Macro Economic Policies in India

Module 2
1. Industrial Policy 2. Monetary Policy 3. Fiscal policy Rajachellaiah committee 4. Trade policy 2004- 2006 5. Exim policy - 2002- 2007

Industrial Policies
Industrial policy refers to governments policy towards industries- their establishment, functioning, growth and management of. This indicates the respective areas of large, medium and small-scale sectors, foreign cap., Labour. Tariff, and other related aspects. In short the industrial devt. Of a country will be shaped, guided, fostered, regulated and controlled by its IP.

Policies over a period

Industrial policy Resolution of 1948. Industrial policy Resolution of 1956

Industrial policy Resolution of 1977

Industrial policy Resolution of 1980 Industrial policy Resolution of 1991

Industrial policy Resolution of 1948

The first important IP resolution was issued by the Govt. of India on April 6,1948. Following are the main features of this policy:

Acceptance of the importance of both private and public sectors. Division of the Industrial sector: under this the industries are divided into four categories namely:

1. Industries where state had a monopoly- arms and ammunition, atomic energy and rail transport. 2. Mixed sector coal, Iron & steel, aircraft mfg., ship building, mfg. of telephones, telegraph & wireless apparatus & mineral oils. Here hew industries will be set up by Govt. only. 3. The field of govt control: 18 industries of national importance were included here. 4. The field of private enterprise: all other industries not included in the above 3 categories were left open to private sector, State may take over any industry if they performance is not satisfactory.

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Role of small & cottage industries- the various problem of these industries should be solves by both central and state government together to facilitate the development. Other important features of 1948 policy are: * If the industries are requiring foreign capital than it was decided that Indians should have a major say in the ownership & management * It called for harmonious relations between the management & Labour. * The fair wage policy was enunciated. * Labour participation in management was stressed.

Indian capitalists were satisfies with this but it was subjected to a number of criticisms.

Industrial policy Resolution of 1956

During the 1948 policy many changes has taken place in the economy like: * Country has completed one five year plan in the period of 1951-56 * Industries (Development and regulation Act), was passes in 1951 * Ruling part had declared socialism pattern of society as the goal for the country. Because of above reason a need for new IP was felt and Industrial policy Resolution of 1956 came into existance.

Objective of IP of 1956
1.

2.

3.

4.
5.

6.

To accelerate the rate of growth and to speed up industrialization To develop heavy industries and machine making industries. To expand public sector To reduce disparities in Income & Wealth To build up a large and growing cooperative sector; To prevent monopolies and concentration of income and wealth in the hands of a few.

Salient features of Industrial policy of 1956

1.
2.

3.

Division of the Industrial sector: Monopoly of the state Mixed sector of public & private enterprise Industries left for public sector Mutual dependence of public & pvt. Sector Assistance & control of Pvt. Sector Importance of small-scale & cottage industries. Reduction of regional inequalities.

Salient features of Industrial policy of 1956

Division of the Industrial sector: Industries were divided into 3 categories as against four in 1948.

1. Monopoly of the state: Those industries whose future devt. Would be the exclusive responsibility of the state. * 17 industries were included here as schedule A. * grouped into 5 categories namely: i. Defense industry ii. Heavy industries iii. Minerals iv. Transport & Communication v. Power. Of these four industries- arms &ammunition, atomic energy, railways and Air trpt. Were to be the govt. monopolies. remaining 13- all new units were to be established by the state. Existing units in pvt. Were allowed to subsit & expand. State may seek the cooperation of private whenever it is required at the nations interest.

Salient features of Industrial policy of 1956

2. Mixed sector of public & private enterprise: 12 industries listed in schedule B were included. These were: all other minerals, road, sea transport, machine tools, Ferro-alloys and tool steels, basic & intermediate products required by chemical industries such as manufacture of drugs, dyestuffs and plastics, antibiotics etc. Here state would establish new industries but would not deny the private sector if they wanted to establish.

Salient features of Industrial policy of 1956

3. Industries left for Private sector: All the industries not listed in schedule A & B were included in this category. These were left open to private sector. The main role of State was to provide facilities.

Industrial policy Resolution of 1977

In March,1977 the Congress party was thrown out & Janata part assumed power at the center. In December 1977 JP announced a New Industrial Policy by way of a statement in the parliament. For 20 year the policy of 1956 was in force and governed the economy but it resulted in some problems as: unemployment, rural-urban disparities, The industrial growth was just 3% to 4% pa. Increase in industrial sickness contributed towards the passing of new policy.

Main elements of Industrial policy of 1977

1.

2.
3.

