indian economic system · · 2017-11-17achieve certain pre-determined objectives. ... the bombay...

Unit 2

Indian Economic

System

Indian Economic System

Business Environment – MBA I Semester

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Mixed Economy is neither pure capitalism nor pure socialism but a mixture of the two system.

In this system we find characteristics of both capitalism and socialism. Mixed economy is

operated by both, private enterprise and public enterprise.

That is private enterprise is not permitted to function freely and controlled through price

mechanism. On the other side, the government intervenes to control and regulate private

enterprise in several ways. It has been realised that a free functioning of private enterprise

results in several types of problems.

According to J. W Grove, “One of the presuppositions of a mixed economy is that private firms

are less free to control major decisions about production and consumption than they would be

under capitalist- free enterprise, and that public industry is free from government restrains than

it would be under centrally directed socialist enterprise.”

Characteristics of Mixed Economy:

The important characteristics of mixed economy are as follows:

1. Co-existence of the public and Private Sectors:

The important characteristics of mixed economy are that in this economy both private sector

and public sector function together. The heavy industries such as defence equipment, atomic

energy, heavy engineering industries etc., come under the control of public sector, on the other

hand, the consumer goods, small and cottage industries, agriculture, etc., are assigned to the

private sector. The government helps the private sector by providing several facilities, of their

development.


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2. Economic Welfare:

It is the most important criterion of the success of a mixed economy. Public Sector seeks to

avoid regional inequalities, provides large employment opportunities and often its price policy

is guided by considerations of economic welfare rather than by profit motive. Private activities

are influenced through monetary and fiscal policies to make them contribute to economic

welfare of the society at large level.

3. Economic Planning:

In Mixed economy, the Government adopts the instrument of economic planning. This is

necessary for the public sector enterprises which have to work according to some plan and to

achieve certain pre-determined objectives.

In the same way, the Private Sector cannot be left to develop in its own way. To ensure a co-

ordinated and fast economic development the programmes of both the sector are drawn in such

a way that growth in one complements the growth in the other.

4. Free and Controlled Economic Development:

The Mixed Economic System considered to be more appropriate to remove the demerits of the

capitalist and communist economic systems. Encouragement is given to free economic

activities and at the same time steps are also taken to control economic activities.

Merits of Mixed Economy:

The merits of mixed economic system are discussed below:

1. Adequate Freedom:


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Mixed economy also permits adequate freedom to different economic units: (a) Consumers are

free to dispose of their incomes in a manner they want, although the government does try to

influence these decisions through monetary, fiscal and commercial policies, (b) Factors of

production are free to choose their own occupations although again the Government may strive

to create conditions favourable for the growth of chosen occupations.(c) Private initiative is

always encouraged to find it’s best possible use.

2. Maximum Welfare:

In mixed economic system, the state makes efforts to provide maximum welfare to workers

and other citizens. The government makes provision for the employees for housing, education,

minimum wages, good working conditions, etc.

3. Modern Technology:

In mixed economy, the modern technology and capital saving method is used, with the result

large- scale production and profit could be possible. Reserve fund is created to meet any

undesired situation in future. It produces more at the time of trade boom and utilise the reserve

capital when there is recession.

4. Best Allocation of Resources:

The resources are utilised in the best possible manner in the Mixed Economic System. The

Central Government makes economic planning for optimum use of the resources. Thus

shortage is avoided; productive efficiency increases and cyclical fluctuations are eliminated.

Demerits of Mixed Economy:

The major disadvantages of mixed economy are:


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1. Low inflow of Foreign Capital:

Because of the government policy and the fear of nationalisation there is less possibility of

inflow of foreign capital which is very essential of the development of private sector.

2. Inefficiency of Public Sector:

In comparison to private sector, public sector efficiency is lacking and corruption,

discrimination and red-tapism are the evils spread in the public sector.

3. Maximum Control on Private Sector:

On one side, opportunity is given to private sector for development but, on the other side

stringent controlling is exercised by the government to regulate the functioning of private

enterprises. This has an adverse impact on the development of private sector.

4. Fear of Nationalisation:

The private entrepreneurs are much worried about the government policy to nationalise private

enterprises in certain situations.

5. Problem of Concentration of Economic Power:

Although it is said that the mixed sector minimises economic concentration but in practice the

private-entrepreneurs take the advantage of government policy and accumulate wealth since

both the private and public sectors co-exist, the government will not be in a position to impose

any stringent steps to prevent economic concentration.

6. Presence of Imbalance in the Economy:

The mixed economy cannot provide faster development as the government simply wants to

maintain a balance between the private and public sectors. The policies of the government are


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not so clear or it facilitates to give any direction with the result, there exists non-clarity of

objectives and presence of imbalance in the economy.

FIVE YEAR PLANS

7.1 Introduction : Indian planning is an open process. Much of the controversy and the

debates that accompany the preparation of the plans are public. The initial aggregate

calculations and assumptions are either explicitly stated or readily deducible, and the makers

of the plans are not only sensitive but responsive to criticism and suggestions from a wide

variety of national and international sources. From original formulation through successive

modifications to parliamentary presentation, plan making in India has evolved as a responsive

democratic political process and the culmination of the same in the final document is an

impressive manifestation of the workings of an open society. But by its very nature it also

generates many problems from the point of view of mapping an optimal strategy for economic

development.

7.2 History of Planning in India & Origin of Five Year Plans:

7.2.1 Though the planned economic development in India began in 1951 with the inception of

First Five Year Plan , theoretical efforts had begun much earlier , even prior to the

independence. Setting up of National Planning Committee by Indian National Congress in

1938 , The Bombay Plan & Gandhian Plan in 1944, Peoples Plan in 1945 (by post war

reconstruction Committee of Indian Trade Union), Sarvodaya Plan in 1950 by Jaiprakash

Narayan were steps in this direction.


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7.2.2 Five-Year Plans (FYPs) are centralized and integrated national economic programs.

Joseph Stalin implemented the first FYP in the Soviet Union in the late 1920s. Most communist

states and several capitalist countries subsequently have adopted them. China and India both

continue to use FYPs, although China renamed its Eleventh FYP, from 2006 to 2010, a

guideline (guihua), rather than a plan (jihua), to signify the central government’s more hands-

off approach to development.

7.2.3 After independence, India launched its First FYP in 1951, under socialist influence of

first Prime Minister Jawaharlal Nehru. The process began with setting up of Planning

Commission in March 1950 in pursuance of declared objectives of the Government to promote

a rapid rise in the standard of living of the people by efficient exploitation of the resources of

the country, increasing production and offering opportunities to all for employment in the

service of the community. The Planning Commission was charged with the responsibility of

making assessment of all resources of the country, augmenting deficient resources, formulating

plans for the most effective and balanced utilisation of resources and determining priorities.

7.2.4 The first Five-year Plan was launched in 1951 and two subsequent five-year plans were

formulated till 1965, when there was a break because of the Indo-Pakistan Conflict. Two

successive years of drought, devaluation of the currency, a general rise in prices and erosion of

resources disrupted the planning process and after three Annual Plans between 1966 and 1969,

the fourth Five-year plan was started in 1969.


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7.2.5 The Eighth Plan could not take off in 1990 due to the fast changing political situation at

the Centre and the years 1990-91 and 1991-92 were treated as Annual Plans. The Eighth Plan

was finally launched in 1992 after the initiation of structural adjustment policies.

7.2.6 For the first eight Plans the emphasis was on a growing public sector with massive

investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, the

emphasis on the public sector has become less pronounced and the current thinking on planning

in the country, in general, is that it should increasingly be of an indicative nature.

Outline of Various Five year Plans:

First Plan

(1951-56)

Target

Growth: 2.1%

Actual Growth

3.6%

It was based on Harrod-Domar Model. Influx of refugees, severe food

shortage & mounting inflation confronted the country at the onset of the first

five year Plan. The Plan Focussed on agriculture, price stability, power and

transport. It was a successful plan primarily because of good harvests in the

last two years of the plan. Objectives of rehabilitation of refugees, food self

sufficiency & control of prices were more or less achieved.

Second Plan

(1956-61)

Target Growth

4.5% actual

4.3%

Simple aggregative Harrod Domar Growth Model was again used for

overall projections and the strategy of resource allocation to broad sectors

as agriculture & Industry was based on two & four sector Model prepared

by Prof. P C Mahalanobis. (Plan is also called Mahalanobis Plan). Second

plan was conceived in an atmosphere of economic stability. It was felt

agriculture could be accorded lower priority. The Plan Focussed on rapid

industrialization- heavy & basic industries. Advocated huge imports


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through foreign loans. The Industrial Policy 1956 was based on

establishment of a socialistic pattern of society as the goal of economic

policy. Acute shortage of FOREX led to pruning of development targets,

price rise was also seen (about 30%) vis a vis decline in the earlier Plan &

the 2nd FYP was only moderately successful.

Third Plan

(1961 - 66)

Target

Growth: 5.6%

Actual

Growth:

2.8%

'self-generating' economy. Based on the experience of first two plans

(agricultural production was seen as limiting factor in India’s economic

development) ,agriculture was given top priority to support the exports and

industry. The Plan was thorough failure in reaching the targets due to

Unforeseen events-Chinese aggression (1962), Indo-Pak war (1965),

severe drought 1965-66. Due to conflicts the approach during the later

phase was Failure of Third Plan that of the devaluation of rupee( to boost

exports) along with inflationary recession led to postponement of Fourth

FYP. Three Annual shifted from development to defence & development

plans were introduced instead. Prevailing three annual crises in agriculture

and serious food shortage necessitated the Plans (1966- emphasis on

agriculture during the annual Plans. Three Annual crisis in agriculture and

serious food shortage necessitated the Plans (1966- emphasis on agriculture

during the annual plans. During these plans a whole new agricultural

strategy was implemented. It involving wide spread distribution of high –

yielding described as varieties of seeds, extensive use of fertilizers,

exploitation of irrigation plan holiday. Potential and soil conservation.

Fourth Plan During the annual plans, the economy absorbed the shocks generated

during the Third Plan. It paved the path for the planned growth ahead.


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(1969 - 74)

Target Growth

5.7% Actual

Growth: 3.3%

Refusal of supply of essential equipments and raw materials from the allies

during Indo Pak war resulted in twin objectives of “ growth with stability

“ and “progressive achievement of self reliance “ for the fourth plan. Main

emphasis was on growth rate of agriculture to enable other sectors to move

forward. First two years of the plan saw record production. The last three

years did not measure up due to poor monsoon. Implementation of Family

Planning Programmes was amongst major targets of the Plan. Influx of

Bangladeshi refugees before and after 1971 Indo-Pak war was an important

issue along with price situation deteriorating to crisis proportions and the

plan is considered as big failure.

Fifth Plan

(1974-79)

Target Growth

4.4% Actual

Growth 4.8%

The final Draft of fifth plan was prepared and launched by D.P. Dhar

in the backdrop of economic crisis arising out of run-away inflation fuelled

by hike in oil prices and failure of the Govt. takeover of the wholesale trade

in wheat. It proposed to achieve two main objectives: 'removal of poverty'

(GARIBI HATAO) and 'attainment of self reliance' Promotion of high rate

of growth, better distribution of income and significant growth in the

domestic rate of savings were seen as key instruments Due to high inflation,

cost calculations for the Plan proved to be completely wrong and the

original public sector outlay had to be revised upwards. After promulgation

of emergency in 1975, the emphasis shifted to the implementation of Prime

Ministers 20 Point Programme. FYP was relegated to the background and

when JANTA PARTY came to power in 1978, the Plan was terminated.

Rolling Plan There were 2 Sixth Plans. JANTA GOVT. put forward a plan for 1978-


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(1978 - 80) 1983 emphasising on employment, in contrast to Nehru Model which the

Govt criticised for concentration of power, widening inequality & for

mounting poverty. However, the government lasted for only 2 years.

Congress Govt. returned to power in 1980 and launched a different plan

aimed at directly attacking on the problem of poverty by creating

conditions of an expanding economy.

Sixth Plan

(1980 - 85)

Target Growth

5.2% Actual

Growth: 5.7%

The Plan focussed on Increase in national income, modernization of

technology, ensuring continuous decrease in poverty and unemployment

through schemes for transferring skills (TRYSEM) and sets (IRDP) and

providing slack season employment (NREP), controlling population

explosion etc. broadly, the sixth plan could be taken as a success as most

of the target were realised even though during the last year (1984-85) many

parts of the country faced severe famine conditions and agricultural output

was less than the record output of previous year.

Seventh Plan

(1985-90)

Target Growth

5%

Actual Growth

6%

The Plan aimed at accelerating food grain production, increasing

employment opportunities and raising productivity with focus on food

work and productivity. The plan was very successful as the economy

recorded 6% growth rate against the targeted 5% with the decade of 80’s

struggling out of the Hindu rate of growth.

