Economic Policies in India

Concept of Economic Policy

Economic Policy is comprehensive and wide and it
covers all those procedures, principles, policies rules
and regulations which control the industrial and
economic affairs of the country and shape the pattern of
industrialization.
It incorporates fiscal and monetary policies, industrial
policy, the tariff & trade policy, labor policy, exim. policy,
foreign exchange policy and foreign investment &
technology policy and the Governments attitude not
only towards external assistance but the public and
private sectors also.

THE ASPETCS OF THE ECONOMIC

POLICY

Policy of liberalization
relaxation of control;

accompanied

by

removal/

Restoration of the competition;

Reorientation of the fiscal policy;

Modernization of the industries with a hi-tech bias;

A long term perspective; and
A bigger role for the private sector

Constituents of Economic Policy

Industrial policy
Fiscal & monetary policies
Tariff & trade policy
Labor policy
Exim policy
Foreign exchange Policy
Foreign investment & technology policy

Parameters to measure
The main objectives of the India Economic
Policy is to take care of the basic parameters of
the Indian Economy as mentioned below:
Agriculture
Industry
Trade

Fiscal and Monetary Policy

The objectives of fiscal policy may be regarded as
follows;

1. To achieve desirable price level

2. To achieve desirable consumption level
3. To achieve desirable employment level
4. To achieve desirable income distribution
5. Increase in capital formation
6. Degree of inflation

1.Taxation
2.Public Borrowing
3.Public Expenditures

The compulsory payment made by the people to the

government authority for the service render by the
latter (government).

During the inflation period that

is when there is excess of money
supply in the economy, the
government borrows excess
money from the public.

In order to stabilize the economy,

the public expenditure need to be
increases and decreases.

 Taxation Fiscal policy, especially tax policy, can be used to

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

The three possible stances of fiscal policy are neutral,

expansionary, and contractionary:

A neutral stance of fiscal policy implies a balanced

budget where G = T (Government spending = Tax
revenue).
An expansionary stance of fiscal policy involves a net
increase in government spending (G > T) through rises
in government spending, a fall in taxation revenue, or a
combination of the two..
A contractionary fiscal policy (G < T) occurs when net
government spending is reduced either through higher
taxation revenue, reduced government spending, or a
combination of the two.

What is GST?
Goods and Service Tax (GST) is a comprehensive tax
levy on manufacture, sale and consumption of goods
and service at a national level.
LS: 8th Aug ; RS: 3rd Aug; Date: 1st April 2017
GST is a tax on goods and services with value
addition at each stage having comprehensive and
continuous chain of set-of benefits from the
producers/ service providers point up to the
retailers level where only the final consumer should
bear the tax.

Model of GST
The dual GST model proposed by the Empowered
Committee and accepted by the Centre will have dual
system for imposing the tax. GST shall have two
components i.e.
(i) Central GST
(ii) State GST
Central Excise duty, additional excise duty, services tax
and additional duty of customs (equivalent to excise),
state VAT entertainment tax, taxes on lotteries, betting
and gambling and entry tax (not levied by local
bodies)would be subsumed within GST

GST - Salient Features

It would be applicable to all transactions of goods and
service.
It to be paid to the accounts of the Centre and the
States separately.
The rules for taking and utilization of credit for the
Central GST and the State GST would be aligned.
Cross utilization of ITC between the Central
GST and the State GST would not be allowed except
in the case of inter-State supply of goods.

 The Centre and the States would have concurrent

jurisdiction for the entire value chain and for all
taxpayers on the basis of thresholds for goods
and services prescribed for the States and the
Centre.
The taxpayer would need to submit common
format for periodical returns, to both the Central
and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN-linked
taxpayer identification number with a total of
13/15 digits.

Subsuming of Existing Taxes

Sl.
No.

Subsumed under CGST

Subsumed under SGST

Central Excise Duty

VAT / Sales tax

Additional Excise Duties

Entertainment tax (unless it is levied by the local

bodies).

