The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2,20,000.
Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance.
Ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous bank.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
- To regulate the issue of banknotes
- To maintain reserves with a view to securing monetary stability and
- To operate the credit and currency system of the country to its advantage.
The Currency Department in RBI attends to the core statutory function of note and coin issue and currency management. This involves forecasting the demand for fresh notes and coins, placing the indent with four printing presses and mints, receiving supplies against those indents and distributing them through the 18 offices of the Bank, a wide network of currency chests
Repositories and small coin depots.
The Department also keeps an account of notes in circulation and also the stocks at RBI offices and currency chests.
The Reserve Bank has the sole authority to issue banknotes in India. Reserve Bank, like other central banks the world over, changes the design of banknotes
From time to time.
The Reserve Bank has introduced banknotes in the Mahatma Gandhi Series since 1996 and has so far issued notes in the denominations of Rs.5, Rs.10, Rs.20, Rs.50,
Rs.100, Rs.500, and Rs.1000 in this series.
Function of reserve bank of india
Bank of issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government.
The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes
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Payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.
CONCEPT AND MEANING of deficit financing
Deficit financing refers to means of financing the deliberate excess of expenditure
Over income through printing of currency notes or through borrowings. The term is also generally used to refer to the financing of a planned deficit whether operated by a government in its domestic affairs or with reference to balance of payment deficit.
In the West, the phrase “Deficit financing” has been used to describe the financing of a deliberately created gap between public revenue and expenditure or a budgetary deficit. This gap is filled up by government borrowings which include all the sources of public borrowings viz., from people, commercial banks and the Central Bank. In this manner idle savings in the country are made active. This increases employment and output.
But according to Indian budgetary documents government resorting to borrowing
From the public and the commercial banks does not come under deficit financing.
These are included under the head of ‘Market Borrowings’ and government spending to the extent of its market borrowings does not result in or lead to deficit financing. In the Indian context, public expenditure, which is financed by borrowing from the public, commercial banks are excluded from deficit financing. While borrowing from the central bank of the country, withdrawal of accumulated cash balances and issue of new currency are included within its purview.
Deficit financing in Indian context occurs when there’ are budgetary deficits. Let us Now discuss the meaning of budgetary deficit. Budgetary deficit refers to the excess of total expenditure (both revenue and capital) over total receipts (both revenue and capital). In the words of the First Plan document, the term ‘deficit financing’ is used to denote the direct addition to gross national expenditure through budget deficits, whether the deficits are on revenue or on capital account. The essence of such a policy I lies, therefore, in government spending in excess of the revenue it receives in the
Shape of taxes, earnings of state enterprises, loans from the public, deposits and funds and other miscellaneous sources. The government may cover the deficit either by running down its accumulated balances or by borrowing from the banking system
(Mainly from the Central Bank of the country) and thus ‘creating money’. Thus, the government tackles the deficit financing through approaching the Central Bank of the country i.e. Reserve Bank of India and commercial banks for credit and also by withdrawing its cash balances from the Central Bank. The magnitude of actual budget deficit during the seventh plan had been of the order of Rs. 29,503 crore (at 1984-85 prices) which was more than double the estimate of Rs. 14,000 crore. The Budget for 1990-91 laid stress on limiting the size of the budget
Deficit through containment of expenditure growth and better tax compliance. The budget programmed a deficit of Rs. 1,10,592 crore in 1989-90. The revised estimates for the year 1990-91 placed the budgetary deficit at Rs. 10,772 crore which is nearly 50% higher than the budget estimate.
Proper financial management demands that the revenue receipts of the government, which are in the shape of taxes, loans from the public, earnings of the state enterprises etc., should not only meet the revenue expenditure but also leave a surplus for financing the plan. Contrary to this deficits on revenue account are growing year after year.
For example the revised estimates place the deficit on revenue account during 1990-91 at Rs. 17,585 crore as against the budget deficit of Rs. 10,772 crore. A higher revenue deficit implies higher borrowed resources to cover the deficit leading to higher interest payments thus creating a sort of vicious circle.
