Macro Economic Policies in India

8/7/2019 Macro Economic Policies in India

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INDIAN BUSINESS

ENVIRONMENTMODULE-2

MACRO ECONOMIC POLICIES IN INDIA

HARISH R

SUNIL T N

JAMSHIDCHANDRAKALA

HARRIS

ESHWARI

JABEER

VINAY KARTHIK


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CONTENTS

Industrial Policy of 1991

Monetary policy, objectives, credit control tools

Fiscal policy, objectives, budget

Direct and indirect taxes

Revenue and expenditures of the union and state

Recent foreign trade and Exim policies

Disinvestments in Indian public sector since 1991


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NEW INDUSTRIAL POLICY 1991

MEANING

Industrial policy refers to governments

Policy toward industries their establishment

Functioning , growth , & management.

This policy indicates respective areas

Small medium and large scale industries.


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IMPORTANTNCE OF IP

When India became independent in 1947,the

industrial base of the economy was very small.

Industries were be set with many problems such

as shortage of raw material , deficiency of capital,bad industrial relations etc.,

There is hesitate in the mind of investors about

the policy of the new national govt. and

industrial climate with uncertainties and

suspicious.

Thus govt. called an industrial conference to

remove the uncertainties and suspicious in the

minds of investors and entrepreneurs.


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OBJECTIVES

To build on the gains already made.

To correct the distortions or weakness that

might have crept in.

o To maintain a sustained growth in productivityand gainful employment.

To provide enhanced support to the small scale

sector.

To attain international competitiveness


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MAIN PROVISIONS OF 1991

POLICY

Abolition of industrial licensing :

In 1951 ,18 industries for which licensing

was kept necessary but now licensing is

compulsory for only 6 industries.public sectors role diluted :

In 1956 IP had reduced 17 industries for public

sector. In 1991 this reduced to 8 . In 1993 , 2

industries reduced . On 2001 the govt. opened uparms & ammunition sector to the private sector.

Now 3 industries reserved for the public sector


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CONTD. .

MRTP limit :

under this act all firms with assets above acertain size (rs.100 crore since 1985) wereclassified as MRTP firms. Such firms werepermitted to enter selected industries only.

Free entry to foreign investment andtechnology :

where in permission was to be made available for

direct investment upto 51 % for foreign equity.The limit is raised from 51% to 74% & then to100%for many of these industries.


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BENIFITS

It attracts capital , technology , managerial

expertise from abroad.

Privatization may increased efficiency. The memorandum of understanding may improve

the performance of public sector.

Strengthening of MRTP will curb anti-

competitive behaviour of the firm in monopolyoligopoly etc.


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CRITICISM OF 1991 INDUSTRIAL

POLICY

No evidence of positive impact on industrial

growth.

Distortions in production structure.

Threat from foreign competition.


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MONETARY POLICY:

Monetary policy is generally defined to include all

the measures direct & indirect which affects the

money supply, liquidity, cost, direction &

availability of credit & overall efficiency &

development of financial sector.

According to H. G. Johnson, monetary policy is a

policy employing the central banks control of

supply money as an instrument for achieving the

objectives of general economic policy.


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OBJECTIVES

High rate of growth

Full employment

Price stability

Equitable distribution of wealth &income

Healthy BOP

Control of business cycle.


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CREDIT CONTROL TOOLS

Quantitative tools Qualitative tools

Bank rate policy

Open marketoperation

Variable reserve ratio:

1. Cash reserve ratio

2. Statutory liquidity ratio

RBI can give directionsas to purposes for which

advances may not bemade.

Margin requirement tobe maintained inrespect to securedadvance.

Condition for maximumamt of advances to anyone borrower.

Moral suasion

Credit monitoringarrangements.


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FISCAL POLICY

Meaning

Fiscal policies refers to the policies of the

government as regards to taxation, public

borrowing and public expenditure with specificobjectives in view


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OBJECTIVES OF FISCAL POLICY

Improving growth and performance

Ensuring social justice to the people

High rate of economic growth

Economic stability

Equitable distribution


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TAX, MEANING OF TAX

To tax (from the Latin taxo; "I estimate", which in turn is

from tang; "I touch") is to impose a financial charge or

other levy upon a taxpayer (an individual or legal

entity) by a state or the functional equivalent of a state

such that failure to pay is punishable by law.

Taxes are also imposed by many sub national entities.

