ABSTRACT

This chapter describes the quantification of inter-relationships between fiscal, monetary and foreign exchange variables and how they affect the sectoral level performance of the economy. It assesses the macro economic framework that is to provide the basic links between macro policies and the agricultural sector. Fiscal variables affect the production sectors through both general mechanisms and direct interventions in the form of taxes, subsidies and expenditures in specific sectors. Monetary aggregates provide the link between fiscal variables and prices and through prices to the other real variables. The trends in agricultural subsidies and public investment show a trade-off between the two types of expenditure, caused by the growing fiscal imbalance. In the central government account, agricultural subsidies comprise of food and fertilizer subsidies. The Central government has the option of monetizing its deficit whereas the state governments face a harder financing constraint in the sense that there are limits up to which the Central bank could lend.