ROLE OF DEFICIT FINANCING AS AN AID TO FINANCING ECONOMIC DEVELOPMENT
Deficit financing has been resorted to during three different situations in which objectives and impact of deficit financing are quite different. These three situations are war, depression and economic development.
Deficit financing during war
Deficit financing has its historical origin in wlr finance. At the time of war, almost
every government has to spend more than its revenue receipts from taxes and borrowings. Government has to create new money (printed notes or borrowing from the Central Bank) in order to meet the requirements of war finance. Deficit financing during war is always inflationary because monetary incomes and demand for consumption goods rise but usually there is shortage of supply of consumption goods.
Deficit financing during depression
The use of deficit financing during times of depression to boost the economy got impetus during the great depression of the thirties. It was Keynes who established a positive role for deficit financing in industrial economy during the period of depression. It was advocated that during depression, government should resort to
Construction of public works wherein purchasing power would go into the hands of people and thereby demand would be stimulated. This will help in fuller utilization of already existing but temporarily idle plants and machinery. Deficit spending by the government during depression helps to start the stagnant wheels of productive machinery and thus promotes prosperity.
Deficit financing and economic development
Deficit financing for development, like depression deficit financing, provides stimulus to economic growth by financing investment, employment and output in the economy. On the other hand “development deficit financing” resembles “war deficit financing” in its effect on the economy. Both are inflationary though the reasons for price rise in both the cases are quite different. When government resorts to deficit financing for development, large sums are invested in basic heavy industries with long gestation periods and in economic and social overheads. This leads to immediate rise in monetary incomes while production of consumption goods cannot be increased immediately with the result that prices go up. It is also called the inflationary way of financing development. However, it helps rapid capital formation for economic development.
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Inflation may occur if the government of country prints money in excess that what is actually required, to deal with financial emergencies. This results in the escalation of the prices with rapidity, to keep pace with the currency surplus. This situation is known as the Demand- Pull, which is characterized by forceful escalation of the prices, owing to a higher demand. That is deficit inflation.
It is the inflation caused by deficit financing. When the government budgets contain heavy deficit financing, through creating new money, the purchasing power in the community increases and prices rise. This may be referred as to as deficit-induced inflation. During a planning era, when government launches upon heavy investment, it usually resorts to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when adequate resources are not found. An inflationary spiral develops due to deficit financing, when the production of consumption goods fails to keep pace with the increased money expenditure.
CAUSES OF DEFICIT INFLATION
In order to meet its mounting expense the government resorts to deficit financing by borrowing from the public and even by printing more notes. This raises aggregate demand ill relation. to aggregate supply, thereby leading to inflationary rise in prices. This .is also known as deficit induced inflation.
Increase in Money Supply.
Inflation is caused by an increase in the supply of money which. leads to increase in aggregate demand. The higher the growth rate of the nominal money supply, the higher is the rate of inflation. Modern quantity theorists do not believe that true inflation starts after the full employment level. This view is realistic because all advanced countries are faced with high levels of unemployment and high rates of inflation.
EFFECTS OF INFLATION
Inflation affects different people differently. This is because of the fall in the value of money. When price rises or the value of money falls, some groups of the society gain, some lose and some stand in between.
Broadly speaking, there lire two economic. Groups in every society, the fixed income’ group and the flexible income group. People belonging to the first group loss and those belonging to the second group gain. The reason is that the price movements in the case of different goods, services, assets, etc. are not uniform. When there is inflation, most prices are rising, but the rates of increase of individual prices differ much. Prices of some goods and services rise faster, of others slowly and of still others remain unchanged. We discuss below the effects of inflation on redistribution of income and wealth, production, and on the society as a whole.
The society who suffered with loss
Salaried workers such as clerks, teachers, and other white collar persons lose when there is inflation. The reason is that their salaries are slow to adjust when prices are rising.
Wage earners may gain or lose depending upon the speed with which their wages adjust to rising prices. If their unions are strong, they may get their wages linked to the living index. In this way, they may be able to protect themselves from the bad effects of inflation. But the problem is that there is often a time lag between the raising of wages by employers and the rise in prices. So workers lose because by the time wages are raised, the cost of living index may have increased further. But where the unions have entered into contractual wages for a fixed period, the workers lose when prices continue to rise during the period of contract. On the whole, the wage earners are in the same position as the while collar persons.
