Economic Reforms Process in India

7/28/2019 Economic Reforms Process in India

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1)Privatisation in India through DisinvestmentDisinvestment is the first step in the process of disinvestment. Disinvestment involves the

sale of the public sector equity to the private sector and the public at large. In India thedisinvestment started in 1991- 1992 when the government announced its new economic

policy. The principles off governing public sector investments are as follows: The public sector should make investment only in those areas where investment is

mainly infrastructural in nature and private sector are not likely to come forward.

The public sector must withdraw from areas where no public purpose is served by

its presence.

The principle of market economy should be accepted as the main operative

principle by all public sector enterprise unless the commodities and services

produced and distributed are specially for protecting the poorest in the society.

The overall objective of the disinvestment policy is to raise resources from within the

public sector for meeting the following cost:

Costs associated with the closure of enterprise declared as terminally sick by

BIFR.

Part of the revenues will be used for restructuring those enterprises which are

on the verge of becoming chronically sick but are as yet not beyond

redemption.

For retaining workers displaced or affected as a result of the closure and

internal restructuring involving down sizing.

Another objective of disinvestment policy is to create conditions condusive to raising

productive efficiency in all its dimensions, lowering costs of production, improving

product quality and variety, improving innovative behavior, and fostering investment

based on prospective profitability.

There are two major reasons for disinvestment in India. One is to provide fiscal

support and the other one is to improve the efficiency of the enterprise.

2) Reforms of the Banking Sector

Despite of heavy opposition from political parties and the bank unions in the country, the

Government of India accepted all the major recommendations of the Narasimham Committee

and started implementing them. The measures taken as the part of the banking reforms are listed

below:


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Statutory Liquid Ratio- The SLR on incremental net demand and time liabilities were

reduced from 38.5% to 25% and the SLR on outstanding net domestic demand a nd time

liabilities were reduced from 38.5% to 27% In March 1997 and further to 25% in October

1997 and then to 25% in October 1997.

Cash Reserve Ratio- It was the intention of the RBI to bring down the CRR from 15%,

which was brought down to 14% in May 1993. Even the incremental cash reserve of 10%

was abolished. The reason behind reducing the CRR was to release funds locked up with

RBI for lending to the industrial and other sectors which were lacking bank credit

Interest Rates- Interest rates were reduced from 20 t0 2 by 1994-1995. The prime lending

rate of SBI and most other banks on general advances of over 2 lakhs has been reduced,

interest rate on domestic term deposits above one year, and on non residential ,non

repartiable rupee deposits was decontrolled, also the rate of interest on bank loans above

2 lakhs has been fully decontrolled, even the interest rates on deposits (except urban co-

operative banks) have been deregulated subject to a minimum lending rate of 13% . Thos

was to stimulate healthy competition among the banks and encourage their operational

effieciency.

Prudential Norms-Prudential Norms were started by RBI as a part of reformative process.

This purpose of prudential system of recongnisation on income, classification of assets

and provisioning of bad debts was to ensure that the books of commercial banks reflect

their financial position more accurately and in accordance with internationally accepted

accounting practices.

Capital Adequacy Norms: Capital Adequacy Norms were fixed at 8% by the RBI in April

1992 and banks had to comply with it for more 3 years, A new capital framework was

introduced for the Indian Scheduled Commercial Banks based on the Basle Committee

recommendations presenting two tier of capital banks. The government of India amended

the Banking Companies Act to enable the nationalized banks to access market for capital

funds through public issues, subject to the provision that the holding of central

government would not fall below 51% of the paid up capital.

Freedom of operation- Scheduled commercial banks were now given freedom to open

new branches and upgrade extension counters, after obtaining capital adequacy norms

and prudential accounting standards.


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Supervision of Commercial Banks- Supervision on commercial banks was tightened by

RBI.

Recovery of Debts- The Government passed Recovery of Debts sue to banks and

Financial Institution Act, 1993 to facilitate and speed up recovery of debts to banks and

other financial institutions.

3)Convertibility in current account and capital accountCurrent account includes all transactions, which give rise to or use of our National income, while

Capital Account consist of short term and long term capital transactions. As per FEMA "capital

account transaction" means a transaction which alters the assets or liabilities, includingcontingent liabilities, outside India of persons resident in India or assets or liabilities in India of

persons resident outside India. Those which are not Capital Account transactions are currentAccount transactions.

Current Account Transactions covers the following.

1. All imports and exports of merchandise2. Invisible Exports and Imports (sale/purchase of services3. Inward private remittances to & fro4. Pension payments (to & fro)5. Government Grants (both ways)

Capital Account transactions consist of the following

1. Direct Foreign Investments (both inward & outward)2. Investment in securities (both ways)3. Other Investments (both ways)4. Government Loans (both ways5. Short-term investments on both directions.

The substance of convertibility is to dispense with the discretionary management of foreign

exchange and exchange rates and to adopt a more liberal and market driven exchange allocation

process. All transactions are still conducted within the framework of exchange controls, as

prescribed by the RBI. Full convertibility on current account is manifested as below:

On trade account and on account of the receipt side of the invisibles, the rupee is fully

convertible at market determined exchange rates.

The payment side of the invisible and receipts and payments of capital account are

subject to exchange control

However, exchange rates for all these permissible transactions are undertaken at the freemarket exchange rates


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Modvat stands for "Modified Value Added Tax". It is a scheme for allowing relief to final

manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by

them. eg ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for usein manufacture. POR Ltd would have paid excise duty on components manufactured by it and it

would have recovered that excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to

pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier,PQR Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take creditfor excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd.

The scheme was first introduced with effect from 1 March 1986. Under this scheme, amanufacturer can take credit of excise duty paid on raw materials and components used by him

in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise

element on raw materials and components used by him in his manufacture. Since it amounts to

excise duty only on additions in value by each manufacturer at each stage, it is called value-added-tax (VAT)

The MODVAT credit can be utilized towards payment of excise duty on the final product.

When the scheme was first introduced, it covered only some excisable goods. Gradually, the

scope of the modvat scheme has been enlarged from time to time under various notifications.

From 16 March 1995, all excisable goods can take the benefits.

Service Tax

In the budget of 1994-95 a tax on three specified services namely telephone, general insurance

and stock brokerage was introduced. Today more than 40 specified services attract service tax

levy. The prevailing rate of centres service tax is 5% of the value of taxable services. Reasonsbehind imposing service tax were to bring equity, to stop encouraging spending on services at the

expense of goods etc.

Economic Reforms Process in India

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