BUSINESS ENVIRONMENT IN POST REFORM PERIOD

SUBMITTED BY :ISHU CHOPRA (1711)AANCHAL KHATRI (1703)SECTION -- B

SUBMITTED TO :PROF. KUNWAR MILIND SINGH

INDIA AFTER INDEPENDENCE On 14 August 1947, Nehru had declared: the country

that the tasks ahead included “the ending of poverty and ignorance and disease and inequality of opportunity”.

The objective of India’s development strategy has been to establish a socialistic pattern of society through economic growth with self-reliance, social justice and alleviation of poverty. These objectives were to be achieved within a democratic political framework using the mechanism of a mixed economy where both public and private sectors co-exist.

TRADE AND DEVELOPMENT DURING1947 TO 1990 India initiated planning for national economic

development with the establishment of the Planning Commission. The aim of the First Five Year Plan (1951-56) was to raise domestic savings for growth and to help the economy resurrect itself from colonial rule.

The real break with the past in planning came with the Second Five Year Plan (Nehru-Mahalanobis Plan). The industrialization strategy articulated by Professor Mahalanobis placed emphasis on the development of heavy industries and envisaged a dominant role for the public sector in the economy.

The objectives of industrial policy were: a high growth rate, national self-reliance, reduction of foreign dominance, building up of indigenous capacity, encouraging small scale industry, bringing about balanced regional development, prevention of concentration of economic power, reduction of income inequalities and control of economy by the State.

Doubts were raised in the early seventies about the effectiveness of the approach to banish poverty. Further, the growth itself generated by the planned approach remained too weak to create adequate surpluses. Public sector did not live up to the expectations of generating surpluses to accelerate the pace of capital accumulation and help reduce inequality. Agricultural growth remained constrained by perverse institutional conditions.

A shift in policy was called for. The Fifth Plan (1974-79) corrected its course by initiating a program emphasizing growth with redistribution.

Three important committees were set up in the early 1980s. Narsimhan Committee on the shift from physical controls to fiscal controls, Sengupta Committee on the public sector and the Hussain Committee on trade policy.

Two kinds of delicencing activity took place. First, thirty two groups of industries were delicensed without any investment limit. Second, in 1988, all industries were exempted from licensing except for a specified negative list of twenty six industries. Entry into the industrial sector was made easier but exit still remained closed and sealed.

FAILURE IN PLANNING PROCESS While the reasons for adopting a centrally directed

strategy of development were understandable against the background of colonial rule, it, however soon became clear that the actual results of this strategy were far below expectations.

Instead of showing high growth, high public savings and a high degree of self-reliance, India was actually showing one of the lowest rates of growth in the developing world with a rising public deficit and a periodic balance of payment crises. Between 1950 and 1990, India’s growth rate averaged less than 4 per cent per annum

LPG Liberalization : It refers to the relaxation of previous

government restrictions usually in areas of social and economic policy. Thus, when government liberalizes trade it means it had removed the tariff, subsidies and other restrictions on the flow of goods and services between countries.

Privatization: It refers to the transfer of assets or service functions from public o private ownership or control and opening of the hitherto closed areas to private sector entry. It can be achieved by leasing, contracting, divesture and franchising.

Globalization: Integrating domestic economy with world economy.

NEED FOR LPG Foreign currency reserves had tumbled

down to almost billion. Inflation was at soaring high of 17%

highest level of fiscal deficit. Capital was on the verge of flying out of

the country and we were on the brink of becoming loan defaulters.

Foreign investors were losing confidence in Indian Economy with all these factors.

SIGNIFICANCE OF LPG Making Indian economy as the fastest

growing economy and globally competitive. It marks the advent of the real integration

of the Indian economy into global economy. Globalization implies opening up the

economy to FDI by providing facilities to foreign companies to invest in different fields of economic activity in India.

OBJECTIVES OF NEW INDUSTRIAL POLICY Self-reliance to build on the many sided

gains already made. Encouragement to Indian

entrepreneurship, promotion of productivity and employment generation.

Removing regulatory system and other weaknesses.

Enhanced support to the small-scale sector.

Incentives for the industrialization of backward areas.

Increasing the competitiveness of industries for the benefit of the common man.

Insure running of public sector undertakings (PSUs) on business lines and cur their losses.

Development of indigenous technology through greater investment and bringing in new technology to help Indian manufacturing units attain world standards.

PROVISIONS OF NEW ECONOMIC POLICY, 19911. Trade and Capital Flow reforms: The Government devalued the rupee in early July 1991

which led to a fall in the value of the rupee against the five major international currencies by roughly 22 %.

