Macro Economic Policy MBA PPT

7/31/2019 Macro Economic Policy MBA PPT

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McGraw-Hill/IrwinStrategic Management, 10/e Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

MACRO ECONOMICPOLICY

MODULE - 2


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MONETARY POLICY

LEARNING OBJECTIVES

Industrial Policies of the past-

1948,1956,,1977,1980,1991.

Monetary Policy

Objectives of Monetary Policy

Credit Control tools


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INDUSTRIAL POLICY

Meaning of Industrial policy:

Industrial policy refers to government's policy

towards industries- their establishment, functioning,

growth and management of this this indicates the

respective areas of large, medium and small sector

industries, foreign capital, labor tariff and otherrelated aspects.


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Industrial Policy

1947- India became independent. Industrial basesmall & beset with many problems:

Shortage of raw materials, deficiency of capital, bad industrial relations.

Investorsnot sure about the industrial policy of new national government &industrial climate wrought with uncertainties and suspicions.

1947 -Industrial conference in December 1947adopted a resolution for industrialpeace and recommended a clear-cut division of industries into Public & private

sector & thus removed the uncertainties & suspicions in the minds of investors &entrepreneurs.

Various industrial policies were passed from time to time to improve theindustrialization our country.


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INDUSTRIAL POLICY RESOULTION OF 1948

IPR 1948 was the first industrial policy issued by thegovernment.

Following were the features of Industrial Policy of

1948:

1. Acceptance of the importance of both Private & Public

sectors.

Two important strategies: i) Expansion of the state sector

in areas where it was operating and in new lines ofproduction.

ii) Allowing the private sector to submit and expand albeit

under proper direction and regulation.


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2. Division of the industrial sector into four categories:

i) Industry where state had a monopoly : arms &

ammunition, atomic energy and rail transport.

ii) Mixed sector: six industries were specified:

Coal, iron & steel, aircraft manufacture, ship building,manufacture of telephone, telegraph & wireless appratus

& mineral oils.

In the national interest the state itself finds it necessary to

secure the cooperation of private enterprise.


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iii) The field of Govt. control: 18 industries of national importance wereincluded in this category.

.

Industries were- automobiles, heavy chemicals, heavy machines,machine tools, fertilizers, electrical engineering, sugar, papercement, cotton and woolen textiles.

iv) The field of private sector: all other industries were left open to the

private sector.

However, the state could take over any industry in this sector if itsprogress was unsatifsctory.


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Other imp. Features of the industrial policy 1948:

Small & cottage industries: IPR -1948 accepted the

importance of small & cottage industries in industrial development.

Best suited for the utilization of local resources and for creation of

employment opportunities.

Factories Act -1948: The rosolution enunciated a policy of just

labour conditions wherein workers would be given fair wages. Forpurposes of maintaining industrial peace, labour participation inmanagement.


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INDUSTRIAL POLICY -1991

The Congress Govt led by Mr. Narasimaha Rao announced the New IndustrialPolicy in July 1991.

The main aim of the new Industrial policy was :

To Introduce liberalization with a view to integrate the Indian economy with the

world economy.

To remove restriction on direct foreign investment as also to free the domestic

entrepreneur from the restrictions of MRTP Act.

To unshackle the Indian Industrial economy from the cobwebs of unnecessary

bureaucratic control.

The policy aimed to shed the load of the public enterprises which have shown a very

low rate of return or were incurring losses over the years.


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MONETARY POLICY

Monetary Policy refers to the measures adopted by the

Central Bank of a country to control the money supply to

achieve the objectives of general economic policy.

According to RP KENT, Monetary Policy is the

management of the expansion and contraction of the

volume of money in circulation for the explicit purpose ofattaining a specific objective such as all full employment


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OBJECTIVES OF MONETARY

POLICY

Price stability: when prices rise , the fixed group gets Adversely affected and when the prices fall, the producers and

businessman Get affected. It is argued that the price stability ensures

steady growth in Production and employment.

Stability of Foreign Exchange: one of the traditional objectives ofmonetary policy. When countries were on the gold standard, the aim

of the monetary authorities was to regulate credit in such a way as to

minimize fluctuations in foreign receipts and payments and thereby

protect gold reserves. Full Employment: The monetary policy should aim at solving the

unemployment problem by expanding consumption and investment

expenditure.