Taxes consist of direct tax or indirect tax, and may bepaid in money or as its labour equivalent (often but not

always unpaid). A tax may be defined as a "pecuniary

burden laid upon individuals or property owners to

support the government [] a payment exacted by

legislative authority." A tax "is not a voluntary payment

or donation, but an enforced contribution, exacted

pursuant to legislative authority"


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DIRECT TAX

The term direct tax generally means a tax paid

directly to the government by the persons on

whom it is imposed.

In the general sense, a direct tax is one paiddirectly to the government by the persons

(juristic or natural) on whom it is imposed (often

accompanied by a tax return filed by the

taxpayer). Examples include some income taxes,

some corporate taxes, and transfer taxes such asestate (inheritance) tax and gift tax.


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INDIRECT TAX

Indirect taxes are imposed on rights, privileges,

and activities. Thus, a tax on the sale of property

would be considered an indirect tax, whereas the

tax on simply owning the property itself would be

a indirect tax.

This include VAT and a range of excise duties on

oil, tobacco, alcohol. The burden of an indirect tax

can be passed on by the supplier to the final

consumer depending on the price elasticity ofdemand and supply for the product.


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REVENUE AND EXPEMNDETURE OF

UNION

Sources of revenue for the union

The union list in the constitution includes the following

Revenue subjects;

Taxes on income other than agricultural income

Duties and customs, including export duties;

Duties of excise on tobacco and other goods

manufactured or produced in India, except alcoholic

liquors for human consumption and opium, Indian

hemp and other narcotic drugs and narcotics;


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SOURCES CONT

Corporation tax

Taxes on the capital value of asset exclusively of

agricultural land of individuals and company;taxes on the capital of companies

Terminal taxes on goods of passengers carried by

the railways, by sea, or air; taxes on railway faresand freight

Fees taken in the supreme court


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SOURCES CONT

Taxes other than stamp duties on transactions on

stock exchange;

Rate of stamp duties on bills of exchange;

Taxes on sale or purchase of newspapers and on

advertisement published therein;

Any tax not mentioned in the state list or

concurrent list;


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EXPENDITURE OF UNION

Classified into two:

Non-plan expenditure

Plan expenditure


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NON-PLAN EXPENDITURE

(a)Revenue expenditure:- Interest payment

defence revenue expenditure,

major subsidies, debt relief to farmers,

police, pension,

Power,

Agriculture, Transport,

Communication,

Science and technology,


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NON-PLAN EXPENDITURE

(b) capital expenditure:-

Defense capital expenditure

Loans to public enterprises

Loans to state and union territories

Loans to foreign governments


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PLAN EXPENDITURE

Agriculture

Rural development

Irrigation

Flood control Energy

Minerals

Transport

Communication

Central assistance for plans of state and union

territories


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INCOME AND EXPENDETURE OF

THE STATE

Sources of revenue for the state

The state list in the constitution include the following

revenue subject:

Land revenue, including the assessment and

collection of revenue, the maintenance of land record,

survey for revenue purposes and record of rights and

alienation of revenue;

Taxes on agricultural income; Duties in respect of succession to agricultural land;

Estate duties in respect of agricultural land

Taxes on lands and building.


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CONT:

Taxes on mineral rights, subjects to any

limitations imposed by parliament by law

relating to mineral development.

Duties of excise on the following goodsmanufactured or produced elsewhere in India (a)-

Alcoholic liquors for human consumption. (b)-

Opium, Indian hemp and other narcotic drugs

and narcotics.

Taxes on the entry of goods into a local area forconsumption, use or sale therein:


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CONT:

Taxes on the consumption and sale of electricity.

Taxes on the sale or purchase of goods, (other

than news papers).

Taxes on goods and passengers carried by road orinland water ways.

Taxes on vehicles, whether mechanically

propelled or not, used on raods.

Taxes on animals and boats. Tolls.

Taxes on profession, trades, calling and

employment.


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CONT:

Capitation taxes.

Taxes on luxuries, including taxes on

entertainment, amusement, betting and

gambling. Rates of stamp duty in respect of documents

other than those specified.

Fees in respect of any of the matters in this list

but not including fees taken in any court.

Fisheries.

Forests.

Irrigation, water storage and water power.


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EXPENDITURES OF THE STATE

Classified under two headings:

Revenue Exp:-

Cash used in payment of goods and services

consumed in a short period.

Capital Exp:-

Cash used in purchase of fixed asset.


