Macroeconomics
3.1 Banking system and
monetary policy:
A bank is the financial institution in collection of saving and lending, The word Bank is derived from French word ‘Banque ’, Italian word’ , ‘ Banco’ Latin word ‘Bancus’ and German word ‘Bank’. The meaning of all these are money dealers and used to deal sitting on the bench. Goldsmiths, money leaders (Mahajan) and businessman had positive roles in innovation of banking activities in various societies. Goldsmith used to lend money charging certain interest rate to the people. The money leaders used to keep saving of the people and refund those in case of needy situation. People used to deposit money to businessman for safety and security of fund for a long time.
Different kinds of money were used in the ancient society of
Greece and Rome before 2000 BC.
Babylonians had developed banking system using their temples as bank
which has some features of modern banking system. The Romans interdicted rules
and regulations for banking. In Venice and Geneva cities banking institutions
were developed for receiving deposit and lending money in the real sense. The
bank of Venice -1157 AD was the first modern bank in the world. The first
commercial bank of Nepal is Nepal bank limited which was established on 30th
kartik, 1994.
A bank is a financial intuition licensed to receive deposits
and provide loans. Bank is an individual
created by the existing law and provision. Bank collects the idle money as a
deposit and lending to the needy people. It pools for the deflect and surplus
of money on economics sectors. it bridges the household, government, business
houses and external sector of the economy. Bank works as an agent on behalf of
costumer for different kinds of services like payment of utility bill
(electricity, telephone, water etc), dividend collection, interest collection,
tax payment and providing remittance services. The bank also collects the funds
on behalf of its customers through instrument such as cheque, demand draft,
bills etc. the functions of banks are increasing over the years. By realizing
this fact, various economists and bankers have defined it giving focus on
different aspects. Some definitions are given below.
R.P. Kent. “Bank is an institution which collects idle money
temporarily from the public and lends to other people as per need”.
P.A. Samuelson, “Bank provides service to its client and in
turn receives perquisites in different forms.”
W. Hock, “Bank is such an institution which creates money by
money only”.
Crowther, bank collect money from those who have it to spare
or who are saving it out of their incomes. It lends this money to those who
require it”.
Prof. Sayers, “A bank is an institution whose debts
(deposits) are widely accepted in settlement of other people’s debts to each
other”.
World Bank, “Banks are financial institutions that accepts
funds in the form of deposited repayable on demand or in short notice.”
On the basis of above definitions following features can be
summarized.
1. A bank is a financial institution that makes a profit by
taking people’s deposits and lending that money at a profit.
2. It is an institution where individuals, companies,
charities, government departments, and other can deposit and borrow money.
3. A bank is bridge between customers suffering from
financial deficits and customers with saving capacities.
4. It is established as an institution for maximizing profits
and to conduct overall economic activities by selling services to earn money.
5. It helps to maintain economic stability by means of
controlling money market.
3.1.1 Role of banking
system in Economy
Banks play an important role in the economy of offering a
service for people wishing to save and finance to business who wish to invest
and expand. These loans and business investment are important for enabling
economic development. The banking system plays an important role in the modern
economic world. Without a sound and effective banking system, no country can
have a healthy economy. It is necessary to encourage people to deposit their
surplus fund with the banks. These funds
are used for providing loans to the industries their by making productive
investments. The most important role bank is to connect those who have capital
with those who need capital. It gathers saving from all over the country and
provides liquidity for industry and trade. The central bank of country makes
monetary management of the country and implements monetary policy. The role of
banking institutions continues to grow with large increase in population and
multifarious national activities. The role of banking system is an economy can
be explained under the following headings:
1. Capital formation: Banks play an important role in
capital formation which is essential for the economic development of a country.
Saving is the base for capital formation. Banks operate by borrowing funds
usually by accepting deposits or by borrowing in the money markets. Banks
borrow from individuals, business, financial institutions, and governments with
surplus funds i.e. savings. They then use those deposits and borrowed funds
liabilities of the bank to make loans to businesses, other financial
institutions, individuals, and governments. Banks provide inters for people’s
deposit that encourage them to save more.
2. Mobilization of
saving: Banks
mobilize the small savings of the people scattered over a wide area through
their network of branches all over the country and make it available for
productive purposes. Interest is also earned thereby. Thus, the desire to save
is simulated and the volume of saving increases. The savings can be utilized to
produce new capital assets. When savings can be utilized to produce new capital
assets. When saving are deposited in banks, total amount becomes sufficient
enough to invest in various productive sectors. It promotes industrialization
and commercialization.
3. Monetization of
economy: Before the
invention of money, there was the practice of barter system in transactions. In
rural areas of developing countries, people have still no banking habits, if
more branches of banks are established, people can deposit their saving in the
bank and utilize the saved balance when they need. It helps for monetization in
rural areas.
4. Safety of wealth: People are not feeling safe by
putting their money and valuable metals/ ornaments at home. People can deposit
their savings for its security and also get interest. Banks have provided
locker facilities so that people can keep their valuables at the bank. On one
hand it controls unnecessary expenditure and on the other hand people can feel
themselves secure.
5. Development of
agricultural sectors:
The banks help the agricultural sector in a number of ways. They open a network
of branches in rural areas to provide agricultural credit. Farmers need
financing both for recurring seasonal expenses and for long term investments in
machinery and land farming now involves more expensive machinery, larger unit
of land , and the use of chemical fertilizers, sprays, hybrid deeds and prepare
food, vitamins and antibiotics for livestock. These agricultural costs often
require financing. The banks provide direct and indirect finance for these
activities. Banks and Financial institutions help for agricultural marketing.
6. Development of trade
and commerce:
The banking system facilities internal and international
trade. A large part of trade is done on credit. Banks provide references and guarantees,
on behalf of their customers. On the basis of which sellers can supply goods on
credit. This is particularly important in international trade when the parties
reside in different countries and are very often unknown to one another.
7. Industrialization:
In the industrial
field banks serve as friend, philosopher and guide to industrial units. They
provide short term, medium term and long term credit to industrial units. They
provide short term, medium term long term credit to industries for their
establishment, expansion modernization and renovation. But their role is not
limited only to provide finance to the industries. Rather they play an
important role in the revival in the sick units. Banks set up cells, manage by
expert, technical personnel to advice industrial units, as how to recognize
their production plan and make arrangement for better financial management and cash flows.
8. Employment creation:
Banking system can
solve the problems of unemployment directly or indirectly. When more blanks and
financial institutions are established, staff, personnel and workers can get
employment opportunity. On the other hand, when there is the development of
agricultural sector as well as industrial sector, people can get more
employment opportunities.
9. Poverty reduction
and balance development: the poor people in developing countries are provided loans on reasonable
rate interest. They can invest it in income generating activities that helps to
reduce poverty. In Nepal, micro credit development banks and agricultural
development bank are playing important role poverty reduction. With the
increase in economic activities, employment opportunities can be create that
also helps in poverty reduction. Banks also help in promoting balanced
development in the economy. By providing loans to investors in less development
areas, banks help these areas develop and this in turn, increases investment,
trade and production in the economy.
10. Support from
privatization: The
role of private sector is crucial in accelerating the pace of economic growth.
The banks increase the participation of the private sector in economic
development by making available the loans easily on reasonable rate of
interest. The expansion of financial sector encourages entrepreneurs to make
investments by promoting entrepreneurship.
11. Remittance to
money: Cash can be
transferred easily from one place to another and from one country to another by
the help of a bank. It has facilitated transaction in distant places. This, in
turn, has expanded the internal and external trade and market. The men have
become free of risks of carrying cash, gold, silver etc. the credit instruments
issued by banks such as cheque, draft, real time gross settlement, credit have
facilitated the transfer of money.
12. Rapid economic
development: rapid economic development: Banks support for
the promotion of agriculture sector, industrialization and trade and commerce
which are the key factors of economic development. They make available loans of
different period to agriculture, industry and trade. They make direct
investment in industrial sectors. They provide industrial, agricultural and
commercial consultancy hence facilitating the process of economic development.
3.1.2 Classification/
types of bank
The functions of bank are changing over the years. In course
of time, the specialized system of working has been developed in various
nations. On the basis of their functions, ownership and purposes of their
establishment, banks can be classified in different forms. The main types of
banks are as follow:
1. Central bank: A central bank is a governmental
owned financial institution that controls the nation’s currency, interest rates
and money supply. A central bank is often the regulator of the commercial
banking system of a country and acts as a ‘lender of last resort’ to the
banking sector when banks find themselves unable to obtain sufficient
liquidity. The main goals of a central bank are high employment price stability
and economic growth, which are achieved with macroeconomic reforms, fights
against inflation, capital investment and consulting activities. Central bank
is responsible for the formulation of monetary policy and the regulation of
member banks. Its objectives are not to earn profit. The main faction of
central bank is to issue notes and coins.
As banker to the government, it makes and receives payments on behalf of the government. It advances short term loans to tide over difficulties. It floats public loans to the government to tide over difficulties. Its floats public loans and manage the public debts on behalf of the government. It keeps the banking accounts and balance of the government after making disbursements and remittance. As an adviser to the government to provides advice the government on all monetary and economic matter. The central bank also acts as an agent to the government where general exchanged control is in force.
The central bank is regulator and authority in the banking and monetary systems. The history of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank. The Swedish Risk bank. It was established in 1668 as a joint stock bank. The most famous central bank of the era, the Bank of England, was founded in 1694 as a joint stock company to purchase government debt.
Nepal rastra bank is the central
bank of the Nepal which was established on April 26, 1956 A.D.( Baisakh 14,2013
B.S) under the Nepal Rastra bank Act
1955 AD. Its main objective is to regulate and systematize domestic financial
sector. As the central bank of Nepal, it is the monetary supervisory and
regulatory body of all the commercial banks in Nepal and guides monetary
policy. Nepal Rastra Bank also oversees foreign exchange rates and the
country’s foreign exchange reserves.
2. Commercial banks:
Commercial banks refers to a financial institution that
offers services such as accepting deposits, Making business loans and offering
basic investment products that is operated as a business for profit. Commercial
banks accept various types of deposit from the public including saving account
deposits, current account deposits and fixed deposits. These deposits are
returned whenever the customer demands it or after a certain time period. They
make money by providing and earning interest from loan and such as mortgage,
auto loans, business loans, and personal loans. Customer deposits provide banks
with the capital to make these loans. The general role of commercial banks is
to provide financial services to the general public and business, ensuring
economic and social stability and sustainable growth of the economy.
Commercial banks play an important role in the economy. They
provide consumers with an essential service and they also help to create
capital and liquidity in the market. The creation of credit leads to an
increase in production, employment and consumer spending that is helpful
boosting the economy. Commercial banks provide overdraft facility, cash credit,
bill discounting, Money at all etc. They also give demand and terms loans to
all types of clients against proper security. They perform several agency
functions as to collect and clear cheque, dividends, and interest, to agency
factions as to collect and clear cheque, dividends, and interest, to make
payments of rent, insurance premium to purchase and sell securities and deal in
foreign exchange transactions. Money transfer facility, issue of traveler’s
cheques, credit cards, debit cards and accepting various bills for payment as
phone bills, gas bills and water bills are important utility factions of
commercial banks at present.
The commercial bank was founded with the mission of serving
the financial needs of the citizens and businesses. The first commercial bank
of Nepal is Nepal bank ltd. Which was established in 1994 BS 1937 AD there are
twenty seven commercial banks in Nepal at present running in different parts of
the nation?
3. Development bank:
Development banks refer to specialized financial institutions
established to develop particular sector of economy. They provide medium and
long term finance to the industrial and agricultural sector and both private
and public sector. Development banks are multipurpose financial institutions.
They do term lending, investment in securities and other activities. They are
concerned with providing all types of financial assistance (medium as well as
long term) to business units, in the form of loans, underwriting, investment
and development bank is a development-oriented bank.
The main objectives of the development banks are to promote
agricultural and industrial growth, to developed backward areas, to create more
employment opportunities, to generate more exports and encourage modernization
and improvement in technology etc. they support to promote more self-employment
projects and help us remove regional imbalance.
Nepal industrial development bank is the first development
bank of Nepal which was established in 1959 A.D. (2016 B.S) an industrial
finance organization. NIDC has worked to expand Nepalese industrial finance
organization. NIDC has worked to expand Nepalese industrial and services,
including hotels, industrial districts, and the Nepal stock Exchange. According
to ‘Bank and financial institution Act- 2063’development bank fall under the
class ‘B’ financial institution and are performing their activities for the
development of specific sectors of the economy.
4. Financial
institutions:
A financial institution (FI) is a company engaged in the
business of dealing with financial and monetary transactions such as deposits,
loans, investment, and currency exchange, financial institutions encompass a
board range of business operations within the financial services sector
including banks, trust companies, brokerage firms, and investment dealers.
Financial institutions can vary by size, scope, and geography.
According to NRB Act -2012, “Financial Institution” means a
corporate body incorporate to carry on banking and financial transactions and
the word also includes a branch office
or other office of the development bank, finance company, Micro finance company
located in Nepal or a branch office or other office opened outside Nepal by a
financial institution incorporated in Nepal. Further, NRB Act has stated that
the objectives of a financial
institution established may include
providing loans for agricultural, industrial or may other specific economic
purpose or for collecting deposits from the general public. A “financial
institution” also includes an institution prescribed as financial institution
by government of Nepal by publishing notice I n the Nepal Gazette.
Financial institutions offer a wide range of products and
services for individual and commercial clients. A commercial bank is a type of
financial institution that accepts deposits, offers checking account services,
makes business, personal, and mortgage loans, and offers basic financial
products like certificates of deposit (CDs) and savings accounts to individuals
and small businesses. Investment banks specialize in providing services designed
to facilitate business operations, such as capital expenditure financing and
equity offerings, including initial public offering. Among the most familiar
non-bank financial institutions are insurance companies. Providing insurance
whether for individuals or corporation, is one of the oldest financial risk,
secured through insurance products, is an essential service that facilitates
individual and corporate investments that fuel economic growth.
Financial institution is responsible for the supply of money
to the market through the transfer of funds of loans, deposits, and
investments. The Nepali financial system is composed of deposit-taking and
contractual saving institutions. The deposit taking financial institutions
include commercial banks, development banks, microcredit development banks, finance
companies, financial cooperatives, and non-government financial organizations
performing limited banking activates. Likewise, other contractual saving
organizations comprise insurance companies, employee’s provident fund, citizen
investment trust, postal saving offices, and the Nepal stock exchange.
5. Microfinance
The term microfinance refers to all financial products and
services developed for those excluded from traditional banking channels.
Microfinance encourages social and banking inclusion, by enabling socially
vulnerable people to benefit from productive loans saving solutions and more.
Microfinance institution (MFI) is a financial institution that is especially
established to provide services in business development and society empowerment
by saving loans or financing for micro scaled business of MFI members and
society, providing deposit management or giving consultancy services in
business development that is conducted not merely for profit. The main
objectives of MFI are to improve access to micro-scaled funding for society, to
help improving economic empowerment and productivity in society and to help
increasing society’s income and prosperity, mainly of disadvantaged and/or
low-income society.
Microfinance services are designed to reach excluded
customers, usually pooper population segments, possibly socially marginalized,
or geographically more isolated, and to help them become self-sufficient.
Microfinance initially had a limited definition: the provision of microloans to
poor entrepreneurs and small business lacking access to credit. The two main
mechanisms for the delivery of financial services to such clients were: (1)
relationship based banking for individual entrepreneurs and small business; and
(2) group- based models, where several entrepreneurs come together to apply for
loans and other services as a group. Over time microfinance has emerged as a
larger movement.