Eight Plan

(1992-97)

Worsening Balance of Payment position, rising debt burden, widening

budget deficits, recession in Industry and inflation were the key issues

during the launch of the plan. The plan undertook drastic policy measures


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Target Growth

5.6%

Actual Growth

6.8%

to combat the bad economic situation and to undertake an annual average

growth of through introduction of fiscal and economic reforms including

liberation under the Prime Minister ship of Shri P V Narsimha Rao.

Ninth Plan

(1997-2002)

Target

Growth:6.5%

Actual Growth

5.4%

Some of the main economic outcomes during eighth plan period were rapid

economic growth (highest annual growth rate so far – 6.8 %), high growth

of agriculture and allied sector, and manufacturing sector, growth in

exports and imports, improvement in trade and current account deficit.

High growth rate was achieved even though the share of public sector in

total investment had declined considerably to about 34 %. The Plan

prepared under United Front Government focussed on “Growth With

Social Justice & Equality “ Ninth Plan aimed to depend predominantly on

the private sector – Indian as well as FDI and State was envisaged to

increasingly play the role of facilitator & increasingly involve itself with

social sector viz education , health etc and infrastructure where private

sector participation was likely to be limited. It assigned priority to

agriculture & rural development with a view to generate adequate

productive employment and eradicate poverty.

Tenth Pan

(2002-2007)

Target Growth

8%

Recognising that economic growth can’t be the only objective of national

plan, Tenth Plan had set ‘monitorable targets’ for few key indicators (11)

of development besides 8 % growth target. The targets included reduction

in gender gaps in literacy and wage rate, reduction in Infant & maternal

mortality rates, improvement in literacy, access to potable drinking water


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Actual Growth

7.6%

cleaning of major polluted rivers, etc. Governance was considered as factor

of development & agriculture was declared as prime moving force of the

economy. States role in planning was to be increased with greater

involvement of panchayati Raj Institutions. State wise break up of targets

for growth and social development sought to achieve balanced

development of all states.

Eleventh Plan

(2007-2012)

Target Growth

9%

Actual Growth

8%

Eleventh Plan was aimed “Towards Faster & More Inclusive Growth

“after UPA rode back to power on the plank of helping Aam Aadmi

(Common Man) India had emerged as one of the fastest growing economy

by the end of the Tenth Plan. The savings and investment rates had

increased, industrial sector had responded well to face competition in the

global economy and foreign investors were keen to invest in India. But the

growth was not perceived as sufficiently inclusive for many groups,

specially SCs, STs and minorities as borne out by data on several

dimensions like poverty, malnutrition, mortality, current daily employment

etc.

7.4 Twelfth Five Year Plan (2012-17)

7.4.1 The Twelfth Plan commenced at a time when the global economy was going through a

second financial crisis, precipitated by the sovereign debt problems of the Eurozone which

erupted in the last year of the Eleventh Plan. The crisis affected all countries including India.

Our growth slowed down to 6.2 percent in 2011-12 and the deceleration continued into the first

year of the Twelfth Plan, when the economy is estimated to have grown by only 5 percent .


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The Twelfth Plan therefore emphasizes that our first priority must be to bring the economy

back to rapid growth while ensuring that the growth is both inclusive and sustainable. The

broad vision and aspirations which the Twelfth Plan seeks to fulfil are reflected in the subtitle:

‘Faster, Sustainable, and More Inclusive Growth’. Inclusiveness is to be achieved through

poverty reduction, promoting group equality and regional balance, reducing inequality,

empowering people etc whereas sustainability includes ensuring environmental sustainability

,development of human capital through improved health, education, skill development,

nutrition, information technology etc and development of institutional capabilities ,

infrastructure like power telecommunication, roads, transport etc ,

7.4.2 Apart from the global slowdown, the domestic economy has also run up against several

internal constraints. Macro-economic imbalances have surfaced following the fiscal expansion

undertaken after 2008 to give a fiscal stimulus to the economy. Inflationary pressures have

built up. Major investment projects in energy and transport have slowed down because of a

variety of implementation problems. Some changes in tax treatment in the 2012–13 have

caused uncertainty among investors. These developments have produced a reduction in the rate

of investment, and a slowing down of economic growth.

7.4.3 The policy challenge in the Twelfth Plan is, therefore, two-fold. The immediate

challenge is to reverse the observed deceleration in growth by reviving investment as quickly

as possible. This calls for urgent action to tackle implementation constraints in infrastructure

which are holding up large projects, combined with action to deal with tax related issues which

have created uncertainty in the investment climate. From a longer term perspective, the Plan


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must put in place policies that can leverage the many strengths of the economy to bring it back

to its real Growth potential.

7.4.4 Immediate priority is to revive the investor sentiment along with next short term action

of removing the impediments to implementation of projects in infrastructure, especially in the

area of energy which would require addressing the issue of fuel supply to power stations,

financial problems of discoms and clarity in terms of New Exploration Licensing Policy

(NELP)

7.4.5 Although planning should cover both the activities of the government and those of the

private sector, a great deal of the public debate on planning in India takes place around the size

of the public sector plan. The Twelfth Plan lays out an ambitious set of Government

programmes, which will help to achieve the objective of rapid and inclusive growth. In view

of the scarcity of resources, it is essential to take bold steps to improve the efficiency of public

expenditure through plan programmes. Need for fiscal correction viz tax reforms like GST ,

reduction of subsidies as per cent of GDP while still allowing for targeted subsidies that

advance the cause of inclusiveness etc . and managing the current account deficit would be

another chief concerns.

7.4.6 Achieving sustained growth would require long term increase in investment and savings

rate . Bringing the economy back to 9 per cent growth by the end of the Twelfth Plan requires

fixed investment rate to rise to 35 per cent of GDP by the end of the Plan period. This will

require action to revive private investment, including private corporate investment, and also

action to stimulate public investment, especially in key areas of infrastructure especially,


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energy, transport, water supply and water resource management. Reversal of the combined

deterioration in government and corporate savings has to be a key element in the strategy.

Industrial Policy and Performance in India: Pre-reform Period

Industrial Policy in pre reform period –1948, 1956, 1977: Before

Independence our Industries was totally distributed and governed by the British policies.

After Independence India required overall balance development in all spheres. But that there

was a lack of Infrastructure, technology, skilled man power, capital, low national income,

low rate of employment and other problems. So, it required such policies and reforms, made

at the level which can help in overall balance growth and development. it became necessary

to led down new Industrial policies to develop our Industries for economy growth. Keeping

this in mind our first government after Independence called a meeting in December 1947 for

revival and reforms of industries. In 1948 they have announced a policy for its reform is

called Industrial policy 1948.

After independence, India needs to develop and convert its agro-based

economy into developed Industries economy. To make it grand success, it needs to develop


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and structure both private and public sector Industry together, as Industries plays a vital role

in Indian economy. Industries development and growth will also add in Indian economy

growth.

In another words, we need overall growth in all sectors so we have not only passed

policies but also implemented various act and also given importance to small, medium and

domestic industries for their development.

Firstly, we will study about the five year policy of 1948. We also try to understand the

the provision and its impact on economic growth.

Industrial Policy Resolution 1948

(a) Objective of the policy: -

Outlined the approach to Industrial growth and development.

Emphasized the importance of securing a continuous increase in production and ensuring

its equitable distribution.


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It plans progressively active role in the development of Indian Industries.

State monopoly on – Arms and ammunition, atomic energy and railways.

State reserved the responsibility of establishing new undertakings of six Industries.

(b) Effect of the policy: - The result of implementing the policy was not up to mark as it was

expected. Under this policy, government has kept various fields in its control but not

responsibilities which were the major loop hole in this policy. In fact even private sector was

not set free from government control. The best part in this policy was that all small, medium

and large scale Industries was given equal importance.

2.2.Industrial Policy Resolution 1956: - After Independence since the amendment

of Indian constitution, the main objective is to achieve socio-economic growth so in 1956

Industrial policy was comprehensively revised and with reforms a new policy was led down

in 1956.

(a) Main points/provisions of Industrial policy 1956: -

To accelerate the rate of economic growth and speeding up Industrialization to achieve

socio-economic growths.


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This policy gives primary role of assuming predominant and direct responsibilities to

the state because of insufficient capital and not having strong base of entrepreneurships.

(b) Categorization of Industries: -

After establishing the Industries, its future development is the primary role

and responsibility of the State.

In this state is responsible and take initiative to establish new undertakings in which

private enterprises will also be expected to supplement the efforts of the state.

Rest of the left Industries to the initiative and enterprises of private sector.

Even stress is led to the role of small scale, cottage and domestic Industries for the

development of the national economy. Disparity in the levels of development between different

regions should be progressively reduced.

(c) Objectives:-

Reduction in the income and wealth disparities.


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Prevention of private monopolies and concentration of economy power in different fields

in the hands of small numbers of individuals.

Public sector all Industries of basic and strategic importance, or in the nature of public

utility services.

The state can undertake any type of industrial production.

Industrial policy 1956 is very much progressive in comparison to industrial policy

1948 but still some of aspects were missing to achieve growth. Some loopholes were still

present or in others words we have more progressive steps were required like a demand of

oriented market or a good marketing arrangement still required along with this up gradation

technology for units and we can saw here a weak linkage between main unit and raw material

producing place.

2.3. Industrial policy Resolution 1977:

In 1977 govt again announce a new industrial policy.


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(a) Emphasis On: -

Producing inputs needed by a large number of smaller units and making adequate

marketing arrangements.

Up gradation the technology of small Industries.

Promoting the development of a system of linkages between nucleus large plants and

the satellite ancillaries.

In this policy main emphasis was on development of small scale

Industries the industries limit was enhanced for tiny units and small scale units. For its

development government has established Industrial Development Cooperation in the state

and the National small Industries Cooperation in centre and some other targets also decided

like: -

1. Optimum utilization of installed capacity.

2. Maximum production and achieving higher productivity.

3. Higher employment generation.


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4. Correction of regional imbalances.

5. Strengthening of the agriculture base through agro-based Industries and promotion of

optimum inter sect oral relationship.

6. Promotion of export oriented Industries.

7. Promotion of economic federalism through equitable spread of investment and

dispersal of returns.

8. Consumer protection against high prices and bad quality government recognised

the need for social and economic justice to end poverty and unemployment to build

a modern, democratic, socialist prosperous and forward looking India.

9. India grew as part of the world economy and not in isolation.

10. Great emphasis placed on building up ability to pay for imports though our own

foreign exchange earnings.

11. Development and utilization of indigenous capabilities in technology and manufacturing


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as well as its up gradation to world standards.

Production standard was increased. Many loopholes of economy were

disappeared. New Indian economy achieved some parameters of world economy also.

3.0. Industrial Licensing: Though this part of the lesson, we try to understand about

Industrial licensing and also know about licensing system, how can a firm get license to

operate the economic activities, what are the criteria to provide the licence how can control

the business of firm, what is MRTP act. Success and failure of MRTP act, what are recent

changes in MRTP act? Why we required MRTP act or why we introduced the MRTP act?

Why was MRTP act changed? Which provisions are added in this act and why it’s essential?

(a)Highlight and Motivations: - Happening in the licence policy. For achieved rapid

economic growth changing in licensing system were essential in this chapter (module) a brief

Introduction of license, detail about MRTP act in brief history and evaluation of MRTP act and

its impacts would also be discussed. To control and regulate the process of Industrial

development in the country a act was passed by the parliament in 1951 known as the Industries

development and regulation act 1951 it come in to force 1952. Main aims of government behind

Implement licensing is – to promote both development and regulation of private sector and also

growth that licensing ensured realization of physical targets for capacity set by a Industry plan.


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(b) Objective of licensing policy: -

Regulation of industrial investment and production according to plan priorities and

targets.

Protection of small entrepreneurs against competition from large Industries.

Prevention of monopoly and concentration of ownership of industries and balanced

regional development.

Note – It was hoped that thought of the “licensing” the state would be able to – direct

Investment in two most important branches correlate supply and demand in the domestic

market and also ensure to utilization of social capital. How the licensing control the work

of

Firm – In other words, how it acts? Undertaking of all those Industries which were included

in the scheduled of the Industries act 1951 was required to be registered. Venture between

the public sector and private sector.

(c) Cancellation of registration and licence – Conditions: -


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1. If particular obtaining licence by submitting wrong information. Government

could council the registration under article 10(A) of the act.

2. Government could council the licence if the undertaking was not set up within

the stipulated periods.

(d)Reformative Provisions or Government’s action: - Now on industries

direct control of government on regulation long with this control on price, distribution and

supply. For constructive majors government established central advisory council to inspire

mutual confidence and elicit cooperation from the workers. Act would be applicable only to

enterprises employing 50 or more workers if worked with the aid of power as employing 100

or more workers if worked without the power. Later period successive changes in licensing

policy observed like in 1960 change was made all enterprises with capital of 10 lakh or less

were exempted from licence. In 1978, this limit raise to an exemption limit from 1 crore to 3

crore and in this process government announced a major package of industrial de-licensing

during year 1988-89. This package provided that henceforth, only project involving an

investment in fixed assets of more than 50crore if they are located in non-backward areas

would require Industrial licences.

