Page 163 - DECO402_Macro Economics

Macroeconomic Theory

Notes Lipsey and Steiner also believe that expansion of credit is not automatic. It depends on decisions of
banks. If banks do not use the increase in cash reserve fund, expansion of credit may not happen.

17.8 Money Supply in India

Since 1977, RBI in india is using four monetary aggregate measures which are M , M , M , M . M is
3
4
1
2
1
a narrow measure while M is a detailed measure of money supply. Since the first five year plan till
3
today, there is a rapid increase in both M and M . In currency component and bank deposit components
1
2
of money supply, in both there has been a rapid increase. In the initial years of the plan, increase in
currency component was more that deposit component. But at present time, in comparison to currency
component, increase in demand deposit component is much faster; its main reason is extensive increase
in banking services. Table 17.2 shows increase in M and M aggregates of money supply.
1 3
Table 17.2 Money Supply
(M and M )
1 2
Year (1) M (2) M (3)
1 3
1970-71 7,321 10,958
1980-81 23,117 55,358
1990-91 92,892 2,65,828
2000-02 4,22,843 14,98,355
2004-05 6,46,263 22,33,164
2005-06 8,26,375 27,29,545
2006-07 7,65,195 33,10, 278
(Source : RBI Bulletin 2006, Statistical Outline of India, 2007-08)
From table 17.2 it is clear that from 1970-71 to 2006-07, increase in M and M happened with a rapid
1
3
speed. Rapid increase of M (approximate 302 times) happened due to increase in time deposits.
3
Extensive increase of M happened due to increase in demand deposits.
1
Knowledge of Supply of money in India during various plan periods, national income and percentage
increase in price levels can be obtained through table 17.3:
Percentage Growth Rate in Money Supply, National Income
and Price Level

Growth Rate
Growth Rate in Money Growth Rate in National
Period in Price-
Supply (M ) Income
3 Level
First Plan
-3.6
Second Plan 2.2 3.7 +6.3
5.3
4.1
Third Plan 9.1 2.4 +5.8
Fourth Plan
Fifth Plan 15.5 3.3 +9.0
17.9
+6.3
5.0
Sixth Plan 16.7 5.4 +9.7
Seventh Plan 17.5 5.7 +6.7
Eighth Plan 13.8 5.8 +6.6
Ninth Plan 14.2 5.6 +3.9
Tenth Plan 16.4 8.7 +5.2
(2002-03)
(Source: Statistical Outline of India, 2007-08)

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