Page 14 - DECO402_Macro Economics

Unit-1: Introduction of Macroeconomics

(5) Budgetary Deficit and fiscal Policy Notes
World’s economies after privatisation and globalistation in development process direct participation of
government(as an investor) is becoming continuously less. But due to the extension of welfare related
work, government budget related expenditure is increasing. Specially defence to face the challenge
of terrorism and to maintain law and order government expenditure is continually increasing. An
another cause of increasing in government expenditure is giving subsidy to farmer. This matter is to
pay attention that India like country a major part of government expenditure is expensing on non-
development activities. It means that government expenditure is more on consumption of goods and
services and less in their production. India like countries mostly government as a means of income
depends on borrowings. As a result of this fiscal deficit Borrowing by government in huge quantity
is continuously increasing. As much increasing in borrowing by government, the central bank of
India (Reserve bank of India) issuing note subjection as much increases. As a result of this fuel add
to inflation like fine whose adverse effects on country’s growth and its development. As a form of
alternative, government for increasing his income, try to impose more tax. But, by government, money
paid by taxpayer, expenses consumption related activities than production (that is also pleasing policy
of common peoples) its causes social resentment, by that political instability occurs and for country’s
whole economic activities danger increases.
Budgetary deficit and fiscal policy related to that is a central problem of macroeconomics on which
serious supervision is needed, so that in economy for investment a favourable environment can be
made.

(6) Interest Rates and Monetary policy

Monetary policy is related to those monetary measures by which government in economy (i) rate of
interest and (ii) changes in supply of money, so that growth with stability can be promoted. High
rate of interest means high cost of investment which is harmful to development process. India like
underdeveloped countries high rates of interest is very sensitive, because due to this whole production
cost is increased and in international market their competitiveness is become less. As a result these
countries exports are affected and their import capacity is reduced; whether reality is that, for these
countries economic development’s acceleration fast, capital intensive goods import is necessary.
On the other hand high interest rate is a great challenges for these economy, because it causes more
inflation. These economies mostly agriculture intensive and on it season effects to a great extent, due
to shortage of rain in these economies occurs much imbalance between supply and demands of food.
This imbalance causes inflation. Inflation gradually takes whole economy in his grip. When general
price level increases, then increase of interest rate and their adverse effects is inevitable.
In above section discuss of it that government’s deficit budget and as a result of this taking borrowing
by government has become a central problem of macroeconomics. Generally in economy due to
borrowing, supply of money increases that become the immediate cause of inflation whose production
capacity is very low.
Supply of money and rate of interest keeping in control for underdeveloped countries regarding
macro-economies a great challenge because these countries become a victim of immediate inflationary
factor pressure. But, it means not that there is no relevancy of monetary policy is developed countries.
If underdeveloped economies due to low production capacity and high aggregate demand sensitive
towards inflation-factor-pressure, then developed countries also due to comparision of total supply
of goods and services, recurring deficiency of aggregate demand as much sensitive towards inflation
factors pressure.
In inflation condition, investment initiative become very low, rather rate of interest is low. The purpose
of monetary policy of such economies is to increase supply of money, so that expense on goods and
services can be increased and in this way shortage of demand can be removed.

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