Fixed Income Group.
The recipients of transfer payments such as pensions, unemployment insurance, social security, etc. and recipients of interest and rent live on fixed incomes. Pensioners get fixed pensions. Similarly the rentier class consisting of interest and rent receivers get fixed payments. The same is the case with the holders of fixed interest bearing securities, debentures
and deposits. All such persons lose because they receive fixed payments, while the value of money continues to fall with rising prices. Among these groups, the recipients of transfer payments belong to the lower income group and the rentier class to the upper income group. Inflation redistributes income from these two groups towards the middle income group comprising traders and businessmen.
Agriculturists are of three types, landlords, peasant proprietors, and landless agricultural workers. Landlords lose during rising prices because they get fixed rents. But peasant proprietors who own and cultivate their farms gain. Prices of farm products increase more than the cost of production. For prices of inputs and land revenue do not rise to the same extent as the rise in the prices of farm products. On the other hand, the landless agricultural workers are hit hard by rising prices. Their wages are not raised by the farm owners, because trade unionism is absent among them. But the prices of con-sumer goods rise rapidly. So landless agricultural workers are losers.
The society who got profit
Business of all types, such as producers, traders and real estate holders gain during periods of rising prices. Take producers first. When prices are rising, the value of their inventories (goods in stock) rise in the same proportion. So they profit more when they sell their stored commodities.
Persons who hold shares or stocks of companies gain during inflation. For when prices are rising, business activities expand which increase profits of companies. As profits increase, dividends on equities also increase at a faster rate than prices.
REASON OF “WHY DO NOT PRINT MORE MONEY”:-
After the print of more money inflation will came in economy and mostly middle classes and poor people can suffered with inflation because, incomes of the rich have increased and middle and poor classes have declined with inflation. Inflation brings about shifts in the distribution of real income from those whose money incomes relatively inflexible to those whose money incomes are relatively flexible.
The poor and middle classes suffer because their wages and salaries are more or less fixed but the prices of commodities continue to rise. They become more impoverished. On the other hand, businessmen, industrialists, traders, real estate holders, speculators, and others with variable incomes gain during rising price The latter category of persons become rich at the cost of the former group. There is unjustified transfer of income and wealth from the poor to the rich. As a result the rich roll in wealth and indulge in conspicuous consumption, while the poor and middle classes live in abject misery and poverty.
By the study of above things we got conclusion if the government print more money than may economy can trap in inflation and poverty may be increases broadly because, middle classes and poor people can suffered with inflation because, incomes of the rich have increased and middle and poor classes have declined with inflation. Inflation brings about shifts in the distribution of real income from those whose money incomes relatively inflexible to those whose money incomes are relatively flexible.
- RBI:- http://finance.indiamart.com/investment_in_india/rbi.html
- INDIAN CURRENCY:- http://www.rbi.org.in/currency/faqs.html
- BANK NOTES:- http://finance.indiamart.com/investment_in_india/rbi.html
- FUNCTION OF RBI:- http://finance.indiamart.com/investment_in_india/rbi.html
- DEFICIT FINANCING:- http://www.egyankosh.ac.in/bitstream/123456789/25383/1/Unit-14.pdf
- ROLE OF DEFICIT FINANCING:- http://www.egyankosh.ac.in/bitstream/123456789/25383/1/Unit-14.pdf
- DEFICIT INFILATION:- http://www.managementparadise.com/forums/archive/index.php/t-50041.html
- CAUSES OF DEFICIT INFILATION:- http://rbidocs.rbi.org.in/rdocs/content/PDFs/90018.pdfhttp://www.psnacet.edu.in/courses/MBA/economics%20notes/14.pdf
- EFFECT OF INFILATION:- http://www.psnacet.edu.in/courses/MBA/economics%20notes/14.pdf
- REASON:- http://www.egyankosh.ac.in/bitstream/123456789/25383/1/Unit-14.pdf
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