4.

5.

6.

Devt. of Small-Scale Sector Areas for Large-Scale-Sector Approach towards large business houses Expanding the role for the public sector. Approach towards foreign collaboration Approach towards sick unit.

1.Devt. of Small-Scale Sector

the main thrust of this policy will be on effective promotion of cottage and small industries widely dispersed in rural areas. The small sector was classified into 3 categories: 1. Cottage & household Industries self empt. 2.Tiny sector- invst.in Industrial unit in m/c & eqmt. upto 1 lakh. 3. Small- scale industries comprising industrial unit with an investment upto Rs. 10 lakh and in case of ancillary Rs. 15 lakh.

Purpose of the classification of SSI:

Purpose of the classification was to specifically design policy measures for each category. As against 180 items in the list of reservation earlier increased to 807 items by May 1978. District Industries center (DIC) in each district was set up to cater the needs of small scale industries. The Govt. revamped the khadi and village industries commision to enlarge its areas of operation.

2. Areas for Large-Scale-Sector

The policy of 1977 prescribed the following areas for large-scale: 1. Basic industries, essential for providing infrastructure as well as for the devt. of SSI, such as steel, cement, oil refineries etc. 2. Capital goods industries, for meeting the machinery reqt. of both basic and SSI. 3. High technology industries: such as Petrochemicals, fertilizers, pesticides etc. 4. Other industries which were outside the list of reserved items for SSI.

Evaluation of 1977 policy.

This policy was just the extension of the 1956 policy except a few changes like emphasis on SSI etc. The large scale has to rely on their own finance was the big blow to large scale industries. It did not contain any radical policies regarding foreign companies. The fall of Janatha party.

Industrial policy Resolution of 1980

The congress party announced its IP in July, 1980. It witness several steps to liberalize the IP Its main features are: 1. Exemption from Licensing- limit was raised. 2. Relaxation to MRTP & FERA Companies. 3. Delicensing 4. Re-endorsement of capacity 5. Broad branding of industries 6. Minimum economic scale of operation 7. Development of backward areas. 8. Incentives for export production 9. Enhancement of Investment limit for SSI and Ancillary units.

New Industrial policy, 1991

Announced on July 24,1991. It deregulates the industrial economy in a substantial manner. The major objectives of this policy are: To build on the gains already made To correct the distortions or weaknesses that might have crept in To maintain a sustained growth in productivity and gainful employment To attain international competitiveness.

Main provisions of 1991 policy

Abolition of Industrial licensing Public sectors role diluted MRTP Limit Goes Free entry to Foreign Investment and technology Other Liberalization Measures: a.Industrial location policy liberalized. b.abolition of Phased Mfg. Programmes for new projects. c.Removal of mandatory convertibility clause

Appraisal of 1991 policy

Benefits:
According to J C Sandesara, the new industrial policy seeks to Raise efficiency and accelerate industrial production in five different ways:
1. 2. 3. 4. 5.

All the provisions are such as do away with the prior clearance of the govt. It attracts capital, technology and managerial expertise from abroad. Privatization may increased efficiency. The Memorandum of Understanding may improve the performance of public sector. Strengthening of MRTP will curb anti-competitive behaviors of firm in monopoly. Oligopoly etc.

Criticism of 1991 policy

No evidence of positive impact on industrial growth Distortions in production structure Threat from foreign competition Dangers of business colonalisation Misplaced faith in foreign investment Personalistic relationship and practices continue to prevail.

Trade policy: New foreign trade policy 2004-09

The UPA (United Progressive Alliance) govt. at the center announced a new foreign trade policy 2004-09 on August 31,2004. Today there is a need for facilitatory trade policy rather than restrictive trade policy and hence govt. took the step & formed new policy to meet the need of globalisation.

Objectives of FTP 2004-09

There are two major objectives namely: 1. To double our percentage share of global merchandise trade within the next five years. 2. To act as an effective instrument of economic growth by giving a thrust to employment generation.

Strategies to achieve its objectives:

1. 2. 3. 4. 5. 6. 7. 8. 9. Unshackling of controls and creating an atmosphere of trust and transparency in dealing with business Simplifying procedures and bringing down transaction cost. Facilitating devt. Of India as global hut for mfg, trading & services. Identifying & generating additional areas of employment in both rural & urban. Technological & infrastructural up gradation of all the sectors. To ensure that out RTA are beneficiary. Up gradation of our infrastructure on international standards. Revitalising the board of trade & redefining its role. Activating our embassies as key players in our export strategy.

