Indian Economy - Economic Reforms

Economic Reforms

19.1 Reforms in Industrial Sectors

Industrial licensing has been abolished except for 18 industries. Presently industrial licensing is not required for 6 industries. The Industrial Policy (1991) is aimed at maximizing production.

Through liberalisation of economic policy, India inviting is greater foreign participation in India capital.

Reforms Initiatives

Defence production was de-reserved and opened to private sector through Licensing. Private sector companies who is seeking entry into defense production requires minimum capital investment of 100 crores.

Foreign investment is allowed upto 26 percent of a capital employed by a private sector who is seeking entry into defense production.

Tax reform committee (TRC) was formed for making reforms regarding direct tax and indirect tax laws.

                                                      

i.      Reservation for Public Sector: The following industries are reserved only for public sector enterprise and not open for private sector.

1. Arms & ammunition and allied items of defence equipments.
2. Atomic energy
3. Coal & lignite
4. Mineral oils
5. Specified minerals.
6. Railway Transport

ii.    Delicensing: Licensing policy has been abolished except for following 15 industries, which have basic and strategic importance.

1. Coal & lignite
2. Petroleum and its distillation products.
3. Distillation and brewing of alcoholic drinks.
4. Sugar
5. Animal fats and oils.
6. Cigar & cigarettes of tobacco.
7. Asbestos and asbestos based products.
8. Plywood, veneers & other decorative wood based product.
9. Tanned or dressed fur skins.
10. Paper and Newsprint.
11. Electronic aerospace & defence equipment.
12. Industrial explosives.
13. Hazardous chemicals.
14. Drugs & pharmaceuticals.
15. Entertainment electronic.

iii.   Automatic clearance of import of capital goods: Approval for the import of capital goods where foreign exchange availability is ensured through foreign equity. Automatic clearance for import of capital goods up-to 25% value of plant and equipment is given to the importers.

iv.   Exemption from registration: Entrepreneurs are freed from the registration schemes such as DGTD registration. These registration schemes are abolished and the entrepreneurs have to file only an information memorandum for setting up new projects or expansion of existing units.

19.2 External sector reforms

i.      Trading/Star Trading House: New trade policy allows export and trading houses to import a wide range of items. Under the Exim policy, export houses and trading houses are given the benefit of self-certification under the advance licence system, which permits duty free imports for exports. The Exim policy has introduced a new category of trading houses (termed as super-star trading houses). These houses will be allowed to get membership of apex consultative bodies attached with trade policy and promotion. Representation in important delegations, special permission for overseas trading and special import licenses at increasing rate.

ii.    Exemptions and Incentives: The new trade policy has way for the strengthening for incentives for exports and increasing the profitability of export business. A large number of tax benefits and concessions have been provided to liberalise import and promote exports. A number of tax benefits have also been declared for the three integral parts of the convergence revolution (i) the Information Technology sector, (ii) the Telecommunication sector and (iii) the entertainment industry.

iii.   Free Trade Zones (FTZs): Exim policy, 1999-2000 introduced the concept of free trade zones. FTZs without customs intervention and with greater operational freedom in export activity.

iv.   Special Economic Zones (SEZs): A scheme for setting Special Economic Zones (SEZs) in the country to promote exports was announced by the Government in the Exim policy in 2000. The SEZs provide an internationally competitive and hassle-free environment for exports and are expected to give a further boost to the country’s exports.

v.     Foreign Investment: Foreign investment had played a very limited role in India’s economy prior to 1991. The restrictions on equity participation in Indian industries, the technology requirements and the then existing industrial licensing policy tended to discourage foreign direct investment (FDI) in India. New industrial policy and subsequent policy announcements liberalized the existing industrial policy. This led to liberalisation of FDI and foreign technology agreements.

vi.   From FERA to FEMA: Due to acute shortage of foreign exchange in the country, the Government of India had enacted the Foreign Exchange Regulation Act (FERA) in 1973. FERA remained a nightmare for 27 years for the Indian corporate world. Instead of facilitating external trade it discouraged. As a result, Foreign Exchange Management act (FEMA) was introduced. FEMA sets out its objective as “facilitating external trade and payment” and “ promoting the orderly development and maintenance of foreign exchange market India”.

vii.  Other measures: The Foreign Trade Policy 2004-09 has identified certain thrust areas, like agriculture, handlooms and handicrafts, gems and jewelley, leather and footwear etc. Special schemes have been started to promote their growth. For example, ‘Vishesh Krishi Upaj Yojana’ has been started to promote agricultural exports. Similarly, to accelerate growth in exports of services, earlier Duty Free Export Credit (DFEC) scheme has been revamped and recast into the ‘Served from India scheme’.

19.3 Fiscal Policy

Fiscal policy refers to a process of shaping public taxation and public expenditure, so as to dampen the swings of the business cycle and to contribute towards the maintenance of a progressive, high employment economy, free from excessive inflation or deflation.

Constituents of the fiscal policy;

-         Taxation policy

-         Public expenditure policy

-         Public debt policy.

19.3.1 Objectives of Fiscal Policy

The objectives of fiscal policy differ from country to country according to the level of economic development. The main aim of the fiscal policy in a developing country is to maintain level of full employment, in a developing country, the role of fiscal policy is to accelerate the rate of capital formation.

Main objectives of fiscal policy in an developing country:

i.      Minimising inequalities of income and wealth: Objectives of the fiscal policy of an economy should be to remove or at least to reduce the inequalities of income and wealth.

ii.    Price stability: In this regard, fiscal policy tackles the inflationary and deflationary situations. During inflation price-level goes up and during deflation price-level goes down, which results in the problem of economic instability. With the help of taxation policy and tools of public expenditure, the government exercises control over the prices. The fiscal policy should aim at curbing inflationary pressures inherent in a developing economy.

iii.   Acceleration of economic growth: The government must set up the fiscal policy in such a way that it accelerates the rate of growth so that the real national income may increase in the long run. The government should make proper use of the tax revenue for productive investment. Public expenditure should be diverted to new and more useful development activities. High rate of investment will stimulate business activities.

iv.   To increase employment opportunities: The government should, with the help of its fiscal measures, create atmosphere for employment opportunities to achieve the economic growth. To raise the level of employment in a developing country, methods like (1) public spending (2) Taxation policy (3) Public debt policy are normally adopted.

19.3.2 Fiscal Policy Tools

Tools used to implement fiscal policy

1.     Public Expenditure: Public expenditure implies the expenditure incurred by the government for the purpose of generating base for future production and increasing employment opportunities. Public enterprise are established for enhancing revenue and production of commodities. Expenditures are incurred on social security schemes too. It is one of the procedure with the help of which inflationary pressure can be regulated.

2.     Public revenue: The different receipts of government by way of fines, taxes, profits of public enterprises, interest on loans, profit of financial institutions are referred to as public revenue. To fulfill its financial requirements, the government takes loans from the Central Bank.

3.     Public debt: When the government borrows money in the form of internal and external loans to meet its expenditure, it is known as public debt. It is one of the vital sources of public revenue. The government can take public borrowing in two ways (i) in form of voluntary loan and (ii) in form of compulsory loan.

4.     Deficit financing: When the expenditure exceeds over the revenue receipt. To cover up this deficiency, notes are released or new currency loans from the Central Bank is taken (known as Deficit Financing). Deficit financing is generally used to fill the gap of deficit budget.