development activities. Development activities include expenditure on infrastructure, railways,
roads,etc.
6) Reducing Inequalities of Income and Wealth: By reducing the income inequality which
prevails in various segments of the society, the objective of fiscal policy of attaining social equity
is tried to the accomplished. Higher taxes are applied on the rich segment of population, while
lower tax rates are imposed on the weaker sections of thesociety.
7) Price Stability and Inflation Control: Having price stability and controlling the inflation
are the main objectives of fiscal policies. The attempts are made by the government to control the
inflation by reducing the fiscal deficits, productive and efficient utilization of resource, tax saving
schemes and so on.
8) Employment Generation: With the help of effective fiscal policies, a lot of efforts are
being made by the government to improve the situation of employment level in the country.

9) Balanced Regional Development: Ensuring a balanced regional development is another

main focus of fiscal policies. Lot of incentive programmes are being initiated by the government
so that the investments can be directed towards the backward areas of society. Concession in taxes
and duties in the form of tax holidays, cash subsidies, finance at lower rate, etc., are some of the
provisions.
10) Controlling the Deficit in Balance of Payment: Various fiscal measures such as
exemption of central excise duties, income tax exemption on export earnings, sales tax
exemptions, octroi, customs exemptions, etc., are provided by fiscal policies to promote more
exports. By facilitating various fiscal advantages to import substitute industries, having higher
custom duties on imports and so on, foreign exchange is also preserved.
11) Capital Formation: Increasing the capital formation rate is also one of the main
objectives of fiscal policies in India. The rate of capital formulation is increased so as to increase
the rate of economic development. These policies encourage savings, and thus, faster the
economic development of the country.

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short-term loans, investment in the stock market, etc., are the part of it. These types of claims are
highly susceptible to associated changes in the interest rates in associated countries and the
expected variation in the rate of exchange.
3) Official Reserve Account: Official reserves refer to governmental resources. It stands
for buying and selling through the centra central bank is
Reserve Bank of India,
4) Other items in the BOP (Balance of Payments): The other items in the BOP are the
things which could not be incorporated in any of the above types. In order to maintain the balance
in BOP, they are included in it. Following are the different types of residual things:

i) Errors and Omissions: In this category, the errors in recording the data mayhappen at
the time of accounting. The reasons behind these flaws could be depicting the sample instead of
the exact data of the dealings (for example, the average export of rice is presented, rather than
giving an exact record of each and every quintal), fraudulence such as reporting lesser amount for
avoiding the levied taxes, illegal transactions outside the country, and soon.
ii) Official Reserve Transactions: Except this category, the remaining types are known as
this implies that
they are carried out without the desire to bring about the relative effect on the BOP or rate of
exchange.
WTO: WORLD TRADEORGANISATIONINTRODUCTION:
World Trade Organisation is a global institution which deals with the set of laws to administer
and liberalize international trade between different nations. It was established on January 1, 1995
under the Marrakech Agreement. WTO is the successor of General Agreement on Tariffs and
Trade (GATT) which was introduced in 1947. The headquarters of WTO is at
Geneva,Switzerland.
The WTO acts as a framework for formalizing and negotiating trade agreements between nations.
It is also a dispute settlement body for the members of WTO, where WTO agreements are signed

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by the representatives of the trading nations and approvedby their respective parliaments. The
working of WTO is on the basis of the negotiations occurred previously from Uruguay
Round(1986-1994).

ROLE AND FUCNTIONS OF WTO IN PROMOTING WORLD TRADE

1) Helping Developing and Transition Economies: About 75% of WTO members are
developing countries. Most of them are transitioning from planned economy to a market based
economy. The major function o WTO is to help these countries in developing their
economicsystem.
2) Specialized Help for Export: International Business Centre was formed by WTO and
United Nations in 1964 to promote exports of developing countries. It was established to provide
important export related information, suggestions and techniques to the developing countries for
improving their marketing activities.
WTO performs the following role and functions as discussed below:

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3) WTO in Global Economic Policy-Making: WTO works together with international
institutions like World Bank and IMF for making the global economic policies moreconsistent.
4) Taking Information: Another important function of WTO is collecting information
about policies and tariffs from the member countries. It regularly records the ongoing
development activities in differentcountries.
5) Giving Information to Public: It also facilitates internal information regarding
changes and progress to the general public through its website orpublications.
6) Encouraging Development and Economic Reforms: In addition of giving
concessions and trade support to developing member countries, WTO also helps them by
providing transition periods to adjust with new difficult economic conditions.
IMPLICATIONS OF WTOINTRODUCTION:
A Working Group established in 1996 conducts analytical work on the relationship between trade
and investment. The Agreement on Trade Related Aspects of Intellectual Property Rights
(TRIPS) is an international agreement administered by the World Trade Organisation (WTO) that
sets down minimum standards for many forms of intellectual property (IP) regulation as applied
to nationals of other WTO members. The Agreement on Trade-Related Investment Measures
Agreements on Trade in Goods, prohibits
trade-related investment measures, such aslocal content requirements, that are inconsistent
with basic provisions of GATT 1994.The General Agreement on Trade in Services addresses
foreign investment in services as one of four modes of supply of services investment,
competition, procurement, simpler procedures.

