ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Unhappy Financial Position

M P Chitale The economic activities of production and distribution are increasingly set in motion by bank credit or finance secured from the capital market. Credit is made available in anticipation that activities so set in motion will be validated by acceptance in the market and realisation of price which has to include the element of interest on funds employed. Against this background, the tendency to raise rates of interest runs counter to the objective of maintaining or lowering the level of prices. Unless conscious steps are taken to reverse this tendency, this factor of rise in interest rates will perpetuate inflationary forces. Expenditure on interest has already weakened the financial structure of government. It will do likewise in respect of economic agents other than the government. The role of monetary and credit policies will therefore remain important in the task of maintaining price stability TAKING over the portfolio of finance ministry seems to have lent a touch of caution and balance to the prime minister. He was faced with the mounting expenditure on defence reaching Rs 12,500 crore compared to last year's already high level of Rs 10,000 crore and was left with a budgetary deficit of Rs 6,010 crore. The prime minister has resisted taking the course of increasing generally the rates of income-tax, excise duties, etc. Rather, realising that a large order of unproductive expenditure on defence and inflationary potential of the budgetary deficit would lead to increase in money supply and prices, he has sought to dampen inflationary tendencies. Generally, rise in prices takes place immediately after increases in excise and import duties as they cause increases in production cost of manufactured articles. A careful exercise in restructuring excise duties and import duties has therefore been undertaken so as to lower the incidence of excise duties and import duties on production cost of non-luxury articles.

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