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OBJECTIVES OF MONETARY

POLICY

High Rate of Economic Growth: the concept of economicgrowth implies qualitative and quantitative increase in the

volume of goods and services produced in the economy.

A large No. of branches of commercial banks have been set

up in the rural areas, and special institutions for providing

credit to industries have been started in the urban areas.

Equitable Distribution of Income: Credit policy can be

organized in such as way as to provide more credit to thepoor and needy, to help them purchase productive assets.

Such a policy will also help in tackling the problems of

unemployment and poverty.


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CREDIT CONTROL TOOLS

OPEN MARKET OPERATIONS: OMP refer to the buying and

selling of government and other securities by the Central Bank.

Whenever the Central Bank sells securities, it intends to contract the

quantity of money and credit by absorbing the purchasing power inthe hands of public.

At the same time it, it manages to reduce the cash reserves of the

commercial banks and thereby reduces their capacity to create credit.

Reverse is the same.

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VARIABLE STATUATORY RESERVE RATIO: Central Bank of a country enjoys the power to determine the statutory cash

reserve requirements of the commercial banks.

Under this policy, the central bank requires the commercial banks to maintain a

certain percentage of their demand and time deposits as reserves.

Ex: If the banking system has Rs. 6,000 crores in total reserves and legal reserve

required is 8%, then the banking system can support Rs 5,520 crores of demand

deposit.

Let us suppose that legal reserve requirement is raised to 9% . Banking system will

be able to support only Rs. 5,460 crores.

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SELECTIVE OR QUALITATIVE METHODS OF CREDIT CONTROL

They aim at curtailing the flow of credit into unproductive channels and

diverting them into productive channels. They operate by means of official

regulations issued and enforced by Central Bank.

Some of the important methods of Selective Credit control tools are:

Rationing of credit: Central Bank may issue direction to commercial banks to

restrict (ration) credit to certain sectors or sections of the population. This

method is useful in controlling inflationary pressures.

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FISCAL POLICY

MODULE - 2

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Fiscal policy

Fiscal Policy refers to the policy of the Governmentregarding Public Revenue, Public Expenditure and Public

Debt.

It tells the methods adopted by the government to earn

revenue, to spend it and manage the deficit.

Modern Economists believe that the Fiscal Policy can be

used to change aggregate demand in a such an extent that

contributes to economic stabilization.

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OBJECTIVES OF FISCAL POLICY

1. Attaining Full Employment : Increase in Govt. Exp.pushes up aggregate and thru

multiplier effect, there woulde be multiple increase in national income

and employment.

2. Maintenance of Price Stability and Economic Stability: Fiscal policies of the

Govt. should be framed in such a manner as to counteract the cyclical

fluctuations.

Ex: Booms and Depression

During a depression, appropriate fiscal policy would be to increase publicexpenditure and decrease tax rates.

During Inflation : Appropriate policy would be to reduce public expenditure and

increase taxes, thereby reducing purchasing power in the hands of the people. This

will help in achieving price and economic stability.

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3. Increasing the Rate of Capital Formation: In a developing countries where the

level of income and employment are very low, the fiscl policy must aim at

increasing the rate of investment. This can be done by restricting consumption.

4. Minimizing inequalities in income and wealth : reduce disparities of income and

and wealth, the Govt. may design a tax structure which is progressive in nature.

Indirect Taxes should be heavy on luxury goods and light on necessary goods.

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5. Reducing Unemployment and under employment :Fiscal policy of the govt. Can

tackle the problem of unemployment and under employment, with the help

of specific public expenditure programmes.

Ex; Building roads, bridges undertaking multipurpose river projects, can provide

employment to the urban unemployed population.

Building of schools, hospitals , irrigation canals etc., during off season can provide

employment to the rural under employed population.

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FOREIGN TRADE POLICY

Indian economy is foreign trade oriented.

Government of India has announced massive Trade

Policy in 1991 to open up the economy to foreigntrade and to integrate the Indian economy into the

global economy.

Indian economy has undergone changes both in its

composition and direction of Foreign trade.

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Before the economic planning was started in India, mainexports were primary goods and imports consisted ofmanufactured goods.

