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Common Proficiency Test (CPT)

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ECONOMICS
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Chapter 7: Economic Reforms in India (Full)

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CHAPTER 7 UNIT 1 ECONOMIC REFORMS IN INDIA

1.0] BACKGROUND:
After Independence, India followed Conservative Policy i.e. a) Public sector was made the main instrument of growth. b) Fund from Private sector will be used for development programme. c) Fund from public sector will be used for Investment in Infrastructure. As a result, sign of crisis began in 1991 : These were: a) Foreign Exchange Reserve was available just to finance only 3 weeks Imports. b) National Debt Constituted 60% of the GNP IN 1991. c) The Inflation was very high i.e. the Whole sale Price Index increased to 12%p.a

1.1] INDUSTRIAL SECTOR REFORMS:

1. Abolition of Industrial License: Abolished license (delicensing) for all project except for 18 industries At present only 6 industries are under licensing i.e. (1) Alcoholic (2) Cigar, Cigarettes, Tobacco (3) Defense Equipment (4) Industrial Explosive (5) Hazardous Chemicals (6)Drugs & Pharmaceuticals Privatization: All Industries were privatized except 8 Industries: At present only 3 industries are reserved for public i.e. (1) Atomic Energy (2) Substances as per GOI Schedule (3) Railways. Defense production was dereserved but minimum capital of 100 crores required by Private Company to enter& Foreign Investment up to 26% being allowed. Import of Capital Goods: Automatic clearance would be given if: a) The value of Imported Capitals Goods required is less than 25% of Total Value of P&M up to maximum Rs 2 crores. b) Foreign Exchange availability ensured through foreign equity. No Automatic Industrial approval is allowed in cities of more than 1Million populations. & Industries of polluting nature would be located 25Km away from periphery. Mandatory Convertibility Clauses would no longer be applicable for term loans for new project. Foreign Investment: Foreign Direct Investment (FDI) is allowed up to 51% in high priority List (total 34 Industries) Foreign Equity up to 51% is allowed for trading company in Exports.

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At present FDI allowed up to : 26% in Defense production, Insurance, Print Media Not Allowed in Atomic energy, Lottery , Gambling Betting, Chit fund, Nidhi companies

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100% in Drugs & Pharmaceuticals, Hotels & Tourism, Courier Services, Oil refining, Airport, E commerce

74% in Banking sector, Telecommunication

49% in Air Transport Services

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MRTP ACT: Under New Economic policy 1991, Growth & restructuring (i.e. expansions, merges, amalgamation & Take over) Freed from MRTP constraints.

1.2] FINANCIAL SECTOR REFORMS:

Banking Sector capital Market (Stock Market) Insurance sector

Banking Sector reforms:

A] In pre reform period (i.e.period before 1991): Administered interest rate. Quantitive restrictions on credits (Loans). High reserve requirements i.e. CRR& SLR. In Post Reform period [i.e. Period After 1991]: At present CRR was reduced to 5% At present SLR was reduced to 24%. Prime Lending Rates (PLR) are decided by Banks and not RBI At present the bank rates was reduced to 6% Interest on saving A/C & export credit are still subject to regulations. At present Interest on saving A/C is 3.5%. Special Recovery Tribunals were set up to facilitate Quick recovery of Bad debts due to Bank. Credit risk Management System was setup to reduce Non performing Assets (NPAs) The entry for Foreign Banks was released by RBI. Based 2 frame work has been operationalised by banks since March 2008.

B]

1.3] EXTERNAL SECTOR REFORMS:

A] In pre reform period (i.e. period before 1991): Up to Sixties: a. Only capital goods was Imported. b. Import of Food grains were allowed in order to meet domestic demand. In Seventies: a) Few relaxation was made. In Eighties: Import were liberalized in order to promote Export .i.e. a. Fiscal & monetary concession was granted to Exporters. b. Duty drawback, Cash Compensatory Scheme, 100% Export oriented Units (EOU) & Export Processing Zone (EPZ) were started to promote exports. c. Export Promotion Council, Federation of Indian Export Organization (FIEO), Indian Institute of Foreign Trade (ITFT) was started.

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B] 1)