In Nepal, it emerged as a poverty reduction tool from 1970s
with the implementation of small farmer Development program (SFDP). Garmin bank
financial system (GBFS) was introduced with Nepal Rastra Bank’s initiation in
1990s. Private sector also implemented GBFS through Non- Government
Organizations (NGOs) which were transferred in to regulated microfinance
financial institutions (MFFIs) later. Modern microfinance movement started from
1993 in Nepal has completed a long journey of operation. Many savings and credit
cooperatives (SACCOs) and financial non-government organization (FINGOs) are
also providing microfinance services in Nepal Nirdhan Utthan bank ltd. Chimek
Bakes Bank are the top three microfinance institutions in the country.
A central bank is a governmental owned financial institution
that controls the nation’s currency, interest rates and money supply. The main
goals of a central bank are high employment, price stability and economic
growth, etc. it carry out various functions to meet the above mention
objectives. In this context, the meaning and functions of central bank are
discussed in the following heads.
3.1.3.1 Introduction to central bank
A central bank plays an important role in monetary and
banking system of a country. It is responsible for maintaining financial
sovereignty and economic stability of a country, especially in underdeveloped
countries. Central bank is the supreme monetary institution, which is remained
at the Apex body of the monetary institution. This is remained at the apex body
of the monetary and banking structure of a country. It is a leader of financial
system and it controls, regulates and supervises the activities of the banks
and financial institutions. Central bank is defined by various scholars
considering its nature. According to De Kock, “A bank which constitutes the
apex of the monetary and banking structure of the country in the central bank”.
Like that way, Vera Smith, has said “Central bank is a banking system in which
a single bank has been entrusted the duty of regulating the volume of currency
and credit in that country”.
3.1.3.2 Function of
central Bank:
The central bank is non-profit making organization to manage
the whole monetary system of the country. The central bank of Nepal is ‘Nepal
Rastra Bank” which was established in 2013 BS under NRB Act -2012. It has
monopoly power to issue national currency and it started issuing currency
science 2016 BS. It performs many important and essential functions which are
explained as follows.
1. Monopoly power of note issue:
The central bank has monopoly power of note issue in every
country. The granting of monopoly right of issue makes it easier to maintain
uniformity in money and control and make supervision of note issuing function. The uniformity in notes insures people
confident in notes. In Nepal, Nepal Rastra Bank had started to issue note since
2016 phalgun. The notes are issued against the fixed percent reserve of good,
silver and foreign currency.
2. Banker’s adviser and
agent of government:
The central banks act as a banker, agent and adviser of the
government. Central bank keeps the banking accounts of government departments,
boards and performs the same function as a commercial bank performs for banking
accounts of government departments. Boards and performs the same function as a
commercial bank performs for customers. It keeps the deposits from the
government and undertakes their collection of cheques and drafts deposited in
the government accountant. It also provides short term loans such as overdraft
to the government. it also provides foreign exchange facilities to the
government in economic, monetary, financial and fiscal policy such as
evaluation, trade policy, foreign exchange policy, etc. as an agent of
government manage the public debt and issue the new loan and treasury bill on
behalf of the government.
The central bank works as the banker of the other banks.
Central bank holds the right of supervision, control on other banks. Acting as
the custodian of the cash reserve of commercial bank. Every commercial banks of
the country has to keep a certain percentage of the cash balance as deposits
with the central bank. Such reserve can be used by commercial banks to meet the
emergencies.
4. Lender of last
resort:
As a lender of the last resort, in time of crisis, the central
bank provides financial helps to the commercial banks by rediscounting their
bills or by providing loans against the short term securities. When there is excess pressure on deposits
payments commercial banks have to face financial crisis. They should pay their
customers in time otherwise people lost their trust on banks. Commercial banks
approach central bank for financial help to fulfill their financial
requirement.
5. Clearing house
function:
The central bank is the clearing gent of the transaction between
the different banks. Since, all the banks have their account with central
bank’s account. The funds are transferred to the accounts of the bank’s
account. The funds are transferred to the accounts of the bank as per need.
6. Control of credit:
The create should be
controlled to maintain the price stability, Uncontrolled credit causes economic
fluctuation in the economy, Inflation occurs when there is over supply of money
and on the other hand, deflation occurs due to under expansion of credit. In order
to control the credit, the central bank may use various tools such as bank rate
policy, open market operation, change in reserve ratio and selective methods
etc.
7. Maintains of
exchange rate:
Central bank has right to regulate and control the foreign exchange
rate. Central bank tries to maintain the stability in value of domestic
currency. To maintain the stable exchange rate, central bank is always prepared
to buy and sell foreign currency.
8. Development
function: There was
various development functions of central bank, which are as follow:
·
Development
of banks: The NBR helps in the development of banks and non-banking financial
institutions. It encourages banks to open branches in remote areas by providing
compensation and interest free loan.
·
Special
program: The programs like priority sector credit program cottage and small
industries projects, micro-credit for women have been lunched with the
initiative of NRB.
·
Publicity:
Central bank/NRB has been regularly publishing reports, journals and bulletin’s
related to the economic activities.
·
Relationship
with international agencies: It establishes friendly relationship with
international financial institutions such as IMF, WB, ADB, etc.
·
Economic
study and research: Central bank conducts several research works and economic
survey in specific economic issues. It also provides necessary information for
plan formulation.
3.1.4 Functions of
commercial Banks with reference to Nepal:
Commercial banks are other important financial institutions.
These are related to carryout various types of financial function as per need
of the nation. In the context, the meaning and functions of commercial banks
are discussed in the following heads.
3.1.4.1 Interdiction to
commercial bank:
A bank established with the objectives to promote and help in
the operation of trade, commerce and industries in the economy in the country
is known as commercial bank. It is established with a motive to earn profit by
providing loans to the needy people or organizations against securities for the
purpose of earning interest of a certain percent. According to World Bank,
“Banks are financial institutions that accept funds in the form of deposits
repayable on demand or in short notice”.
In general, commercial bank acts as a bridge between those
who have surplus money and those who need it. Receiving deposit and advancing
loans are the main functions of commercial banks. Commercial banks are
established with the sole purpose of making a profit. Nepal Bank Ltd. is the
first commercial bank of the Nepal which is established in 1994 BS. Now there
are 27 commercial banks in Nepal.
3.1.4.2 Functions of
commercial Banks:
The objective of commercial banks is to earn profit by
providing the financial services in the economy, generally, their functions are
guided by the central bank, and banks own policy and need of the people and
economy the functions of commercial banks can be discussed as follow:
A. primary function
1. Accepting deposits:
It deals with the collection of deposit which is its main
function. The amount collected is deposit in to their personal accounts by
giving guarantees. Commercial banks provide the trust to people and convince to
deposit their amount in daily, amount, current account, saving account and
fixed account.
I. Current Account: Current account is generally
maintained by traders and businessmen who need daily transactions for their
daily business activities. Current account deposit is known as demand deposit
as money can be withdrawn from this account at any time. This account requires
a certain minimum amount of deposit while opening the account. On this deposit,
the bank does not pay any interest on the balances.
II. Saving account: This account is suitable for people
are who have a definite income and are looking to save money. For example, the
people who get salaries or the people who work as laborers. This type of
account can be opened with a minimum initial deposit that varies from bank to
bank. Money can be deposit at any time in this accounts withdrawals can be made
either by singing a withdrawals can be made either by singing a withdrawals can be made either by singing a
withdrawal from or by issuing a cheque or by using an ATM card. Normally banks
put some restriction on the number of withdrawal from this account Withdrawals
can be made either by singing a withdrawal from or by issuing a cheque or by
using an ATM card. Normally banks put some restriction on the number from this
account. The rate of interest on saving
bank account varies from bank to bank and also changes from time to time. A
minimum balance has to be maintained in the account as prescribed by the bank.
2. Providing loans
The next function of commercial banks is providing the loans
to needy people, it provides the loans to businessman, merchant farmers and
others who demands. As the bank collects the deposit, they are invested as
loans in to the market to gain profit. Loans are also provided in term wise
that is short term, medium term loan, and long-term loan. The main forms of
loan provided by commercial banks are as follow:
I. Cash credit:
Cash credit is a short-term financing solution a business customer has
at their disposal. If the customer doesn’t have enough funds their account, they
can use the cash credit for routine banking transactions up to the credit
products, interest is charged on utilized amount. A cash credit is an important
source of working capital financing.
II. Bank Overdraft: Overdraft is a form of financing
issued by a financial institution to individuals and is attached to a bank
account, usually a checking account. If a customer doesn’t have enough funds in
their account to complete a transaction, the overdraft covers the difference,
allowing the account to go into a negative balance. The facilities are given
only to reliable customers who are doing their transactions for a long time.
III. Loan and advances: When a financial institution offers
a sum of money in the form of a debt to another enterprise or individual that
is meant to pay back with interest within a specific period of time is referred
to as a loan. An advance is rather like a credit facility extended to a
borrower, which he may use to fulfill any short term requirements. The advance
is generally provided for a shorter duration of time, for instance a year. This
high terms loan is rapid in and above 5 years. The amount and portion of loan
define the period of time for repayment. Mostly the industrialist and merchant
take the long term loan because of their large network business and the short
term loan is taken by a small businessman.
IV. Call loans: Such loans are very short period
loans. It is provided only or some days and weeks and the rate of interest is
high.
B. Secondary functions:
1. Remittance of
memory: This is the
major function of sending and receiving the memory from far distances. There
are many clients who receive the money from the foreign country and even more
sent it to from domestic country. Transfer and receipt of money from one
country to another country and even in native lands from places to places is
called remittance. Moreover, the banks provide the services of transferring the
funds directly in to receptive person’s accounts by the different mediums like
draft, mail transfer and so on.
2. Acceptance and
payment of different items:
Its main function also deals with the collecting of many
bills like cheque, dividends, bills, offers letter, etc. on the request and
instruction of customer. The customer also wants to solve all the extra
problems with the help of the bank if possible. To deals with that, the bank
provides the services of paying the electricity bills, telecommunication bills,
recharge, insurance premium and other taxes on behalf of the costumer request
and instructions. Moreover, bills of exchange are referred as promising bills
where the promise is made to pay the amount of money after some period of time
or maybe in demands or according to the instruction and agreement that the
bills expose.
3. Purchase and sale of
securities:
Commercial banks also solve the problems of buying and
selling stocks, shares, debentures. Most of the organizations do their
transaction through commercial banks for reliable trust. Both private and
government sector do their works of buying and selling stocks, shares and
different papers by the bridges of commercial banks for making trustable
transaction having proof. When some of any private or governmental organization
has the necessity of equity of capital, then they use the road of commercial
banks by announcing the number of shares giving the instruction of paying the
amount through commercial banks.
4. Services of foreign
exchange: The
exchange rate of foreign currency and the domestic currency is determined by
the Nepal Rastra bank but it transacted through some other banks. When people
from foreign come to Nepal, they use the commercial bank for exchanging the
money. Commercial banks convert their money into Nepalese money for making
their visit and landing in Nepal easily. Commercial banks also charge as a
commission after giving these services too.
5. Trustee and
Executor: Commercial
banks are also taken as a friend of the customer because they do not keep
anything confidential which will harm the customer rights. Commercial banks do
their duty very neatly and as trustee. When people make some mistake, they are
even taught and make them understand the relevant issues. In the same case when
the person gets out of contact and transaction for s long time, what types what
types of accounts are checked and informed for keeping it in active mode. If
the account is not transacted for six months, they become passive. Moreover,
when some account holder dies, the amount in their account is given to the
beneficiary person whom he or she has referred.
6. Acts as a tax
consultant:
Commercial banks also give the consultation to their reliable customer and
mostly to great trader who deals with large transaction about tax payment and
process of doing it neatly and clearly. It provides the instruction, advice,
process, and laws relating to it to make the client clearer about the policy.
C. Contingent functions
1. Locker facilities: The commercial bank also provides
locker facility to their reliable and good character customers. Most people do
not want to keep expensive jewelry, Ornament, and valuable armament, articles
or papers at home considering security purposes. The customer wants to keep it
all safe in safe places. Bank is the most secure places to keep all the things
safety in lockers. The customer provides their personal locker and their key
where their key, they keep their valuable materials. For these services also,
they charge the commission. Banks also provide the loan on the base of gold. In
that case, also, the customer uses this locker services.
2. Traveler’s cheque:
By keeping the consideration of costumer safety in the
journey many times we have faced with unexpected problems because of cash loot,
or theft, pick pocketing. These kinds of crimes are normally happening with the
customer during their long journey. And this issue makes them irritating and
sad with their journey due to the empty wallet and an empty and an empty
pocket. So commercial banks provide traveler cheques as a card that avoids the
tension of carrying the cash in the pocket which arises the mental pressure
throughout the journey.
3. Letter of credit: this is also the more effective
function of costumer in which banks work as the mediator of paying the amount
to the third party after giving instruction as a letter of credit. Bank pays
the amount to the third party after the agreement and instruction of account
holder. This is mostly done to communicate with foreign trade. The foreign
trader is paid money directly by the bank by standing as a guarantee on behalf
of the first party.
4. ATM banking: Commercial banks are also famous for
giving these services in places to places mostly in crowd area and emergency
area like Hospital, Supermarket, mall etc. Nowadays the youth are updating
themselves with a change of technology and time. People of today also want to
make their work terminated within a few time because of their busyness. They do
not want to stand in a queue in banks of withdrawing and depositing the amount.
Thus, banks provide the ATM card to the customer who demands it and charges
some amount annually.
5. Interest banking: It is also the function of
commercial banks which develops the trust of the customer without reaching to
offices. Nowadays a person is busier and wants to compete for their task by
sitting on the chair. That is why bank is trying to give more and more standard
and dynamite service for protecting the costumer and keeping in touch. Internet
banking is such services which reduce the pressure of sending money to anyone
departing to the offices. A person can send their money to anyone account
directly by self-control of account. They can view their account anytime and
know about the transaction for these for these services. The customer has to
notices and request to provide it. It instead of taking these services, banks
also charge very few amounts and even some do not charge. It is operate and can
be conducted only if the connection is linked with an internet browser.
6. Collection of
statistics:
Commercial banks collect various information about industry, banking trade and
commerce. They publish journals and bulletins containing research articles and
also provide information to the central banks for publication.
.1.5 Concept of 3money
market and capital market:
A financial market in which people trade financial securities
and derivatives at low transaction costs. Some of the securities include stock
and bonds, shares, etc. Financial markets do a security business of trillions
of dollars daily, and some are small-scale with less activity. These are
markets where businesses grow their cash, companies decrease risks, and
investors make more cash.
On method is related to the type of assets traded. i.e.
short term or long-term assets. The market in which short-term financial
instruments are trade is called money market whereas the market in which
long-term financial instruments are trade is called capital market. This is
also called functional classification of financial markets. Detailed of money
market and capital market are discussed below.
3.1.5.1 Money market:
The money market is a component of the economy which provides short term
funds. The money market deals in short-term loans, generally for a period of a
year (365 days) or less. There are several money market instruments including
treasury bills. Commercial paper, banker’s acceptances, certificates of
deposits etc. the money market consist of financial institution and dealers in
money or credit who wish to either borrow or lend. Participants bowwow and lend
for short periods, typically up to twelve months. Money market trades in short
term financial instruments commonly called paper. According to World Bank,
“Money market is the market in which short term securities such as treasury
bills, certificates of deposits and commercial bills are trade”. Some important
features of money market are mentioned below.
1. Money market performed the functions of mobilizing funds
in the economy. The main aim is to provide short-term finance at reasonable
rates to the institutes in need. The money market helps such organizations to
have the necessary funds to meet their working capital requirements.
2. Its trades in financial instruments and commodities
s that have a term of less than one year i.e. the maturity
period of such instruments ranges anywhere from one day to another year.
3. Money market deals in low risk, generally unsecured,
short-term debt instruments. These instruments are a close are a close
substitute for cash since it can be converted to cash on short notice.