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EXPENDITURES OF THE STATE

Government acquisition of goods and services

intended to create future benefits.

Government spending can be financed by taxes,

or government borrowing. increased government spending is thought to

raise aggregate demand and increase

consumption


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EXPENDITURES CONT

Road and bridges.

Spending for other infrastructure.

Subsidies .

Allowances.


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IMPORT POLICY

PRE-REFORM PERIOD

Important constituents

Import restrictions

-starts from the year 1956-57-import license was imposed

Import substitution

objectives:

- to save scarce foreign currency

-to achieve self reliance in production


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Phases :

Earlier phasedomestic production of consumer

goods

Second phasereplacement of the import capitalgoods

Third phase---reducing the dependency on foreign

technology by developing & encouraging the

use of Indigineous

Techniques.


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IMPORT LIBERALISATION

Carried from 1977-78

Policy for import of capital goods

Open general license-capital good Registered exporters permited to import capital

equipments against REP (registered Exporter

policy)

1990-92concessional duty to manufacturers-exporters


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Policy for import of raw materials

Supplementary license

Import policy for registered Exporters

Duty free import of raw materials Policy of Export/ trading House

Import benefits

Policy for import of technology

Liberal approach


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EXPORT POLICY

PRE-REFORM PERIOD

Phase 1-----exports from developing countries

faced stagnant world demand

Phase 2----exports given high priority Phase 3----incentives to export production


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EXPORT PROMOTION POLICIES

Cash compensatory support

Duty draw back system

Replenishment licenses

Advance licenses & duty exemption schemes EPZs &100 % EOUs

Subsidies on domestic raw materials

Fiscal concession for exports

Export credit & assistance to EPCs.

Blanket exchange permit scheme


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NEW TRADE POLICY

Reform period

Freer imports & exports

Rationalisation of tariff structure

Decanalisation

Convertability of rupee on current account

Trading house

Special economic zones

EOU scheme

Agriculture export zones Market access initiative scheme

Focus on service exports

Concessions & Exemptions


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FOREIGN EXCHANGE

REGULATION ACT (FERA) 1973

Sec 29, directed towards the operation of MNCs

Converting to Indian companies

60% local equity participation

Subsidiaries of foreign co.s equity share should

bring down to 40% or less


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FOREIGN EXCHANGE

MANAGEMENT ACT 1999

Exchange management

To facilitate external trade & payments

Promote & maintainance of foreign exchange

market in India


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FOREIGN TRADE POLICY 2004-09

Objective:-

# Facilitate sustained growth in exportsto attain a share of at least 1.5% of globalmerchandise trade.

# Present share - 0.67%# Export target (2006-07)- 85 b $.# Present Annual growth rate -11.9%

#Facilitating high share of Indian Goodsand Services in the International market

# Act as Instrument of Economic Growth,Employment Generation and Poverty

Alleviation# Reflect the priorities for development of

the Indian Economy


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STRATEGY TO ACHIEVE THE

OBJECTIVES

# Bring down transaction cost Simplified procedure,

Unshackling of controls, built-in transparency &

mutual trust;

# India to be a Global hub for Manufacturing, Trading & Services;

# Special Focus area Initiatives;

# Facilitating Technological & Infra-structural

upgradation;

# Neutralising incidence of all levies & duties on

inputs

Duties & Levies should not be exported.


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FEATURES OF FTP,2004-09

Doubling share of global merchandise trade.

0.75 % to 1.5% by 2009

Five thrust sectors

Agricultural

Handicrafts

Handlooms

Gems and JewelleryLeather

Textile


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Served from India to be built as a brand

New categories of star houses---

one star-export of rs.15cr Two star-export of rs.100cr

three star-export of rs.500cr

four star-export of rs.1500cr

five star export of rs.5000cr Target plus scheme

amended on april 7,2006

Setting up of Free trade &Warehousing Zones

carry out trade transactions in free currency Sops for EOUs

retain 100% of export earnings in EEFC a/c


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Income tax benefts to DTA to EOUs.

Reducing transactional costs & simplifing

procedures.

Focus on infrastructure development Other measures.

Supplement to FTP anounced in april 2008

kept export target for2008-09 at$200 billion

Reduced to $175 billion in febraury 2009


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CENTRAL DUTIES CUSTOMS DUTYBasic, Addl(CVD), E.Cess,

Anti-dumping, Safeguard duties etc.

