RELATIONSHIP BETWEEN

EMPLOYMENT GENERATION

AND

MONETARY POLICY

Submitted To: Submitted By:

Dr. M.S. Toor Saransh Gupta

L-2014-BS-35-MBA

MONETARY POLICY

Monetary policy refers to the use of official instruments under the control of the central bank to regulate the availability, cost and use of money and credit with the aim of achieving optimum levels of output, employment, price stability and balance of payments equilibrium.

Monetary policy is now regarded as one of the most important tools of economic management.

An appropriate monetary policy by adjusting money supply to the needs of growth, directing the flow of funds in keeping with the overall economic priorities, and providing institutional facilities for credit in specific areas of economic activity all combined creates a favourable environment for economic growth.

OBJECTIVES OF MONETARY POLICY

Following are the main objectives of monetary policy in India :-     (i) Growth With Stability:

Traditionally, RBI’s monetary policy was focused on controlling inflation through contraction of money supply and credit. This resulted in poor growth performance. Thus, RBI have now adopted the policy of ‘Growth with Stability’. This means sufficient credit will be available for growing needs of different sectors of economy and at the same time, inflation will be controlled with in a certain limit.      (ii) Regulation, Supervision And Development Of Financial Stability:

Financial stability means the ability of the economy to absorb shocks and maintain confidence in financial system. Threats to financial stability can come from internal and external shocks. Such shocks can destabilize the country’s financial system.

Thus, greater importance is being given to RBI’s role in maintaining confidence in financial system through proper regulation and controls, without sacrificing the objective of growth. Therefore, RBI is focusing on regulation, supervision and development of financial system.      (iii) Promoting Priority Sector:

Priority sector includes agriculture, export and small scale enterprises and weaker section of population. RBI with the help of bank provides timely and adequately credit at affordable cost of weaker sections and low income groups. RBI, along with NABARD, is focusing on microfinance through the promotion of Self Help groups and other institutions.      (iv) Generation Of Employment:

Monetary policy helps in employment generation by influencing the rate of investment and allocation of investment among various economic activities of different labour Intensities.       (v) External Stability:

With the growth of imports and exports India’s linkages with global economy are getting stronger. Earlier, RBI controlled foreign exchange market by determining eaxchange rate. Now, RBI has only indirect control over external stability through the mechanism of ‘managed Flexibility’, where it influences exchange rate by buying and selling foreign currencies in open market.      (vi) Encouraging Savings And Investments:RBI by offering attractive interest rates encourage savings in the economy. A high rate of saving promotes investment. Thus the monetary management by influencing rates of interest can influence saving mobilization in the country.      (vii)    Redistribution Of income And Wealth:

By control of inflation and deployment of credit to weaker sectors of society the monetary policy may redistribute income and wealth favouring to weaker sections.

      (viii) Regulation Of NBFIs :

Non-banking Financial Institutions (NBFIs), like UTI, IDBI, IFCI plays an important role in deployment of credit and mobilization of savings. RBI does not have any direct control on the functioning of such institutions. However it can indirectly affects the policies and functions of NBFIs through its monetary policy. 

But India’s monetary policy seems to be in contradiction with its objective of “Employment Generation”

Problems of reconciling objectives relating to output, employment, and price level stability arise, however, when the supply of output does not respond in such a favorable manner to increases of demand—when prices rise before the economy has neared its capacity to produce. Even in the face of considerable amounts of unemployment, average money wage rates may rise faster than average output per man-hour, thereby tending to raise costs of production. And for this, or other reasons, business firms may raise the prices of their products even though considerable amounts of excess capacity persist. Under such conditions it may be impossible to achieve all objectives, to acceptable degrees, solely by controlling aggregate demand. Levels of demand sufficient to elicit “full employment” and capacity output may bring inflation, while levels of demand low enough to assure stability of price levels may leave large amounts of unemployment and unused capacity.

Because of such difficulties, many economists and other observers have come to believe that objectives relating to output, employment, and price levels can be reconciled satisfactorily only if regulation of aggregate demand through monetary and fiscal policies is supplemented by measures designed to elicit more favorable responses by the economy.

These measures are of several types, which can only be listed here: (1) reform of wage-making processes in order to avoid inflationary increases of money wage rates, (2) decrease of monopoly power in industry, and (3) increase of regional and occupational mobility of labor.

As stated by Nasser Munjee (Chairman, Development Credit Bank), “Unemployment caused by our present monetary policy in the last 18 months is horrendous and the word unemployment doesn’t even appear in the discussions we are having”

RBI needs to ease the monetary policy and focus on growth instead of trying to tame inflation.

A lot of factories today in the corporate India are employing contract labour who are just rendered unemployed as the slowdown has beaten our economy. This in turn affects aggregate demand because as people et unemployed or are scared of losing their jobs, they are not going to spend their money and this causes a huge decline in the Indian economy and that is the fundamental cause of loss of confidence in the economy and its policy paradigms.

Monetary policy should involve cutting interest rates. Lower rates decrease the cost of borrowing and encourage people to spend and invest. This will increase aggregate demand and will also help to increase GDP and reduce demand deficient unemployment.