Excise Duty-Medicinal and Toiletries Preparation Act

Luxury tax

Service Tax

Taxes on lottery, betting and gambling.

Additional CVD

State Cesses and Surcharges (supply of goods and

services)

Special Additional Duty of Customs - 4% (SAD)

Entry tax not in lieu of Octroi

Surcharges

Ceses

Taxes that may or may not be

subsumed
There are few other indirect taxes that may or may not be
subsumed under the GST regime as there is no consensus
among States and Centre & States
Purchase tax
Stamp Duty
Vehicle Tax
Electricity Duty
Other Entry taxes and Octroi

What will be out of GST?

Levies on petroleum products

Levies on alcoholic products
Taxes on lottery and betting
Basic customs duty and safeguard duties on import of
goods into India

Entry taxes levied by municipalities or panchayats

Entertainment and Luxury taxes

Electricity duties/ taxes

Stamp duties on immovable properties

Taxes on vehicles

Exemption of Goods and Services

Concept of providing threshold exemption of GST
Scope of composition and compounding scheme under
GST
Items of GS to be exempt
Treatment for goods exempt under one state and
taxable under the other

GST on Export & Import

GST on export would be zero rated
Both CGST and SGST will be levied on import of goods
and services into the country. The incidence of tax will
follow the destination principle and the tax revenue in
case of SGST will accrue to the State where the
imported goods and services are consumed. Full and
complete set-off will be available on the GST paid on
import on goods and services.

Monetary Policy
The term monetary policy refers to actions taken by central
banks to affect monetary magnitudes or other financial
conditions.
Monetary Policy operates on monetary magnitudes or
variables such as money supply, interest rates and availability
of credit.
Monetary Policy ultimately operates through its influence on
expenditure flows in the economy.
In other words affects liquidity and by affecting liquidity, and
thus credit, it affects total demand in the economy.

Credit Policy
Central Bank may directly affect the money supply to control
its growth.Or it might act indirectly to affect cost and
availability of credit in the economy.
In modern times the bulk of money in developed economies
consists of bank deposits rather than currencies and coins.
So central banks today guide monetary developments with
instruments that control over deposit creation and influence
general financial conditions.
Credit policy is concerned with changes in the supply of credit.
Central Bank administers both the Credit and Monetary policy

Aims of Monetary policy

MP is a part of general economic policy of the govt.
Thus MP contributes to the achievement of the goals of
economic policy.

Objective of MP may be:

1)Full employment
2)Stable exchange rate
3)Healthy BoP
4)Economic growth
5)Reasonable Price Stability
6)Greater equality in distribution of income
&wealth
7)Financial stability

Inflation targetting

 Total five people in this Committee:

Chairman: Rajan himself (governor Urjit )
Vice Chairman: Any one Dy Governor (RBI has
total four governors)
Members:
One Insider: RBIs own Executive Director (in
charge of Monetary policy).
Two outsiders/External members:
Noted Economists, finance experts etc, whore not
office bearers in RBI.
term: three years
not eligible for re-appointment.

Instruments of Monetary Policy

Variations in Reserve Ratios
Discount Rate (Bank Rate)
(also called rediscount rate)
Open Market Operations (OMOs)
Other Instruments

Variations in Reserve Ratios

Banks are required to maintain a certain percentage of their
deposits in the form of reserves or balances with the RBI
It is called Cash Reserve Ratio or CRR
Since reserves are high-powered money or base money, by
varying CRR, RBI can reduce or add to the banks required
reserves and thus affect banks ability to lend.

Discount Rate (Bank Rate)

Discount rate is the rate of interest charged by the central bank
for providing funds or loans to the banking system.
Funds are provided either through lending directly or
rediscounting or buying commercial bills and treasury bills.
Raising Bank Rate raises cost of borrowing by commercial
banks, causing reduction in credit volume to the banks, and
decline in money supply.
Variation in Bank Rate has an effect on the domestic interest
rate, especially the short term rates.
Market regards the increase in Bank rate as the official signal
for beginning of a tight money situation.