3.1. Need to changes in licensing policy: - When we revive are policies we need


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certain changes in this policy. Various committee and commissions appointed by the

government like Hazari commission, Dutta committee. They point out that the licensing policy

has failed to achieve its objective in many cases. Result was just the opposite of what the govt

had planned.

Licensing was supposed to ensure creation of capabilities according to plan priorities

and targets. But unfortunately there is no clear priorities for private sector were laid down in

the plan and therefore the private sector choose those industries which appeared more

profitable and many industries like big houses indulged in bad practices like to restrict output

and raise prices. So it is harmful and also against licensing policies aims another region is

Discretionary power of licensing authorities: - in many studies it is point out the considerable

discretionary power vested in the regulation agencies. The whole system landed to promote

corruption rent seeking and discrimination based on personality relationships.

In this context we can see two features of the formal bureaucratic institutions

functioning in India. First – government official often favour member of their own social

network and second is a strong nexus between higher government officials and managers of

large Industrial houses as result the actual functioning of the industrial approval system on

India favoured large Industrial houses.

One of the avowed objective of the industrial licensing policy was the reduction in

regional Inequalities and Imbalance but we seen here just apposite even here the developed


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state benefited more because developed states like Maharashtra, Gujarat, W, Bengal, Tamil

Naidu received 46.4% of total licence issued whereas rest combined states have only 16.2%

along with this delays in processing of applications – the licensing committee worked in

haphazard (unmanaged way) manner, and there were no definite criteria adopted for

acceptance or rejection of applications. All these factors impeded Industrial growth.

3.2. Licensing policy in India before liberalization: - Because of above

criticism indicating the failure of the Industrial licensing policy in achieving its objectives. The

government of India announced a number of liberalisation measures in the Industrial licensing

policy. In this manner licensing policy announced in 1970, 1973 and 1978 and 1980. The

government comes forward with an Industrial policy statement which served as a guideline to

various liberalisation measures: -

(a) Brief Introduction of MRTP act: - All firms with assets above a certain size (Rs 100crore

since 1985) were classified as MRTP firms

(b) History of MRTP firms: - MRTP firms were permitted to enter selected industries only

and also on a case by case approval basis. In addition to control through Industries licensing,

separate approvals were required by such large firms for any Investment proposal. The

government felt that this was having deleterious effects on many large firms on their plans

for growth and diversification. In this manner according to MRTP act 1969 all big companies


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and large business houses were required to obtain clearance from the MRTP commission for

setting up any new Industrial unit because such companies were allowed to invest only in

some selected Industries. This besides obtaining a licence they were also required to get

MRTP clearance.

This was big impediment for Industrial development as the big business firms which

had the resources for development could not grow and diversify their activities.

(c) Changes in the MRTP act: - Due to all above regions, in Industrial policy 1991 abolishing

provisions of the MRTP act which mediate mandatory for the large Industrial houses

to seek prior from MRTP commission for their new projects. Under the amended act, The

MRTP commission will concern itself only with the control of monopolies and restrictive trade

practices that are unfair and restrict competition to the determinant of consumer’s Interests.

No prior approval of or clearance from the MRTP commission is now required for setting

up Industrial units by the large business houses. The MRTP act was accordingly amended.

The amended act gave more emphasis to the prevention and control of monopolistic,

restrictive and unfair trade practices so that consumers are adequately protected from such

practices.


29

(d) Need for a New MRTP Act and introduction of competition act: - MRTP act has

become absolute in certain areas in the light of International economic development relating

to competition laws. So we need to shift our focus from curbing monopolies to promoting

competition.

Government appoint a high level committee to advise a modern competition law for India

and to suggest a legislative frame work. The committee included competition expert

representatives of Industry and consumer’s economists, charted accountant and advocates

etc. Here government aim was made a modern competition law which suitable for conditions.

In 2002 India introduced to competition act.

4.0. Forex market in India: Indian forex market has been highly regulated till about 1992-93

government have absolute control on forex market activities like FDI, export-import policy etc.

After Independence union government’s socialistic way of managing business and the licence

raj made the Indian companies non competitive in the International market leading to decline

in export simultaneously India’s import bill because of capital goods, crude oil & petrol

products Increased the forex out go leading to sever scarcity of forex.

FERA was enacted so that all forex by companies and residents have to report and

surrendered at a rate which was mandated by RBI. FERA was given the real power by making,

“Any violation of FERA was a criminal offense liable to Imprisonment.” It is a professed a

policy of a person is guilty of forex violation unless he proves that he has not violated any

norms of FERA. To sum up FERA prescribed a policy nothing is permitted unless specifically

mentioned in the act.


30

4.1. A historical prospective of Forex market: - During 1947 to 1971, Indian exchange rate

system followed the per value system RBI fixed Rupee’s per value at 4.15 grains of fine gold.

In 1978-1992, during this period exchange rate of rupee was officially determined in terms of

a weighted basket of currencies of India’s major trading partners. In this period RBI instructed

authorised dealer to buy and sell forex at the rate given by RBI on daily basis. As mentioned

in sector 5.1 FERA was part of exchange rate regulation practices followed by RBI.

(a) FERA & FEMA Introduction – FOREX regulation act (FERA) 1947 to regulate the

operation of foreign controlled companies in India. This act was amended in 1973.

(b) Major objectives of FERA: - The conservation of India’s precious forex resources and the

issue of guidelines to the foreign investors to invest in India’s care sector which employ

sophisticated foreign technology, dealing in Forex and securities, export-import of currency

for the conservation of forex resources of the country along with this to decide proper

utilization of forex, so as to promote the economic development of the country.

(c)Basic purpose of FERA: - Exchange rate stability and to conserve precious forex to

prevent /regulate foreign business in India. The element of new legislation was basically on

to main counts.

(d)Need of FERA: - Firstly, FERA was enacted in 1973, when dollars in forex reserve; it is

not satisfactory for a big country it required stringent control’s to conserve forex and to

utilized in the best In-trust of the country very strict restrictions have out lived their utility in

the current changed scenario.


31

Secondly, there was a need to remove the draconian provisions of FERA and have

a forward looking legislation covering forex matters.

FERA come under severe criticism particularly for the section which stipulated that

whenever a person was prosecuted, rule, under the act, this often led to unnecessary

harassment of bonafide person and companies with show cause notices and prosecution for

alleged violations of FERA’s on narrow technical grounds. At the same times however

thousands of crooks, both individuals and companies managed to evade and avoid the

draconian provisions of FERA and got away scot free.

5.0. Role of public sector enterprises in Indian industrialization: Thepresent Indian

economic structure is mixed economy. There are two field of production one is private and

other is public sector. In the development of the Indian economy role of public sector was

decided by the Indian industrial policy 1956 as Indian required a rapid growth. This push could

not come from the Indian private sector. It was assumed at that time that only the government

intervention is a big planned way could be accelerate agriculture and industrial production.

In this section a brief introduction and historical evaluation of public and

private enterprises will be discussed with the special emphasis on Indian

industrialization.

Public sector: public sector enterprises refer to those industrial institutions

which are owned, managed and controlled by the government. Thus public sector

includes all states, centre and jointly owned by the govt. On the sectors govt has full

control. The objective of these enterprises is to promote social welfare along with

earning profits.


32

(b)Public sector enterprise, its evaluation - A historical perspective:

India is a agro based economy after independence 1947. India had no public sector. After 1947

in the post independence period establishment and expansion of public sector was integral part

of 1956 industrial policy. At the time of independence, the country was backward and under

development. It was an agrarian economy with a weak industrial base, along with that absence

of infrastructures. That is why the public sector came into existence.

(c) Objective of public sector: to promote rapid economic development through creation

and expansion of industrialization. Generate financial resources for development for

promotion of re-distribution of income and wealth along with that to create employment

apportunities and promote balanced regional growth and encourage to development of small

scale Industries and ancillary Industries to promote export – import for country.

(d) Role of public sector in Industrialisation: - Main role of public sector in Industrialisation

by provide various type of support live development of basic and heavy Industries,

development of Infrastructure without Infrastructure facilities in the form of irrigation power

energy and transportation etc. The Industrial sector cannot properly grow similarly in the

absence of adequate development of transport and communication. The process of

Industrialization cannot be sustained without support of in form of motivation and adequate

financial resources to invest in by public sector. Along with that development of backward area

it has been the objectives of the plan to develop industrially backward state and regions setting

up giant undertaking example are the of steel plant set up in Orissa, Bihar, U.P., M.P., and

fertilizers plant setup in Assam, Orissa, Bihar, Punjab, Kerala private sector are not in trusting

in setting units in backward areas due to poor marketing condition and low profit.


33

Another setup of public sector to promote Industrialization is to mobilise savings and

earn forex like some companies BHEL, ONGC Videsh some examples of PSU’s which has

helped the economy in saving forex. Undertaking like HMT, STC and MMTC have made

significant contribution in our export earning along with that the public sector help in creaking

the concentration of economic power in a few private hands and reducing inequalities of

Income and wealth.

The private sector also promote equality of income and weak distribution since PSU’s are

owned and managed by government profit are earned by government these profit are plan

either played back in the Industries or spent on social welfare programmes in this way they

provide benefit to poor people to promote socialistic society. Public sector by

Industrialisation produced goods which are substitute of import goods.

The public sector was thought of as an engine for self reliance economic growth to

develop a sound agriculture and Industrial base, diversify the economy and overcome

economic and social backwardness. Industrialization by public sector will more close from

the following points: - number of PSUs, Size of PSUs, and Investment in PSUs .;is

continuously increasing. The bulk of investment in basic Industries like: steel, power,

petroleum, fertilizers etc. later, investment in the financial services followed by the

telecommunication services.

5.1.Performance of Public Sector Undertaking: - PSU’s have not performed well on

Investment front though they have accumulated huge reserve and management culture appear

to have more sick overseas showing preference for reducing debt. Although the number of

loss making PSU’s come down, yet they face a big challenge the government because of the

need to protect employment on the one hand and the need to curtail fiscal deficit on the other


34

hand. When we count the performance we can seen one thing that “profit should not be used

as a criterion for judging the performance of public enterprises. Because in social unity

services like railways, posts, supply of water electricity energy etc, state should not raise the

prices of these services. After Independence there was virtually no public sector in Indian

economy the Industrial policy resolution of 1956 gave public strategic role in Indian economy

at the time of Independence the country was backward and underdeveloped economy basically

on agrarian economy with a weak Industrial base heavy unemployment low level of saving

and Investment and near absence of Infrastructure facility Indian economy need a big push.

This big push could not came from private sector, which was starved for fund and managerial

quality and was incapable of undertaking risk involved in long gas station period Investment.

It was assumed that government Intervention in a big planned way could raise agriculture and

Industrial production. Expand employment opportunities etc.

5.2. Disinvestment in Public Sector Enterprises: - Disinvestment is the process through

which privatisation could take place of public sector. Disinvestment is used to indicate the

process of privatisation since the beginning of 1980’s the function of the public sector began

to be questioned, it was felt that public sector performed will only when protected through state

monopolies, entry reservation high tariffs and quotes etc. This line a large number of public

enterprises incurred losses year after year that time believe that objective for disinvestment

should be to benefit the public the consumer and the investor and at the same time to improve

competitiveness and eliminate monopoly.

6.0. Small Scale Industries: Small scale industries play a vital role in the development of

economy mainly in developing countries. India has huge population so it can be said that this

sector has a wide scope in India but this sector faces may problem like lack of money,

technology and competition with large scale Industries along with all challenges this sector

can prove itself as a developing engine.


35

(a)Definition of small scale Industries: In small scale Industry it have fixed Investment in

plant and machinery, weather held on ownership basis or lease basis or hire purchase basis not

more than Rs. 1crore.

(b) Characteristics of small scale Industries – Historical perspective:

The concept of small scale Industries is not only new to India but also participating in the

old age traditional system in ancient period. The definition of small scale Industries are

changing its central idea and hence been shaped in the planning period since then it was

maintained till the year 2006. These units have been merged with micro, small and medium

enterprises. The act clearly divided into two categories of Industries, one is engaged in

manufacturing of goods and second is engaged in providing or sending of services.

(c) Characteristics: Ownership of small scale Industries is with one Individual, Single owner

or it can be with a few individuals in partnership. Along with the management and control of

Industries is normal a one man of partnership managerial activity was performed by active

partner and rest of generally non active partners.

Mostly these units were managed in a single person fashion the owner is involved in

all kind of decisions related to this business. The area of activities of SME’s is generally

localised to fulfil the needs of regional demands.

These Industries labour intensive and more flexible for adopt charges as new

methodology of production, Introduction of new product etc. These small units are basically

used local resources and so they can be established anywhere placed to the availability of these

resources, labour and raw materials.


36

(d) Objectives of small scale Industries: To create my employment with less Investment and

provide economic resolution of rural areas and less developed areas and reduced economic

inequalities in regional areas. To improve living standard of regional people ad solved their

unemployment problems. Along with that new technology was adopted by small scale

Industries for providing better qualities of production at lower cost.

