MONEY AND BANKING (Part – I)

1. Monetary Measures:

• Increasing the rate of interest
• Credit control
• Controlling the money supply
• Demonetization of currency

2. Fiscal Measures:

• Reduction in unnecessary expenditure
• Increase in Taxes
• Increase in Saving
• Surplus Budget
• Public Budget

3. Other Measures

• To increase production
• Rational wage Policy
• Price control
• Rationing
• Controlling the demand

Causes of the Rise in Food Inflation

• Temperature and Weather Challenges: Issues like adverse weather conditions,
  such as the prediction of a weak monsoon and heatwave for this year affecting crop yields, particularly for cereals, pulses, and sugar, contributed to supply shortages and higher prices domestically.
• For example, cereal and pulse inflation showed double-digit inflation in April 2024.
• Fuel Prices: The price of fuel, key input in agriculture, has witnessed a considerable increase in recent years.
  For example, an increase in fuel inflation by 1% leads to a 0.13% rise in food inflation, and the effect slowly declines through the next 12 months.
• Transportation Issues: Disruptions in the supply chain due to factors like
  transportation constraints, labour shortages, and logistical challenges can lead to a decrease in the availability of food products, causing prices to rise.
• Production Costs: Rising production costs for farmers can lead to higher food prices. This includes expenses such as fuel, fertiliser, and labour costs.
• Global Causes: The ongoing Russia-Ukraine war has a global impact, particularly affecting developing countries. Energy and commodity prices have risen, and global logistical supply chains have been disrupted.
  Ukraine and Russia account for up to 30% of global wheat exports, leading to an increase in food prices.

Inflation is a gradual loss of purchasing power that results in a significant increase in the prices of goods and services over time. The inflation rate is calculated by averaging the price increases of a basket of selected goods and services over a year. High inflation means that prices are rising rapidly, whereas low inflation means that prices are rising more slowly.
Inflation impacts various aspects of the economy, from reducing purchasing power and increasing interest rates to widening income inequality and affecting investment returns. It also hampers export competitiveness and raises business costs, complicating economic planning.
Reduced Purchasing Power: Inflation erodes the purchasing power of money, meaning consumers can buy fewer goods and services with the same income, ultimately affecting their quality of life and standard of living.
Increased Interest Rates: To control inflation, central banks often raise interest rates, making borrowing more expensive for individuals and businesses, which can slow down economic growth and investment activities.
Income Inequality: Inflation impacts income groups unevenly. Lower-income households feel the pinch more as a larger portion of their income goes toward essentials, widening the gap between socioeconomic classes.
Investment Returns: Inflation diminishes real returns on investments, especially fixed-income assets, as the actual purchasing power of returns is reduced, potentially discouraging savings and long-term investment.
Export Competitiveness: Rising domestic prices make exports less competitive internationally, as foreign buyers may seek cheaper alternatives elsewhere, potentially harming industries that rely on exports for revenue.
Business Costs and Planning: Inflation raises operational costs for businesses, especially in materials and labour, leading to challenges in pricing and long-term planning as businesses struggle to maintain profit margins.

Financial inclusion refers to ensuring that individuals and businesses can access essential financial products and services, such as savings accounts, loans, insurance, and payment services, at affordable prices. Financial inclusion aims to eliminate the barriers that prevent people from participating in the financial sector and using its services to improve their lives. It is also known as inclusive finance..
In India, financial inclusion has been pivotal for poverty alleviation, bridging the income divide, and supporting national economic objectives. By fostering financial literacy, promoting digital banking, and improving access to formal banking channels, financial inclusion aims to achieve sustainable economic and social equity.

Banking Regulation Act, 1949

• About: This landmark legislation provided a comprehensive framework for regulating and supervising banks, addressing the challenges of the pre-independence era.
• Licensing and Operations: The Act mandates that all banks must obtain a license from the
  Reserve Bank of India (RBI) to operate. It also lays down rules for opening and closing branches, ensuring that banks operate in a regulated manner.
• Management Oversight: The RBI has significant control over the management of banks, including the composition of the board of directors, appointment of key personnel, and overall management practices.
• Financial Stability: The Act sets prudential norms for banks, including requirements for maintaining cash reserves, liquid assets, and restrictions on dividends.
• Public Disclosure: To promote transparency and accountability, the Act mandates regular audits and public disclosure of financial statements. This helps depositors and investors make informed decisions.

Nationalisation of Banks means transferring control and ownership of private banks into the hands of the government. This means the government becomes the majority shareholder in an erstwhile private bank, and the bank operates as a public sector entity.
Benefits of Nationalisation of Banks

• Removal of Barriers: Nationalisation of banks in India meant that there were no longer any barriers, social, economic, or political between the bankers and customers.
  This enabled in a massive quantitative expansion in the customer base                    and also helped improve the services.
• Enabled Banks to Widen their Reach: The banks began to expand into the rural areas. With this
  the economy also expanded and employment opportunities were created even in the remote corners of the country.
• Expansion of Branch Network: During the last 28 years of nationalisation of banks, the branches of the public sector banks rose 800 percent from 7,219 to 57,000, with deposits and advances taking a huge jump by 11,000 percent and 9,000 percent.
• Reorientation of Bank Lending: Accelerated the process of development of the priority sectors of the economy, which were hitherto not getting sufficient attention from commercial banks.
• Increased Credibility of Indian Banking System: Ease of factor access and increased banking habits led to increased credibility of the Indian banking system.
• Priority Sector Lending: Priority Sector Lending (PSL) scheme, that was initiated post nationalisation of banks, meant that the agriculture and allied sectors emerged as the largest contributors to the national income.
• Mobilization of Savings: Nationalisation helped mobilize the savings of the people to a great extent and utilize them for productive purposes.

Nationalisation of Banks means transferring control and ownership of private banks into the hands of the government. This means the government becomes the majority shareholder in an erstwhile private bank, and the bank operates as a public sector entity.
Benefits of Nationalisation of Banks

• Removal of Barriers: Nationalisation of banks in India meant that there were no longer any barriers, social, economic, or political between the bankers and customers.
  This enabled in a massive quantitative expansion in the customer base                    and also helped improve the services.
• Enabled Banks to Widen their Reach: The banks began to expand into the rural areas. With this
  the economy also expanded and employment opportunities were created even in the remote corners of the country.
• Expansion of Branch Network: During the last 28 years of nationalisation of banks, the branches of the public sector banks rose 800 percent from 7,219 to 57,000, with deposits and advances taking a huge jump by 11,000 percent and 9,000 percent.
• Reorientation of Bank Lending: Accelerated the process of development of the priority sectors of the economy, which were hitherto not getting sufficient attention from commercial banks.
• Increased Credibility of Indian Banking System: Ease of factor access and increased banking habits led to increased credibility of the Indian banking system.
• Priority Sector Lending: Priority Sector Lending (PSL) scheme, that was initiated post nationalisation of banks, meant that the agriculture and allied sectors emerged as the largest contributors to the national income.
• Mobilization of Savings: Nationalisation helped mobilize the savings of the people to a great extent and utilize them for productive purposes.

First phase of Bank Nationalization          - 1969

Establishment of Regional Rural Banks   - 1975

Second phase of Bank Nationalization    - 1980

Establishment of NABARD                         - 1982

Hence, option (a) is the correct answer.