Nature and Objectives of Economic Policies

Submitted by:•Astha Ahir•Hema Singh•J.Pooja•Lekshmi P•Mamta Singh•Rama Pruthi•Tanvi Srivasthava

INDIAN ECONOMIC POLICYINDIAN ECONOMIC POLICYContains basic principles and points the direction in which

India proposes to move.The main objectives of the India Economic Policy is to take

care of the basic parameters of the Indian Economy as mentioned below:  

Agriculture Industry Trade and Commerce

Fiscal PolicyFiscal Policy

Objectives of fiscal policy:

The objectives of fiscal policy may be regarded as follows;

1. To achieve desirable price level

2. To achieve desirable consumption level

3. To achieve desirable employment level

4. To achieve desirable income distribution

5. Increase in capital formation

6. Degree of inflation

InstrumentsInstruments of Fiscal Policy: of Fiscal Policy:

1. Public expenditure2. Taxes3. Public debts

The three possible stances of fiscal policy are neutral, The three possible stances of fiscal policy are neutral, expansionary, and contractionary:expansionary, and contractionary:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue).

An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending, a fall in taxation revenue, or a combination of the two..

A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue, reduced government spending, or a combination of the two.

Taxation Fiscal policy, especially tax policy, can be used to enhance growth, by encouraging the efficient use of any given amount of scarce resources.

Public expenditure embraces all the public sector spending including that of central governments, state governments, local authorities and public corporations. The pattern of public expenditure is influenced by interest groups and by economic, political, demographic, sociological and technological factors. In addition, international demonstration effect induces developing countries like India to follow spending patterns of advanced countries.

Monetary Policy

Monetary PolicyMonetary PolicyThe term monetary policy refers to actions taken by

central banks to affect monetary magnitudes or other financial conditions.

Monetary Policy operates on monetary magnitudes or variables such as money supply, interest rates and availability of credit.

Monetary Policy ultimately operates through its influence on expenditure flows in the economy.

In other words affects liquidity and by affecting liquidity, and thus credit, it affects total demand in the economy.

Credit PolicyCredit PolicyCentral Bank may directly affect the money supply to control

its growth.Or it might act indirectly to affect cost and availability of

credit in the economy. In modern times the bulk of money in developed economies

consists of bank deposits rather than currencies and coins.So central banks today guide monetary developments with

instruments that control over deposit creation and influence general financial conditions.

Credit policy is concerned with changes in the supply of credit.

Central Bank administers both the Credit and Monetary policy

Aims of Monetary policyAims of Monetary policyMP is a part of general economic policy of the govt.

Thus MP contributes to the achievement of the goals of economic policy.

Objective of MP may be:

1)Full employment2)Stable exchange rate3)Healthy BoP4)Economic growth5)Reasonable Price Stability

6)Greater equality in distribution of income &wealth

7)Financial stability

Operation of Monetary PolicyOperation of Monetary PolicyInstruments

1. Discount Rate (Bank Rate) 2.Reserve Ratios 3. Open Market Operations

Operating Target

• Monetary Base• Bank Credit• Interest Rates

Intermediate Target

•Monetary Aggregates(M3)•Long term interest rates

UltimateGoals

•Total Spending• Price Stability Etc.

Instruments of Monetary PolicyInstruments of Monetary Policy

Variations in Reserve RatiosDiscount Rate (Bank Rate)

(also called rediscount rate)Open Market Operations (OMOs)Other Instruments

Variations in Reserve Variations in Reserve RatiosRatiosBanks are required to maintain a certain percentage of

their deposits in the form of reserves or balances with the RBI

It is called Cash Reserve Ratio or CRRSince reserves are high-powered money or base money,

by varying CRR, RBI can reduce or add to the bank’s required reserves and thus affect bank’s ability to lend.

Discount Rate (Bank Rate)Discount Rate (Bank Rate)Discount rate is the rate of interest charged by the central bank

for providing funds or loans to the banking system. Funds are provided either through lending directly or

rediscounting or buying commercial bills and treasury bills.Raising Bank Rate raises cost of borrowing by commercial

banks, causing reduction in credit volume to the banks, and decline in money supply.