Main features of FTP 2004-09

1. Doubling share of global merchandise trade 2. Five thrust sectors: sectors with significant export prospect and with potential for employment generation in semi-urban & rural areas are called as thrust sectors. FTP announced specific strategies for this five sectors namely: Agriculture, Handicrafts, Handlooms, Gems & Jewellery and Leather & Footwear. These sectors were termed as Special Focus Initiatives.

Main features of FTP 2004-09

3. 4. 5. 6. Served from India to be built as a brand. New categories of star houses. Target plus Scheme. Setting up of Free Trade and Warehousing Zones (FTWZs) 7. Sops/benefits for EOU 8. Reducing transaction costs and simplifying procedures. 9. Focus on infrastructure development 10. Other measures Biotechnology parks will be set up, The board of trade will be revamped, Financial support to exporters.

Critical evaluation of FTP

1. Unrealistic export target-0.8 to 1.5 in 2009. 2. Burden of tax incentives 3. Danger of circular trading 4. Risk of importing outdated machinery 5. Policy fails to take a holistic view of trade issues.

Export-import policy(2002-07)
The govt. of India announced the new five year Exportimport policy covering 10th five year plan period of (2002-07) on march 31,2002. The main initiatives were as follows: 1. It had removed quantitative restrictions on all imports. 2. The govt. decided to focus on the export of 106 items like electrical, electronic, watches, footwear, jeweler etc. were identified in the medium term export strategy released in Jan 2002. 3. Many measures were announced to give major thrust to agri-exports AEZ were identified.

Export-import policy(2002-07)
4. Units set up in SEZs (Special economic zones) were granted a number of concessions and exemptions- income tax benefit, permission to Indian banks to set up overseas banking units(OBUs) in SEZs. These banks were exempted from RBI restrictions. 5. To ensure greater participation of states in export promotion. The center increased fund allocation under the assistance to States for infrastructural Devt. For Exports scheme. 6. It places a special focus on the small-sector which generates almost 50% if Indias esports. 7. The status holders, export houses, trading houses were granted special benefits.- 100% Foreign Exchange in external accounts.

Export-import policy(2002-07)
8. This Exim policy shifted as many as 50 items to the OGL (open general License or free list). 9.It permitted relocation of industrial plants from foreign countries into India with any license to attract foreign capital. 10. Changes were made in the Export Promotion Capital goods scheme to help exporters. 11. It announced lower inspection levels and simplification of schemes to make our exports more competitive.

Monetary Policy
Definition: It is a policy employing the central banks control of the supply of money as an instrument for achieving the objective of general economic policy. Harry G. Johnson Meaning: The regulation of the money supply and the control of the cost and availability of credit by the central bank of the country through the use of deliberate and discretionary action for achieving the objectives of economic policy.

Objectives of Monetary Policy

The Chakravarthy Committee has given the following objectives as the important objectives of MP: High rate of economic growth Price stability Greater equality and social justice in the distribution of income & wealth Promoting and nurturing new monetary and financial institutions . The RBI s monetary policy should based on national economic and social objectives as enunciated from time to time in the five year plans.

Credit control by RBI

RBI Act 0f 1934 and Banking Regulation Act of 1949 both have empowered RBI with to use almost all the traditional instruments of credit control and additional powers to use some other direct methods of credit regulation. The role of RBI is comprehensive. In spite of this RBI is weak in its credit control function because of underdeveloped character of Indian money market.

Credit control tools of RBI

1. 2. 3.

4.
5.

Bank rate policy Open Market Operations Cash Reserve Ratio Statuary liquidity Ratio Selective credit controls.

1.Bank rate policy

Bank rate refers to the rate of interest at which the central bank rediscounts approved bills of exchange. Bank rate was 10% during 1980s. It was raised to 12% from October 9, 1991- to counteract the inflationary pressure. Today it serves as a reference rate for other rates in the financial market.

2. Open Market Operations

The term Open Market Operations refers to the purchase or sale by the central bank of any Securities in which it deals, such as the govt. securities, bankers acceptance or foreign exchanges.

It exerts direct influence on the supply of money in circulation. When central bank offers securities for sale, it intends to contract the quantity of money & credit. When central bank buys securities in the market, it intends to expand the quantity of money & credit. During last two decades RBI is undertaking switch operations involves purchase of one loan against sale of another or vice versa. It is more effective as the govt. security market is well developed in the country.

3. The cash Reserve Ratio

Under RBI (Amendment) Act 1962, the RBI is empowered to determine CRR for the commercial banks in the range of 3% to 15% for the aggregate demand and time liabilities. It is used for control of inflation during 1970 & 1980.It was increased from10 to 15%. It was reduced to 8% in 2000-2001and in Oct 2001 to 5.5% later on 4.5% from June 14,2003. In Sep 11, 2004 it was raised to 5%.