Open Market Operations (OMOs)

OMOs involve buying (outright or temporary) and
selling of govt securities by the central bank, from or to
the public and banks.
RBI when purchases securities, pays the amount of
money by crediting the reserve deposit account of the
sellers bank, which in turn credits the sellers deposit
account in that bank.

Overview of FOREX Policy Over The

Years
Foreign exchange transactions were regulated in India by the
Foreign Exchange Regulations Act (FERA), 1973.
This act regulated certain aspects of the conduct of the
business outside the country and in India by the foreign
countries.
The FERA was widely described as a draconian and obnoxious
law.
The year 1991 - important milestone for the Economy.
There was a paradigm shift in the Foreign Exchange Policy. It
moved from an Import Substitution strategy to Export
Promotion with sufficient Foreign Exchange Reserves.

From Control to Management

Lot of demand for a substantial modification of FERA in the
light of economic liberalization and improving foreign
exchange reserve position.
Consequently, a new Act, the Foreign Exchange Management
Act (FEMA), 1999 replaced FERA.
FEMA extends to whole of India and also applies to all
branches, offices and agencies outside India, owned or
controlled by a person resident in India.
Objectives of FEMA:
1. To facilitate external trade and payments.
2. To promote the orderly development and maintenance of
foreign exchange market.

Foreign Exchange Management Act

The RBI is assigned an important role in administration of
FEMA.
The rules, regulations and norms pertaining to several sections
are laid down by RBI.
The Central Government is responsible to impose restriction
on dealings in foreign exchange and foreign security to and
receipt from any person outside India.
Few Clauses are:
1. Restrictions on person residing in India on acquiring, holding
and owning foreign exchange, foreign security abroad.
2. Dealings in foreign exchange or foreign security and all
payments from abroad shall be made through authorized
persons.

3. Penalty for any kind of contravention under this Act is liable

to a penalty up to thrice the amount involved.
4. This provision is in total contrast to FERA which provided for
imprisonment and no limit on fine.
Basic Difference in FERA and FEMA
1.Aim of FEMA is to facilitate trading as against that of FERA,
which was just to prevent misuse.
2.FEMA is a much smaller enactment only 49 sections as
against 81 of FERA
3.Many provisions of FERA like employment of foreign
technicians in India have no appearance in FEMA

Introduction to Foreign Investment

Foreign investment comprises
Foreign Direct Investment (FDI)
represents a long-term vision and strategic
commitment of the investors to the recipient
economy
Foreign Portfolio Investment (FPI)
Intrinsically short-term and aims to
maximize risk-return payoffs from capital
markets

 Government is making all efforts to attract and

facilitate FDI and investment from Non Resident
(NRIs) including Overseas Corporate Bodies
(OCBs).
FDI is freely allowed in all sectors, except few
which have a pre decided upper ceiling on the
foreign investment.

 49% FDI under automatic route permitted in

Insurance and Pension sectors
Foreign investment up to 49% in defence
sector permitted under automatic route. The
foreign investment in access of 49% has been
allowed on case to case basis with
Government approval in cases resulting in
access to modern technology in the country or
for other reasons to be recorded

 FDI up to 100% under automatic route permitted

in Teleports, Direct to Home, Cable Networks,
Mobile TV, Headend-in- the Sky Broadcasting
Service
FDI up to 100% under automatic route permitted
in Up-linking of Non-News & Current Affairs TV
Channels, Down-linking of TV Channels
Foreign equity cap of activities of Non-Scheduled
Air Transport Service, Ground Handling Services
increased from 74% to 100% under the
automatic route
100% FDI under automatic route permitted in
Brownfield Airport projects