6.1. Performance of Small Scale Industries: In Indian small scale Industries has two aspects

one traditionally small scale Industries includes khadi and handloom village Industries. The

traditionally small Industries are highly labour-intensive. Because it is a artistic Industry like

marble work, stone curving jewellery, bronze metal and copper wears etc. and in handlooms

India famous for the saree of Varanasi, malmal of dalla, calicoes of Bengal and other fabrics if

fact textile handicraft Industries spread all over India.

In modern small scale Industries wide range of goods from comparatively simple items

to sophisticated products such as television sets, electronic control system various engineering

products. We evaluate the performance – these Industries in 1979-80 traditional small scale

Industries accounted only 13% of their total out and share in total employment was 56%. The

performance of modern small scale Industry share of total out 74% and share in employment

was only 33%.

In other words we can say the whole performance of small scale Industries are described

as first – they show promotion of higher growth in manufacturing employment, second – the

growth of small scale Industries in compared to large scale Industries is more. They key

component of small scale Industries performance lies in an evaluation of growth in Indian

manufacturing exports.


37

6.2. Problems of Small Scale Industries: Small scale Industries plays a vital role in

development of Indian economy and these industries have wide scope of employment in India.

But at present small scale Industries in India could not progress. Satisfactorily due to various

problems that they faced planning commission has summarized some of the problems and

difficulties that faced by small scale Industries competition from imported goods and large

scale industries. Along with this lack of raw material and advanced technology besides these

problem also observed.

(a)Market Problem: - This is the major problem of small scale Industries, in absence of

organised market; lack of standardisation and the product were inefficient lack of skilled man

power – especially in rural areas this is major problem and success of these Industries depends

upon production by skilled labours.

(b) Inadequate Finance: Financial problem is a major problem for small scale Industries, due

to weak economic base they enable to purchase machine and advanced technology and also

enable to choose highly skilled workers because wages of skilled workers is more than general

workers.

(c) Irregular supply of raw material: - Non availability of sufficient quality of raw materials,

sometimes poor quality and increased cost of raw material, is a painful problem for small scale

Industries.

(d) Lack of machinery and equipment: - Most of small scale units have traditional and out

dated technology. They create major stumbling block for the growth of small scale Industries

besides the above problems small scale units have been of constrained by a number of other

problems also they include poor project planning, managerial inadequacies old and orthodox

designs high degree of obsolescence transportation problem lack of power inadequate

warehousing.


38

Due to all these problems, the development of small scale Industries could not reach a

prestigious stage. The promotion of small scale Industries is essential in developing economics

like India to achieve equitable distribution of income and wealth, economic self dependence

and entrepreneurial development, to empower this sector is essential because small scale

Industries is the growth engine of Indian economy. The small scale Industries needs to be

educated and informed to the latest development taking place globally and helped to acquire

skills necessary to keep pace with global development.

7.0. Summary: After Independence there was virtually no public sector in Indian economy the

Industrial policy resolution of 1956 gave public strategic role in Indian economy at the time of

Independence the country was backward and underdeveloped economy basically on agrarian

economy with a weak Industrial base heavy unemployment low level of saving and Investment

and near absence of Infrastructure facility Indian economy need a big push. This big push could

not came from private sector, which was starved for fund and managerial quality and was

incapable of undertaking risk involved in long gas station period Investment. It was assumed

that government Intervention in a big planned way could raise agriculture and Industrial

production. Expand employment opportunities etc.

FOREIGN TRADE POLICY 2015-2020

A. SIMPLIFICATION & MERGER OF REWARD SCHEMES

Export from India Schemes:


39

1. Merchandise Exports from India Scheme (MEIS)

(a) Earlier there were 5 different schemes (Focus Product Scheme, Market Linked Focus

Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip, VKGUY) for

rewarding merchandise exports with different kinds of duty scrips with varying conditions

(sector specific or actual user only) attached to their use. Now all these schemes have been

merged into a single scheme, namely Merchandise Export from India Scheme

(b) Rewards for export of notified goods to notified markets under ‘Merchandise Exports

from India Scheme (MEIS) shall be payable as percentage of realized FOB value (in free

foreign exchange). The debits towards basic customs duty in the transferable reward duty credit

scrips would also be allowed adjustment as duty drawback. At present, only the additional duty

of customs / excise duty / service tax is allowed adjustment as CENVAT credit or drawback,

as per Department of Revenue rules.

2. Service Exports from India Scheme (SEIS)

(a) Served From India Scheme (SFIS) has been replaced with Service Exports from India

Scheme (SEIS). SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian

Service Providers’. Thus SEIS provides for rewards to all Service providers of notified

services, who are providing services from India, regardless of the constitution or profile of the

service provider.

(b) The rate of reward under SEIS would be based on net foreign exchange earned. The

reward issued as duty credit scrip, would no longer be with actual user condition and will no

longer be restricted to usage for specified types of goods but be freely transferable and usable

for all types of goods and service tax debits on procurement of services / goods. Debits would

be eligible for CENVAT credit or drawback.


40

3. Chapter -3 Incentives (MEIS & SEIS) to be available for SEZs It is now proposed to

extend Chapter -3 Incentives (MEIS & SEIS) to units located in SEZs also.

4. Duty credit scrips to be freely transferable and usable for payment of custom duty,

excise duty and service tax.

(a) All scrips issued under MEIS and SEIS and the goods imported against these scrips

would be fully transferable.

(b) Scrips issued under Exports from India Schemes can be used for the following:-

(c) Basic Customs Duty paid in cash or through debit under Duty Credit Scrip can be taken

back as Duty Drawback as per DoR Rules, if inputs so imported are used for exports.

5. Status Holders

(a) Business leaders who have excelled in international trade and have

successfully contributed to country’s foreign trade are proposed to be recognized as Status

Holders and given special treatment and privileges to facilitate their trade transactions, in order

to reduce their transaction costs and time.

(b) The nomenclature of Export House, Star Export House, Trading House, Star Trading

House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five

Star Export House.

(c) The criteria for export performance for recognition of status holder have been changed

from Rupees to US dollar earnings. The new criteria is as under:-

Export


41

Performance

FOB / FOR (as

Status category converted)

Value (in US $

million) during

current and

previous two

years

One Star Export House 3

Two Star Export House 25

Three Star Export 100

House

Four Star Export House 500

Five Star Export House 2000

(d) Approved Exporter Scheme - Self certification by Status Holders

Manufacturers who are also Status Holders will be enabled to self-certify their manufactured

goods as originating from India with a view to qualify for preferential treatment under

different Preferential Trading Agreements [PTAs], Free TradeAgreements [FTAs],

Comprehensive Economic Cooperation Agreements [CECAs]

and Comprehensive Economic Partnerships Agreements [CEPAs] which are in operation.

They shall be permitted to self-certify the goods as manufactured as per their Industrial

Entrepreneur Memorandum (IEM) / Industrial Licence (IL)/ Letter of Intent (LOI).

B. BOOST TO "MAKE IN INDIA"


42

6. Reduced Export Obligation (EO) for domestic procurement under EPCG scheme:

Specific Export Obligation under EPCG scheme, in case capital goods are procured from

indigenous manufacturers, which is currently 90% of the normal export obligation (6 times

at the duty saved amount) has been reduced to 75%, in order to promote domestic capital

goods manufacturing industry.

7. Higher level of rewards under MEIS for export items with high domestic content and

value addition.It is proposed to give higher level of rewards to products with high domestic

content and value addition, as compared to products with high import content and less value

addition.

C. TRADE FACILITATION & EASE OF DOING BUSINESS

8. Online filing of documents/ applications and Paperless trade in 24x7 environment:

(a) DGFT already provides facility of Online filing of various applications under FTP by

the exporters/importers. However, certain documents like Certificates issued by Chartered

Accountants/ Company Secretary / Cost Accountant etc. have to be filed in physical forms

only. In order to move further towards paperless processing of reward schemes, it has been

decided to develop an online procedure to upload digitally signed documents by Chartered

Accountant / Company Secretary / Cost Accountant. In the new system, it will be possible

to upload online documents like annexure attached to ANF 3B, ANF 3C and ANF 3D, which

are at present signed by these signatories and submitted physically.

(b) Henceforth, hardcopies of applications and specified documents would not be required

to be submitted to RA, saving paper as well as cost and time for the exporters. To start with,

applications under Chapter 3 & 4 of FTP are being covered (which account for nearly 70%


43

of total applications in DGFT). Applications under Chapter-5 would be taken up in the next

phase.

(c) As a measure of ease of doing business, landing documents of export consignment as

proofs for notified market can be digitally uploaded in the following manner:-

(i) Any exporter may upload the scanned copy of Bill of Entry under his digital signature.

(ii) Status holders falling in the category of Three Star, Four Star or Five Star Export House

may upload scanned copies of documents.

9. Online inter-ministerial consultations:

It is proposed to have Online inter-ministerial consultations for approval of export of

SCOMET items, Norms fixation, Import Authorisations, Export Authorisation, in a phased

manner, with the objective to reduce time for approval. As a result, there would not be any

need to submit hard copies of documents for these purposes by the exporters.

10. Simplification of procedures/processes, digitisation and e-governance

(a) Under EPCG scheme, obtaining and submitting a certificate from an independent

Chartered Engineer, confirming the use of spares, tools, refractory and catalysts imported

for final redemption of EPCG authorizations has been dispensed with

(b) At present, the EPCG Authorisation holders are required to maintain records for 3 years

after redemption of Authorisations. Now the EPCG Authorization Holders shall be required

to maintain records for a period of two years only. Government’s endeavour is to gradually

phase out this requirement as the relevant records such as Shipping Bills, e-BRC are likely

to be available in electronic mode which can be archived and retrieved whenever required.


44

(c) Exporter Importer Profile: Facility has been created to upload documents in

Exporter/Importer Profile. There will be no need to submit copies of permanent records/

documents (e.g. IEC, Manufacturing licence, RCMC, PAN etc.) repeatedly with each

application, once uploaded.

(d) Communication with Exporters/Importers:

Certain information, like mobile number, e-mail address etc. has been added as mandatory

fields, in IEC data base. This information once provided by exporters, would help in better

communication with exporters. SMS/ email would be sent to exporters to inform them about

issuance of authorisations or status of their applications.

(e) Online message exchange with CBDT and MCA: It has been decided to have on line

message exchange with CBDT for PAN data and with Ministry of Corporate Affairs for CIN

and DIN data. This integration would obviate the need for seeking information from IEC

holders for subsequent amendments/ updation of data in IEC data base.

(e) Communication with Committees of DGFT: For faster and paperless communication

with various committees of DGFT, dedicated e-mail addresses have been provided to each

Norms Committee, Import Committee and Pre-Shipment Inspection Agency for faster

communication.

(f) Online applications for refunds: Online filing of application for refund of TED is

being. introduced for which a new ANF has been created.

11. Forthcoming e-Governance Initiatives

(a) DGFT is currently working on the following EDI initiatives:

(i) Message exchange for transmission of export reward scrips from DGFT to Customs.


45

(ii) Message exchange for transmission of Bills of Entry (import details) from Customs to

DGFT.

(iii) Online issuance of Export Obligation Discharge Certificate (EODC).

(iv) Message exchange with Ministry of Corporate Affairs for CIN & DIN.

(v) Message exchange with CBDT for PAN.

(vi) Facility to pay application fee using debit card / credit card.

(vii) Open API for submission of IEC application.

(viii)Mobile applications for FTP

D. Other new Initiatives

12. New initiatives for EOUs, EHTPs and STPs

(a) EOUs, EHTPs, STPs have been allowed to share infrastructural facilities among

themselves. This will enable units to utilize their infrastructural facilities in an optimum way

and avoid duplication of efforts and cost to create separate infrastructural facilities in

different units.

(b) Inter unit transfer of goods and services have been allowed among EOUs, EHTPs,

STPs, and BTPs. This will facilitate group of those units which source inputs centrally in

order to obtain bulk discount. This will reduce cost of transportation, other logistic costs and

result in maintaining effective supply chain.

(c) EOUs have been allowed facility to set up Warehouses near the port of export. This

will help in reducing lead time for delivery of goods and will also address the issue of un-

predictability of supply orders.


46

(d) STP units, EHTP units, software EOUs have been allowed the facility to use all duty

free equipment/goods for training purposes. This will help these units in developing skills

of their employees.

(e) 100% EOU units have been allowed facility of supply of spares/ components up to 2%

of the value of the manufactured articles to a buyer in domestic market for the purpose of

after sale services.

(f) At present, in a period of 5 years EOU units have to achieve Positive Net Foreign

Exchange Earning (NEE) cumulatively. Because of adverse market condition or any ground

of genuine hardship, then such period of 5 years for NFE completion can be extended by one

year.