TRADE RELATED ASPECTS OF INTELLECTUAL PROPERY RIGHTS

One of the most controversial outcome of the Uruguay round (UR) is the Agreement on Trade
Related Aspects of Intellectual Property Rights (TRIPRs), including Trade in Counterfeit Goods.
TRIPs along with Uruguay Round. The WTO agreements of Trade- Related Aspects of
Intellectual Property Right (TRIPs) recognizes that widely varying standards in the protection

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DUMPING
MEANING AND DEFINITION OF DUMPING:
word is now
generally used only in the context of international trade law, where dumping is defined as the act
of a manufacturer in one country exporting a product to another country at a price which is either
below the price it charges in its home market or if it can be proven that there has been a
substantial increase of a specific good; dumping large surpluses into a market will substantially
lower the market price as will introducing lower than market priced goods.
SITUATIONS FAVOURING DUMPING:
1) Having Rational Reason of selling below cost: Suppliers may have rational reasons
to want to sell below cost. For example, they may have invested at a certain point in time and
the prices in the market may have dropped below the originalestimate.
2) Undermining Competitors: A firm may have a dominant position or monopoly and
may wish to undermine its competitors by sales below cost. It can only do this if it has deep
pockets. Within national boundaries this practice, which is disallowed by most competition
authorities, relates to the situation where a monopolist or a near monopolist is trying either to
maintain a monopoly or to establishone.
3) Economies of Scales: The argument has also been made that when a single firm sells
below costs in order to increase market share, this is reasonable and normal. It will do so if, by
increasing production, it can recover its costs through economies ofscale.
4) Captive Home Market Advantage: Finally, it may be charging high prices in its
captive home market which permit it to sell at a loss abroad.
TYPES OF DUMPING:
There several types of dumping, such as:
1) Sporadic Dumping: It occurs when a manufacturer with unsold inventories wants to
get rid of distressed and excess merchandise. To preserve its competitive position at home, the
manufacturer must avoid starting a price war that could harm its home market. One way to find a
solution involves destroying excess supplies, as in the example of Asian farmers dumping small
chickens in the sea or burning them.
2) Predatory Dumping: It is more permanent than sporadic dumping. This strategy
involves selling at a loss to gain access to market and perhaps to drive-out the competition. Once
the competition is gone or the market established, the company uses its monopoly position to
increase price.
3) Persistent Dumping: It is the most permanent type of dumping, requiring a consistent
selling at lower prices in one market than in others. This practice may be
recognition that markets are different in terms of overhead costs and demand characteristics.
4) Reverse Dumping: The three kinds of dumping just discussed have one characteristic
in common-each involves charging lower prices abroad than at home. It is possible, however, to
have the opposite tactic-reverse dumping. In orderto have such a case, the overseas demand must
be less elastic.
ANTI-DUMPING MEASURES:
Anti-dumping action means charging extra import duty on the particular product from the