Variation in Bank Rate has an effect on the domestic interest rate, especially the short term rates.

Market regards the increase in Bank rate as the official signal for beginning of a tight money situation.

Open Market Operations Open Market Operations (OMOs)(OMOs)

OMOs involve buying (outright or temporary) and selling of govt securities by the central bank, from or to the public and banks.

RBI when purchases securities, pays the amount of money by crediting the reserve deposit account of the seller’s bank, which in turn credits the seller’s deposit account in that bank.

Foreign Exchange Policy

Overview of FOREX Policy Over The Overview of FOREX Policy Over The YearsYearsForeign exchange transactions were regulated in India by the

Foreign Exchange Regulations Act (FERA), 1973.This act regulated certain aspects of the conduct of the

business outside the country and in India by the foreign countries.

The FERA was widely described as a draconian and obnoxious law.

The year 1991 - important milestone for the Economy. There was a paradigm shift in the Foreign Exchange Policy. It

moved from an Import Substitution strategy to Export Promotion with sufficient Foreign Exchange Reserves.

From Control to Management From Control to Management

Lot of demand for a substantial modification of FERA in the light of economic liberalization and improving foreign exchange reserve position.

Consequently, a new Act, the Foreign Exchange Management Act (FEMA), 1999 replaced FERA.

FEMA extends to whole of India and also applies to all branches, offices and agencies outside India, owned or controlled by a person resident in India.

Objectives of FEMA:

1. To facilitate external trade and payments.

2. To promote the orderly development and maintenance of foreign exchange market.

Foreign Exchange Foreign Exchange Management ActManagement ActThe RBI is assigned an important role in administration of

FEMA. The rules, regulations and norms pertaining to several sections

are laid down by RBI.The Central Government is responsible to impose restriction

on dealings in foreign exchange and foreign security to and receipt from any person outside India.

Few Clauses are:1. Restrictions on person residing in India on acquiring, holding

and owning foreign exchange, foreign security abroad.2. Dealings in foreign exchange or foreign security and all

payments from abroad shall be made through authorized persons.

3. Penalty for any kind of contravention under this Act is liable to a penalty up to thrice the amount involved.

4. This provision is in total contrast to FERA which provided for imprisonment and no limit on fine.

Basic Difference in FERA and FEMA

1.Aim of FEMA is to facilitate trading as against that of FERA, which was just to prevent misuse.

2.FEMA is a much smaller enactment –only 49 sections as against 81 of FERA

3.Many provisions of FERA like employment of foreign technicians in India have no appearance in FEMA

Foreign Investment Policy

Introduction to Foreign Introduction to Foreign InvestmentInvestment• Foreign investment comprises

– Foreign Direct Investment (FDI) represents a long-term vision and strategic commitment of the

investors to the recipient economy

– Foreign Portfolio Investment (FPI) Intrinsically short-term and aims to maximize risk-return

payoffs from capital markets• Government is making all efforts to attract and facilitate FDI and

investment from Non Resident (NRIs) including Overseas Corporate Bodies (OCBs).

• FDI is freely allowed in all sectors, except few which have a pre decided upper ceiling on the foreign investment.

India’s Foreign Investment India’s Foreign Investment PoliciesPolicies• Till 1980s– Cautiously pragmatic during

50s and 60s. Ownership remained primarily with resident investors.

– Tight monitoring, ensured hardly much FDI in economy (Exception oil sector)

– 1970 saw FDI highly regulated and confined to industries requiring sophisticated technology.

– FDI was diverted from consumer goods to capital and intermediate goods.

• Transition in 1991– Government decides to

encourage stable non-debt creating long-term capital flows.

– Decontrolled, outward-oriented and market-friendly system.

– Allowed FDI in 35 high-priority industries.

– Liberalization of FDI is a part of reduction of scope of the public sector.

– State monopoly cramped to only sectors of strategic importance like atomic energy.

Present Day HighlightsPresent Day Highlights• Enabling policies have resulted in aggregate foreign investment into India

increasing from US$103 million in 1990-91 to US$61.8 billion in 2007-2008.

• India is identified as one of the most attractive long-term investment locations.