(f) Time period for validity of Letter of Permission (LOP) for EOUs/EHTP/ STPI/BTP

Units has been revised for faster implementation and monitoring of projects. Now, LOP will

have an initial validity of 2 years to enable the unit to construct the plant and install the

machinery. Further extension can be granted by the Development Commissioner up to one

year. Extension beyond 3 years of the validity of LOP, can be granted, in case unit has

completed 2/3rd of activities, including the construction activities.

(g) At present, EOUs/EHTP/STPI units arepermitted to transfer capital

goods to other EOUs, EHTPs, STPs, SEZ units. Now a facility has been provided that

if such transferred capital goods are rejected by the recipient, then the same can be

returned to the supplying unit, without payment of duty.

(h) A simplified procedure will be provided to fast track the de-bonding / exit of the STP/

EHTP units. This will save time for these units and help in reduction of transaction cost.


47

(i) EOUs having physical export turnover of Rs.10 crore and above, have been allowed

the facility of fast track clearances of import and domestic procurement. They will be

allowed fast tract clearances of goods, for export production, on the basis of pre-

authenticated procurement certificate, issued by customs / central excise authorities. They

will not have to seek procurement permission for every import consignment.

13. Facilitating & Encouraging Export of dual use items (SCOMET).

(a) Validity of SCOMET export authorisation has been extended from the present 12

months to 24 months. It will help industry to plan their activity in an orderly manner and

obviate the need to seek revalidation or relaxation from DGFT.

(b) Authorisation for repeat orders will be considered on automatic basis subject to

certain conditions.

(c) Verification of End User Certificate (EUC) is being simplified if SCOMET item is

being exported under Defence Export Offset Policy.

(c) Outreach programmes will be conducted at different locations to raise awareness among

various stakeholders.

14 Facilitating & Encouraging Export of Defence Exports

(a) Normal export obligation period under advance authorization is 18 months. Export

obligation period for export items falling in the category of defence, military store, aerospace

and nuclear energy shall be 24 months from the date of issue of authorization or co-terminus

with contracted duration of the export order, whichever is later. This provision will help

export of defence items and other high technology items.


48

(b) A list of military stores requiring NOC of Department of Defence Production has been

notified by DGFT recently. A committee has been formed to create ITC (HS) codes for

defence and security items for which industrial licenses are issued by DIPP.

15. e-Commerce Exports

(a) Goods falling in the category of handloom products, books / periodicals, leather

footwear, toys and customized fashion garments, having FOB value up to Rs.25000 per

consignment (finalized using e-Commerce platform) shall be eligible for benefits under FTP.

Such goods can be exported in manual mode through Foreign Post Offices at New Delhi,

Mumbai and Chennai.

(b) Export of such goods under Courier Regulations shall be allowed manually on pilot

basis through Airports at Delhi, Mumbai and Chennai as per appropriate amendments in

regulations to be made by Department of Revenue. Department of Revenue shall fast track

the implementation of EDI mode at courier terminals.

16. Duty Exemption

(a) Imports against Advance Authorization shall also be eligible for exemption from

Transitional Product Specific Safeguard Duty.

(b) In order to encourage manufacturing of capital goods in India, import under EPCG

Authorisation Scheme shall not be eligible for exemption from payment of anti-dumping

duty, safeguard duty and transitional product specific safeguard duty.

17. Additional Ports allowed for Export and import Calicut Airport, Kerala and Arakonam

ICD, Tamil Nadu have been notified as registered ports for import and export.


49

18. Duty Free Tariff Preference (DFTP) Scheme India has already extended duty free tariff

preference to 33 Least Developed Countries (LDCs) across the globe. This is being notified

under FTP.

19. Quality complaints and Trade Disputes

(a) In an endeavour to resolve quality complaints and trade disputes, between exporters

and importers, a new chapter, namely, Chapter on Quality Complaints and Trade Disputes

has been incorporated in the Foreign Trade Policy.

(b) For resolving such disputes at a faster pace, a Committee on Quality

Complaints and Trade Disputes (CQCTD) is being constituted in 22 offices and

would have members from EPCs/FIEOs/APEDA/EICs.

20. Vishakhapatnam and Bhimavaram added as Towns of Export Excellence Government

has already recognized 33 towns as export excellence towns. It has been decided to add

Vishakhapatnam and Bhimavaram in Andhra Pradesh as towns of export excellence (Product

Category– Seafood).

Fiscal Policy

The term ‘Fisc’ in English means ‘treasury’. Hence policy concerning treasury or

Government exchequer is known as ‘Fiscal Policy’. Fiscal policy is that part of Government

policy which is concerned with raising revenues through taxation and other means deciding

on the level and pattern of expenditure it operates through budget. However, generally the

expenditure exceeds the revenue income of the Government. In order to meet this situation,

the Government imposes new taxes or increases rates of taxes, takes internal or external


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loans or resorts to deficit financing by issuing fresh currency. Thus, the collective form of

policies of imposing taxation, taking loans or deficit financing is known as fiscal policy. The

authors have defined it as follows: By fiscal policy is meant the use of public finance or

expenditure, taxes, borrowing and financial administration to further our national income

objective. –Buchler Changes in Government expenditure and taxation designed to influence

the pattern and level of activity. – J. Harry and Johnson

“Fiscal policy is a policy under which the Government uses its expenditure and revenue

programmes to produce desirable effects and avoid undesirable effects on national income,

production and employment.” - Arthur Smithies

There are mainly three constituents of the fiscal policy; these are: (i) taxation policy, (ii)

public expenditure policy, and (iii) public debt policy. All these constituents must work

together to make the fiscal policy sound and effective.

Objectives of fiscal policy

1. Development by effective Mobilization of Resources

2. Efficient allocation of Financial Resources

3. Reduction in inequalities of Income and Wealth

4. Price Stability and Control of Inflation

5. Employment Generation

6. Balanced Regional Development

7. Capital Formation

8. Reducing the Deficit in the Balance of Payment


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9. Foreign Exchange Earnings

NATURE OF FISCAL POLICY

1. Rationalization of product classification codes: The rationalized standard product code

structure for indirect taxes. The change has resulted in reduced disputes and litigations about

product classification.

2. Common accounting year for income tax: Taxation policy has adopted standard

accounting year (April-March) for the purpose of income tax.

3. Long term fiscal policy: Since 1986 budget, the Government of India has introduced

long term fiscal policy to provide greater certainties in its budgetary policies and to improve

the overall environment of business.

4. Impact on rural employment: Generation of employment is the main objective of the

fiscal policy.

5. Reliance on indirect taxes:

6. Inadequate public sector contribution:

7. Introducing of Modified Value Added Tax (MODVAT):

SIGNIFICANCE OF FISCAL POLICY

1. Capital formation

2. Mobilization of resources

3. Incentives to savings

4. Inducement to private sector


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5. Alleviation of poverty and unemployment

6. Reduction in inequality

PUBLIC REVENUES

Any public authority or Government needs income for the performance of a variety of

functions and meeting its expenditure. The income of the Government through all sources is

called public income or public revenue. According to Dalton, public income can be classified

as Public Revenue and Public. Any public authority or Government needs income for the

performance of a variety of functions and meeting its expenditure. The income of the

Government through all sources is called public income or public revenue. According to

Dalton, public income can be classified as Public Revenue and Public Receipts.

Public Revenue:

Public revenue refers to income of a Government from all sources raised, in order to meet

public expenditure. Public revenue consists of taxes, revenue from administrative activities

like fines, fees, income from public enterprises, gifts and grants.

Public Receipts

It includes public revenue plus the receipts from public borrowings, the receipts from sale

of public assets and printing and issuing new currency notes. It includes other sources of

public income along with public revenue. Public Revenue can be classified as Tax Revenue

and Non - Tax Revenue.

Sources of Public Re venue

Public revenue is div ided into tw o groups: Tax Revenue and Non - tax Revenue

Tax Revnue:


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The rev nue raised by the Gov ernment through various taxes is known as t ax revenue. Tax

revenue is the most important source of public revenue. A tax is a co mpulsory payment

levied by the Gov ernment on individuals or compan ies to meet the expen diture whic h is

required for public welfare. According to Hugh Dalton, "a tax is a compulsory contribution

im posed by a public authority, irrespective of the e act amount of service r endered to the

tax paye rs in return and not im posed as a pena lty for any legal offenc ."In 2009-10, the tax

revenue of C entral Gove rnment was estimated a t about 78% of total revenue receipts.

Direct Taxes: - It includes:-

Personal Income Tax: Personal Income Tax is levied on the taxable income of individuals

and Hindu Undivided Families (HUFs). Here various exemptions and deductions are

allowed.

Corporate Tax:

Corporate Tax is levied on taxable income of registered corporate firms. Under various

sections of Income Tax Act, exemptions and deductions are allowed. Other Direct Taxes:

There are various other direct taxes & their share is negligible. For eg :-Interest tax, wealth

tax, estate duty, expenditure tax etc.

Indirect Taxes: - It includes

Customs Duty: Customs Duty is levied on imports and on selective exports. In 2009-10,

customs duty revenue to Central Government was estimated at Rs. 84,244 crore.

Excise Duty:


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Excise duty is levied on goods produced. Over the years the rate of Excise duty has been

reduced on most of the items. In 2009-10, excise duty revenue of Central Government was

estimated at Rs. 1,04,659 crores.

Service Tax:

Service tax was introduced in 1994-95. In February 2010, service tax was reduced to 10%

from12%. About 117 services were subject to service tax. In 2009-10. Service tax of central

Government was Rs. 58,454 crore.

Non - Tax Revenue

The revenue obtained by the Government from sources other than tax is called non - tax

revenue’.

1) Administrative Revenues:

The Government gets revenue from public for administrative work in following forms :-

Fees: A fee is charged by the public authorities for rendering service to the members of

public. There is no compulsion involved in case of fees. For Eg. Fees charged for issuing

licenses, passports, registrations, filing of court cases etc.

Fines and Penalties: Fines or penalties are imposed as a form of punishment for breach of

law or non - fulfillment or failure to observe some regulations. Fines are compulsory

payments without quid-pro-quo. For Eg. Fines are imposed for rash driving, not disclosing

taxable income, travelling without tickets etc.

2) Profits of Government Enterprises: The Government gets revenue by way of surplus from

public enterprises. For Eg: - Surplus from railways, telephones, profits of state undertakings


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etc. Earnings from state enterprises depend on prices charged by them for their goods and

services and the surplus derived.

3) Gifts and Grants: Gifts are voluntary contributions by individuals or institutions to the

Government. Gifts are important source of revenue during the times of war and emergency.

There is no element of quid-pro-quo. The donor may not get anything in return. In modern

day grants from one Government to another is an important source of revenue. Grants are

provided by Central Government to State Governments or by State Governments to local

authorities to carry out their functions. Grants from foreign countries are known as foreign

aid.

PUBLIC EXPENDITURE

Public Expenditure refers to Government Expenditure. It is incurred by Central and State

Governments. The Public Expenditure is incurred on various activities for the welfare of the

people and also for the economic development, especially in developing countries. In other

words The Expenditure incurred by Public authorities like Central, State and local

Governments to satisfy the collective social wants of the people is known as public

expenditure.

NEED IMPORTANCE/ SIGNIFICANCE OF PUBLIC EXPENDITURE:

In modern economic activities public expenditure has to play an important role. It helps to

accelerate economic growth and ensure economic stability. Public Expenditure can promote

economic development as follows:

1. To promote rapid economic development.

2. To promote trade and commerce.


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3. To promote rural development

4. To promote balanced regional growth

5. To develop agricultural and industrial sectors

6. To build socio-economic overheads eg. Roadways, railways, power etc.

7. To exploit and develop mineral resources like coal and oil.

8. To provide collective wants and maximize social welfare.

9. To promote full - employment and maintain price stability.

10. To ensure an equitable distribution of income.

Thus public expenditure has to create and maintain conditions conducive to economic

development. It has to improve the climate for investment. It should provide incentives to

save invest and innovate.

Types of Public Expenditure

Classification of public expenditure refers to the systematic arrangement of different items

on which the Government incurs expenditure. Public expenditure can be classified as

follows.

Capital and Revenue Expenditure:

Capital Expenditure of the Government refers to that expenditure which results in creation

of fixed assets. They are in the form of investment. They add to the net productive assets of

the economy. Capital Expenditure is also known as development expenditure as it increases

the productive capacity of the economy. It is investment expenditure and a non-recurring

type of expenditure. For Ex. Expenditure - on agricultural and industrial development,


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irrigation dams, and public -enterprises etc, are all capital expenditures Revenue

expenditures are current or consumption expenditures incurred on civil administration,

defense forces, public health and, education, maintenance of Government machinery etc.

This type of "expenditure is of recurrent type which is incurred year after year.

Development and Non - Developmental Expenditure / Productive and Non – Productive

Expenditure:

Expenditure on infrastructure development, public enterprises or development of agriculture

increase productive capacity in the economy and bring income to the Government. Thus they

are classified as productive expenditure. All expenditures that promote economic growth

development are termed as development expenditure.

Unproductive (non - development) expenditure refers to those expenditures which do not

yield any income. Expenditure such as interest payments, expenditure on law and order,

public administration, do not create any productive asset which brings income to

Government such expenses are classified as unproductive expenditures.