4. The main instruments of money market are treasure bills,
commercial papers, certificates of deposits etc. which are of short team
nature.
5. Important institutions operating in the memory market are
central bank, commercial banks, bill brokers, non-bank financial institutions
etc.
6. The money market is closely and directly linked with the
central bank of the country.
7. Commercial banks are closely by financial system and need
of the economy. So the functions may vary depending on the economic situation
of the nations. Some important functions of money market are mentioned below:
1. The money market plays crucial role in financi9ng domestic
and international trade. Commercial finance is made available in the traders
through bills of exchange, which are discount markets help in financing foreign
trade.
2. The money market enables commercial banks to use their
excess reserves in profitable investments. The main objective of commercial
banks is to earn income from its reserves as well as maintain liquidly to meet
the uncertain cash demand of its depositors.
3. In an
emergency, When commercial banks have scarcity of funds they can meet their
requirement by recalling their old short-run loans from the money market.
4. Money
market helps to increase the efficiency of the central bank and guides the
central bank to adopt an appropriate banking policy.
5. They help
industries secure short term loans to meet their working capital requirement
through the system of finance bills, commercial papers, etc. and also
indirectly help the industries through its link with and influence on long-term
capital from capital market.
3.1.5.2 Capital Market
The capital
market is also a component of the financial market related to conduct long term
trading of equity and debt securities. Capital market is a market for borrowing
and lending of long-term finance that is for a period of more than one year. It
is an organized financial market basically serves as the like between the
savers and investors. This market involves trading of long term financial
securities for raising and investing of long term finance. The main type of
instruments traded in capital markets are Debentures shares, Government Securities
and Bonds.
Primary market:
The primary market is a new issue market; it solely deals with the
issues of new securities. The main objective is capital formation for
government, institutions, companies, etc. also known as initial public Offer
(IPO), primary market is known as the New Issue Market. It is a market for trending of new securities means
which are traded for the first time. Methods like right issue, offer through
prospectus and initial public offer are used here.
Secondary market: It is a market where securities are
traded on the exchange between the investors. The secondary market is a place
for existing securities. It is known as stock exchange or stock market. Here
the securities are bought and sold by the investors bring information about the
value of security and offers liquidity to the investors for their assets. Some
important features of capital market are mentioned below:
1. Long run transaction: it does not include the
instruments or institutions which provide finance for short period (up to one
year). The common instruments used in capital market are shares, debentures,
bonds, mutual funds, public deposits etc.
2. Link
between savers and investment Opportunities: Capital market is a crucial link
between saving and investment process. The capital market transfers money from
savers to entrepreneurial borrowers.
3. Deals in
long term Investment: Capital market provides funds for long and medium term.
It does not deal with channelizing saving for less than one year.
4. Utilizes
Intermediaries: capital market makes use of different intermediaries such as
brokers, underwriters, depositories, etc. These intermediaries act as working
organs of capital market and very important elements of capital market.
5. Determinant of capital formation: The
activities of capital market determine the rate of cap[ital formation n an
economy. Capital market offers attractive opportunities to those who have
surplus funds so that they invest more and more in capital market and are
encouraged to save more for profitable opportunities.
6. Government
Rules and regulations: The capital market operates freely but under the
guidance of government policies. These markets function within the framework or
government rules and regulations of SEBI which is a government body.
Capital
markets carry out different function as per the situation and vary with the
change in need of the economy. However some important functions can mentioned
as below.
1. It acts
in liking investors and savers.
2. It
facilitates the movement of capital to be used more profitability and
productivity to boost the national income.
3. It helps
to boosts economic growth through proper mobilization of saving for long term
investment.
4. It
facilitates trading of securities.
5. It helps
by minimizing transaction and information cost.
6. It
encourages a massive range of ownership of productive assets.
7. through
derivative trading. If offers insurance against market or price threats and
facilitates transaction settlement.
8. It
support for improvement in the effectiveness of capital allocation and also for
continuous availability of funds.
3.1.5.3. Different
between money market and capital market
Various
similar institutions are involved in financial market. They conduct the
functions related to money market and capital market at the same time. In spite
of that there are various differences in both market as mentioned below.
The
difference between money market and capital market are as follows:
|
Basic of
Difference |
Money market |
Capital market |
|
Maturity
period |
The money market is the components of a financial
market that deals with short term borrowings maturity period is one year or
less than one year |
The capital market is also a component of the
financial market that allows long term trading of equity and debt securities.
It has maturity period more than one year.
|
|
Instrument |
Treasury Bills, commercial paper, certificate of
deposit, trade credit, bills of exchange, promissory notes, call money, etc.
are some of the money market.
|
Financial
products such as stocks (equity shares), preference shares, debentures,
bonds, etc. are the instruments which are trades for longer durations. |
|
Organized/ Unorganized |
Money markets are unorganized markets. Financial
institutions, banks, brokers and money dealers trade for a short period. |
It is
organized financial market where saving and investment are channeled between
the one who has sufficient money and one who is in need of money. |
|
Purpose of loan |
Money market deals with short term loan and provides
working capital to purchase raw materials, payment of wages etc. |
It provides fixed capital to purchase fixed capital
assets such as land, building, machines, etc. |
|
Risk |
The risk associated with money market is low due to
short maturity period. |
There is a high degree of risk involves in the
capital market as it involves long term investment. |
|
Main role |
The main role of money market is liquidity
adjustment |
The main role of capital market is mobilization of
capital. |
|
Relation with central bank |
There is direct and close relation with the central
bank. |
There is relation to the central bank only through
the memory market. |
3.1.6 Monetary policy:
There are mainly two
sub-divisions of macroeconomic policies-monetary policy and fiscal policy.
Monetary policy is one of the macroeconomic policies laid down by monetary
authority of the country or the central bank. It involves management of money
supply and interest rate to achieve macrocosmic objectives like control; on
inflation, regulation of consumption, economic growth and liquidity. Another is
fiscal policy made and implemented by government through the ministry of
finance regulation the government revenue and government expenditure.
3.1.6.1 Meaning and
objectives of monetary policy
Monetary policy is policy adopted by the monetary authority
of a nation to control either the interest rate payable for very short term borrowing
(borrowing by banks from each other to meet their short borrowing by banks from
each other to meet their short-term need) or the money supply. It is often
regarded as an attempt to reduce inflation or the money supply of money and
credit.
It refers to the policy measures undertaken by the government
or the government or the central bank to influence the availability, cost and
use of money and credit with the help of monetary techniques to achieve specific
objectives. Monetary policy aims at influencing the economic activity in the
economy mainly through two major variables, i.e. (a) Money or credit supply,
and (B) the rate of interest. The concept of monetary policy has been defined
in a different manner according to different economists.
R.P Kent: “Monetary policy is the management of the expansion
and contraction of the volume of money in circulation for the explicit purpose
of attaining a specific objective such as full employment”.
Edward Shapiro, “Monetary policy is the exercise of the
central bank’s control over the money supply as an instrument for achieving the
objectives of economic policy”.
D.C Rowan, “The monetary policy is defined as defined as
discretionary action undertaken by the authorities designed to influence (a)
the supply of money, (b) cost of money or rate interest and (c) the
availability of money”.
Crowther: “Monetary policy consists of the steps taken or
efforts made to reduce to a minimum the disadvantages that flow from the
existence and operation of the monetary system. It is a policy to regulate the
flow of monetary resources in the economy to attain certain specific
objectives”.
Hence, it can be said that monetary policy is a purposeful
effort of central bank to control money supply and ratio of credit in an
economy for achieving definite objective like economic stability and best
allocation of resources so, monetary policy is measured as an important tool of
the government to plan various types of economic policies. The main instruments
of monetary policy are bank rate, open market operation and required reserve
ratio. The general objectives of the monetary policy are as follows:
1. Neutrality of money: The main objective of the monetary policy is
neutrality of money. Any monetary change is the root cause of all economic
fluctuations. The monetary change is the root cause of all economic
fluctuations. The monetary change causes distortion and disturbances in the
proper operation of thee economic system of the country. Quantity of money
should be perfectly stable. It is not expected to influence or discourage
consumption and production in the economy company.
2. Exchange Stability: Exchange stability was the
traditional objective of monetary authority. If there is instability in the
exchange rates, it would result in outflow or inflow of good resulting in
unfavorable balance of payments. Therefore, stable exchange rates play a key
role in international trade. Thus, it is clear from this fact that the main
objective of monetary policy is to maintain stability in the external
equilibrium of the country. In order words, they should try to eliminate those
adverse forces which tend to bring instability in exchange rates.
3. Price stability: Price stability is considered the
most genuine objective of monetary policy. Stable prices response public
confidence because activity and ensures equitable distribution of income and
wealth. As a consequence, there is general wave of prosperity and welfare in
the community. Price stability also impedes economic progress as there is no
incentive left with the business community to increase production of
qualitative goods. It discourages exports and encourages imports. But it is
admitted that price stability does not mean price rigidity or price stagnation.
A mild increase in the price level provides a tonic for economic growth. It
keeps all full employment level.
4. Full Employment: Full employment is assumed as the main goal of monetary policy. In recent times, it is argued that the achievement of full employment automatically includes prices and exchange stability. The main objective of monetary policy of a country is to bring about equilibrium between saving and investment at full employment level.
5. Economic Growth: In recent years, economic growth is the basic issue to be discussed among economist and statesmen throughout the world. It implies an increase in the total physical or real output, production of goods for the satisfaction of human wants. In other words, it means utilization of all the productive natural, human and capital resources in such a manner as to ensure a sustained increase in national and per capita income over time. Therefore, monetary policy promotes sustained and continuous economic growth by maintaining equilibrium between the total demand for money and total production capacity.
6. Equilibrium in the balance of payment:
Equilibrium in the balance of payment is another objective of monetary policy. Thus is simply due to the problem of international liquidity on account of the growth of word trade at a faster speed than the world liquidity it is clear that increasing of deficit in the balance in the balance in the balance of payments reduces the ability of an economy to achieve other objectives, As a result, many less developed countries have to curtail their import which adversely affects development activities. Therefore, monetary authority makes effects that equilibrium should be maintained in the balance of payments.
3.1.6.2 Types of monetary policy:
While making the monetary authority considers the economic situation, need, government economic policy etc. So monetary policy may be different depending the situation. Basically there are two types of monetary policy which are as follows:
1. Expansionary monetary policy:
Expansionary monetary policy is simply a policy is simply a policy which expands/ increases the supply of money in an economy. Monetary authority (Central Bank) can use its tools individually or collectively to expand the supply of money. Central bank can purchase treasury bills. Expansionary monetary policy causes an increase in bond prices and a reduction in interest rates. Lower interest rates lend to higher levels of capital investment. The lower interest rates make domestic bonds less attractive, so the demand for domestic bonds falls and the demand for foreign currency rises, causing a decrease in the exchange rate. A lower exchange rate causes exports to increase, imports to decrease and the balance of trade to increase. Expansionary monetary policy is implemented by central bank to overcome recession or depression faced by the economy. It is also known as cheap monetary policy. In the period of recession or depression, aggregate demand falls due to cyclical unemployment so that central bank takes steps to stimulate economy by increasing money and supply and lowering the rate of interest. Reduction in the bank rate, reduction in cash reserve ratio, open market operation is the monetary measures adopted by monetary authority to control recession or depression.
2. Contractionary
Monetary Policy:
A contractionary monetary policy is focused on decreasing the money supply in the economy. Contractionary monetary policy contract/ decreases the supply of a country’s currency. Policy maintains short-term interest rates greater than usual, slows rate of growth of the money supply, or even decreased it to slow short term economic growth of the money supply, or even decreases it to slow short term economic growth and lesson inflation. Contractionary monetary policy can result in increased unemployment and depressed borrowing and spending by consumer and businesses, which can eventually result in an economic recession if implemented too vigorously. Contractionary monetary policy causes a decrease in bond prices and an increase in interest rates.
Such monetary policies are formulated by the central bank to overcome inflationary pressure. It is also known as dear monetary policy. Selling the bonds, securities and treasury in the minimum required reserve ratio are the discount rate and increase in the discount rate increase in the minimum required reserve ratio are the main instruments for quantitative control. Commercial banks are forced to control the expansion of credit during inflation so that aggregate demand falls which ultimately helps to control inflation.
3.1.7 Commercial
Banks and Development Banks in Different Provinces in Nepal
The distribution of banking network provides the situation of banking system and access of the people for their services. By considering this notion, government of Nepal and central banks are making the programs to open the branches in various provinces promoting the commercial bank and development bank. By the mid July, 2020, there are 27 commercial banks and 20 development banks and providing the services through 4436 and 1029 branches respectively. They are distributed in various provinces as shown in the following table.
|
Provinces |
Commercial banks (27) |
Development banks (28) |
|
1 |
687 |
165 |
|
2 |
514 |
69 |
|
Bagmati |
1553 |
275 |
|
Gandaki |
555 |
179 |
|
Lumbini |
657 |
262 |
|
Karnali |
177 |
17 |
|
Sudurpaschim |
293 |
62 |
|
Total |
4436 |
1029 |
Table 3.1 source: Nepal rastra bank, 2020
The above table clearly indicates that commercial banks and development banks are distributed in various provinces. The branches of commercial banks are more than development banks which clearly indicates the importance of commercial banks in financial services in all areas.
|
Provinces |
Number of local bodies |
Local level having commercial banks |
|
1 |
137 |
136 |
|
2 |
136 |
136 |
|
Bagmati |
119 |
117 |
|
Gandaki |
85 |
84 |
|
Lumbini |
109 |
109 |
|
Karnali |
79 |
78 |
|
Sudurpaschim |
88 |
86 |
|
Total |
753 |
746 |
Table: 3.2
|
Types of banks |
Number |
Number of b Branches |
|
Commercial banks |
27 |
4436 |
|
Development banks |
20 |
1029 |
Table 3.3
3.2 Government finance:
Public finance is the study of the branch of economics which assesses the government revenue and government expenditure of the public authorities. As the role of government is increasing day by day, the government uses the different types of revenue and expenditures as fiscal tools to achieve different types of revenues and expenditures as fiscal tools to achieve the different objective. This is more important for most of the developing countries. In this context, various aspects of public finance are discussed in the following heads.
3.2.1 Concept and Importance of government/Public Finance
Government finance is the branch of economics. It is made of two words as ‘public’ and ‘finance’. The term ‘public’ means ‘government’s and ‘finance’ means ‘science of management of money’. So literally, public finance means the study of allocation of economic resources for achieving the goals of public affairs. Thus, public finance is the study of allocation and management of resources and technology for achieving the goals of public organization, regarding this, various economists has defined the government finance. Some important definitions are mentioned below:
Dalton, “public finance is concerned with the income and expenditure to the public authorities and with the adjustment of the one to the other”.
F.E. Taylor, “public finance is concerned with the operation of the fiscal science, its policies are fiscal policies, and its problems are fiscal problems”.
Bastable, “public finance deals with the expenditure and the income 0 public authorities 0 the state and their mutual relations as also with financial administration and control”.
Findlay Shirras, ‘Public finance is the study of principles underlying the spending and raising of funds by public authorities”.
From the analysis of above definitions, it is clear that government finance is the study of revenue, Expenditure, management of deficit finance is high economic growth, price stability, favorable balance of trade and payment, equitable distribution of income and wealth, proper allocation of resources, balanced and stable economic growth and so on.
Government finance has importance for both developing and developed economics. It has a very important role for high economics. It has a very important role for high economic growth, price stability, favorable balance of trade and payment, equitable distribution of income and wealth, proper allocation of resources, balanced and stable economic growth and so on.
1. Proper allocation of
resources:
The government finance is important for proper utilization of natural, manmade and human resources. for it, on the production and sales of less desirable goods, the government imposes more taxes and provides subsidies or imposes taxes lightly on more desirable goods. The government collects funds from various tax and non tax sources and invests it in productive sectors. it helps to increase national output and income. Government provides subsidies to domestic industries than can use available resources in the country.