4. Statutory Liquidity Ratio

The Banking Regulation (Amendment) Act 1962 provides for maintaining a minimum SLR of 25% by the banks against their net demand and time liabilities. Empowered to raised up to 40% if required to control liquidity. In 1990 it was raised to 38.5% to reduced commercial banks ability to create credit and thus eased inflationary pressure and to made large resources available for the state.

Based on the Narsimham Committee recommendation the govt. reduced SLR in stages from 38.5% to 25% in October 10, 1997 to till date.

5. Selective Credit Controls

Are meant to regulate credit for specific purposes or specific branches of economic activities. It helps to check the misuse of borrowing facilities, It can prevent speculative hoarding of essential commodities and undue rise in the price. Since 1956 the RBI relied mainly on three techniques of selective CC namely: 1. The determination of margin requirements for loans against certain securities. 2. Determination of maximum amount of advance 3. Charging of discriminatory interest rates on certain types of advances. 4. The Credit Authorization scheme of 1965was this kind.

Fiscal policies
Meaning: Refers to the policy of the govt. as regards taxation, public borrowing and public expenditure with specific objectives in view.

Objectives of FP
Fiscal policy of India is having two major objectives namely: 1. Improving the growth performance of the economy- It affects growth by influencing the mobilization of resources for development and by improving the efficiency of resource allocation 2. Ensuring Social justice to the people.

Budget
Fiscal policy operates through budget.

FP is also known as budgetary policy.

The word budget is derived from the French word Bougette which means a leather bag or a wallet used to carry financial papers. In simple terms budget means an estimate of revenue & expenditure. In broader term It is a master financial plan of the govt. The work of preparing the Union budget begins in the month of August every year and after finalizing it will presented in the parliament on the last day of February. The budget is divided into two parts, Revenue budget and capital budget.

Budget 2006-2007 @ glance

According to Central Govt. budget for 2006-07, The total revenue receipts are estimated at Rs. 403465 crores The total capital receipts are estimated at Rs. 160526. crores Total receipts are at Rs. 563991 crores Total disbursements at Rs. 563991 crores Revenue deficit of Rs. 84727 Fiscal deficit of Rs. 148686 crores with a primary deficit of Rs.8863.

Direct & Indirect taxes

Taxes may be divided into two broad categories: Direct & Indirect. Direct Tax is one where the impact and incidence of the tax is on the same person. Ex. Income tax, wealth tax, and gift tax. Indirect tax is one where the impact and incidence of the tax is on the different persons. Ex. Excise duty, custom duty, Sales tax etc.

Revenue of the Union/ Central Government

The revenues of the Govt. of India can be divided into two namely:
I. Tax-revenue II. Non tax revenue.
I.
1. 2. 3.

Sources of Tax revenue:

4.
5. 6. 7. 8. 9. 10.

Union Excise Duties are levied on commodities produced within a country. Excluding those where state has the right to charge. Income tax: In 2006-2007 budget it counts for 11% of total revenue. Corporation Tax: This is charged on the net profit of JSC. In 2006-2007 budget it counts for 20% revenue. Customs: includes both import & export duties. 90% is from imports. In 2006-2007 budget it counts for 11% Tax on Capital gains: introduced in 1946 Tax on wealth: introduced in 1957-58 Service tax: introduced in 1994-95 Expenditure Tax: on expenditure incurred in hotel rooms costing more than Rs.400 per day. Interest tax: In 1974It is first time in the world in India this tax was introduced on banks income from interest on their lending. Gift Tax: introduced in 1958

II. Non tax revenue of central Govt.

Surplus profit of RBI Currency & Coinage & Mint Railways Posts & Telegraphs Profits of Public enterprises Interest Receipts Other Non tax revue sources: Departmental receipts, Multipurpose River schemes etc. In budget 2006-07 the total tax revenue is expected as 65% and next only 11% from Non tax revenue and nest 24% from Borrowings and other liabilities.

Expenditure of the Central Govt.

Defense One fourth of the total revenue exp. In 200607 budget it is estimated as 13% Administrative services Social & devt. Expenditure Assistance to states: In 2006-07 budget it is estimated as 6% Interest payments: In 2006-07 budget it is estimated as 21% Fiscal services Central subsidies: In 2006-07 budget it is estimated as 7%

Revenue of the State Government

The three broad sources of revenue for the states are: 1. Tax Revenue 2. Non Tax revenue of state. 3. States share in revenues of and grants from the central Govt.