Plan and Non - Plan Expenditure

The plan expenditure is incurred on development activities outlined in ongoing five year

plan. In 2009-10, the plan expenditure of Central Government was 5.3% of GDP. Plan

expenditure is incurred on Transport, rural development, communication, agriculture,

energy, social services, etc.

The non - plan expenditure is incurred on those activities, which are not included in five-

year plan.


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Other Classification (Mrs. Hicks)

Mrs. Hicks classified Public Expenditure on the basis of duties of Government. It is as

follows. Defense Expenditure: It is expenditure on defense equipment, wages and salaries of

armed forces, navy and air force etc. It is incurred by Government to provide security to

citizens of country from external aggression.

Civil Expenditure: Government/incurs this expenditure to maintain law and order and

administration of justice.

Development Expenditure: It is expenditure on development of agriculture, industry, trade

and commerce, transport and communication etc.

PUBLIC DEBT

Public debt refers to Government debt. It refers to Government borrowings from individuals,

financial institutions, organizations and foreign countries. If revenue collected through taxes

and other sources is not adequate to cover expenditure, the Government may resort to

borrowings. Thus public debt is one of the instruments to cover deficits in budget. Over the

years, the public debt of Central Government and that of State Government’s has increased

during the planning period. In short, public debt refers to “obligations of Governments,

particularly those evidenced by securities, to pay sums to the holders at some future date”.

Borrowed funds are utilized for development and non-development activities.

Types of Public Debt

1. Internal And External Debt

2. Short Term, Medium Term And Long - Term Debt

3. Productive And Unproductive Debt


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4. Redeemable And Irredeemable Debt

5. Funded And Unfunded Debt

Internal and External Debt

Internal Debt: Government borrowings within the country are known as internal debt.

Public loans floated within the country are called internal debt. The various internal sources

from which the Government borrows include individuals, banks, business firms and others.

The various instruments of internal debt include market loans, bonds, treasury bills, ways

and means advances etc.

External Debt: Borrowings by the Government from abroad is known as external debt. The

external debt comprises of Loans from World Bank, Asian Development Bank, etc. External

loans help to take up various developmental programmes in developing and underdeveloped

countries.

Short Term, Medium Term and Long - Term Debt

Short Term Debt: Loans for a period of less than one year are known as short - term debt.

For Ex. The treasury bills are issued by RBI on behalf of the Government to raise funds for

a period of 91 days and 182 days. Interest rates on such loans are very low. To cover the

temporary deficits in budget short - term loans are taken.

Medium - Term Debt: The period of medium term debt is normally for a period above one

year and up to 5 years. One of the main forms of medium term debt is by way of market

loans. The interest rates on medium term loans are reasonable. These are preferred to meet

expenditure on health, education, relief work etc.


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Long - Term Debt: Loans for a period exceeding 5 years are called long - term debt. One of

the main forms of long term loans is by way of issue of bonds. Long term debt is required

for the purpose of retirement of debts and also for the purpose of development projects.

Productive and Unproductive Debt

Productive Debt: Public debt is said to be productive when it is raised for productive

purposes and is used to add to the productive capacity of the economy. These loans are

normally long - term in nature. These loans are utilized on development activities such as

infrastructure development like roadways, railways, airports, seaports, power generation,

telecommunications etc.

Unproductive Debt: An unproductive debt is one which does not yield any income. It does

not add to the productive assets of the country. For Ex. debts utilized for transfer payments

in form of subsidies, old age pension, special incentives to weaker sections etc.

Redeemable and Irredeemable Debt

Redeemable Debt: Loans which Government promises to pay off at some future date are

called redeemable debts. Their maturity period is fixed. The Government has to make

arrangements to repay the principal and interest on due date.

Irredeemable Debt: Loans for which no promise is made by the Government regarding

their exact date of repayment are called irredeemable debts. Such debt has no maturity

period. The Government may pay interest regularly. Normally, Government does not resort

to such borrowings.

Funded and Unfunded Debt


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Funded Debt: Funded debt is normally obtained on long - term basis. The interest on funded

debt must be paid regularly. But the Government has the option to repay the principal. If

market conditions are favorable Government may repay it before maturity.

Unfunded Debt: Unfunded debts are of short term. They are also known as floating debt.

Unfunded debts are incurred to meet temporary needs of the Government. The rate of interest

is low. There is no special fund created to repay this debt.

DEVELOPMENT ACTIVITIES ALLOCATION OF FUNDS

Announcement of long term fiscal policy was in the direction of determining the relationship

between planning in India and the process of making the budget. During the course of this

budget speech 1985-86, the finance Minister and promised to adopt such long term fiscal

policy which will be co-terminus with the period of plan.

The first long-term fiscal policy was announced on 27 December, 1985.

The objectives of long term fiscal plan are to achieve all those objectives which are directly

related to the alleviation of poverty. The main objectives of fiscal policy are

1. To accelerate the process of economic growth

2. Removal of poverty

3. To prepare Indian economy for the 21st century

4. Better coordination of plans and impart uniformity to the policies

5. To provide direction and coordination to annual budget

CRITICAL ANALYSIS OF THE RECENT (2015-16) FISCAL POLICY OF

GOVERNMENT OF INDIA


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Taxation

• Abolition of Wealth Tax.

• Additional 2% surcharge for the super-rich with income of over Rs. 1 crore.

• Rate of corporate tax to be reduced to 25% over next four years.

• No change in tax slabs

• 100% exemption for contribution to Swachch Bharat, apart from CSR.

• Service tax increased to14 per cent.

Agriculture

• Rs. 25,000 crore for Rural Infrastructure Development Bank.

• Rs. 5,300 crore to support Micro Irrigation Programme

• Farmers credit - target of 8.5 lakh crore.

Infrastructure

• Rs. 70,000 crores to Infrastructure sector.

• Tax-free bonds for projects in rail road and irrigation

• PPP model for infrastructure development to be revitalised and Govt. to bear majority

of the risk.

• Atal Innovation Mission to be established to draw on expertise of entrepreneurs, and

researchers to foster scientific innovations; allocation of Rs. 150 crore.

• Govt. proposes to set up 5 ultra-mega power projects, each of 4000MW.


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Education

• AIIMS in Jammu and Kashmir, Punjab, Tamil Nadu, Himachal Pradesh, Bihar and

Assam.

• IIT in Karnataka; Indian School of Mines in Dhanbad to be upgraded to IIT.

• PG institute of Horticulture in Amritsar.

• Kerala to have University of Disability Studies

• Centre of film production, animation and gaming to come up in Arunachal Pradesh.

• IIM for Jammu and Kashmir and Andhra Pradesh.

Defence

• Allocation of Rs. 2,46,726 crore; an increase of 9.87 per cent over last year.

• Focus on Make in India for quick manufacturing of Defence equipment.

Welfare Schemes

• JAM trinity (Jan Dhan Yojana, Aadhaar and Mobile) to improve quality of life and to

pass benefits to common man.

• Six crore toilets across the country under the Swachh Bharat Abhiyan.

• MUDRA bank will refinance micro finance organisations to encourage first generation

SC/ST entrepreneurs.

• Housing for all by 2020.


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• Up gradation 80,000 secondary schools.

Welfare Schemes

• New scheme for physical aids and assisted living devices for people aged over 80

• Govt. to use Rs. 9,000 crore unclaimed funds in PPF/EPF for Senior Citizens Fund.

• Govt. to create universal social security system for all Indians.

Renewable Energy

• Rs. 75 crore for electric cars production.

• Renewable energy target for 2022: 100K MW in solar; 60K MW in wind; 10K MW in

biomass and 5K MW in small hydrogen

Tourism

• Development schemes for churches and convents in old Goa; Hampi, Elephanta caves,

Forests of Rajasthan, Leh palace, Varanasi , Jallianwala Bagh, Qutb Shahi tombs at

Hyderabad to be under the new tourism scheme.

• Visa on Arrival for 150 countries.

Gold

• Sovereign Gold Bond, as an alternative to purchasing metal gold.

• New scheme for depositors of gold to earn interest and jewellers to obtain loans on their

metal accounts.


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Financial Sector NBFCs registered with the RBI and having asset size of Rs 500 crore

and above to be considered as ‘financial institution’ under Sarfaesi Act, 2002, enabling them

to fund SME and mid-corporate businesses.

Meaning of Monetary Policy

The term monetary policy is also known as the 'credit policy' or called 'RBI's money

management policy' in India. How much should be the supply of money in the economy?

How much should be the ratio of interest? How much should be the viability of money? etc.

Such questions are considered in the monetary policy. From the name itself it is understood

that it is related to the demand and the supply of money.

Definition of Monetary Policy

Many economists have given various definitions of monetary policy. Some prominent

definitions are as follows.

According to Prof. Harry Johnson,

"A policy employing the central banks control of the supply of money as an instrument for

achieving the objectives of general economic policy is a monetary policy."

According to A.G. Hart,

"A policy which influences the public stock of money substitute of public demand for such

assets of both that is policy which influences public liquidity position is known as a monetary

policy."

From both these definitions, it is clear that a monetary policy is related to the availability

and cost of money supply in the economy in order to attain certain broad objectives. The


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Central Bank of a nation keeps control on the supply of money to attain the objectives of its

monetary policy.

Objectives of Monetary Policy

The objectives of a monetary policy in India are similar to the objectives of its five year

plans. In a nutshell, planning in India aims at growth, stability and social justice. After the

Keynesian revolution in economics, many people accepted significance of monetary policy

in attaining following objectives.

Rapid Economic Growth

➢ Price Stability

➢ Exchange Rate Stability

➢ Balance of Payments (BOP) Equilibrium

➢ Full Employment

➢ Neutrality of Money

➢ Equal Income Distribution

These are the general objectives which every central bank of a nation tries to attain by

employing certain tools (Instruments) of a monetary policy. In India, the RBI has always

aimed at the controlled expansion of bank credit and money supply, with special attention to

the seasonal needs of a credit.

Let us now see objectives of monetary policy in detail:-


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Rapid Economic Growth: It is the most important objective of a monetary policy. The

monetary policy can influence economic growth by controlling real interest rate and its

resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by

reducing interest rates, the investment level in the economy can be encouraged. This

increased investment can speed up economic growth. Faster economic growth is possible if

the monetary policy succeeds in maintaining income and price stability.

Price Stability: All the economics suffer from inflation and deflation. It can also be called

as Price Instability. Both inflation are harmful to the economy. Thus, the monetary policy

having an objective of price stability tries to keep the value of money stable. It helps in

reducing the income and wealth inequalities. When the economy suffers from recession the

monetary policy should be an 'easy money policy' but when there is inflationary situation

there should be a 'dear money policy'.

Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms

of any foreign currency. If this exchange rate is very volatile leading to frequent ups and

downs in the exchange rate, the international community might lose confidence in our

economy. The monetary policy aims at maintaining the relative stability in the exchange

rate. The RBI by altering the foreign exchange reserves tries to influence the demand for

foreign exchange and tries to maintain the exchange rate stability.

Balance of Payments (BOP) Equilibrium: Many developing countries like India suffers

from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy

tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the

'BOP Surplus' and the 'BOP Deficit'. The former reflects an excess money supply in the

domestic economy, while the later stands for stringency of money. If the monetary policy

succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.


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Full Employment: The concept of full employment was much discussed after Keynes's

publication of the "General Theory" in 1936. It refers to absence of involuntary

unemployment. In simple words 'Full Employment' stands for a situation in which everybody

who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In

that senses the full employment is never full. Monetary policy can be used for achieving full

employment. If the monetary policy is expansionary then credit supply can be encouraged.

It could help in creating more jobs in different sector of the economy.

Neutrality of Money: Economist such as Wicksted, Robertson has always considered

money as a passive factor. According to them, money should play only a role of medium of

exchange and not more than that. Therefore, the monetary policy should regulate the supply

of money. The change in money supply creates monetary disequilibrium. Thus monetary

policy has to regulate the supply of money and neutralize the effect of money expansion.

However this objective of a monetary policy is always criticized on the ground that if money

supply is kept constant then it would be difficult to attain price stability.

Equal Income Distribution: Many economists used to justify the role of the fiscal policy

is maintaining economic equality. However in recent years economists have given the

opinion that the monetary policy can help and play a supplementary role in attainting an

economic equality. Monetary policy can make special provisions for the neglect supply such

as agriculture, small-scale industries, village industries, etc. and provide them with cheaper

credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent

period, monetary policy can help in reducing economic inequalities among different sections

of society.

Instruments of Monetary Policy - Quantitative & Qualitative Tools


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The instrument of monetary policy are tools or devise which are used by the monetary

authority in order to attain some predetermined objectives. There are two types of

instruments of the monetary policy as shown below.