2. Equitable distribution of wealth and income:
In developing economics there is a very serious problem regarding inequalities in the distribution of income and wealth. The rich are getting more and more while the poor are not getting enough and are thereby becoming poorer and poorer. So to promote equal distribution government ordered to invest in the development activities for the poor people. The government uses the revenues and expenditures of itself in order to reduce inequality. If there is high disparity it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies, allowance, and other types of direct and indirect benefits to them.
3. Price stability: Public finance is a very effective to used by the government to control inflation, the government increases the tax rate and capital expenditure. While during deflation government decreases the tax rate bringing down the prices thereby increasing the demand, it collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed.
4. Economic stability: The government uses the fiscal tools to stabilize the economy. During prosperity, the government imposes more tax and raised the internal public debt. The amount is used to repay foreign debt and invention. The internal expenditures are reduced. At the time of depression, the government can increase; it helps the recovery of the economy. Thus, public finance can maintain the economic stability in any economy.
5. Infrastructure development: Public finance helps the government in raising efficient funds for promoting the various infrastructural facilities. Government enterprises produce and supply social goods like electricity, drinking water transportation facilities, communication facilities etc. Government spends on education, health and other social infrastructure. It has to keep peace, justice and security too. It uses the collected socio-economic reformation too. For all these things, it uses the collected revenues of expenditures as fiscal tools.
6. Economic growth and development: To main objective of public finance is to provide give priority in fulfilling the basic needs of the citizens of the country. Government should give priority in fulfilling the basic needs of the people. Physical and social infrastructures are important for rapid economic growth and development. Governments collect the revenue from various tax and no-tax sources that can be properly allocated to achieve economic development. Public finance is also important to achieve sustainable high economic growth rate. The government uses the fiscal tools in order to bring increase in both aggregate demand and aggregate supply. The tools are taxes, public debt, and public expenditure and so on.
7. Promotion of export: the government promotes the export imposing less tax or exempting from the taxes or providing subsidized prices. It imposes more taxes on imports. It helps in promoting the export from the country the thereby earning the foreign exchange. Government provides subsidies for export-oriented industries.
8. Capital formation: Public finance helps in encouraging saving and investment: In the developing countries, majority of people invest their income on consumption and saving proportion is very low. Due to less saving there is less capital formation and less investment. The government can use its finance to promote saving and investment habits in people by reducing the tax rate and providing some relief on product and services prices. A large fund is collected through public finance and it can be invested for formation of physical and human capital.
9. Balanced development: The government uses the revenues and expenditures in order to minimize the gap between urban and rural areas. Government’s plans are formulated and implemented in priority base. The collected revenue from one sector can be invested on another sector. Government allocated budget for infrastructural development in rural areas and also for direct economic benefits to the rural people.
10. Correct balance of payments: In developing countries, there is great problem of trade deficit. Government can impose high tax rate on importing goods that helps to reduced to encourage export. Subsidies and other facilities can be increased to promote export-oriented enterprises. When the value of export. Subsidies and other facilities can be increased to promote export-oriented enterprises. When the value of export is more than the value of imports, balance of payment can be corrected.
3.2.2 Government Expenditure concept and classification with reference:
Government expenditure refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare,, protection and defense. In the past role of government was limited to maintain the peace and security in the country. In the modern world, there are significant changes in the role of governments around the world. There are significant changes in the role and size of governments around the world. Each and every country has focused on privatization. So, the role of government is increasing as facilitators of economic activities.
Expenditure on social and development services is now the most
important head of government head of government’s revenue expenditure.
Social Community services seek to improve and build up the human capital and social infrastructure of the country. The main purpose of government expenditure is to supply goods and services that are not supplied by the private sector. Government should goods and services that are not supplied by the private sector. Government should spend on physical and social infrastructure such as electricity, drinking water, transportation, communication, education, health etc. Investment in such projects is so high and return from them is so low that private investors do not undertake such projects voluntarily. Government provides subsidies to industries that may need financial support for either their operation or expansion. It is to help redistribute income me promote social welfare.
Interest paid on borrowed funds is another type of government expenditure. Government should spend on transfer payments such as social security benefits, compensation to unemployed people, benefits to senior citizens and pensions to retired government employees. Government expenditure is necessary when the economy faces the problem of inflation, unemployment ad inequality. Public expenditure is necessary to control business cycles or to stabilize the economy. Public expenditure is necessary to control business cycles or to stabilize the economy. Public expenditure is likely to have beneficial effect on society, i.e. reduction of income inequality, control of business cycles, and achievement of employment and so on.
The government expenditure has increased in recent years due to the development activities of the government. Every government presents budget for the forth-coming fiscal year by sitting the expenditure and expected revenue. In Nepal, government expenditure is classified in to two headings, i.e. recurrent/regular expenditure and capital development expenditure.
1. Recurrent/ regular expenditure:
Recurrent expenditure mainly refers to spending on salaries, wages, operations, current grants, and purchase of goods and services. It is related to the government’s expenditure on regular activities of the country so it is also called regular expenditures or administrative expenditure. It is classified into various headings as follows:
a. Expenditures for constitutional bodies such as state council, parliament secretariat Supreme court, election Commission, Auditor General Office, Law council, Office of Attorney General, etc.
b. Expenditure for general administration such as councils of ministers, province administration, district administration, district administration, police, jail etc.
c. Expenditure on revenue administration (land, revenue, customs, excise etc).
d. Expenditure on economic administration and planning (planning, statistics, office of Auditor, Metric Measurement etc).
e. Expenditure on judicial administration (Court and court for prevention of misuse of Authority).
f. Expenditure on foreign services (Embassy, Consulates etc).
g. Expenditure on defense related offices.
h. Expenditure on social services (health, Education etc).
I. Expenditure on economic services (Agriculture, irrigation, electricity, transportation, communication, etc).
j. Expenditure on loans and investment (Loans repayment, government investigation).
k. Miscellaneous Expenditure (Travelling expenses of government delegation, allowances, donation and other emergency funds.)
2. Capital/ development Expenditure:
Capital spending is expenditure used on fixed assets that are substantial. It is related to the expenditure of the government on economic activities of the country mainly for capital formation. It is also called development expenditure. It is classified as follows:
a. expenditure on infrastructure development of constitutional bodies such as state council, parliament Secretariat, Supreme court, Election Commission, Auditor General office, Law council, office of Attorney General etc.
b. Expenditure on administrative reforms of government organizations.
c. Expenditure on infrastructure development and reforms of land revenue, custom, excise offices.
d. Expenditure on economic planning and collecting statistics,
e. Expenditure on judicial administration reforms (Court and court for prevention of Misuse of Authority)
f. Expenditure on constructing schools, hospitals, roads, etc, and also for providing trainings.
g. expenditure for the development of agriculture, forestry, electricity, transportation, communication etc).
h. Miscellaneous expenditure.
3.2.3 Concept of direct and indicate taxes, progressive, proportional
and regressive tax
Tax is a permanent instrument for revenue collection. It is a major source of government revenue in the developed countries as well as developing countries. The main objectives of tax are to raise more revenue, to redistribute wealth for the common good, to prevent concentration of wealth in a few hands, to remove regional disparities, to reduce unemployment and to boost up the economy.
Government can impose the different taxes to the people and business organizations. The taxes have different nature, system, rate, etc. By considering this fact, economists have classified the tax on different ground as discussed below.
3.2.3.1 Direct and indirect tax:
On the basis of nature, tax can be classified in two broad categories, direct and indirect tax. Various aspects of direct and indirect taxes are discussed below:
A. Direct tax:
Direct taxes refer to the type of the tax which is directly imposed on a person. A direct tax is a tax an individual or organization pays directly to the imposing entity. A taxpayer, for example, pays direct taxes to the government for different purposes, including real property tax, personal property tax, income tax, or taxes on assets.
Direct taxes are based on the ability to pay principle. This economic principle sates that who have more resources or earn a higher income should pay more taxes cannot be passed onto a different person or entity; the individual or organization upon whom or which the tax is levied is responsible for the fulfillment of the full tax payment. Direct taxes, especially in a tax-bracket system, are thought by some to be a disincentive to work hard and earns, the more taxes they pay.
Various economists have defined the direct tax considering its nature According to Dalton, “A direct tax is really paid by the person whom it is legally imposed, while is indirect tax is imposed on one person but is paid partly or wholly by another, “In the same manner according to J.S. Mill, “Direct tax is reveled on the same person who is desired to pay it”.
Thus, direct tax has no be paid by the person on whom the tax was legally imposed on in the first place. The burden of a direct tax cannot be shifted to someone else. In other words, the same person pays and bears the tax burden. The example of direct tax are income tax, property tax, interest tax, capital gain t6ax, vehicle tax, death tax, death tax, gift tax, expenditure tax, profit tax, etc.
Advantages/Merits of direct taxes:
Some of the most notable advantage or merits of direct taxes are as follows:
· Equitable: the canon of equality states that the taxes should be implied on the basis of quality. It is important to note that quality here does not mean that everyone should pay the same amount of taxes, while the poor shouldn’t. Direct taxes tend to be progressive- people in the higher income group pay a greater percentage than poorer people. Direct taxes are based on the ability-to pay principle. When income level increases, tax rate also increase, increase in tax doesn’t affect low income level of people.
· Certainty: Direct taxes are also in accordance with the canon of certainty. The canon of certainty states that the amount of tax should not be any ambiguity regarding the amount of tax to be paid. As the amount of tax should be certain and definite to the taxpayer. There should not be any ambiguity regarding the amount of the tax to be paid. As the amount of direct tax is seceded well-before the submission date, the taxpayer has a fair idea of the amount that he will be paying. On the other hand, the government is also certain as to the amount of money it will receive as tax.
· Equal distribution of income and wealth: Having equal distribution of wealthy is one the biggest primary objectives for any economy and government. A great advantage of direct tax is that it helps for equal distribution of income and wealth in the society. As the government charges more taxes from the people who can affords them and spend that money on the poor, a step in the right direction is made. Furthermore, it also positively affects the social binding of different groups of people that are divided on the basis of income and wealth.
· Increases savings and investments: Direct taxes directly affect the level of saving and investment-for an individual and for the overall economy as well. These direct taxes, therefore, can be used to affect the overall ratio of savings in an economy- by decreasing for increasing the tax rate. When a direct tax is decrease d, the person has been left with more money to save, and hence, the investment level of the economy is increased and vice versa. This technique is used to create more investment opportunities and employment in an economy.
· Economical and desirable: it is based on the cannon of economy. There is low cost for the collected by the related offices and there is no need of another staff. It is also economical for the tax –players. It is also based on the cannon of desirability.
Disadvantages of Direct Taxes
The disadvantage of direct taxes is as follows:
· Tax evasion: There is probability of tax evasion and corruption in a society. It encourage tax evasion –to avoid paying so much tax, if the system is not water tight, there is always a chance of tax evasion by manipulating the law and using subtle techniques. Tax payers show wrong statement of profits, which reduces the tax rate imposed on the person. It is very difficult to collect detail information about people’s income and the amount of tax they have to pay. It reduces the government’s revenue.
· Creates social conflict: Since not everybody has to pay direct taxes, it is often responsible for creating social conflict amongst societies. It also leads to crime, social injustice and a sense of inferiority among different groups of people. Lower income group do not pay tax and they do not have any contribution to the nation. It is beyond the cannon of equality.
· Inconvenient: Another great disadvantage of the direct taxes is that they are usually not in accordance with the cannon of convenience. In order to submit the tax, a person has to undergo several formalities and procedures. Due to such inconvenience, there is more possibility of evasion of direct taxes.
· Uneconomic: Government should spend much for revenue administration. There should be proper records of tax-payers, properties of the citizens, profits of business organization. Trained and skilled man-power is essential. Awareness programs are needed to encourage people to pay tax. It is difficult to implement tax policy mainly in the developing countries.
· Limits capital formations and discourage investment: Direct taxation discourages savings because, after paying tax, individuals and companies have less income available to save. This means that investment, which relies on the level of savings, is low and this could cause less which relies on the level of savings, is low and this could cause less production and employment. It significantly limits the capital formation and investment opportunities in an economy. Thus, in turn, leads to higher unemployment and lower growth of economy.
· Discourage production: when people work harder, they can generate more income. When there is more income, they have to pay more money should be paying more taxes. Therefore, it dramatically affects the ability to work and motivation to excel. Direct taxation may be a disincentive to hard work. High rates of income tax may discourage people from working overtime or trying to gain promotion at work. It discourages production.
· Sectoral Imbalance: There is distinction between corporate sector and agriculture sector is imposed high rate of tax and on the other hand, agricultural sector is totally tax free. It may cause the sectoral imbalance in the economy.
· Limited scope: Direct tax isn’t imposed on all earning groups. Low earning groups have no contribution though direct taxation. It can’t cover all economic sectors and only limited revenue can be collected.
B. Indirect taxes:
Indirect tax is imposed on commodities and services. It is imposed on one on one person but partly or wholly paid by another. In direct tax the impact and incident of tax are on different persons. In other words, the person paying and bearing the tax is different. An indirect tax is collected by one entity in the supply chain (usually a producer or retailer) and paid to the government, but if it is passed on to the consumer as part of the purchase price of a good or service. The consumer is ultimately paying the tax by paying more for the product; Burden of tax can be shifted from one person to another.
The most common example of an indirect tax is import duties. The duty is paid by the importer of a good at the time it enters the country. If the importer goes on to resell the good to a consumer, the cost of the duty, in effect, is hidden in the price that the consumer pays. The consumer is likely to be unaware of this, but he will nonetheless be indirectly paying the import duty. Sales tax is paid by trades initially and traders charge the amount o tax the customers. Excise is imposed on the production of goods kike sugar, cotton, cement etc.
Advantages/Merits of indirect taxes:
· Convenient: In directed taxes are paid only when the goods and services are bought. They are paid in small amount. So, taxpayers do not fell much burden while paying the tax. It is included in price of the commodity.
· Elastic: The rate of tax can be increased or decreased as per need when government wants to collect more revenue, the excise and custom duties are increased. Costumers do not feel much burden as they pay only the small amount. If there is decrease in demand for a certain commodity, tax can be reduced to increase demand. Thus, tax rate is flexible.
· Broad based: Indirect taxes are imposed on goods and services. It is imposed on all earning groups. The main merit of an indirect tax is that it touches all income groups. Direct tax, like income tax, is imposed on persons having a certain minimum level of income. People having income below that level are exempted from the payment of tax. But indirect taxes, such as sales tax or excise duty, are equally imposed on all consumers or purchasers irrespective of their incomes.
· Progressive in nature: It is also progressive in nature. Government impose high rate of tax on luxurious goods that can be purchased only by the rich. Generally, basic goods are tax free. Who consume more commodity and services, pay more tax, lower income groups have less purchasing power and pay less tax.
· Economical: There is no extra economic burden for paying tax as it is imposed on commodities and services. Traders and producers themselves deposit tax to the government so government can collect ax with less administrative cost. Final taxpayers pay tax while purchasing goods and services.
· Diversity: Indirect taxes are imposed on variety of goods and services. When government reduces the tax on any commodity for increasing demand, revenue can be collected continuously from other commodities. Government can be sure of continuously from other commodities. Government can be sure of continuous and sufficient revenue.
· Less evasion: Indirect taxes are imposed on goods and services Customer pay tax unknowingly as price of the commodity from other commodities, so they can’t evade it. Producers, wholesalers and retailers do not mind paying tax as burden can be shifted to the ultimate consumers.
· Checks the consumption of harmful goods: Government can impose high rate of tax on harmful good like wine, cigarettes etc. Due to increase in tax rate, price increases and general people cannot afford them. On one hand, it helps government to collect more revenue and on the other hand, it prevents using harmful goods.