1.Tax Revenue of state

1.

2.
3. 4. 5.

Sales Tax State Excise Stamps & registration Land revenue Agricultural Income tax

2. Non Tax revenue of state

Irrigation Charges Betterment Levy Forests State Lotteries Interest Receipts Receipts from Economic services Receipts from general services and social community services Dividends from Commercial undertakings

3. States share in revenues of and grants from the central Govt.

A. Share in Central Taxes: 1. Share in Income tax 2. Share in union Excise B. Grants from the central Govt. 1. Grant to Jute growing states 2. For special purpose 3. Plan grants etc.

Expenditure of the State Government

1.

2.

3.

4.
5. 6.

Administrative services- Admn. Police Jail etc Social services & Community services Edn medical family welfare, calamities etc Economic services Agri, Forest irrigation etc. Fiscal services cost in tax collection Debt servicing and interest payments Grants to local bodies and panchayati Raj Institutions

Dr. Raja J. chelliah committee recommendations on taxation

To meet the requirement of new industrial policy in 1991 the Govt. of India constituted this committee to fulfill the following objectives: 1. To examine the structure of direct & indirect taxes 2. To make recommendation to make the tax system more elastic & broad. 3. To suggest measures required for simplifying law and regulation to facilitate better enforcement and compliance.

Dr. Raja J. chelliah committee recommendations on taxation

This committee submitted its interim report in February 1992 to the Govt. of India to enable Finance minister in framing budget 1992-93. The committee submitted its Final report in two parts, part I in Aug.1992 and part II in Jan.1993. The finance minister implemented this recommendation in both 1992-93 & 1993-94 budget.

Recommendations
A. Personal Income tax reforms. The policy of moderating tax rates & widening the tax base combined with fewer deductions. Incomes falling in the slab Rs. 50,000 to Rs. 2,00,000 should be taxed at 27.5% & the maximum marginal rate if IT of 40% inclusive of surcharge should be applicable to income above Rs. 2,00,000. Withdrawal of exemptions in respect of various saving like NSS. The income of the minor child from gifted assets should be clubbed with that of the parent. The double taxation should be avoided. Presumptive tax scheme for small shop owners and traders The taxing of leave travel allowance & receipts on retirement to be taxed. The agricultural income in excess of Rs. 25,000 accruing to the non agriculturist be taxed by aggregating it with non Agri. Income.

B. Capital Gains Tax reforms: The committee has favored tax on capital gains from the sale of an assets net of its price increase owing to general inflation over a period of time for which it is held. C. Wealth Tax reforms: 1. The investment in shares, securities, bonds, banks deposits etc. should be exempted from tax. 2. Wealth tax should be levied on individuals, Joint Hindu families and all companies only in respect of non productive assets. 3. Wealth tax should be levied at the rate of 1% with an exemption of Rs. 15 lakh. 4. The abolition of present wealth tax.

D. Gift tax reforms: The gift tax limit should be raised from Rs. 20.000 to 30,000. E. Corporate Tax reforms: 1. The corporate tax rates for domestic companies to be lowered to 45% in 1993-94 from 51.75% by abolition of surcharge, further to 40% in 199495 2. The corporate tax rates for foreign companies to be lowered. The diff. should be 7.5% to 10% between domestic and foreign corp. tax. 3. The double taxation of foreign companies in respect of fees for technical services should be avoided. 4. The retention of the central rate of depreciation on plant & m/c at 25%. 5. Abolition of tax on interest. 6. In future the partial integration of company & individual to be introduced.

F. Custom Duties Reforms: 1. Reduction in custom tariffs rates to 15-20% by 1997-98. 2. A stable import duty rate to avoid pressure from exemptions & concessions. 3. Rules out a single duty regime & favored for a very limited number of rates. 4. A minimum 5% custom on all goods which now enjoy total exemption. 5. The custom tariff on finish goods should be more than on raw materials.

G. Excise Duties Reforms: 1. The present Excise tax system should be gradually transformed into a genuine VAT. 2. The extension of MODVAT (Modified Value Added Tax) to textiles & petroleum products. 3. Three rate MODVAT regime at the mfg. level with excise duties of 10%, 15% & 20% and on non essential commodities as 30%, 40% & 50%. 4. The extension of MODVAT to wholesalers to increased the revenues for state Govt. H. Value Added Tax: A VAT should replace excises, states sales taxes & the municipal Octroi, with the revenue being shared between Centre, State & local self govt. *****************