Instruments of Monetary Policy

Quantitative Instruments or General Tools

The Quantitative Instruments are also known as the General Tools of monetary policy. These

tools are related to the Quantity or Volume of the money. The Quantitative Tools of credit

control are also called as General Tools for credit control. They are designed to regulate or

control the total volume of bank credit in the economy. These tools are indirect in nature and

are employed for influencing the quantity of credit in the country. The general tool of credit

control comprises of following instruments.

Bank Rate Policy (BRP)

The Bank Rate Policy (BRP) is a very important technique used in the monetary policy for

influencing the volume or the quantity of the credit in a country. The bank rate refers to rate

at which the central bank (i.e RBI) rediscounts bills and prepares of commercial banks or

provides advance to commercial banks against approved securities. It is "the standard rate at

which the bank is prepared to buy or rediscount bills of exchange or other commercial paper

eligible for purchase under the RBI Act". The Bank Rate affects the actual availability and

the cost of the credit. Any change in the bank rate necessarily brings out a resultant change

in the cost of credit available to commercial banks. If the RBI increases the bank rate than it

reduce the volume of commercial banks borrowing from the RBI. It deters banks from


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further credit expansion as it becomes a more costly affair. Even with increased bank rate

the actual interest rates for a short term lending go up checking the credit expansion. On the

other hand, if the RBI reduces the bank rate, borrowing for commercial banks will be easy

and cheaper. This will boost the credit creation. Thus any change in the bank rate is normally

associated with the resulting changes in the lending rate and in the market rate of interest.

However, the efficiency of the bank rate as a tool of monetary policy depends on existing

banking network, interest elasticity of investment demand, size and strength of the money

market, international flow of funds, etc.

Open Market Operation (OMO)

The open market operation refers to the purchase and/or sale of short term and long term

securities by the RBI in the open market. This is very effective and popular instrument of

the monetary policy. The OMO is used to wipe out shortage of money in the money market,

to influence the term and structure of the interest rate and to stabilize the market for

government securities, etc. It is important to understand the working of the OMO. If the RBI

sells securities in an open market, commercial banks and private individuals buy it. This

reduces the existing money supply as money gets transferred from commercial banks to the

RBI. Contrary to this when the RBI buys the securities from commercial banks in the open

market, commercial banks sell it and get back the money they had invested in them.

Obviously the stock of money in the economy increases. This way when the RBI enters in

the OMO transactions, the actual stock of money gets changed. Normally during the inflation

period in order to reduce the purchasing power, the RBI sells securities and during the

recession or depression phase she buys securities and makes more money available in the

economy through the banking system. Thus under OMO there is continuous buying and

selling of securities taking place leading to changes in the availability of credit in an

economy.


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However there are certain limitations that affect OMO viz; underdeveloped securities

market, excess reserves with commercial banks, indebtedness of commercial banks, etc.

Variation in the Reserve Ratios (VRR)

The Commercial Banks have to keep a certain proportion of their total assets in the form of

Cash Reserves. Some part of these cash reserves are their total assets in the form of cash.

Apart of these cash reserves are also to be kept with the RBI for the purpose of maintaining

liquidity and controlling credit in an economy. These reserve ratios are named as Cash

Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). The CRR refers to some

percentage of commercial bank's net demand and time liabilities which commercial banks

have to maintain with the central bank and SLR refers to some percent of reserves to be

maintained in the form of gold or foreign securities. In India the CRR by law remains in

between 3-15 percent while the SLR remains in between 25-40 percent of bank reserves.

Any change in the VRR (i.e. CRR + SLR) brings out a change in commercial banks reserves

positions. Thus by varying VRR commercial banks lending capacity can be affected.

Changes in the VRR helps in bringing changes in the cash reserves of commercial banks and

thus it can affect the banks credit creation multiplier. RBI increases VRR during the inflation

to reduce the purchasing power and credit creation. But during the recession or depression

it lowers the VRR making more cash reserves available for credit expansion.

Qualitative Instruments or Selective Tools

The Qualitative Instruments are also known as the Selective Tools of monetary policy. These

tools are not directed towards the quality of credit or the use of the credit. They are used for

discriminating between different uses of credit. It can be discrimination favoring export over

import or essential over non-essential credit supply. This method can have influence over


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the lender and borrower of the credit. The Selective Tools of credit control comprises of

following instruments.

Fixing Margin Requirements

The margin refers to the "proportion of the loan amount which is not financed by the bank".

Or in other words, it is that part of a loan which a borrower has to raise in order to get finance

for his purpose. A change in a margin implies a change in the loan size. This method is used

to encourage credit supply for the needy sector and discourage it for other non-necessary

sectors. This can be done by increasing margin for the non-necessary sectors and by reducing

it for other needy sectors. Example:- If the RBI feels that more credit supply should be

allocated to agriculture sector, then it will reduce the margin and even 85-90 percent loan

can be given.

Consumer Credit Regulation

Under this method, consumer credit supply is regulated through hire-purchase and

installment sale of consumer goods. Under this method the down payment, installment

amount, loan duration, etc is fixed in advance. This can help in checking the credit use and

then inflation in a country.

Publicity

This is yet another method of selective credit control. Through it Central Bank (RBI)

publishes various reports stating what is good and what is bad in the system. This published

information can help commercial banks to direct credit supply in the desired sectors.

Through its weekly and monthly bulletins, the information is made public and banks can use

it for attaining goals of monetary policy.

Credit Rationing


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Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount

available for each commercial bank. This method controls even bill rediscounting. For

certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit.

This can help in lowering banks credit exposures to unwanted sectors.

Moral Suasion

It implies to pressure exerted by the RBI on the indian banking system without any strict

action for compliance of the rules. It is a suggestion to banks. It helps in restraining credit

during inflationary periods. Commercial banks are informed about the expectations of the

central bank through a monetary policy. Under moral suasion central banks can issue

directives, guidelines and suggestions for commercial banks regarding reducing credit

supply for speculative purposes.

Control through Directives

Under this method the central bank issue frequent directives to commercial banks. These

directives guide commercial banks in framing their lending policy. Through a directive the

central bank can influence credit structures, supply of credit to certain limit for a specific

purpose. The RBI issues directives to commercial banks for not lending loans to speculative

sector such as securities, etc beyond a certain limit.

Direct Action

Under this method the RBI can impose an action against a bank. If certain banks are not

adhering to the RBI's directives, the RBI may refuse to rediscount their bills and securities.

Secondly, RBI may refuse credit supply to those banks whose borrowings are in excess to

their capital. Central bank can penalize a bank by changing some rates. At last it can even


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put a ban on a particular bank if it does not follow its directives and work against the

objectives of the monetary policy.

These are various selective instruments of the monetary policy. However the success of these

tools is limited by the availability of alternative sources of credit in economy, working of

the Non-Banking Financial Institutions (NBFIs), profit motive of commercial banks and

undemocratic nature off these tools. But a right mix of both the general and selective tools

of monetary policy can give the desired results.

Limitations RBI’s Monetary Policy - India Money Management

Obstacles in Implementation of Monetary Policy

Through the monetary policy is useful in attaining many goals of economic policy, it is not

free from certain limitations. Its scope is limited by certain peculiarities, in developing

countries such as India. Some of the important limitations of the monetary policy are given

below.

Limitations Monetary Policy India

There exist a Non-Monetized Sector

In many developing countries, there is an existence of non-monetized economy in large

extent. People live in rural areas where many of the transactions are of the barter type and

not monetary type. Similarly, due to non-monetized sector the progress of commercial banks

is not up to the mark. This creates a major bottleneck in the implementation of the monetary

policy.

Excess Non-Banking Financial Institutions (NBFI)


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As the economy launch itself into a higher orbit of economic growth and development, the

financial sector comes up with great speed. As a result many Non-Banking Financial

Institutions (NBFIs) come up. These NBFIs also provide credit in the economy. However,

the NBFIs do not come under the purview of a monetary policy and thus nullify the effect

of a monetary policy.

Existence of Unorganized Financial Markets

The financial markets help in implementing the monetary policy. In many developing

countries the financial markets especially the money markets are of an unorganized nature

and in backward conditions. In many places people like money lenders, traders, and

businessman actively take part in money lending. But unfortunately they do not come under

the purview of a monetary policy and creates hurdle in the success of a monetary policy.

Higher Liquidity Hinders Monetary Policy

In rapidly growing economy the deposit base of many commercial banks is expanded. This

creates excess liquidity in the system. Under this circumstances even if the monetary policy

increases the CRR or SLR, it dose not deter commercial banks from credit creation. So the

existence of excess liquidity due to high deposit base is a hindrance in the way of successful

monetary policy.

Money Not Appearing in an Economy

Large percentage of money never come in the mainstream economy. Rich people, traders,

businessmen and other people prefer to spend rather than to deposit money in the bank. This

shadow money is used for buying precious metals like gold, silver, ornaments, land and in


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speculation. This type of lavish spending give rise to inflationary trend in mainstream

economy and the monetary policy fails to control it.

Time Lag Affects Success of Monetary Policy

The success of the monetary policy depends on timely implementation of it. However, in

many cases unnecessary delay is found in implementation of the monetary policy. Or many

times timely directives are not issued by the central bank, then the impact of the monetary

policy is wiped out.

Monetary & Fiscal Policy Lacks Coordination

In order to attain a maximum of the above objectives it is unnecessary that both the fiscal

and monetary policies should go hand in hand. As both these policies are prepared and

implemented by two different authorities, there is a possibility of non-coordination between

these two policies. This can harm the interest of the overall economic policy.

These are major obstacles in implementation of monetary policy. If these factors are

controlled or kept within limit, then the monetary policy can give expected results. Thus

though the monetary policy suffers from these limitations, still it has an immense

significance in influencing the process of economic growth and development.

Monetary Policy of India - 1990 Reforms and its Evaluation

Monetary Policy Reforms in India

The Monetary Policy of the RBI has undergone massive changes during the economic reform

period. After 1991 the Monetary policy is disassociated from the fiscal policy. Under the

reform period an emphasis was given to the stable macroeconomic situation and low

inflation policy.


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Monetary Policy in India

The major changes in the Indian Monetary policy during the decade of 1990

Reduced Reserve Requirements: During 1990s both the Cash Reserve Ratio (CRR) and

the Statutory Liquidity Ratio (SLR) were reduced to considerable extent. The CRR was at

its highest 15% plus and additional CRR of 10% was levied, however it is now reduced by

4%. The SLR is reduced from 38.5% to a minimum of 25%.

Increased Micro Finance: In order to strengthen the rural finance the RBI has focused more

on the Self Help Group (SHG). It comprises small and marginal farmers, agriculture and

non-agriculture labour, artisans and rural sections of the society. However, only 30% of the

target population has been benefited.

Fiscal Monetary Separation: In 1994, the Government and the RBI signed an agreement

through which the RBI has stopped financing the deficit in the government budget. Thus it

has separated the monetary policy from the fiscal policy.

Changed Interest Rate Structure: During the decade 1990s the administrated interest got

were changed to market oriented or liberal rate of interest. Interest rate slabs are now reduced

up to 2 and minimum lending rates are abolished. Similarly, lending rates of above Rs. Two

Lakhs are freed.

Changes in Accordance to the External Reforms: During the 1990, the external sector has

undergone major changes. It comprises lifting various controls on imports, reduced tariffs,

etc. The Monetary policy has shown the impact of liberal inflow of the foreign capital and

its implication on domestic money supply.


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Higher Market Orientation for Banking: The banking sector got more autonomy and

operational flexibility. More freedom to banks for methods of assessing working funds and

other functioning has empowered and assured market orientation.

Evaluation of Monetary Policy in India

During the reforms though the monetary policy has achieved higher success in the monetary

policy, it is not free from limitation or demerits. It needs to be evaluated on a proper scale.

Failed in Tackling Budgetary Deficit: The higher level of the budget deficit has made the

monetary policy ineffective. The automatic monetization of the deficit has led to high

monetary expansion.

Limited Coverage: The Monetary policy covers only commercial banking system leaving

other non-bank institutions untouched. It limits the effectiveness of the Monetory Policy in

India.

Unorganized Money Market: In our country there is a huge size of the unorganized money

market. It does not come under the control of the RBI. Thus any tools of the monetary policy

do not affect the unorganized money market making monetary policy less effective.

Predominance of Cash Transaction: In India still there is huge dominance of the cash in

total money supply. It is one of the main obstacles in the effective implementation of the

monetary policy. Because the monetary policy operates on the bank was on credit rather on

cash.

Increase Volatility: As the Monetary policy has adopted changes in accordance to the

changes in the external sector in India, it could lead to a high amount of the volatility.


79

There are certain drawbacks in the working of the Monetary Policy in India. However,

during the economic reforms it has got different dimensions.

Economic Reforms of the Banking Sector in India - Brief

Economic Reforms of the Banking Sector In India

Indian banking sector has undergone major changes and reforms during economic reforms.

Though it was a part of overall economic reforms, it has changed the very functioning of Indian

banks. This reform have not only influenced the productivity and efficiency of many of the

Indian Banks, but has left everlasting footprints on the working of the banking sector in India.