the injury to domestic industry in the importing country. Anti- dumping duties may be levied by
an importing country when producers sell their goods inthat market at a price below than at what
they are sold in the home market (price discrimination), or below the cost of production (Normal
value). A variety of different arguments is put forward in favor of anti-dumping measures:
1) Removal of Unfair Competition: The argument in favor of anti-dumping measures is
the removal of Firms frequently sell a proportion of their output below
cost whenever the market for the good is depressed.
2) Different Cost Structures: Another argument is based on the existence of different
cost structures in different countries, which results in some countries having a greater tendency
to dump. some countries, fixed costs account for
a higher proportion of total costs than in others.
3) Reducing Employment Variation: It is argued that anti-dumping measures are
needed to reduce employment variation. Frequent upwards and downward changes in domestic
output and employment impose considerable adjustment costs on the importing country, so the
argument goes.
4) Exchange-Rate Variations: It is possible for dumping to appear to be taking place
when in fact it is not, due to exchange-rate variations. This position could arise where goods are
sold under contract and where the currency appreciation takes place shortly before the period of
investigation and before exporters have had time to raise prices.
dramatic or musical or artistic work. Cinematographic films including sound- tract and video
films and recordings on discs, tapes, perforated roll or other devices are covered by copyrights.
3) Industrial Design: Many varieties and brands of the same product (e.g., car, television,
personal computer, a piece of furniture, etc.) in the market can be seen, which look quite different
from each other. If the products have similar functional feature or have comparable price tags, the
eye appeal or visual design of a product determines the choice.
4) Trademarks: A trademark is a distinctive sign, which identifies certain goods or
services as those produced or provided by a specific person or enterprise. Trademarks may be one
or combination of words, letters, and numerical.
5) Geographical Indications: The term GI has been defined as
as agricultural
goods, natural goods or manufactured goods as originating, or manufactured in the territory of a
country, or a region or locality in that territory.
6) Integrated Circuit Layout Design (IC): It provides protection for semiconductor IC
layout designs. India has now in place Semiconductor Integrated Circuits Layout Design Act,
2000 to give protection to IC layout design.
7) Protection of Undisclosed Information: The protected subject matter is
informationlawfullywithinthecontrolofanaturalpersonorlegalpersonthatissecret that has
commercial value because it is secret and that has been subject to reasonable steps by the person
lawfully in control of the information, to keep it secret.
TRADE RELATED INVESTMENT MEASURES (TRIMs)
The Agreement on Trade Related Investment Measures (TRIMs) is one of Agreementscovered
under Annex IA to the Marrakech Agreement, signed at the end of the Uruguay Round (UR)
negotiations. The Agreement addresses investment measures that are trade related and that also
violate Article III (National treatment) or Article XI (general elimination of quantitative
restrictions) of the General Agreements on Tariffs and Trade. International business is aware of

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the many restrictions on their investments in foreign countries.
FEATURES OF TRIMs:
The main features of TRIMs are:
1) Coverage: TRIMs applies only to investment measures related to goods. It does not
cover trade in services. Measures concerning service industries are addressed by the GATS,
which does not contain explicit rules dealing with TRIMs.
2) Treatment to Entities: TRIMs agreement is concerned with the discriminatory
treatment of imported and exported goods and is not specifically concerned with the treatment of
foreign legal or natural person.
3) Substantive Obligations: The TRIMs Agreement prohibits trade-related investment
measures that are inconsistent with the basic propositions of GATT 1994. TRIMs forbidden by
the agreement include those which are mandatory or enforceable under domestic law and those
which are required in order to obtain an advantage, such as subsidies or tax breaks.

4) Transparency: Members commit to comply with GATT 1994, regarding Notification,

Consultation, Dispute Settlement and Surveillance. Members must notify the Secretariat of the
publications in which TRIMs may be found including those applied by regional and local
governments.
5) Establishment of Committee: TRIMs establish Committee on Trade-Related
Investment Measures responsible for the monitoring of operations and implementation of the

GENERAL AGREEMENT ON TRADE IN SERVICES

The General Agreement on Trade in Services (GATS), negotiated during the Uruguay round, is
the first step of multilaterally-agreed and legally enforceable rules and discipline ever
negotiated to cover international trade in services. The agreement containsthree elements: A
Framework of genera; rules and disciplines, Annexes addressing special conditions relating to
individual sectors (the sectors covered are: movement of natural persons, cross-border trade,
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consumption abroad, and commercial presence) and National schedules of market access
commitments. A council for trade in services overseas the operation of the agreement.
MODES OF GATS
The GATS cover four modes of international delivery of services:

1) Cross-border supply (Trans-border Data Flows, Transportation services): Cross-

border supply is defined to cover services from the territory of one Member into the territory of
another Member (e.g., banking or architectural services transmitted via telecommunications or
mail).
2) Commercial Presence (Provision of Services Abroad through FDI or
representative offices): Commercial presence implies that a service supplier of one member
establishes a territorial presence, including through ownership or lease of premises, in another
subsidiaries of foreign insurance
companies or hotel chains).

3) Consumption Abroad (Tourism): Consumption abroad refers to situations where a

service consumer (e.g., to obtain a
service.
4) Movement of Personnel (Entry and Temporary Stay of Foreign Consultants):
Presence of natural persons consists of persons of one member entering the territory of another
member to supply a service (e.g., accountants, doctors or teachers).

SERVICES COVERED BY GATS

The GATS practically covers all types of services. The services covered are currently classified
under the following twelve broad sectors, each divided into several sub-sectors:
1) Business Services: Professional services, including legal services, accounting, auditing
and book-keeping, architectural and real estate services, engineering services, medical and dental
services, veterinary services, other professional services, computer and related services, research
and development services, real estate service and rental/leasing services and other business
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