· Help policy makers: It can be used as a powerful tool for formulating fiscal policy and other trade related polices. If government wants to protect domestic industries, it can levy high import duties. if protection is necessary for any particular industry, more tax is imposed on the production of others.
· Easy to collect: Collection takes place automatically when goods are bought and sold. A dealer collects the tax when he charges a price. He is an honorary tax collector.
Disadvantage/ demerits of indirect taxes:
· Regressive: Indirect taxes are regressive in nature. People with lower incomes bear a higher burden as compared to the rich people. Rich or poor has to pay the same rate of excise duty or sales tax levied on commodities irrespective of their ability to pay. Same rate of an excise duty on sugar, mill-made cloth, etc. has to be paid both by the poor people have lower ability to pay than the rich.
· Inflationary: Indirect taxes are inflationary; increase in tax rate causes a rise in prices of commodities. Even essential commodities such as sugar, cloth, petroleum products were subjected to heavy excise duties and sales taxes. These taxes were wholly or partly added to the prices of goods which caused cost push inflation. Price of commodities also increases due to the effect on indirect taxes on the prices of inputs of the industrial commodities.
· Uncertain revenue: When indirect taxes are imposed on commodities demand for those commodities decrease due to increase in price. It adversely affects government revenue. It is very difficult to estimate the total amount of revenue from indirect taxes. It depends on the production and sale of commodities.
· Increases prices unduly: They cause the price of a commodity to rise more than the tax. A fraction of the money unit cannot be calculated, so ever middleman tends to charge more than the tax. This process is cumulative.
· Uneconomical: The cost of collection is quite heavy. Every source of production has to be guarded. Large Administrative staff is required to administer such taxes. They should check the accounts and stocks of producers, suppliers and traders to find out whether they are paying tax or not.
· Lack of public consciousness: These taxes do not develop public consciousness, because many times the tax-payer does not even know that she/he is paying tax. Tax is included in the price of the commodity. Majority of thee taxpayers are not aware that they have some contribution to the nation.
· Adverse effect on production and employment: When tax is imposed on factors of production, the cost of production increases many there is less profit in business. It adversely affects the investment. Due to less investment, production will be less. It also causes the unemployment problem.
· Inefficiency is resource allocation: The most important harmful effect of indirect taxes is that they make the allocation of resources inefficient and cause excess burden on the consumers. Resources allocation is efficient when resources are property allocated to the production of goods, it maximizes social welfare. Indirect taxes distort the pattern of production or resource allocation and thereby cause inefficiency and loss of consumer welfare.
3.2.3.2 Concept of progressive, proportional and regressive Tax:
On the base of nature of rate of tax, it can be classifying as progressive, proportional and regressive tax. Detailed about them is discussed in the following heads.
1. Progressive Tax:
A progressive tax is a tax in which the tax rate increases as level of income or the taxable base amount increases. The average tax rate is lower than lower than the marginal rate tax. An average tax rate is lower than the marginal tax rate. An average tax rate is lower than the marginal tax rate. An average tax rate is the ratio o f the total amount of taxes paid to the total tax base whereas the marginal tax rate equals the change in taxes, divided by the change in tax base. The term “progressive” describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high. The term can be applied to individual taxes or to a tax system as a whole. They are imposed in attempts to reduce the tax incidence of people. This type of tax system is in practice in most of the developing countries including Nepal. It can be illustrated as follows:
|
Income (in RS.) |
Tax Rate (in %) |
Tax Amount (In Rs) |
|
10,000 |
5 |
500 |
|
20,000 |
10 |
2,000 |
|
30,000 |
15 |
4,500 |
|
40,000 |
20 |
8,000 |
|
50,000 |
25 |
12,500 |
In the above table, the initial rate of tax is 5 percent when income is rs.10, 000. When income increase the rate of tax is increase in the same direction. When income becomes Rs. 50,000, the rate of tax is 25 percent; it can be presented in the following figure.
The tax system reduces the unequal distribution of income in the society. It is based on ability to pay. High rate of tax is imposed on the rich and low tax rate is imposed on the poor. Government can collect more revenue with little cost. It is helpful to reduce the consumption of unnecessary goods and services.
On the other hand, this tax system has some drawbacks. As it is based on capacity to pay, low income groups are tax free and high income groups pay much tax that affects saving and investment. There is more possibility of tax evasion, it is equitable and widely used system.
2. Proportional Tax:
A proportional tax is a tax imposed so that the tax rate is fixed, whether income level increases or decreases. The average tax rate equals the marginal tax rate. The rate of tax remains constant for all income level burden of tax is more on the poor and less on the rich. It can be illustrated in the following table and diagram.
|
Income in (Rs) |
Tax rate (TR) |
Tax amount (In rs) |
|
10,000 |
10 |
1,000 |
|
20,000 |
10 |
2,000 |
|
30,000 |
10 |
3,000 |
|
40,000 |
10 |
4,000 |
|
50,000 |
10 |
5,000 |
Table 3.3
The table shows that income level is increasing from Rs. 10,000 to 50,000 but the rate of tax is only 10% for all income level. It can be presented in the following figure.
As the rate of tax is the same, the government can collect tax easily. All income level groups can contribute through taxation. But it creates unequal distribution of income. It is also inelastic as the rate of tax increases; it adversely affects the poor. It is socially unjustifiable.
3. Regressive tax: A regressive tax is a tax imposed in such a manner that the tax rate decreases as level of income increases. The average tax rate is higher than the marginal tax rate is imposed on low income level groups and low rate of tax is imposed on high income groups. There is an inverse relationship between the tax rate and the taxpayer’s ability to pay as measured by assets, consumption or income. It is just opposite to progressive tax system. It can be illustrated in the following table. And diagram.
|
Income (in Rs) |
Tax rate (in %) |
Tax amount in(RS) |
|
10,000 |
10 |
1,000 |
|
15,000 |
9 |
1,350 |
|
20,000 |
8 |
1,600 |
|
25,000 |
7 |
1,750 |
|
30,000 |
6 |
1,800 |
Table 3.6
In the table, the rate of tax is 10 percent when income level is Rs. 10,000. Tax rate is decreasing with increase in the level of income. But the total amount of tax is increasing very little. It can be presented in the following figure.
Such type of tax system isn’t equitable in the society; it is against the welfare state in the current world. So it is not applicable.
3.2.4. Qualities of a good tax:
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by the government in order to manage fund for government expenditure, in economic terms, taxation transfers wealth from households or business to the government. The purpose of taxation are (i) to raised revenue for the government (ii) to redistribute income and wealth from the rich to the poor people (iii) to protect domestic industries from foreign competition (iv) to promote social welfare. This has effects which can both increase and reduce economic growth and economic welfare. A good tax system can contribute a lot to the economic development of a country and its national exchequer. Equitable tax system bears a significant role in bringing the harmony in the life style of the population of the country. There are some guiding principles of good tax system. The first four principles are the maxims of taxation laid out by classical economist Adam Smith in his book. The wealth of nations published in 1776. According to Dam smith four canons of taxation are canon of economy and canon of convenience. Modern economists have added more in the list of cannons of taxation.
1. Canon of equality: Canon of equality states that the burden of taxation must be distributed equally or equitably among the taxpayers. Rich people are capable of paying more taxes than poor people. Thus, a person having greater ability, then scarifies of all taxpayers of all taxpayers become equal. This is the essence of canon of equality (of scarifies). To establish equality in scarifies, taxes are to be imposed in accordance with the principle of ability are the two sides of the same coin.
2. Canon of certainty: The tax which an individual has to pay should be certain and not arbitrary. According to Adam Smith, the time of payment, the manner of payment, the quantity to be paid should all to be clear and plain to the tax-levying authority. When, where and how much tax is to be paid must be known beforehand so that taxpayers won’t feel much burden while paying the tax. Similarly, there must also be certainty of revenue that the government intends to collect over the given time period, only then government can make proper plan for utilizing collected revenue.
3. Cannon of economy: This canon implies that the cost of collecting a tax should be as low as possible. A good tax system should aim to collect maximum revenue; it would be meaningless or collect tax.
4. Cannon of convenience: A good tax system is that which cares for the convenience of the tax payer. Taxes should be levied and collected in such a manner that it provides the greatest convince to the taxpayer as well as to the government. Thus, it should be painless and trouble free as far as practicable. According to Adam Smith, Every tax ought to be levied at time or the manner in which it is most likely to be convenient for the contributor to pay it.
5. Canon of productivity: This canon states that only those taxes should be imposed that do not hamper productive effort of the community. The tax system should yield a satisfactory return to the government to meet the public expenditure, and the taxation system should be such as not to any produce any adverse effect on the productive capacity of the economy country. It produces any adverse effect on the productive to a well known classical economist Charles F. Bastable taxes must be productive or cost-effective, A tax is said to be a productive one only when it acts as an insensitive to production.
6. Canon of elasticity: This canon implies that a tax should be flexible or elasticity in the tax system. It means that the tax revenue should increases with the increase in the national income of the country without any fresh imposition of tax dose. The tax system should be so as to yield more income when the government expenditure goes up at a time of emergency or crisis. There should a proper balance between direct and indirect taxes. And certain sources of income should be exclusively reserved for emergencies like war etc. Modern economists attach great importance to the canon of elasticity.
7. Canon of diversity: Every tax must be simple and intelligible to the people so that the taxpayer is able to calculate it without taking the help of tax consultants. If the tax system is complex or complicated, there will be undesirable side-effects. It may encourage taxpayers to evade taxes. A complicated tax system is expensive in the sense that even the most honest educated taxpayers will have to seek advice of the tax consultants. Tax system should be simple and easy to understand that encourage people to say.
8. Canon of diversity: Taxation must be dynamic. This means that a country’s tax structure ought to be dynamic or diverse in nature rather than having a single or two taxes. There should be involvement of the majority of the sectors of the economy. if a single tax system is introduced, only a particular sector will be asked to pay to the national exchequer leaving a large number of populations untouched. Obviously, incidence of such tax system will be greater on certain taxpayers. A dynamic or a diversified tax structure will result in the allocation of burden of taxes among the vast population resulting in a low degree of incidence of a tax in the aggregate.
If the tax system satisfies the above cannons of taxation, it is a good tax system. There shouldn’t be the problem of tax-evasion. There should be maximum social advantage. According Dalton, that system of taxation is the best which is based on the principle of maximum social advantage i.e. Greatest good of the greatest number. The main objective such as redistribution of wealth and income, to reduce inequalities, etc. Tax system should be balanced. A good tax system should be composed of all kinds of taxes, direct and indirect. It will produce more revenue to the government and the maximum benefit to the society. It should be so balanced that every citizen should contribute to the exchequer.
3.2.5 Government revenue: Tax and Non-Tax Sources
Government revenue refers to the income of the government derived from various sources. Every government needs huge fund to handle day by day administration, maintain peace and security carry out development plans and lunch other public welfare activities. The government collects the required fund from two sources. They are internal and external sources. Internal sources of fund can be divided in to two types. They are tax source and non-tax source. Tax source is the one of the most important source of government revenue. Tax sources include vat, custom duty, excuse duty, income tax, Non-tax sources include gifts and grants provided by individuals and institutions to the government, fees, licensing fees, fine and penalties, special levies charged by the government and income from public properties and enterprises. Another important source of government revenue in developing countries is foreign grants. There is a high contribution of tax source than non-tax source in total GDP of Nepal.
The newly promulgated constitution of Nepal has put major revenue sources under the central government’s duty, excise duty, value added tax (VAT), compensation tax, password changes, visa fees, tourism chargers, services fees and penalty, VAT, income tax, custom duty and excise duty are the largest contributors to the government revenue. As per the new constitution, there will be three layers of federal structures, central, provincial and local governments the provinces have been given the authority and collect house and land registration fees, vehicles tax, entertainment tax, advertisement tax, tourism tax. The local governments would look after cooperatives, and raised taxes like property tax, service charge and entertainment tax, among others, at the local level.
Government revenue in Nepal amounted to approximately 22.5 percent of the nation’s gross domestic product (GDP). Although it is an increase from 2012, but there is decrease in comparison to the revenue collected in 2018. It was amounted to approximately 25.4 percent of the country’s GDP in 2018. Sources of government revenue in Nepal can be classified as follows:
A. Tax revenue:
Tax revenue refers to compulsory transfers to the government for public purposes. Taxation is the most important sources of government revenue and gross domestic product (GDP) of a nation. There are two types of taxation, direct and indirect. Indirect tax has always been an important part of any tax system. Domestic indirect taxes are the major source of revenue for governments in low-income countries like Nepal. These taxes are applied to large sections of the population and are relatively easy to administer, Revenue largely depends on indirect taxes like VAT and excise duty. The share of the direct tax revenue (ITR) to GDP has been increasing every year. The share of the direct tax revenue (DTR) reached 6.9 percent of GDP in FY 2018/2019 while it was 1.1 percent in FY 1990/1991 and increased to 15.0 percent in FY 2018/2019. This indicates that the contribution of both direct and indirect taxes to the GDP has been increasing continuously. The various sources of taxes to the GDP have been increasing continuously. The various sources of tax in Nepal as follows:
1. Taxes on income, profit and capital gains:
Resident individuals are subject to tax on their worldwide income derived from employment business or investment Non-residents are subject to tax on their net income earned having source in Nepal. Income tax is levied on the total income earned or received by an individual employment income includes wages salary leave pay, overtime pay, fees, commission, prizes gift bonuses and other facilities. House rental tax of 10% on payment to natural person should be deposited in respective municipality ward office, income from bank deposits of resident natural person is taxed separately at source at a flat rate of 5% capital gains tax is taxed at source as a final withholding, tax is Imposed on the profit of any business organization.
2. Taxes on goods and services: The tax on consumption and production of goods and services is an indirect tax. VAT, excise duty taxes on specific services etc. are the components of indirect tax revenue; among them all value added tax (VAT) is the largest sources of government revenue in Nepal, the VAT revenue increased from 1.96 percent of GDP to 6.97 percent during the period from FY 1990/1991 to FY 2018/2019.
3. Taxes on international trade: this tax is also an indirect tax. It includes custom and other import duties. tax on imports and other taxes on internal trade and transaction. The share of customs duties (CD) is declaiming while that of excise duties (ED) is increasing. Exercise duty revenue increased from 0,. To 3,5 percent of GDP in FY 1990/1991 to 4.4 percent in FY 2018/2019. The process of trade liberalization will make trade taxes even less important in the future as Nepal has to comply with international commitments as a member of WTO, BIMSTIC and SAFTA.
4. Tax on property and registration fees:
The tax imposed on landlords for the ownership of land and house owners is direct tax. Registration tax is imposed for the registration of land and house at the time of their purchase.
B. Non-tax revenue:
Taxation is a primary source of income for the government. These are some sourcing of revenue other than tax is called non-tax resources. Tax revenue is charged on income earned by an individual or an entity as direct tax and on the value of transaction of goods and services provided by the government by the government for various purposes. Non-tax revenue becomes payable only when services offered by the government are availed. The sources of non-tax revenue in Nepal are as follows:
1. Income from national property: Government derives interest and dividends from public enterprises such as financial institution, business sector, industrial sector and other services sector. Government also obtains revenue from royalties. It is agreed payments and is paid for mining mountaineering and for the use of natural resources.
2. Fees for services, license and permits: government of Nepal obtains revenue by selling various goods and services; government provides certain services as education electricity, drinking water, transportation facilities, communication facilities, etc. and collects revenue from those services. It also includes administrative fees; government also collects revenue by providing license for holding gun. Pistol, vehicle and permission for business purposes.