Banking Sector Reforms In India

Let us get acquainted with some of the important reforms in the banking sector in India.

Reduced CRR and SLR: The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

are gradually reduced during the economic reforms period in India. By Law in India the CRR

remains between 3-15% of the Net Demand and Time Liabilities. It is reduced from the earlier

high level of 15% plus incremental CRR of 10% to current 4% level. Similarly, the SLR Is also

reduced from early 38.5% to current minimum of 25% level. This has left more loanable funds

with commercial banks, solving the liquidity problem.

Deregulation of Interest Rate: During the economic reforms period, interest rates of

commercial banks were deregulated. Banks now enjoy freedom of fixing the lower and upper

limit of interest on deposits. Interest rate slabs are reduced from Rs.20 Lakhs to just Rs. 2

Lakhs. Interest rates on the bank loans above Rs.2 lakhs are full decontrolled. These measures

have resulted in more freedom to commercial banks in interest rate regime.


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Fixing prudential Norms: In order to induce professionalism in the operations of the RBI

fixed prudential norms for commercial banks. It includes recognition of income sources.

Classification of assets, provisions for bad debts, maintaining international standards in

accounting practices etc. It helped banks in reducing and restructuring Non-performing assets

(NPAs).

Introduction of CRAR: Capital to Risk Weighted Asset Ratio (CRAR) was introduced in

1992. It resulted in an improvement in the capital position of commercial banks, all most all

the banks in India has reached the Capital Adequacy Ratio (CAR) above the statutory level of

9%.

Operational Autonomy: During the reforms period commercial banks enjoyed the operational

freedom. If a bank satisfies the CAR then it gets freedom in opening new branches, upgrading

the extension counters, closing down existing branches and they get liberal lending norms.

Banking Diversification: The Indian banking sector was well diversified, during the economic

reforms period. Many of the banks have stared new services and new products. Some of them

have established subsidiaries in merchant banking, mutual funds, insurance, venture capital,

etc which has led to diversified sources of income of them.

New Generation Banks: During the reforms period many new generation banks have

successfully emerged on the financial horizon. Banks such as ICICI Bank, HDFC Bank, UTI

Bank have given a big challenge to the public sector banks leading to a greater degree of

competition.

Improved Profitability and Efficiency: During the reform period, the productivity and

efficiency of many commercial banks has improved. It has happened due to the reduced Non-


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performing loans, increased use of technology, more computerization and some other relevant

measures adopted by the government.

These are some of the import reforms regarding the banking sector in India.

With these reforms, Indian banks especially the public sector banks have proved that they are

no longer inefficient compared with their foreign counterparts as far as productivity is

concerned.

Nationalisation of Banks in India - Introduction Objectives Demerits

Nationalisation of Banks in India - Introduction

After independence the Government of India (GOI) adopted planned economic development

for the country (India). Accordingly, five year plans came into existence since 1951. This

economic planning basically aimed at social ownership of the means of production. However,

commercial banks were in the private sector those days. In 1950-51 there were 430 commercial

banks. The Government of India had some social objectives of planning. These commercial

banks failed helping the government in attaining these objectives. Thus, the government

decided to nationalize 14 major commercial banks on 19th July, 1969. All commercial banks

with a deposit base over Rs.50 crores were nationalized. It was considered that banks were

controlled by business houses and thus failed in catering to the credit needs of poor sections

such as cottage industry, village industry, farmers, craft men, etc. The second dose of

nationalisation came in April 1980 when banks were nationalized.

Nationalisation of Banks in India

Objectives behind Nationalisation of Banks in India


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The nationalisation of commercial banks took place with an aim to achieve following major

objectives.

Social Welfare: It was the need of the hour to direct the funds for the needy and required

sectors of the Indian economy. Sector such as agriculture, small and village industries were in

need of funds for their expansion and further economic development.

Controlling Private Monopolies: Prior to nationalisation many banks were controlled by

private business houses and corporate families. It was necessary to check these monopolies in

order to ensure a smooth supply of credit to socially desirable sections.

Expansion of Banking: In a large country like India the numbers of banks existing those days

were certainly inadequate. It was necessary to spread banking across the country. It could be

done through expanding banking network (by opening new bank branches) in the un-banked

areas.

Reducing Regional Imbalance: In a country like India where we have a urban-rural divide; it

was necessary for banks to go in the rural areas where the banking facilities were not available.

In order to reduce this regional imbalance nationalisation was justified:

Priority Sector Lending: In India, the agriculture sector and its allied activities were the

largest contributor to the national income. Thus these were labeled as the priority sectors. But

unfortunately they were deprived of their due share in the credit. Nationalisation was urgently

needed for catering funds to them.

Developing Banking Habits: In India more than 70% population used to stay in rural areas. It

was necessary to develop the banking habit among such a large population.

Demerits, Limitations - Bank Nationalisation in India


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Though the nationalisation of commercial banks was undertaken with tall objectives, in many

senses it failed in attaining them. In fact it converted many of the banking institutions in the

loss making entities. The reasons were obvious lethargic working, lack of accountability, lack

of profit motive, political interference, etc. Under this backdrop it is necessary to have a critical

look to the whole process of nationalisation in the period after bank nationalisation.

The major limitations of the bank nationalisation in India are:-

Inadequate banking facilities: Even though banks have spread across the country; still many

parts of the country are unbanked. Especially in the backward states such as the Uttar Pradesh,

Madhya Pradesh, Chhattisgarh and north-eastern states of India.

Limited resources mobilized and allocated: The resources mobilized after the nationalisation

is not sufficient if we consider the needs of the Indian economy. Sometimes the deposits

mobilized are enough but the resource allocation is not as per the expansions.

Lowered efficiency and profits: After nationalisation banks went in the government sector.

Many times political forces pressurized them. Banking was not done on professional and

ethical grounds. It resulted into lower efficiency and poor profitability of banks.

Increased expenditure: Due to huge expansion in a branch network, large staff administrative

expenditure, trade union struggle, etc. banks expenditure increased to a dangerous levels.

Political and Administrative Inference: Many public sector banks badly suffered due to the

political interference. It was seen in arranging loan meals. It ultimately resulted in huge non-

performing assets (NPA) of these banks and inefficiency.

These are several limitations faced by the banks nationalisation in India.


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Apart from this there are certain other limitations as well, such as weak infrastructure, poor

competitiveness, etc.

But after Economic Reform of 1991, the Indian banking industry has entered into the new

horizons of competitiveness, efficiency and productivity. It has made Indian banks more

vibrant and professional organizations, removing the bad days of bank nationalisation.

Changing Role of Banks in India Since Economic Reforms of 1991

Changing Role of Banks in India

The role of banks in India has changed a lot since economic reforms of 1991. These changes

came due to LPG, i.e. liberalization, privatization and globalization policy being followed by

GOI. Since then most traditional and outdated concepts, practices, procedures and methods of

banking have changed significantly. Today, banks in India have become more customer-

focused and service-oriented than they were before 1991. They now also give a lot of

importance to their rural customers. They are even willing ready to help them and serve

regularly the banking needs of country-side India.

The changing role of banks in India can be glanced in points depicted below.

Changing role of banks in India

➢ The following

points briefly

highlight the

changing role of

banks in India.

➢ Better customer

service,

➢ Mobile banking

facility,

➢ Bank on wheels

scheme,

➢ Portfolio

management,

➢ Issue of electro-

magnetic cards,

➢ Universal banking,

➢ Automated teller

machine (ATM),

➢ Internet banking,


85

➢ Encouragement to

bank

amalgamation,

➢ Encouragement to

personal loans,

➢ Marketing of

mutual funds,

➢ Social banking,

etc.


86

The above-mentioned points indicate the role of banks in India is changing. Now let's discuss how

banking in India is getting much better day after day.

Better Customer Service

Before 1991, the overall service of banks in India was very poor. There were very long queues

(lines) to receive payment for cheques and to deposit money. In those days, some bank staffs were

very rude to their customers. However, all this changed remarkably after Indian economic reforms

of 1991.

Banks in India have now become very customer and service focus. Their service has become quick,

efficient and customer-friendly. This positive change is mostly due to rising competition from new

private banks and initiation of Ombudsman Scheme by RBI.

Mobile Banking

Under mobile banking service, customers can easily carry out major banking transactions by

simply using their cell phones or mobiles.

Here, first a customer needs to activate this service by contacting his bank. Generally, bank officer

asks the customer to fill a simple form to register (authorize) his mobile number. After registration,

this service is activated, and the customer is provided with a username and password. Using secret

credentials and registered phone, customer can now comfortably and securely, find his bank

balance, transfer money from his account to another, ask for a cheque book, stop payment of a

cheque, etc.

Today, almost all banks in India provide a mobile-banking service.

Bank on Wheels


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The 'Bank on Wheels' scheme was introduced in the North-East Region of India. Under this

scheme, banking services are made accessible to people staying in the far-flung (remote) areas of

India. This scheme is a generous attempt to serve banking needs of rural India.

Portfolio Management

In portfolio management, banks do all the investments work of their clients.

Banks invest their clients' money in shares, debentures, fixed deposits, etc. They first enter a

contract with their clients and charge them a fee for this service. Then they have the full power to

invest or disinvest their clients' money. However, they have to give safety and profit to their clients.

Issue of Electro-Magnetic Cards

Banks in India have already started issuing Electro-Magnetic Cards to their customers. These cards

help to carry out cash-less transactions, make an online purchase, avail ATM facility, book a

railway ticket, etc.

Banks issue many types of electro-magnetic cards, which are as follows:

Credit cards help customers to spend money (loaned up to a certain limit as previously settled by

the bank) which they don't have in hand. They get a monthly statement of their purchases and

withdrawals. Along with the transacted amount, this statement also includes the interest and

service fee. The entire amount (as reflected in the statement of credit card) must be paid back to

the bank either fully or in installments, but before due date.

Debit cards help customers to spend that money which they have saved (credited) in their

individual bank accounts. They need not carry cash but instead can use a debit card to make a


88

purchase (for shopping) and/or withdraw money (get cash) from an ATM. No interest is charged

on the usage of debit cards.

Charge cards are used to spend money up to a certain limit for a month. At the end of the month,

customer gets a statement. If he has a sufficient balance, then he only had to pay a small fee.

However, if he doesn't have a necessary balance, he is given a grace period (which is generally of

25 to 50 days) to repay the money.

Smart cards are currently being used as an alternative to avail public transport services. In India,

this covers Railways, State Transport and City (Local) Buses. Smart card has an integrated circuit

(IC) embedded in its plastic body. It is made as per norms specified by ISO.

Kisan credit cards are used for the benefit of the rural population of India. The Indian farmers

(kisans) can use this card to buy agricultural inputs and goods for self-consumption. These cards

are issued by both Commercial and Co-operative banks.

Universal Banking

In India, the concept of universal banking has gained recognition after year 2000. The customers

can get all banking and non-banking services under one roof. Universal bank is like a super store.

It offers a wide range of services, including banking and other financial services like insurance,

merchant banking, etc.

Automated Teller Machine (ATM)

There are many advantages of ATM. As a result, many banks have opened up ATM centres to

offer convenience to their customers. Now banks are operating ATM centres not only in their


89

branches but also at public places like airports, railway stations, hotels, etc. Some banks have

joined together and agreed upon to set up common ATM centres all over India.

Internet Banking

Internet banking is also called as an E-banking or net banking. Here, the customer can do banking

transactions through the medium of the internet or world wide web (WWW). The customer need

not visit the bank's branch. Through this facility, the customer can easily inquiry about bank

balance, transfer funds, request for a cheque book, etc. Most large banks offer this service to their

tech-savvy customers.

Encouragement to Bank Amalgamation

Failure of banks is well-protected with the facility of amalgamation. So depositors need not worry

about their deposits. When weaker banks are absorbed by stronger banks, it is called amalgamation

of banks.

Encouragement to Personal Loans

Today, the purchasing power of Indian consumers has increased dramatically because banks give

them easy personal loans. Generally, interest charged by the banks on such loans is very high.

Interest is calculated on reducing balance. Large banks offer loans up to a huge amount like one

crore. Some banks even organise Loan Mela (Fair) where a loan is sanctioned on the spot to

deserving candidates after they submit proper documents.

Marketing of Mutual Funds

A mutual fund collects money from many investors and invests the money in shares, bonds, short-

term money market instruments, gold assets; etc. Mutual funds earn income by interest and


90

dividend or both from its investments. It pays a dividend to subscribers. The rate of dividend

fluctuates with the income on mutual fund investments. Now banks have started selling these funds

in their own names. These funds are not insured like other bank deposits. There are different types

of funds such as open-ended funds, closed-ended funds, growth funds, balanced funds, income

funds, etc.

Social Banking

The government uses the banking system to alleviate poverty and unemployment. Many social

development programmes are initiated by the banks from time to time. The success of these

programmes depends on financial support provided by the banks. Banks supply a lot of finance to

farmers, artisans, scheduled castes (SC) and scheduled tribe (ST) families, unemployed youth and

people living below the poverty line (BPL).

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