 100% FDI under automatic route permitted in

the marketplace model of e-commerce
100% FDI under Government route for retail
trading, including through e-commerce
100% FDI allowed in Asset Reconstruction
Companies under the automatic route
74% FDI under automatic route permitted in
brownfield pharmaceuticals. FDI beyond 74%
will be allowed through government approval
route
FDI limit for Private Security Agencies raised to
74%

Indias Foreign Investment Policies

Till 1980s
Cautiously pragmatic during
50s and 60s. Ownership
remained primarily with
resident investors.
Tight monitoring, ensured
hardly much FDI in
economy (Exception oil
sector)
1970 saw FDI highly
regulated and confined to
industries requiring
sophisticated technology.
FDI was diverted from
consumer goods to capital
and intermediate goods.

Transition in 1991
Government decides to
encourage stable non-debt
creating long-term capital
flows.
Decontrolled, outwardoriented and marketfriendly system.
Allowed FDI in 35 highpriority industries.
Liberalization of FDI is a
part of reduction of scope of
the public sector.
State monopoly cramped to
only sectors of strategic
importance like atomic
energy.

Present Day Highlights

Foreign investors can invest through:
Automatic Route
allows investors to bring in funds without
obtaining prior permission from the
Government, RBI, or any other regulatory
agency.
invested enterprises are required to inform
RBI within 30 days of receipt of funds .
Government-administered Route
Certain investment intentions require prior
permission from the government.

TRADE POLICY
Under the old economic order, India followed a policy of
import substitution. This led to the establishment of a complex
system of licensing and control over imports through nonfiscal and fiscal barriers.
Trade Policy Reforms have been one of the major planks of
the new economic policies initiated from July 1991 which
were designed to attract significant capital inflows into India
on a sustained basis and to encourage technology collaboration
agreements between Indian and foreign firms.
New trade policy is spelt out in the Export Import (EXIM)
policy, which is valid for the period 1992 to 1997,
amendments to this policy were announced on 31st March
1995.

TRADE POLICY IN INDIA

Trade Reforms form the crux of the economic reforms in
India.
Export Promotion has been and continues to be a major thrust
of Indias trade policy
Accordingly, policies have been aimed at creating a friendly
environment by eliminating redundant procedures, increasing
transparency by simplifying the processes involved in the
export sector and moving away from quantitative restrictions,
thereby improving the competitiveness of Indian industry and
reducing the anti-export bias.
Steps have also been taken to promote exports through
multilateral and bilateral initiatives and giving several
incentives to exports to cope with all uncertainties at the global
level.

EXCHANGE RATE
All export and import transactions are conducted at the market
rate of exchange.
The market rate also applies to other transactions, including
inflow of foreign equity for investment and outflow in the
event of disinvestment, payments in respect of repatriation of
dividends, fees and royalties for technical know-how
agreements and also for foreign travel.

IMPORT POLICY
The recommendations of the tax reforms committee entailed
reduction in tariffs so that by the year 1997-98.
The duty on non-essential consumer goods would then be no
more than 50%.

IMPORT POLICY
All goods can be imported freely except for a small Negative List
consisting of:
Prohibited items : 3 items, import of which is not allowed.
Restricted items : Here, import is allowed against an import
license or under general schemes notified separately. According
to the latest changes in EXIM policy announced on 31st
March'95, the number of items in this list has been reduced to 65
from the earlier count of 72.
Canalised items : 7 items, import of which is permissible only
through designated agencies.

EXPORT POLICY
Exports are the major focus of India's trade policy. The export
promotion package compares favorably with incentives
offered elsewhere in the world. It makes special effort to
attract foreign investors to set up export oriented units in India.

Features of Trade Policy Reform in

India

Free imports and Exports

Rationalization of tariff structure/reducing tariffs.
Liberalization of the exchange rate regime.
Setting up of trading houses, SEZs and Export promotion
industrial parks.
Various exemptions under the EXIM policies to boost exports
and imports and make the trade policy regime transparent and
less cumbersome.