It is a broad term which includes all the processes involved in collecting, budgeting, appropriating and spending public money, auditing income, expenditure etc.
Financial Administration constitutes devices through which the state intervenes in economy – (1) Fiscal Policy, (2) Monetary Policy
Fiscal Policy
Fiscal Policy is concerned with the expenditure, revenue, and borrowing by the government while Monetary Policy is concerned with control and regulation of money supplied by the central bank.
The aim of fiscal policy is the remobilization of resources for investment into priority areas for development. It has become an extremely important tool in the hands of the government to maintain economic stability and a high level of aggregate employment.
Fiscal Policy is the operative federal economy in which the main task of the government is financial coordination amongst several fiscal measures (e.g.: coordinating between income tax, collection by the centre and sale tax by the states.)
In case of depression, an expansionist fiscal policy is adopted under which huge public projects are undertaken along with tax relief with a view to raise employment and national income.
In case of a boom, a constructionist fiscal policy is adopted with the aid of fiscal measures. The public expenditure is brought to the bare minimum on one hand and on the other, high taxes imposed so that there is no pressure on the supply of production.
The major themes in the era of LPG in India are:
- Rationalization of tax structure.
- Shift from direct taxes to indirect taxes.
- Efforts to strengthen methods of expenditure control.
The basic cause of the rising fiscal deficit is the emergence of revenue deficits of Centre as well as State Governments.
Monetary Policy
It is the policy for the regulation of money supply and credit control. Monetary Policy in India is formulated and regulated by the RBI. The RBI sets the ‘bank rate’ which is charged by it from banks and also sets the variable reserves ratio which is of two types:
- Cash Reserve Ration (CRR): It is the minimum percentage of cash reserve a commercial bank is required to deposit with the RBI. If the RBI keeps the CRR low, then it leaves large credit with banks. A high CRR constrains the bank’s credit flow policies.
- Statutory Liquidity Ratio (SLR): It is the percentage of the total deposit a bank is required to maintain in itself. A low SLR will give banks more money for credit but a high SLR leaves little credit with banks.
The high CRR and high SLR leads to conservative banking in which banks do not offer attractive schemes of investments, deposits, and loans.
Monetary Policy also includes several open market operations. It is conducted through the purchase and sale of securities by RBI through and from the commercial banks. If RBI sells securities then the banks have less money with them due to the purchase of securities (e.g.: Pension Regulatory Fund).
Organization of Financial Ministry in India:
The Revenue and Expenditure Department: It is further divided as:
Revenue Division: It takes care of the consolidated funds of the country which includes the funds collected from various sources like Contingency Funds (used in emergencies). It is responsible for revenue policies and taxation. It is controlled by the legislature.
Civil Expenditure Division: It deals with expenditure of all departments within the government except for defense. (e.g.: transportation, communication, agriculture etc).
Defense Expenditure Division: It is exclusive and generally known to the top level executives like PM etc.