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In Post Reform period [i.e. Period After 1991]: Exchange Rate Stabilization: Rupee devalued twice in July 1991up to 19% Quantitative Restriction: (QR) QRs were removed on 714 items & 715 items in EXIM policy 200001 & 200102 respectively. At present QRs on all kind of Consumer goods has been removed expect Defense goods, environmentally hazardous goods & some are sensitive goods. Tariff: Indian Import tariff structure was one of the highest in the world prior to1991 At present tariff is Just 10%. Export Subsidies: Direct subsidies are not provided by India But Indirect subsidies are provided through Duty &Tax concession, Export Finance, export Insurance & guarantee &export promotion marketing assistances. Export promotion Capital Goods (EPCG) scheme was introduced in 1990 & further Liberalized in 19925 to encourage Imports of Capital Goods. Special Economic Zone (SEZ) policy was introduced in 2000 with an objective to promote Export of goods & Services , Create Employment Opportunities & Development Infrastructure. Till 2009 a. 568 SEZs have been according formal approval &318 SEZs have notified. b. Export increased nearly to 1,00,000 crore c. Employment generated up to 3,87,000 persons. Foreign Exchange Reserve: It consists of Foreign currency assets hold by RBI & Special Drawing Right Foreign Exchange Reserve dairy May 2008 have been built up to US $314 billion. From FERA to FEMA : FERA remained a nightmare for 27 years for Indian Corporate world, discourage foreign trade. FEMA was introduced to facilitate external tarde & payment, promotion & orderly development & maintenance & foreign exchange market in India. Other measure: Vishesh Krishi Upaj Yojana started to promote agricultural exports. Served from India started to promote Exports of services. Duty free export Credit (DFEC) has been restructured in to Served from India Scheme.

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1.4] FISCAL POLICY (TAX) REFORMS:

A] Fiscal Policy means policy relating to Public Revenue &Public Expenditure. Direct Tax Reform (Income Tax Reforms) Tax rate for Individual has been reduced to maximum 30%, Tax rate for Domestic Company is 30% & Foreign Company; 50% on royalty income & 40% on other incomes. Dematerialization of TDS certificates would be made effect from 1/4/2008.

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B]

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Indirect Tax Reforms: Rationalizing excise duties with a movement towards a median CENUAT Sales Tax was introducing State Level VAT. Fiscal Responsibility & Budget Management Act (FRBMA) 2003 was introduced. Goods &service Tax (GST) will be introduced in coming years & the introduction of GST would entail a restricting of VAT & Central excise Tax.

CHAPTER 7 UNIT 2 LIBERALISATION, PRIVATISATION AND DISINVESTMENT

L P & D are the out comes of Modern Economic world.

2.0] MEANING OF L, P & D:

1. Liberalization: It refers to the relaxation of previous government restriction usually in the area of Social & economic policies 2. Privatization: It refers to the transfer of Asset or services function from public to private ownership or Control. & It also refers to opening of Closed (Restricted) areas to private sector entry. Franchising, Leasing, Contracting & Disinvestment are the many ways of privatization. Privatization in India generally was in the form of Disinvestment(Divesture) of Equity(most significant method) Disinvestment is one of the method of privatization 3. Precondition of Privatization: a. Liberalization & deregulation of the economy is an essential prerequisite if privatization is to take off & help realize higher productivity & profits b. Capital Market should be sufficiently developed to be able to absorb the disinvested public sector shares. 4. Argument in favour of privatization: Privatization will help: Reducing the burden on exchequer Public sector units to modernize & diversify. In making PSU more competitive In improving the quality of decision makingin PSU ithout political interference. In reviving sick units. 5. Argument against Privatization: Privatization: Encourage monopoly power & Disparities in Income & wealth (Inequality) Result in Lopsided development of Industries Discourage investment in Longgestation projects which retard growth of capital goods industries

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Ignore the needs of Economy (Social justice & Welfare).

6. Disinvestment: It means disposal of public sector units equity in the market or selling of a public investment to a private entrepreneur.

2.1] PRIVATISATION AND DISINVESTMENT IN INDIA:

Normally Privatization has not led to 100% transfer of control from public sector to private sector Unit. Only in Exceptional cases, 100% privatization ha taken place i.e. Centaur hotel.

2.2] METHODS OF DISINVESTMENT:

1. Public offer (issue): Initially equity was offered to retail investor through domestic market & by Global Depository receipts (GDRs) was offered in overseas markets. 2. Cross holding: The government simply selling the part of its share in one PSU to another PSU. 3. Warehouse: Government own financial institution buying governments stake in select PSU & holding them until any third buyer emerged. 4. Retaining golden Share: Retaining governments share up to 26% in the PSU to protect its interest 5. Strategic Sale Method: Under this method, the government sells a major portion of its State to a Strategic buyer & also gives a management Control. Under this method: a) Disinvestment price was market based. b) Sale would be under Department of Disinvestment c) Disinvestment Declined from Union Budget Later 13 profits making Central public sector enterprise was divested through this method. The Last PSU to tap the stock market was Rural Electrification Corporation in Feb 2008.

2.3] PROGRESS OF DISINVESTMENT:

Disinvestment was carried out by government in a hasty, Unplanned & hesitant way. The procedure for disinvestment have suffered from ad hocism i.e. They only focused on disinvestment of shareholding & IGNORED Initial price offers, involvement of strategic partners, setting up of a trust, employees stock ownership & participation etc. The process of Disinvestment has referred Privatization of the profitmaking enterprises & Nationalization of lossmaking enterprises. In 199798 total 39 PSUs were Disinvested out of that only 3 PSUs were loss making i.e. Hindustan Cables Ltd, Hindustan Copper Ltd, Hindustan photo films Mfg co. Ltd, but other 36 PSUs were profit making i.e. BPCL, EIL, GAIL, HMI & BEL . The public equity has been underpriced &thus has been sold for a fraction of what it could actually fetch (i.e. ONGC, Steel Authority, of India, Indian Maruti Udyog Ltd, VSNL, IPCL & Oil Corporate & Shipping Corporate of India etc). The total realization of the government from various rounds of disinvestment has been much below the target.