• The present policy permits foreign investors to collaborate with local partners as well as establish wholly owned subsidiaries (WOSs).

• Foreign investors can invest through:

– Automatic Route allows investors to bring in funds without obtaining prior permission

from the Government, RBI, or any other regulatory agency. invested enterprises are required to inform RBI within 30 days of

receipt of funds .

– Government-administered RouteCertain investment intentions require prior permission from the

government.

Progressive De-licensingProgressive De-licensing• While limiting the public sector increased potential for competition,

withdrawal of licenses facilitated competition.• The Industrial Policy of 1991 confined mandatory licensing to 18

manufacturing industries.

– included minerals and natural resource-based products, chemicals, alcoholic beverages, tobacco and consumer durables

• The remaining licenses were gradually released:

– Automobiles were de-licensed in April 1993

– Most bulk drugs and formulations were freed from licensing in 1994• Progressive de-licensing has resulted in licensing now being confined to

five activities:

– alcoholic beverages, electronic aerospace and defence equipment, cigarettes & tobacco, industrial explosives and hazardous chemicals

Technology through Foreign Technology through Foreign InvestmentInvestment

FDI was initially allowed only in sectors where advanced technology and other attributes could make a significant difference to industrial capacities and competitiveness, both in domestic and overseas markets.

With a view to injecting the desired level of technological dynamism in Indian industry and for promoting an industrial environment where the acquisition of technological capability receives priority, foreign technology induction is encouraged both through FDI and through foreign technology collaboration agreements

100% foreign ownership under automatic route was allowed in electricity generation, transmission, and distribution in June 1998.

In January 1999, projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours were permitted 100 percent FDI.

Scope of Foreign Scope of Foreign InvestmentInvestment

• Foreign investment in agricultural activities.– Currently limited to few value-additive agricultural

activities like aquaculture, floriculture, horticulture, animal husbandry, etc.

• Increasing foreign investments in service sector.– rail transport, airports &seaports, banking and

insurance have overarching state presence limiting the FDI in these sectors

• Continuing the gradual reforms in spite of political oppositions and lobbyists pressures.

Industrial PolicyIndustrial Policy

Industrial Policy up to Industrial Policy up to 19911991Reservation of IndustriesDominance of Public SectorEntry and Growth RestrictionsRestrictions of Foreign Capital

and Technology

The New Industrial PolicyThe New Industrial PolicyObjectives

◦ To build on the gains already made.◦ To correct the distortions that have crept in.◦ To maintain a sustained growth in productivity.◦ To attain international competitiveness.

Redefinition of the role of Public SectorDismantling of Entry and Growth Restrictions

◦ Delicensing◦ Removal of MRTPA Restrictions

Liberalisation of Foreign Investment

Tools of Regulation: IDRA & Tools of Regulation: IDRA & Industrial LicensingIndustrial Licensing IDRA

◦ Development Measures

◦ Regulation of Entry and Growth

◦ Supervision and Control

◦ Take over of Management

◦ Price and Distribution Controls

◦ Exemptions Industrial Licensing

◦ All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for Industries reserved for Public Sector Industries retained under compulsory licensing Items of manufacture reserved for small scale sector If proposal attracts locational restriction

Industrial SicknessIndustrial Sickness The Sick Industrial Companies Act, 1985 defines a sick industrial company as an industrial

company which has at the end of any financial year accumulated losses equal to or exceeding its entire networth.

SICA provided for curative measures against industrial sickness, but was repealed in 2003. A new part- Part VI A, was inserted in the Companies Act, 1956, by the amendment of 2003,

pertaining to Revival and Rehabilitation of Sick Industrial Companies. The procedure to deal with the sickness is stated as:

◦ Reporting of Industrial Sickness to National Company Law Tribunal

◦ Inquiry by Tribunal

◦ Turnaround of Viable Sick Company

◦ Rehabilitation Scheme for unviable Sick Company Financial Reconstruction Change in/ take over of management Amalgamation Sale or lease of a part or whole Repayment of Debt

Price & Distribution Price & Distribution ControlsControls The basic objectives and approach for the Price Policy

was formulated in the Third Plan and continued in the successive plans without any remarkable changes.