EXCISE DUTY--- Basic, Addl etc.

EXPORT CESS

CENTRAL SALES TAX

INCOME TAX

SERVICE TAX

OTHERS

ELECTRICITY DUTY, OCTROI, SALES TAX etc.


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SCHEMES

SEZ Scheme

EOU/EHTP/STP/BTP Schemes

EPIP Scheme

Warehousing Scheme CCP

DTA Schemes


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DISINVESTMENTS IN INDIAN PUBLIC

SECTOR SINCE 1991

The action of an organization or government

selling or liquidating an asset or subsidiary. Also

known as "divestiture".

A reduction in capital investment.


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REASONS FOR DISINVESTMENT

Improvement in efficiency and performance

Fixing responsibility is easier

Private units are subject to capital market

discipline

Political interference is unavoidable in PSUs

Succession planning

Response time in the case of private sector is

less

Remedial measures are taken early in privatesector

Privatization leads to better services to

customers


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DIVESTMENT IN PSUS AND METHODOLOGIES

ADOPTED

Year No of

companiesin which

equity sold

Target

receipt forthe year

(Rs in crore)

Actual

receipt(Rs in

crore)

Methodology

adopted

1991-92 47 2500 3037.34 Sold by auction method

in bundles

1992-93 29 2500 1912.42 Sold shares separatelyby auction method for

each company

1993-94 6 3500 0.00 Sold by auction method

1994-95 17 4000 4843.10 Auction, NRIs and

other legal persons

were permitted to buy,

hold or sell equity


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DIVESTMENT CONTINUED

Year No of

companies

in which

equity sold

Target

receipt for

the year

(Rs in crore)

Actual

receipt

(Rs in

crore)

Methodology adopted

1995-96 5 7000 168.48 Equities of 4 companies

auctioned

1996-97 1 5000 379.67 GDR in internationalmarket (VSNL)

1997-98 1 4800 910.00 GDR in international

market (MTNL)

1998-99 5 5000 5371.11 GDR(VSNL), domesticofferings with the

participation of FIIs and

cross purchase by 3 oil

sector companies

(GAIL, ONGC, IOC)


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DIVESTMENT CONTINUED Year No of

companies

in which

equity sold

Target

receipt for

the year

(Rs in crore)

Actual

receipt

(Rs in

crore)

Methodology

adopted

1999-00 5 10000 1860.14 GDR(GAIL), domestic

issue(VSNL),restructu

ring BALCO,MFILs

strategic sale2000-01 5 10000 1871.26 Strategic sale of

BALCO, LJMC,

CPCL,BRPL

2001-02 8 12000 5632.25 Strategic sale of CMC,

HTL, VSNL, IBP,PPL, hotel

properties of ITDC

and HCI,

MMTC; sale of shares

to VSNL employees.


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DIVESTMENT CONTINUED Year No of

companies

in which

equity sold

Target

receipt for

the year

(Rs incrore)

Actual

receipt

(Rs in

crore)

Methodology adopted

2002-03 8 12000 3347.98 Strategic sale of HZL, IPCL,

hotel properties of ITDC,

Sale of shares to employees

of HZL and CMC.

2003-04 2 14500 15547.41 Strategic sale of JCL; Call

Option of HZL; Offer for

Sale of MUL, IBP, IPCL,

CMC, DCI, GAIL and

ONGC;

Sale of shares of ICI Ltd

2004-05 3 4000 2764.87 Sale of NTPC and ONGC;

sale of shares to IPCL

employees.



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DIVESTMENT CONTINUEDYear No of

companies

in which

equity sold

Target

receipt for

the year

(Rs incrore)

Actual

receipt

(Rs in

crore)

Methodology adopted

2005-06 - - 1567.60 Sale of MUL shares to

Indian public sector

financial

institutions & banks andemployees

2006-07 - - - -

2007-08 - - 2366.94 Sale of MUL shares to

public sectorfinancial institutions,

public sector banks and

Indian mutual funds and

sale of PGCIL

2008-09 - - - -


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Year No of

companies in

which equitysold

Target

receipt for

the year(Rs in crore)

Actual

receipt

(Rs incrore)

Methodology

adopted

2009-10 - - 4259.90 Sale of NHPC and

OIL


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CRITICISMS OF DISINVESTMENT

Undervaluation of assets

Utilization of money from disinvestment


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THANK YOU

Macro Economic Policies in India

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