3. Penalties and fines: Penalties and fines are charged for those who violate the laws, rules and regulations o the nation. It is a kind o punishment. The main purpose of fitness and penalties isn’t to collect revenue but to prevent the repetition of such mistakes. It is not the regular sources of government revenue in Nepal.
4. Income derived from the sale of goods: Sometimes government producers various goods and services when private sector doesn’t produce such commodities. Government produces at low cost through public enterprise and provides in reasonable price. In Nepal, the government has set up numbers of public enterprises to provide public goods and services. Government also gets dividends from the profit of those public enterprises.
5. Voluntary transfer other than grant: people or some organizations inside the country or outside pay the government for the relief works at the time of natural calamities and disaster. It is also known as gift. It is purely voluntary contribution and not the permanents sources of revenue.
6. Specific assessment: Government collects revenue through special levy charged upon public for special services like construction of roads, street lightening, irrigation and other infrastructures. It is not the regular source of revenue.
7. Miscellaneous revenue:
If a person doesn’t have legal heir, government claims his/her property after death. Land bank deposit of the person, property of dissolved organizations is also the sources of revenue. Government of Nepal receives administrative fees, immigration and travel fees, capital revenue etc.
c. Foreign grants and loans:
In Nepal grants and loans are the major sources of income. In terms of sartorial distribution of foreign aid, agriculture, forestry and fisheries have received the largest share followed by energy, transport, health, social development, and human resources development. Foreign aid continues to play an important role in Nepal’s development. According to the ministry of finance, Nepal has receive Rs 118.81 billion from foreign countries in foreign countries in foreign aid, of which, 16.190 billion has been received as grant aid while the 102.62 billion as loan. The foreign grant and loan has gone down in the first nine months of the current fiscal year 2019/20.
3.2.6 Government Borrowing: Concept of internal and external borrowing
3.2.6 Concept of Government Borrowing
In the modern world, it is not possible for the government to meet all its expenditure through tax and non-tax revenue. Hence, in modern times, borrowing by the governments has become a normal method of government finance along with other sources like taxation. Government borrowing refers to borrowing by a governments has become a normal method of government from within the country or from abroad. Government borrowing, sometimes also referred to as government borrowing, represents the total outstanding borrowing (bonds and other securities) of a country’s central government. Government borrowing can be raised both externally and internally. Where external borrowing is the borrowing owned to leaders outside the country and internal borrowing represents the government’s obligations to domestic lenders. Government borrowing is an important source of resources for a government to finance government spending and fill holes in the budget.
According to Prof. Taylor, “Government borrowing arises out of the borrowing by the treasury, from banks, business organizations and individuals. The borrowing is in the form of promises by the treasury to pay to the holders of these promises a principal sum and in most instances interest on that principal”.
Thus, government borrowing is an important source of revenue to a modern government. When governments can’t manage financial resources with only tax and non-tax sources, they raise borrowing from various sources to meet the gap between revenue and expenditure or to meet their deficit budget. In the case of government borrowing, government has to pay interest and repay the principal.
The major objectives of government borrowings are:
a. To meet budget deficit
b. To finance for the development of physical and social infrastructures
c. To encounter emergencies like natural calamities and war.
d. To minimize the problem of taxation.
e. To reduce inflation and depression
f. To tackle with the monopoly of private sectors
g. To increase defense expenditure
h. To solve the problems of unemployment, poverty and inequality in developing countries.
I. To implement monetary policy.
3.2.6.2 Internal and external Borrowing
There are two major sources of government borrowing which can explain as follows:
A. internal sources of government borrowing refer to the government loans floated within the country. Internally the government borrows from private individual’s institutions, commercial banks. Financial institution and central bank of the country. Government borrowing through domestic sources is vital in simulating investment and private savings as well as strengthening domestic financial markets, since it provides depth and liquidity to the markets. Generally, there are two sources of internal borrowing.
1. Market borrowing: Marketing borrowing the process of fund raised by government from various financial institutions and its people by selling transferable government securities like treasury bills, bills of exchange etc. Borrowing can be borrowed from individual citizens of the country. The government issues different bonds and securities such as treasury bills, development bonds; citizen saving certifies and sells to individuals. Similarly, government can sell bonds and securities to commercial banks, financial institution like insurance companies, investment mutual funds, cooperatives etc. they provide loan by purchasing those securities. Sometimes the government can take loan from central bank. Central bank also purchase government securities and bonds and collects funds in government account buying its book.
2. Non market borrowing: Non market borrowing is the process of fund raised by government without selling its securities. Government can borrow directly funds from both government sector and private sector with in the country. In Nepal, government borrows from agriculture development bank, postal saving bank, rural development bank, commercial banks, insurance companies, cooperatives etc.
B. External sources of government borrowing:
External borrowing refers to the obligation of a country to foreign countries or international institutions. It is the portion of a country’s borrowing that is borrowed from foreign lenders, including commercial banks, governments, or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. To earn the needed currency in which the loan was made. To earn the needed currency, the borrowing country may sell and export goods to the lending country. This source is used when borrowing from internal sources isn’t sufficient. At present, it has become essential for almost developed and developing countries. There are two types of external sources:
1. Bilateral borrowing: if government borrows loan by making agreement with the government of another country. It is known as bilateral borrowing. Nepal government takes loan from the government of USA, Japan and other developed countries. In bilateral borrowing, only two countries participate in negotiation.
2. Multilateral borrowing: f the government of the country takes loan from the government of the country takes loan from the international organization like UNDP, World Bank, Asian development bank, European union, international monetary fund etc. it is called bilateral borrowing. These organizations provide short term loans for balancing the balance of payment and long term loans for development projects.
3.2.7 Government Budget: steps of budget formulation with reference to
Nepal
As budget is important matter a economic field, various economists as well as institutions have defined it to make clear in different context. Some important definition is mentioned below:
A. Meaning of Budget:
The word budget is derived from the French word ‘baguette’ which means ‘a small leather bag’. In the eighteen century, Robert Walpole, the British Chancellor of the Exchequer used to carry the leather bag with the annual financial documents. The meaning of budget is the financial proposal kept inside the bag rather than the bag itself he world budget became popular over the years. So a government budget is an annual financial statement. This contains the outlines are estimated government expenditure and expected government revenues for the coming fiscal year.
As budget is important matter in economic field, various economists as well as institutions have defined it to make clear in different context. Some important definitions are mentioned below.
World Bank: “the annual budget is usually the legal authority for public spending”.
P.E. Taylor, “The annual budget is the master financial plan of government. It brings together estimates of anticipated revenue and proposed expenditure for the budget period and from these estimates the activities to be understood and means of their financing can be inferred.”
Bastable, “The budget has come to mean the financial arrangement for a given period with the usual implication that has been submitted to the legislature for the approval.”
Wigan, “Budget is an annual statement of income and expenditure of the government which is prepared by the executive, and presented to the legislature for sanction.”
From the above analysis and views of economists, it is clear that the budget is the principle instrument of fiscal policy of the government that has the following features:
· Budget is a plan or decision making process of the government
· It is an annual financial statement prepared by the executive and approved by the legislature.
· Budget is an economic as well as a political document.
· It is a financial plan covering outlays and receipts both.
· Generally, it is a financial plan covering outlays and receipts both.
· Budget is a mirror to look over development activities.
· It sets a framework for policy formation.
· Budget is a means of policy implementation
· It is a means of legal control.
· Budget document is a good source of public information on past activities, current decisions and future prospects.
B. Objective of budget:
Government prepares the budget for fulfilling certain objectives. These objectives are the direct outcome of government’s economic, social’ and political policies. The various objectives of government budget are mentioned below.
1. Reallocation of resources: Through the budgetary policy, government aims to reallocate resources in accordance with the economic (profit maximization) and social (public welfare) priorities of the country Government can influence allocation of resources through various methods. To encourage investment, government can give tax concession, subsidies etc. to the producers. Government discourages the production of harmful consumption goods (like liquor, cigarettes etc) through heavy taxes, if private sector does not take interest, government can directly undertake the production.
2. Reducing inequalities in income and wealth: Economic inequality is common in every economic system. Government aims to reduce such inequalities of income and wealth, through its budgetary policy, government aims to influence distribution of income by imposing progressive taxes i.e. heavy taxes on the rich and lower tax on poor and spending more on the welfare of the poor.
3. Economic stability: Government budget is important to avoid business fluctuations in inflation or deflation. It is necessary to achieve the objective of economic stability. Making surplus budget during inflation and deficit budget during inflation and deficit budget during deflation helps to maintain stability of prices in the economy.
4. Managment of public enterprises: There are large numbers of public industries which are established and managed for social welfare of the public. Budget is prepared with the objective of making various provisions for managing such enterprises and providing those financial help.
5. Economic Growth: The growth rate of a country depends on rate of saving and investment. Budgetary policy aims to mobilize sufficient resources for investment in public sector. Therefore, the government makes various provisions in the budget to raised overall rate of savings and investment in the economy.
6. Reducing regional disparities: The government budget aims to reduce regional disparities. Through the taxation and expenditure policy, government encourages setting up of production units in economically backward regions.
C. Process/Steps of budget formulation: Budget is a part of economic plan. Therefore, while formulating budget it is necessary to determine resources allocations in conformity with the objectives, policies, programs and strategies set in the plan document. Budget formulation is the act of forecasting the income and expenditure of the government for coming fiscal year. The finance ministry formulation is the act of forecasting the income and expenditure of the government for coming fiscal year. The finance ministry formulates the budget, and the process of budget formulation is as follows.
· Determination of priories: Government is responsible for addressing every issue of the nation. But it is difficult due to the scarcity of the resources. The first step of budget formulation is to determine priorities of government programs from the long list. In this stage, the planning authority fixes priority of development activities and suggests the government to manage the budget considering the capacity. If necessary planning authority and government can discuss about the different issues. The determination of priority depends on the long run perspective plan, periodic plan, need of the nations, etc.
· Estimation of expenditure: the government has to manage the current and capital expenditure. Current expenditure includes day to day running expenditure of government. It is easy to estimate on the basis of previous years data. The estimation of development expenditure depends on the prioritized development activities. After determining priority government financial authority estimates the required expenditure for various programs. Authority collects different project cost through the concerned offices approved by planning authority. Financial authority arranges the discussions programs regarding they total proposed cost of different projects. They consider the resources situation and ultimately reach in decision.
· Estimation of revenue: After estimating cost, financial authority estimates the revenue from various possible sources. While estimatation of revenue, previous data of revenue from various sources are considered as the revenue from various sources are considered as the base. Generally, expenditure increase every year. In such case, financial authority arranges the discussion program with the revenue collection authorities regarding the possibility of increment in revenue for coming years. They consider the various revenue advisory reports. If estimated revenue is lower than required expenditure, financial authority purposes the estimation of borrowing from various sources. The sources may be internal and external.
· Discussion, approval and execution: In the last stage, the finance minister presents the budget in the parliament for discussion. There will be discussion. There will be discussion on each and every item of budget, pros and cons of budget, challenges of budget size and composition, etc. Finally, finance minister gives the answer of all questions raised by parliament members. Parliament passes the budget and sends to head of the state approval for implementation. After approval of the budget, it becomes authorized and ready for execution. The authorized budget is executed by the Ministry of finance.
3.3
International trade:
International trade (trade among the nations) is common since ancient times in the world. It has been significant issue in economics. Various economists are discussing about it for a long time. As the country cannot produce all types of goods and services within the nation, it has been important for every country. Regarding this context, various aspects of international trade are discussed in the following heads.
3.3.1
Concept and importance of international trade:
The buying (importing) and selling exporting) of goods and services between different countries, according to negotiation is called international trade. It is the exchange of goods and services across international borders on defined exchange rate. It includes the export of surplus goods by the country and all the same times the import of deficit goods by the country and at the same times the import of deficit goods from the other countries. Prof. JL. Hanson said, “An exchange of various specialized commodities and services rendered among the corresponding countries is known as foreign trade”. Like that way, according to Dudley G, Locket, “the purchase of goods and services by the citizen of another country is called international trade. International trade allows firms to compete in the global market and to employ competitive pricing for their products and services. As more products become available increasing customer satisfaction. Foreign trade is, in principle, not different form domestic trade as the motivation and the behavior of parties involved in a trade does not change fundamentally depending on whether a trade is across a border or not.
The different between internal and international trade is that international trade is typically costs such as tariffs, time costs due delays and costs associated with country differences such as language, the legal system, or a different culture. Following are the main features of international trade.
· Supplier and purchasers are of different nation. They involve in trade after the negotiation between the countries.
· Exchange of goods and services between the countries according to negotiation
· Goods cross the boarders after completing different rules and regulations, processes, etc.
· Use of foreign currencies common foreign currencies or according to negotiations.
· Trade is possible only after the certain type of negotiations between the nations.
· International trade is affected by various policies of different nations.
· The scope of international trade is expanding with the development of various international agreements, organizations, etc.
International trade is considered as the important economic activity in the world. It helps to bring the improvement in production and promotes economic development of participant nations. It increases competition, prevent the monopolies, provides benefit to consumer by providing the new and cheap commodities at the global level, the benefit from trade depends on the situation of the country. The major importance of international trade is described below:
1. Utilization of resources: As international trade occurs between the nations, the possibility of selling more goods would be high. It provides incentive to utilize the resources.
2. Greater variety of goods available for consumption: International trade helps to import verities of a product from other countries. This gives consumer’s large basket for selection of preferred goods. This ultimately improves the level of satisfaction and quality of life.
3. Higher efficiency in production: International trade creates the competitive situation among the producers and nations. They try to reduce the cost of production in order to be competitive at the international market. It promotes efficiency in production as countries will try to adopt better methods of production.
4. Increment in employment: International trade helps to create more employment through the establishment of industries within the country in order to meet the demands of international market. As market expands, more employment more production and employment would be possible.
5. Good relation with foreign countries:
International trade promotes to establish the relationship between the participant countries. To promote to established the relationship between the participant countries. To promote trade, people visit different countries where the exchange of ideas, culture, knowledge etc. is shared among the people. This helps to develop the friendly relationship among the nations which is necessary for peaceful world.
6. Source of government revenue: As international trade promotes the industrial development, the government can imposed different types of taxes such as VAT. Excise duty, custom duty, profit tax etc. it helps to expand the public sector development of the different nations.
7. Expansion of market:
The market inside the country is small if the production capacity increases. Through the international trade, producers can expand their market throughout the world. This affects positivity in increasing government revenue, employment generation, etc.
3.3.2 Concept of balance of trade and balance of payment:
A. Balance of trade: Every country is involved in international trade. They import the goods and export if there is surplus production. The differences between the values of import the goods and export of visible goods is known as balance of trade. It includes the commodities exports and imports only Balance of trade. It includes the visible items which are recorded in the custom offices of a country during the trade period. So the trade balance is the net sum of a country’s exports and imports of goods without taking in to amount all financial transfers, investments and other financial components. The balance of trade can be deficit, surplus and balance.
1. Deficit trade: Deficit trade is the situation of trade where the value of import is greater than the value of export (receipt) during a period of time.
Symbolically,
Deficit trade-> Import value (payment)>Export value (receipt)
2. Surplus trade: It is the situation where the value of export value (receipt) is greater than value of export (receipt) and value of import (payment).
Symbolically,
Trade surplus -> export value (receipt)> import value (payment)
3. Balance trade: It is the situation of trade where the value of export (receipt) and value of import (payment) are equal.
Symbolically,
Balanced trade -> Export=Import
B. Concept of balance of payment:
Balance of payment is the situation of total receipt and total payment of the country. It includes the visible and invisible items. In other words, the balance of payment (BOP) is a systematic and comprehensive record of visible and no visible economic transaction which is recorded at the custom offices of the nation during the specified period of time. Visible items include the trade of goods i.e. export and import items. Non-visible items are remittance, travelling expenditure, dividends, loan, received and payment.