Indian Companies ActIndian Companies Act India Company Act, 1956, amended from time to time, is an important legislative

instrument to regulate the formation and functioning of companies It recognizes a given set of categories of companies and lays down certain norms

and procedures for the formation of each one of them. It lays down rules regarding issue of shares, debentures, depository receipts by

Indian and foreign companies, acceptance of deposits etc. There are provisions for the protection of share and debenture holders and

depositors in general and of small investors in particular. The Act has norms and rules regarding the composition of the Board of Directors.

Powers and responsibilities of the Board are also specified. It lays down the procedures for the Annual General meetings and passing

resolutions by postal voting. It also states the procedures of buy-back of shares and winding up of companies . It mandates the formation of a committee of the board known as Audit Committee

to stay in line with the appropriate internal control standards.

Competition Policy and Competition Policy and LawLaw The high level committee on Competition Policy and Law centered

its recommendations on the following three areas:

◦ Agreement among enterprises

◦ Abuse of dominance

◦ Combinations among enterprises Following the recommendation of the committee, The Competition

Act, 2002 is the important legislative tool to promote competition.

◦ Establishment of Competition Commission

◦ It declares void any agreement in respect of production, supply, distribution etc., which causes or is likely to cause an appreciably adverse impact on competition within India.

◦ Division of Enterprise enjoying dominant position The central government is empowered to exempt from the

application of this Act.

Trade Policy

TRADE POLICYTRADE POLICYUnder the old economic order, India followed a policy of

import substitution. This led to the establishment of a complex system of licensing and control over imports through non-fiscal and fiscal barriers.

Trade Policy Reforms have been one of the major planks of the new economic policies initiated from July 1991 which were designed to attract significant capital inflows into India on a sustained basis and to encourage technology collaboration agreements between Indian and foreign firms.

New trade policy is spelt out in the Export Import (EXIM) policy, which is valid for the period 1992 to 1997, amendments to this policy were announced on 31st March 1995.

TRADE POLICY IN INDIATRADE POLICY IN INDIA Trade Reforms form the crux of the economic reforms in India. Export Promotion has been and continues to be a major thrust of

India’s trade policy Accordingly, policies have been aimed at creating a friendly

environment by eliminating redundant procedures, increasing transparency by simplifying the processes involved in the export sector and moving away from quantitative restrictions, thereby improving the competitiveness of Indian industry and reducing the anti-export bias.

Steps have also been taken to promote exports through multilateral and bilateral initiatives and giving several incentives to exports to cope with all uncertainties at the global level.

EXCHANGE RATEEXCHANGE RATEAll export and import transactions are conducted at the

market rate of exchange.The market rate also applies to other transactions,

including inflow of foreign equity for investment and outflow in the event of disinvestment, payments in respect of repatriation of dividends, fees and royalties for technical know-how agreements and also for foreign travel.

IMPORT POLICY IMPORT POLICY The recommendations of the tax reforms committee entailed

reduction in tariffs so that by the year 1997-98.The duty on non-essential consumer goods would then be no

more than 50%.

IMPORT POLICY…IMPORT POLICY…All goods can be imported freely except for a small Negative List

consisting of: Prohibited items : 3 items, import of which is not allowed. Restricted items : Here, import is allowed against an import

license or under general schemes notified separately. According to the latest changes in EXIM policy announced on 31st March'95, the number of items in this list has been reduced to 65 from the earlier count of 72.

Canalised items : 7 items, import of which is permissible only through designated agencies.

EXPORT POLICYEXPORT POLICYExports are the major focus of India's trade policy. The

export promotion package compares favorably with incentives offered elsewhere in the world. It makes special effort to attract foreign investors to set up export oriented units in India.

Features of Trade Policy Features of Trade Policy Reform in IndiaReform in India

Free imports and ExportsRationalization of tariff structure/reducing tariffs.Liberalization of the exchange rate regime.Setting up of trading houses, SEZ’s and Export promotion

industrial parks.Various exemptions under the EXIM policies to boost exports

and imports and make the trade policy regime transparent and less cumbersome.

TowardsTowards a more open a more open economyeconomy

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