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CHAPTER 7 UNIT 3 GLOBALISATION

3.0] MEANING OF GLOBALISATION:
Globalization means integrating the domestic economy with the world economy Globalization broadly implies free movement of goods & services & people across the countries

3.3] MEASURES TOWARDS GLOBALISATION:

1. Convertibility of rupee: It means allow it to determine its own exchange rate in the international market with out any official intervention. India achieved full convertibility on current a/c in August 1994 Tara pose Committee 2 has chalked out a road map for capital account convertibility. Strong macro economic framework, strong financial system & prudent regulatory frame work are the precondition for capital convertibility. 2. Import Liberalization: Free trade of all items except negative list of imports & exports has been allowed The peak rate of custom duty has been reduced from 159%to 10% The Agreement on trade related Intellectual Property Rights (TRIPs), the patents (amendments) Act 1999, was passed in 1999 to provide for Exclusive Marketing Rights (EMRs). 3. Opening the Economy of Foreign Capital: Foreign Direct Investment up to 26%, 49%, 51%, and 74% &even up to 100% has been allowed. Foreign Companies have been allowed to use their trademark in India. Repatriation of profit & deal in Immovable properties in India by foreign companies is allowed Foreign Institutional Investor (FITs) have been allowed to invest in Indian Capital Market.

3.4] EFFECT OF GLOBALISATION ON INDIAN ECONOMY:

Indias Share in the world Exports increased to 1% in 2005 &1.1% in 200708 Our foreign Currency reserve increased to 310 billion US dollars in march 2008 & 252 billion dollars in March 2009 Export now Finance Nearly 65% of Imports. In current a/c there was a surplus in 200104 but in 200708 there was a deficit of (1.5)% International Confidences in India had been restored i.e. Foreign Direct & Portfolio investment was increased to 34.4 billion in 200708 Due to globalization India Consumers benefited the form of large variety of consumers goods &Improved Quality goods at a reduced price. The rating Agencies, have upgraded Indias rating in terms of Investment risk.

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INTERNATIONAL MONETARY FUND

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3.5] MAIN ORGANISATION FOR FACILITATING GLOBALISATION:

WORLD TRADE ORGANOSATION WORLD BANK (OR) INTERNATIONAL BANK FOR RECONSTRUCTION(IBRD) Organized in 1946 & Started Format as a part of the deliberations at Formed on 1st Jan 1995 operation in March 1947 as n Bretton woods in 1945. autonomous organization affiliated to UNO Fund now has a membership of World bank now has a membership of WTO now has a membership of 186 countries. 153 countries 186 countries. OBJECTIVES OBJECTIVES OBJECTIVES 1) Investing in people, particularly 1) Elimination or reduction 1) To make the whole world through basic health & of existing exchange as a big village where controls. there is free flow of education. 2) Establishment & 2) Focusing on social goods & services & no maintenance of currency development & protecting trade buriers. convertibility with Stable environment. exchange rate FUNCTION FUNCTION FUNCTION 1) To provide long term loans. 1) Implementation, 1) To provide short term administration & 2) Granting loans for loan (credit). Operation of world trade reconstruction & development 2) Granting loans for agreements. financing current of their territories. 2) Provide the forum for 3) 3. Balanced growth of transaction only & not trade negotiations & capital transactions. International trade & 3) It provides machinery for: Maintenance of equilibrium of Handle trade disputers. a) Orderly adjustment of 3) Provide technical balance of payment. exchange rate. assistance & training to b) Altering sometimes developing countries. the pan value of 4) Cooperate with IMF & currency. IBRD. c) International consultations. 4) Monitors economic & Financial development & Provide advice to its members. FEATURES FEATURES It is a forum, where 1) World Bank is an Intergovt. 1) institution. members nations discuses issues related to MTAs & 2) World bank consist of : a) International Development PTAs Association (IDA) 2) It has wider scope than Established in 1960 GATT. It is called soft lending arm of 3) Consensus decision making i.e. any issues show be IBRD since it gives interest free decided by voting each loan to the poor countries. b) International finance member has one vote. corporation (IFC) 4) WIO has legal personality,

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It provide investments & advisory service to build private sector in developing countries Multilateral Investment Guarantee Agency (MIGA): Established in 1988 It encourages foreign investment in developing countries by providing guarantee to foreign investor against loss. International centre for settlement of Investment Disputer (ICSID): Established in 1966 It facilitates the settlement of disputes between foreign inventors & host countries.

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which handle disputes. trade

c)

d)

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