Balance of payments: is the difference between total receipt and total payment of a country during a given period of time. It is the record of all economic transactions between individuals, firms, and the government and the rest of the world in a particular period. Balance of payments includes payments for the country’s exports and imports of goods, services, foreign investments, loans and foreign aid, etc. the components of BOP Account are current accounts and capital account.
1. Current Account:
Current account is the records export (X) and import (M) of goods and services. In general, it includes import export, travel and transaction, donation, gift, commission, patent fees, royalties, etc. basically there are four major components of the current account are as follows.
1. Visible trade: This is the net of exports and imports of gods (visible items)
2. Invisible trade: This is the net of exports and imports of services (invisible items). Transaction mainly consists of shipping, banking and insurance services.
3. Unilateral transfers to and from abroad:
These refer to payments that are not factor payments-for example, gifts or donations sent to the resident of a country by a non-resident relative.
4. Income receipts and payments: These include factor payments and receipts. These are generally rent on property, interest on capital, and profits on investments.
ii. Capital account: Capital account records the transaction related to flow of money between the countries. It includes investment, borrowings, capital account is used to finance the deficit in the current account or absorb the surplus in the current account. The three major components of the capital account are given below:
1. Loans to and borrowings from abroad: These consist of all loans and borrowings given to or received from abroad. It includes both private sector loans, as well as public sector loans.
2. Investments to/from abroad: These are investment made by nonresidents in shares in the home country or investment in real estate in any other country.
3. Changes in foreign exchange reserves: Foreign exchange reserves are maintained by the central bank to control the exchange rate and ultimately balance the BOP.
C. Differences between balance of trade (BOT) and balance of payment (BOP)
Through the BOT and BOP are related with international payment, there are differences are presented below.
|
S.N. |
Balance of trade(BOT) |
Balance of payment(BOP) |
|
1 |
It is the difference between the value of goods and services included in import and export. |
It is total record of visible and non-visible transaction of a country with rest of the world. |
|
2 |
It includes the visible goods only. |
It includes both visible and non-visible goods and services. |
|
3 |
It is narrow concept, since it includes only the export and import of visible goods and services. |
It is wider and comprehensive concept since, it includes both visible and non-visible goods and services. |
|
4 |
It does not show the entire economic performance of a country. |
It shows the entire economic performance of a country. |
|
5 |
The balance of trade shows a partial picture of foreign exchange. |
The balance of the payments provides a holistic picture. |
|
6 |
The net effect of the balance of trade can be positive, negative or zero. |
The net effect of the balance of payments would always be zero. |
Table 3.7
D. Importance of balance of payment:
The balance of payment is an annual record of value of transactions with other countries of the world. It is an important economic variable and reflects the economic situation of the nation. The significance or importance of BOP is pointed out below.
1. To monitor all international transactions:
The balance of payments monitors and records all of a country’s international transactions with all other countries. It is an account that examines all import and export transactions and reveals the country’s financial situation.
2. To forecast business and economic conditions:
The information provided in the balance of payments serves as the foundation for anticipating the country’s business and economic conditions. Through the balance of payments, the government can assess the export potential of various industries and design policies to assist their growth and development.
3. To help in regulating import and export
Balance of payment is a method for easily regulating import and export. It provides precise information to the government on a wide range of products and services that are imported or exported. It assists the government in enacting protective measures such as raising taxes or taxes or tariffs on imports to discourage them while lowering taxes or traffic on exports to promote them.
4. To clarify foreign exchanged position:
The balance of payments reflects the country’s foreign exchange situation. It analyzes all of the countries international fund flows and assesses whether there is a fund shortage or surplus.
5. To assist in formulating policies:
The balance of payments is payments is crucial to document with the government since it aids in the development of various policies and programs, it gives the government information on the state of the economy that it can use to formulate any monetary, fiscal expansionary, and infliction control policies.
3.3.3 Measures to Reduce trade Deficit of Nepal:
Nepal is involved in international trade since long time. Previously, foreign trade was mainly confined with India. But situation has been changed over the years. Nepal has trade links with more than 100 countries in the world. In spite of that the deficit of foreign trade is alarming.
Nepal exports various goods to other various countries. Rice maize, mustard and linseeds, herbs, ghee, dried, ginger, pulses, live animals flour, ginger, oil cake, catechu, rice bran oil, raw jute, jute cutting, jute goods hessian sacking twines, cardamom, noodles, cattle feed, tooth paste, polyster, yarn, chawyanparash and hajmola, soap, vegetable ghee, pashmina, thread, cooper wine rod, M.S. pipe, plastic utensils, zinc sheet, G.I. pipe, textiles, juice, chemicals are major items exported to India.
In the same way, major items export to china are agarbatti, aluminum, copper and brass utensils, handicraft (metal and wooden), herbs, human, hair, musical instruments & its parts, Nepali papers and its products, noodles, their handicraft goods, pashmina, readymade garments, readymade leather goods, udrakshya, silverware and jewelleries, tanned skin, tea, vegetables, what flour, woolen carpet, etc.
Nepal export pulses, cardamom, herbs, catechu, woolen, textiles, Nepali papers and its products, leather, woolen, carpets, readymade, garments handicrafts, aments pashmina to other countries.
Nepal is importing various goods from other countries. Some important items imported from India are electrical equipments, threads, tobacco, transport equipments, medicine, chemical fertilizer, textiles (cotton and other), vegetables, cement, paper, horlicks and milk products, chemical materials, agriculture equipments and parts, M.S. wire rod. MS billet, steel plate, aluminum ingut, hot roll sheet ( in coil), cold roll sheet (in coil), etc.
Like that ways aluminum scrap, flake, foil, bars and rods, chemicals, chemical fertilizer, electrical equipments and tools, medicine, metal and wooden furniture, office equipments and stationary, other machinery and parts, pipe fittings, plywood and particle board, plastic utensils, raw silk, raw wool, readymade garments, powder for noodles, shoes and sandals, smart card, solar pannel.
I steel rod and sheet, storage battery telecommunication equipments and parts, polyster threds, toys, transport equipment and parts, tyre, tubes and flaps, video television and parts,
The major imports items from other countries are gold, silver, petroleum products, other machinery and parts, electrical equipments, thread, raw wool, transport equipment, medicine, chemical fertilizer paper, computer parts, aircraft spare parts, telecommunication equipment, textiles (cotton and others), polythene granuals, crude palm oil, crude palm oil, crude soyabean oil, copper wire and scrapes, raw silk, etc.
The import, export value and deficit situation is shown in the following table:
|
Fiscal year |
Export |
Import |
Balance |
|
2012/13 |
7691.79 |
55674.00 |
-47982.30 |
|
2013/14 |
9199.10 |
71436.60 |
-62237.50 |
|
2014/15 |
8531.91 |
77468.40 |
-68936.50 |
|
2015/16 |
7011.7 |
77359.9 |
-70348.2 |
|
2016/17 |
7304.9 |
99011.3 |
-91706.4 |
|
2017/18 |
8135.98 |
124510.32 |
-116374.34 |
|
2018/19 |
9710.95 |
141853.53 |
-132142.57 |
Table: 3.8
Source: MOF, economic survey, 2019/20
Above table clearly indicates the alarming deficit situation of Nepalese foreign trade. This requires various steps to control. The major steps to be adopted for reducing such deficit can be summarized as below.
1. The country should focus on promoting products and services where it has competitive advantage.
2. It is necessary to expand human resources base with better training and education for its entire work force.
3. The government should facilitate the financial means and encourage entrepreneurs to engage in trade activities.
4. It is necessary to explore the various products in the nation through the extensive research.
5. Nepal should simplify transportation modalities that have high transit costs, remove administrative hassles.
6. Overall improvements should also be made to the exports of agricultural products.
7. The government needs to implement policies that can attract foreign investment to develop or enhance basic industries that can promote capital growth and economic diversification.
8. The country must invest in primary infrastructure like roads, railways electricity generation and storage depots to improve border crossing time and transport made switching to minimize delays at the borders.
9. There is necessary for creating conducive environment to ease doing business in Nepal.
3.3.4 Free and protectionism:
All most all countries have applied various policies regarding the international trade. They have applied various trade policies. Broadly the trade policies, apply by various nations can be categorized as free trade and protectionism. Both have different objectives, advantages and disadvantages. In this context various aspects of free trade and protectionism are discussed below:
3.3.4.1 Free trade:
A. Concept of free Trade:
Free trade is that situation where there is open exchange of goods and services with rest of the world. In other words, the policy of no restrictions on the exchange of goods between countries is known as free trade policy. According to free trade policy the internal and international trade is more or less same in nature. Businessman from different economics may participate in trade. There is absence of restrictive tariffs, quotas, subsidies or prohibitions on their goods and services. According to Adam Smith, “free trade is that system of commercial policy which draws no distinction between domestic and foreign commodities and therefore, neither imposes additional burdens on the latter nor grants my special favors to the former.”
B. Advantages of free Trade:
Various economist who have favored free trade, have explain and justified the benefits or advantages of free trade are given below:
· Extensive market size: The markets size of different commodities becomes wider and more extensive under the free trade policy. Large amount of goods can be exported to other countries. This reduces production costs and lowers the prices for the consumers.
· Improvement in productive techniques: Because of competition with foreign goods, producers feel pressure to improve the production to secure the market. As a result, there would be improvements in productive techniques.
· Benefit of division of labour: As market size extends, the division of labour would be possible in production. Various countries can provide beneficial goods by considering the comparative advantages easily. This helps in the industrial development activities.
· Benefits to the consumers: As there is competition among the producers, they try to improve the quality of production so that market comes in their hold. They try to produce at lower cost to sell their products at cheap prices. All these efforts ultimately provide benefit to the consumers.
· Utilization of resources: In case of free trade, competition leads towards the proper utilization of resources. Producers try to use them in best uses if possible. This promotes the better utilization of resources creating the suitable environment for more profit.
· Control of monopoly: as there is competition with native and foreign products, no one can set up monopoly power.
C. Disadvantage of tree trade: Though various economists have shown the advantages of free trade, there are some disadvantages or demerits of tree trade. They are as below:
· Harmful for developed countries but not for developing nations like Nepal. As developing countries are backward in the availability of technology, human resources, competitive power, they cannot get sufficient.
· Danger of over dependence: Free trade creates the situation of dependency especially of developing countries. Due to free trade, a country does not produce and start to depend on imports of the goods and services. The situation creates the situation of economic dependency in the long run. Any disturbances in partner nation, immediately affect negatively in the economy.
· Destruction of home industries/ products: Free trade may be the cause for run of domestic industries. Imported goods may be cheaper than domestic industries loss, the market holds and ultimately various industries may be closed.
· Import of harmful foreign goods: Because of tree trade, harmful commodities may in to enter the domestic market. The goods which are not suitable for culture and society can create various evils and difficulties in the country.
· Theft of intellectual property: Many developing countries don’t have laws to protect patents, inventions, and new processes. The laws they do have aren’t always strictly enforced. As a result, corporations often have their ideas stolen. They must then compete with lower-priced domestic knock-offs.
· Unbalanced development of a country: As there is free trade, producers become more profit oriented rather than the responsible for society. They focus on profitable production and leave the other important economic activities. As a result, balanced development is not possible.
· Poor working conditions: Multi-national companies may outsource job to emerging market countries without adequate labor protections. As a result, women and children are often subjected to work in factories in sub-standard conditions.
· Degradation of Natural resources: Emerging market countries often don’t have many environmental protections infrastructure. Free trade leads to depletion of timber, minerals, and other natural resources. Deforestation and mining reduce their jungles and fields to wastelands.
3.3.4.2
Protectionism:
Most of countries in the world in the present days are controlling or regulating the international trade through the different measures. Such controlling is known as protectionism. In other words, protectionism is concerned with the policy of encouraging domestic industries through trade regulation. For protectionism, government can impose high tariffs, duties and quotas besides a large variety of other restrictions on imports. In addition to that, government can give facilities to domestic producers to increase the export capacity:
Advantage of protectionism: generally, protectionism is mainly concerned with the control of import to make favorable balance of trade. Various economists and policy maker have advocated the advantages of protectionism as mentioned below:
· Protection of infant industries: The infant industries means newly established industries which have lower competitive capacity. These industries must be given protection from the competition of efficient and large scale foreign products. As import is controlled, such industries get the market protection and they can run easily.
· Diversification of industries: Through the protection policy, the country can create the environment for verities of industries. This makes self sufficient in all essential commodities.
· Resource utilization: with the established of industries in the country, various types of resources can be utilized. Protectionism policy creates the god environment for local resource utilization. Rural products such as agriculture, forest etc. would be used for beneficial opportunities.
· Self-sufficient: protectionism trade policy helps in utilizing the domestic resources to produce the good and services as per requirement of the nation. This helps to create self-sufficient situation in the long run.
· Increase government revenue: with the increase in production due to protectionism, income and profit of the entrepreneur increases. Producers and employee will have more ability to pay taxes to the government. As a result, government can collect more revenue, with the help of this; government can manage the various public utilities.
· Protection of domestic market: when the government reduced the import by following protectionism policy, domestic industries run smoothly so that the employment opportunities increase in the country.
· Employment generation: Through the protectionism, various industries can be established in different parts of the economy; as a result, value of employment can be increase.
B. Disadvantage of protectionism:
In spite of the benefit of protectionism trade policy, it has various demerits or disadvantage as discussed below:
· No specialization: in the absence of competition, specialization in production through advanced technology is impossible.
· Establishment of monopolistic organization: the protectionism policy provides opportunities to set up monopoly. This can create the exploitive situation in the country.
· Tendency to become permanent: When protectionism is provided to any industry, it is very difficult to withdraw. Industrial want that facilities in different names even after the industry are fully developed and efficient itself.
· Loss of consumers: as the competition is absent, the consumers suffer from losses. They have to pay higher prices on account of the absence of any foreign competition.
· Negative effect on the relation among countries: If a country reduces it imports through the policy of protectionism, other countries also react by levying heavy import duties on the country’s exports goods. This may create conflict in their mutual economic and political relationship.
3.3.5 Comparative
cost theory of international trade:
David Ricardo was famous classical economist in beginning of 19th century. He has developed various theories in economics. In the same manner, he has developed the comparative cost theory of international trade. He has claimed that the countries would be ready to participate in trade if there is comparative cost difference in production of goods between the countries.
According to Ricardo, various countries are different in various aspects, there are differences in availability of productive resources such as natural resources, human resources, capital in difference in availability of productive resources such as natural resources such as natural resources, human resources, capital in different countries. In this situation they cannot produce all goods in their favor. Though they can produce same goods, the cost of production may be different.
As the cost of production varies in the different nations for the same goods, they think about the trade. They compare the cost of production and cost of import of good from other countries. If the cost of production is higher than the import, they become ready to import from other countries rather than the production in the country. So a country entering in to international trade compares the cost of its products with import cost. One country exports those gods which can be produced in the country at higher costs. So the comparison of the cost of production is most important determinant comparative cost theory of international trade is based on following assumptions.
1. There are two countries involved in the foreign trade.
2. Two goods are included in trade.
3. Labour is only the factor of production and exchange rate is determined on the basis of labour requirement.
4. All labors are homogeneous and can be used for producing any kinds of goods and services easily.
5. Factor of production (labor) perfectly mobile within a country and imperfectly mobile between the countries.
6. Constant returns to scale operate in the production n process.
7. There is perfect competition and absence of government intervention in the trade.
8. Full Employment exists in the economy.
9. There is zero transportation cost in the trade.
On the basis of above assumption, comparative cost theory of international trade can be explained through the following hypothetical table
Table
Example of comparative cost theory of international trade:
|
country |
Labour requirement for rice production |
Labour requirement for maize production |
Exchange rate in the market |
|
Nepal |
10 |
5 |
IR=2M |
|
India |
5 |
10 |
IR=0.5M |
Above table shows the labour requirement to produce rice and maize in Nepal and India. Both countries can produce rice and maize by using the labour. But the requirement of labour for per unit production of rice and maize is different in both countries. As a result, the exchange rate is different.