The budget for 1992-93 announced the liberalized exchange rate mechanism. This system introduced partial convertibility of rupee. A dual exchange rate was fixed under which 40% of foreign exchange earnings were to be surrendered at the official exchange rate while 60% were to be converted at market determined rate.

The 1993-94 budget introduced full convertibility of rupee on trade account. Thus the 60:40 ratio was extended to 100% conversion.

In 1994 the Reserve Bank of India undertook several steps towards achieving full convertibility on current account when it announced relaxation in payment restrictions for a number of invisible transactions and liberalization of exchange control regulations up to specified limit relating to:

I. Exchange Earners Foreign Currency AccountII. Basic travel quotaIII. Studies abroadIV. Gift remittances and donations

While convertibility on current account has been accomplished convertibility on capital account is being carried out slowly and cautiously. Some important measures were taken in 2002-03 budget:

I. Full convertibility of deposit scheme for NRIs.II. Freedom to NRIs to repatriate in foreign currency their

current earnings in India such as rent, dividend, pension, interest etc.

III. Allowing Indian companies to make overseas investment in joint ventures abroad up to 50% of their net worth.

IV. Allowing Indian mutual funds to invest in rated securities in countries in countries with fully convertible currencies, within the existing limits.

2. RATIONALIZATION OF TARIFF STRUCTURE

The 1993-94 Budget reduced the maximum rate of duty on all goods from 110% to 85% except for a few items including passenger luggage and alcoholic beverages.

The 1994-95 Budget further brought down the maximum duty from 85% to 65%.

The 2000-01 Budget reduced the peak rate of basic customs duty to 35%.

2002-03 the peak customs duty rate was reduced from 35% to 30%.

The Union Budget for 2003-04 has reduced it further to 25%.

3. DECANALISATION A large number of exports and imports used to be

canalised through the public sector agencies in India. The supplementary trade policy announced on August

13, 1991 reviewed these canalised items and decanalised 16 export items and 20 import items.

The Exim Policy 2001-02 put 6 items under special list- rice, wheat, maize, petrol, diesel and urea.

Import of these items would be allowed only through State Trading agencies. Not theoretically canalised but for all practical purposes they would be.

4. TRADING HOUSES Under the 1992-97 trade policy, export

houses and trading houses were provided the benefit of self certification under the advance license system, which permits duty free imports for exports.

5. ABOLITION OF INDUSTRIAL LICENSING The 1991 Industrial Policy abolished

industrial licensing. Most of the industries have delicensed

and now licensing is compulsory for only 6 industries.

These are alcohol, cigarettes, hazardous chemicals, electronics aerospace and defense equipment, drugs and pharmaceuticals and industrial explosives.

6. DILUTION OF PUBLIC SECTOR The new industrial policy states that the

government will undertake review of the existing public enterprises in low technology, small scale and non-strategic areas.

Sick units will be referred to BIFR for advice about rehabilitation and reconstruction.

The government has also announced its intention to offer a part of government shareholding in the public sector enterprises to mutual funds, financial institutions, general public and workers.

7. MRTP LIMIT SCRAPPED The new Industrial policy scrapped the

threshold limit of assets in respect of MRTP and dominant undertakings.

These firms will now be at par with others, and require prior approval from the government for investment in delicensed industries.

The amended MRTP Act gives more emphasis to the prevention and control of monopolistic, restrictive and unfair trade practices.

8. FREE ENTRY TO FOREIGN INVESTMENT AND TECHNOLOGY

The 1991 Industrial Policy prepared a specified list of high technology and high investment priority industries wherein automatic permission was to be made available for direct foreign investment up to 51% foreign equity.

The industries in which automatic approval was granted included a wide range of industrial activities in the capital goods and metallurgical industries, entertainment, food processing and the service sector having significant export potential.

9. REMOVAL OF MANDATORY CONVERTIBILITY CLAUSE

A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions have followed a mandatory practice of including convertibility clause in their loans into equity.

Henceforth, this mandatory convertibility clause will no longer be applicable.

Performance of the economy under LPG

IMPACT Liberalization and encouragement to foreign direct

investment are key areas of the economic reforms. Liberalization has opened Indian economy to extend

competition. Government truly believes that foreign investment is crucial to development of nation.

India’s policy of protectionism ie. Protecting the domestic industries from foreign multinationals has now changed to exposing the Indian enterprises to the stormy gales of foreign competition.

India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million respectively. Many Indian companies have started becoming respectable players in the International scene.

Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In 2000-01 Agricultural products valued at more than US $ 6million were exported from the country 23% of which was contributed by the marine products alone.

Our Foreign currency reserves had fallen barely to one billion U.S. dollars in June 1991, rose to 180 billion U.S dollars in 2007.

This era of reforms has ushered in a remarkable change in the Indian mindset.

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