OBJECTIVES OF BUDGET

Government budget is a statement of expected receipts and expenditure of the government during a fiscal year. Main objectives of government budget are:

(A)Redistribution of income and wealth: It is one of the most important objective of the government budget. The government imposes heavy taxation on a high income groups redistribute it among the people of weaker section in the society. The government can provide subsidies and other amenities to people whose income levels are low. These increase their disposable income and this reduces the inequalities.

(B)Reallocation of Resources: Reallocation of resources in the manner such that there is a balance between the goals of profit maximization and social welfare. Government uses budgetary policy to allocate resources. This is done by imposing higher rate of taxation on goods whose production is to be discouraged and subsidies provided on goods whose production is to be promoted.

There are some goods and services in which the private sector shows little interest due to huge investment required and lower profits, like sanitation, roads, parks etc. Government can under take the production of these goods and services. Alternatively, it can encourage private sector by giving tax concession and subsidies.

(C)Economic Growth: Another purpose of the government budget today is to study the generation of savings, investment, consumption and capital formation to assess the trend of growth in the economy to improve the standard of living of the people.

(D)Managing Public Enterprises: In the budget government can make various provision to manage public sector enterprises and also provides them financial help.

(E)Economic Stability: The government of the country is always committed to save the economy from business cycles. Government budget is a tool to prevent economy from inflation or deflation and to maintain economic stability. The overall level of employment and prices in the economy depends upon the level of aggregate demand during the time of deflation, deficit budgetary policy are used to maintain stability in economy.

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CREDIT CONTROL METHODS OF RBI

It is one of the important function of RBI for controlling supply of money or credit. There are 2 types of methods employed by the RBI to control credit creation:

1. Quantitative method
2. Qualitative method

Quantitative method:

1. Bank rate: It is the rate of interest at which central bank lends funds to commercial banks. During excess demand or inflationary gap, central bank increases bank rate. Borrowings become costly and commercial banks borrow less from central bank. During deflationary gap central bank decreases the bank rate. It is cheap to borrow from the central bank or the part of the commercial banks which in turn the Commercial banks also decreases their lending rates.
2. Open market operations: The open market operations means buying and selling of bonds and shares by RBI is open market. It is also called buying and selling of government security by the central bank from the public and commercial banks.

Sale of securities

At the time of inflation the RBI starts selling of government securities in the market. The resources of commercial bank are reduced and they are not in a position to lend more to the business community. This reduces the investment and aggregate demand.

Purchase of securities

At the time of deflation the RBI starts buying securities from open market. The reserves of commercial banks are raised and they lend more investment, output income and aggregate demand starts rising.

Legal Reserve Requirement: It is another method of RBI for controlling credit or supply of money. It includes 2 types of methods such as:

3. Cash Reserve Ratio (CRR): It is the ratio of bank deposits that commercial bank has to keep with the central bank. At the time of inflation the RBI increases the rate of CRR, similarly at the time of deflation RBI decreases the rate of CRR.
4. Statutory Liquidity Ratio (SLR): Every bank required to maintain a fixed percentage of its assets in the form of cash or other liquid assets called SLR. At the time of inflation the RBI increases the SLR, similarly at the time of deflation RBI decreases the rate of SLR.

Qualitative method:

1. Margin requirements: It is the difference between the market value of loan and the security value of loan. At the time of inflation the margin requirement value decreases by RBI for discouraging people and commercial banks for approaching more and more amount of loan. On the other hand at the time of deflation the RBI increases the value of margin just to encourage issuing of more amount of loan to the commercial banks and general public.
2. Moral suasion: It refers to written or oral advices given by central bank to commercial banks to restrict or expand credit.
3. Direct Action: Sometimes the RBI directly takes action against the commercial banks. It takes action to such type of commercial banks who are not following the rules regulation of RBI. It cancels their registration or nationalization of commercial banks.
4. Rationing of credit: It is the related to limiting the amount of credit, which is issued by all the commercial banks. RBI fixes the size of issuing the credit according to the requirement of the country.

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FUNCTIONS OF CENTRAL BANK

The Central Bank performs the following important functions:

• Issue of Currency Authority. The Central Bank is the sole authority for the issue of currency in the country. Notes issued by it are circulated as legal tender money. It has its issue department which issue notes and coins. Coins are manufactured in the government mint but they are put into circulation through the central bank. While issuing currency notes, a minimum field amount of gold and foreign currencies is kept by the central bank. By having a monopoly of note issue, it can restrict or expand the supply of cash according to the requirements of the economy.
• Banker to the government. The Central Bank acts as a banker to the government in various respects:

1. The Central Bank accepts receipts and make payments for the governments and carries out exchange, remittance and other banking operations.
2. It provides short-term credit to the government.
3. It provides foreign exchange resources to the government to repay external debt.
4. It manages public debt, i.e., to manage all new issues to government loans.
5. It advises the government on banking and financial matters.

• Banker’s Bank and Supervisor. The Central Bank acts as a banker and supervision to commercial banks in various respects :
• It provides financial assistance to banks by discounting their bills and through loans and advances against approved securities.
• The commercial banks are required to maintain a certain percentage of liabilities with the Central Bank. The sole aim of these reserves is to enable the Central Bank to provide financial assistance in times of financial emergency.
• It supervises, regulates and control the activities of commercial banks.
• It provides the commercial banks with centralized clearing and remittance facility.
• The Central Bank performs the function of controller of credit. For this purpose it adopts quantitative and qualitative methods of credit control.
• Lender of the last resort. The Central Bank acts as a lender of the last resort for commercial banks. When commercial banks fails to meet obligations of their depositors, The Central Bank comes to their rescue. It advances necessary credit against eligible securities subject to certain terms and conditions. This saves bank from a possible breakdown. Prof. Sayers regards this function of the central bank as the basic important function of Central Banking System.

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