As there is zero transportation cost, India and Nepal consider the exchange rate of rice and maize in other country. In the example 1R=2M in Nepal and 1R=0.5M in India, If Nepal produce maize only and import rice from India, the, that would be beneficial for because by exporting 2M to India, Nepal can import 4R. In the same manner India can take benefit by producing rice and importing maize from Nepal. By exporting maize from Nepal, If India produces the maize that would be 0.5 only.
David Ricardo has explained about the comparative cost theory of international trade. He has given focus to the cost as the main cause of trade between the countries. But modern economists have criticized this theory in various ways as given below.
Criticism:
1. This theory has assumed the trade between only two countries and two goods. But it cannot be applied if there are more than two countries and commodities included in the trade.
2. Ricardo has assumed cost as the main cause of trade. But it may not be true in all situations. Various countries produce goods considering security strategy, self reliance policy and so on rather than cost only.
3. Assumption of no government intervention is not valid in the present days. These are some government intervention in international trade depending on the situation and in different.
4. The assumption of zero transportation cost is impossible in the present situation.
5. Units of labour cannot be homogeneous. The quality, efficiency and desire of labour is affected by number of factors.
6. The assumption of constant return to scale is wrong. There may be increasing or decreasing returns to scale in the long run.
7. Labor is not perfectly mobile with in the country. Because of various causes, the perfect mobility of labour is not possible in the economic.
Quick review
Banking system and monetary policy:
A bank is a financial institution licensed to receive deposits and provide loans. Bank is an individual created by the existing law and provision following features of bank can be summarized.
1. A bank is a financial institution that makes a profit by taking people’s deposits and lending that money at a profit.
2. It is an institution where individuals, company’s charities, government departments and other can deposit and borrow money.
3. A bank is bridge between customers suffering from financial deficits and customers with saving capacities.
4. it is established as an institution for maximizing profits and to conduct overall economic activities by selling services to earn money.
5. It helps to maintain economic stability by means of controlling money market.
Role of banking system in economy:
1. Capital formation
2. Mobilization of saving
3. Monetization of economy
4. Safety of wealth
5. Development of agriculture sectors
6. Development of trade and commerce
7. Industrialization
8. Employment creation
9. Poverty reduction and balanced development
10. Support for privatization
11. Remittance of money
12. Rapid economic development
13. Removal of exploitation
Classification
of bank
· Central Bank
· Commercial banks
· Development bank
· Financial bank
· Microfinance
Central bank:
A central bank is a government owned financial institution that controls the nation’s currency, interest rates and money supply. The main goals of a central bank are high employment, price stability and economic growth, etc.
Functional of central bank
· Monopoly power of note issue
· Banker’s adviser and agent of government
· Banker’s bank
· Lender of last resort
· Clearing house function
· Control of credit
· Maintenance and exchange rate
· Development function
Commercial bank
Commercial banks are the general banks whose primary operations are related to accepting public deposit and providing loans to the needy people or organizations against securities for the purpose of earning interest of a certain percent.
Functional of commercial banks:
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A. primary function
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B. Secondary function |
C. Contingent functions |
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accepting function |
Remittance of money |
Locker facilities |
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Current account |
Acceptance and payment of different items |
Traveler’s cheque |
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Fixed account |
Services of foreign exchange |
Letter of credit |
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Providing loans |
Trustee and executor |
Internet banking |
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Cash credit |
Acts as a tax consultant |
Collection of statistic |
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Bank overdraft |
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Loan and advances |
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|
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Call loan |
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C. Memory market and capital market
Money market and capital market
Money market:
The money market is a component of the economy which provides short term funds. The money market deals in short term loans, generally for periods of a year (365 days) or less.
Capital market
The capital market is also a component of the financial market related to conduct long term trading of equity and debt securities. Primary market: The primary market is a new issue market: it solely deals with the issues of new securities. Secondary market: it is a market where securities are traded on the exchange between the investors.
Meaning and objectives of monetary policy:
· Neutrality of money
· Exchange stability
· Price stability
· Full employment
· Economic growth
· Equilibrium in the balance of payments:
Types of monetary policy:
· Expansionary monetary policy
· Contractionary monetary policy
Concept of government finance:
Government finance is the study of the government in the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities. Government expenditure, government borrowing and deficit financing on the economy constitutes the subject matter of public finance.
Importance of government finance:
· Proper allocation of resources
· Equitable distribution of wealth and income
· Price stability
· Economic stability
· Infrastructural development
· Economic growth and development
· Promotion of export
· Capital formulation
· Public finance helps in encouraging savings and investment
· Balanced development
· Correct balance of payments
Government expenditure:
Government expenditure refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection and defense.
Recurrent/ regular expenditure:
Recurrent expenditure mainly refers to spending on salaries, wages, operations, current grants, and purchase of goods and services. It is related to the government’s expenditure on regular activities of the country.
Capital/ development Expenditure: Capital spending is expenditure used on fixed asset creation, for instance, acquiring land, the building of schools and hospitals, and other tangible asset that are substantial. It is related to the expenditure of the government on economic activities of the country mainly for capital formation. It is also called development expenditure.
Direct tax
Direct tax refer to the type of tax which is directly imposed on a person direct taxes cannot be passed on to a different person or entity; the individual or organization upon whom or which the tax is levied is responsible for the fulfillment of the full tax payment.
Advantages of direct taxes are as follows:
· Equitable
· Certainty
· Creates social awareness
· Equal distribution of income and wealth
· Elastic and anti-inflationary in nature
· Increase savings and investment
· Economical and desirable
The disadvantages of direct taxes are as follows:
Tax evasion
· Creates social conflict
· Inconvenient
· Uneconomic
· Limits capital formations and discourage investment
· Discourage production
· Sectarian imbalance
· Limited scope
Indirect taxes:
Indirect tax is imposed on commodities and services. It is imposed on one person but partly wholly paid by another. In indirect tax the impact and incident of tax are on different persons. The consumer is ultimately paying the tax by paying more for the product. Burden of tax can be shifted from one person to another.
Advantage/ merits of indirect taxes:
· Convenient
· Elastic
· Broad-based
· Progressive in nature
· Economical
· Diversity
· Less evasion
· Checks the consumption of harmful goods
· Helps policy makers
· Easy to collect
Disadvantages/demerits of indirect taxes:
· Regressive
· Inflationary
· Uncertain revenue
· Increases prices unduly
· Uneconomical
· Lack of public consciousness
· Adverse effect on production and employment
· Inefficiency in resource allocation
Progressive tax:
A progressive tax is a tax in which the tax rate increases as level of income or the taxable base amount increase.
Proportional tax:
A proportional tax is a tax imposed so that the tax rate is fixed, whether income level increases or decreases. The rate of tax remains constant for all income level groups but total tax amount increases with the increases with the increase in income level.
Regressive tax:
A regressive tax is a tax imposed in such a manner that the tax rate decrease as level of income increases. A regressive tax rate is imposed a greater burden on the poor than on the rich because high tax rate is imposed on how income level groups and low rate of tax is imposed on high income groups.
Qualities of good tax system:
· Canon of equality
· Canon of certainly
· Canon of economy
· Canon of convenience
· Canon of productivity
· Canon of elasticity
· Canon of simplicity
· Canon of diversity
Sources of government revenue:
· Tax revenue
· Non-tax revenue
· Foreign grants
· Cash reserve and irregularities recovery
Tax revenue:
· Taxes on income, profit and capital gains
· Taxes on goods and services
· Taxes on international trade
· Tax on property and registration fees
Non-tax revenue:
· Income from national property
· Fees for services, license and permits
· Penalties and fines
· Income derived from the sale of goods
· Voluntary transfer other than grant
· Specific assignment
· Miscellaneous revenue
Government borrowing:
Government borrowing refers to borrowing by a government from within the country of from abroad. Government borrowing, sometimes also referred to as government borrowing represents the total outstanding borrowing (bonds and other securities) of a country’s central government. Government borrowing can be raised both externally and internally, where external borrowing is the borrowing owned to lender outside the country an internal borrowing represents the government’s obligations to domestic lenders. Government borrowing is an important sources of resources for a government to finance government spending and fill holes in the budget.
Objectives of government borrowings:
1. To meet budget deficit
2. To finance for the development of physical and social infrastructures
3. To encounter emergencies like natural calamities and war
4. to minimize the problem of taxation
5. to reduce inflation and depression
6. To tickle with the monopoly of private sectors
7. To increase defense expenditure
8. To solve the problems of unemployment poverty and inequality in developing countries
9. To implement monetary policy.
Internal sources of government borrowing:
Internal government borrowing refers to the government loans floated within the country, internally the government borrows from private individuals, institutions, commercial banks, financial institutions, and central bank of the country.
External sources of the government borrowing:
External borrowing refers to the obligations of a country to foreign countries or international institutions. There are two types of external resources: Bilateral borrowing and multilateral borrowing.
Meaning of budget: Budget is an annual statement of income and expenditure of the government which is prepared by the executive and presented to the legislature for sanction.
Main features of budget:
· Budget is a plan or decision making process of the government.
· It is an annual financial statement prepared by the executive and approved by the legislature.
· Budget is an economic as well as political document.
· It is a financial plan covering outlays and receipts both.
· Generally, it is prepared for a fiscal year.
· Budget is a mirror to look over development activities.
· It sets a framework for policy formation.
· Budget is a means of policy implementation.
· It is a means of legal control.
· Budget document is a good source of public information on past activities, current decisions and future prospects.
Objective of budget
· Reallocation of resources
· Reducing inequalities in income and wealth
· Economic Stability
· Management of public enterprises
· Economic growth
· Reducing regional disparities
Process/steps of budget formulation
· Determination of priories
· Estimation of expenditure
· Estimation of revenue
· Discussion, approval and execution
International trade
The buying (importing) and selling exporting) of goods and services between different countries, according to negotiation, is called international trade. It is exchange of goods and services across international borders on defined exchange rate. It includes the export of surplus goods by the other countries.
Features of international trade:
· Supplier and purchasers are of different nations. They involve in trade after the negotiation between the countries
· Exchange of goods and services between the countries according to negotiation.
· Goods cross the boarders after completing different rules and regulations, processes, etc.
· Use of foreign currencies common foreign currencies or according or negotiations
· Trade is possible only after the certain types of negotiations between the nations.
· International trade is affected by various policies of different nations.
· The scope of the international agreements, organizations, etc.
The important of international trade:
· Utilization of resources
· Greater variety of goods available for consumption
· Higher efficiency in production
· Increment in development
· Good relation with foreign countries
· Source of government revenue
· Expansion of market
Balance of trade
Balance of payment is the situation of total receipt and total payment of the country. It includes the visible and invisible items. In other words, the balance of payment (BOP) is a systematic and comprehensive record of visible and non-visible economic transactions which are recorded at the custom offices and not recorded at custom offices of the nation during the specified period of time.
Free trade:
Free trade is that situation where there is open exchange of goods and to services with the rest of the world. In other words, the policies of no restrictions on the exchange of goods between countries are known as free trade policy.
Advantages of free trade:
· Extensive market size
· Improvement in productive techniques
· Benefit of division of labour
· Benefit to the consumers
· Utilization of resources
· Control of monopoly
Disadvantages of the free trade:
· Harmful for developing countries (LDCS)
· Danger of over dependence
· Distribution of home industries/ products
· Import of harmful foreign goods
· Theft of Intellectual property
· Unbalanced development of a country
· Poor working condition
· Degradation of natural resources
Protectionism:
Protectionism is concerned with the policy of encouraging domestic industries through trade regulation. For protectionism, government can impose high traffics, duties and quotas besides a large variety of other restrictions on imports. In addition to that, government can give facilities to domestic producers to increase the export capacity.
· Protection of infant industries
· Diversification of industries
· Resource utilization
· Self sufficient
· Increase government revenue
· Protection of domestic market
· Employment generation
Disadvantages of protectionism
· No specialization
· Establishment of monopolistic organization
· Tendency to become permanent
· Loss to consumers
· Negative effect on the relation among countries
Exercises
Long questions
1. Define bank. Explain the role of banking system in the economy.
2. Briefly discuss about the nature of different types of bank?
3. What are the functions of central bank?
4. Discuss about the functions of commercial bank?
5. Explain about the money market and capital. Discuss about the various difference of money market and capital market.
6. What is monetary policy? Discuss about the various objectives of monetary policy.
7. What is government finance? Explain the important of the government finance.
8. Define direct tax. Explain its merits and demerits.
9. Define direct tax. Describe its advantage and disadvantages.
10. Described about the non-tax source and tax source of government revenue.
11. What is meant by government borrowing? Describe about the various source of government borrowing.
12. Explain about the various steps of budget formulation.
13. Define free trade. What are its merits and demerits?
14. What is meant by protectionism in trade? Explain its merits and demerits.
15. Explain about the comparative cost theory of international trade.
Short questions
1. Describe the importance of banking system in the economy.
2. Briefly explain the functions of central bank.
3. What are the functions of commercial bank?
4. Differentiate between money market and capital market.
5. What are the objectives of monetary policy?
6. Explain various types of monetary policy?
7. Explain the importance of government finance.
8. Briefly explain about the classification of government expenditure.
9. What is the advantage of direct tax?
10. Explain about the disadvantages of indirect tax.
11. Explain the merits of indirect tax?
12. What are the demerits of indirect tax?
13. Explain about the progressive tax with table and diagram.
14. Describe proportional tax with the help of table and diagram
15. Discuss about the regressive tax.
16. What are the qualities of a good tax system?
17. Explain about the various tax resources of government revenue.
18. Described about the various no-tax sources of government revenue,
19. Explain about the internal and external borrowing.
20. What are the features of budget?
21. Discuss about the objectives of budget formulation.
22. Why is foreign trade important?
23. Differentiate between balance of trade the balance of payment?
24. What is the importance of balance of payment?
25. What is your suggestion for reducing in foreign trade problems of Nepal?
26. What are the merits of free trade?
27. Discuss about the demerits of tree trade?
28. What are the advantages of protectionism in international trade?
29. Explain about the disadvantages of protectionism in international trade.
30. Write down the assumption of comparative cost theory of international trade?
31. Point out the weakness of comparative cost theory of international trade.
Very short questions
1. Define bank
2. Mentioned any four importance of banks in the economy
3. Define central bank
4. What is meant by development bank?
5. Mentioned any four differences between central bank and commercial bank
6. Mentioned any functions of central bank
7. List out any four functions of commercial bank
8. Define money market
9. What is meant by capital market?
10. What is monetary policy?
11. State any four objectives of monetary policy.
12. Define government finance.
13. Mention any importance of government finance.
14. Define regular expenditure
15. What is meant by indirect tax?
16. Define direct tax
17. What is meant by indirect tax?
18. Mentioned any two merits of direct tax
19. Mentioned any four disadvantage of direct tax
20. List any four merits of indirect tax.
21. State any four demerits of indirect tax.
22. Define progressive tax.
23. What is meant by proportional tax?
24. What is regressive tax?
25. Mention any four qualities of good tax system.
26. Mention any four source of non-tax source of government revenue.
27. Define government borrowing.
28. Define about the internal and external sources of borrowing
29. What is budget?
30. Mention any four objective of budget.
31. What is international trade?
32. Mention any four objectives of budget?
33. Define balance of trade.
34. What is meant by balance of payment?
35. Define tree trade.
36. What is protectionism in trade?
37. Mention any four merits of tree trade.
38. List any four disadvantage of tree trade.
39. State any four advantages of protectionism in trade
40. List any four disadvantages of protectionism in trade
41. Mention any four assumptions of comparative cost theory of international trade.
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