But after planning , there has been a total change in itscomposition.

In recent years India started exporting various kinds ofmanufactured goods like engineering goods, ready madegarments, chemicals and allied products, software, leatherand leather products etc.,

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2004-2006

KEY STRATEGIES :

1. Unshackling (set free) of controls

2. Creating an atmosphere of trust and transparency

Simplifying procedures and bringing down

transaction costs.

Identifying and nurturing different special focus

areas to facilitate development of India as a Global

hub for manufacturing, trading and services.

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Highlights of Foreign Trade Policy

2004-2006

STRATEGY: it is for the first time a comprehensive Foreign TradePolicy is being notified.

FTP takes an integrated view of the overall development of Indias

Foreign trade.

OBJECTIVES OF THE FOREIGN TRADE POLICY:

1. To double Indias Percentage share of global merchandise

trade by 2009.

2. To act as an effective instrument of economic growth by

giving a thrust to employment generation, especially in

semi-urban and rural areas.

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EXIM POLICY 2002-2007

EXIM policy of India is primarily a five year policy, Commerceministry announces appropriate amendments every year , keeping inmind the latest national and international developments. This is

usually done on 31st

march every year.

Exim policy is supposed to last for 5 years, the UPA Governmentannounced new five year Foreign Trade Policy: by changing thename EXIM POLICY.

The Exim Policy -2002-2007 places a special focus on the small scalesector which generates almost 50% of Indias exports.


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Union Commerce and Industry Minister Mr. MurasoliMaran announced the EXIM policy for the 5 years period .

The main thrust of the policy is to push Indias exports

aggressively by undertakings several measures aimed ataugmenting exports of farm goods, small scale sector,textiles, gems and jewellery, electronic hardware etc.

Policy aims to reduce transaction cost to trade through anumber of measures to bring about proceduralsimplifications.

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EXIM policy initiated a number of measures which would help employmentorientation.

External Sector is becoming increasingly important for the growth of the Indianeconomy.

The Main Initiatives announced in the Exim Policy 2002-2007.

The focus of trade policy reforms in India have been on liberalization, openness, andglobalization with a basic trust on export promotion activity.

Exim Policy 2002-02 had removed quantitative restrictions on all imports.

Imports of second hand or used vehicles, meat and poultry products and and textileand textile articles were allowed.

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2004-2006

Special focus initiatives have been identified for the Agriculture, handlooms,handicraft, gems and jewellery and leather sectors.

1. New SchemeVishesh Krishi Upaj Yojana (spl. Agricultural produce scheme)

for promoting the export of fruits, vegetables, flowers, minor forest produce, and their

value added products has been introduced.

2. Funds shall be earmarked for the development of Agri Export Zones(AEZ)

3. Units in AEZ shall be exempted from bank guarantee under Export Promotion Capital

Goods scheme.

4. New towns of export excellence with a threshold (points of entry or beginning) limit of

Rs. 250 crore have been identified.

5. Specific funds earmarked under Market Acess Initiative Scheme for promotinghandloom and handicraft exports.

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2004-2006

Special focus initiatives have been identified for the Agriculture, handlooms,handicraft, gems and jewellery and leather sectors.

6. New handicrafts SEZs shall be established which would procure products from

the cottage sector and do the finishing for exports.

7. The Handicraft Export promotion Council has been authorized to import

trimmings, embellishments(Beautify) and consumables on behalf of those

exporters for whom direct importing may not be viable.

8. Import of gold of 18 carat and above shall be allowed under the

replenishment(fill up again).

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The five year 2002-2007 policy removed quantitative restrictions onexports except jute and onion which were retained for export throughthe state trading enterprises.

Government decided to focus on the export of 106 items includingengineering goods, electrical goods, electronic goods ,watch,footwear, chemicals, textiles, jewellery ect.,

Many measures were announced to give major thrust agri- exports.

Policy announced transport assistance for the export of fresh andprocessed fruits, vegetables, floriculture, poultry, dairy products

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Salient features :

The Exim policy 2002 was described as pro-growth and positive

with certain concrete measures.

The most important initiatives of the policy were:

Removal of Quantitative Restrictions on Agricultural exports.

Setting up of 20 Agri-Export Zones in 12 states.

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Salient features :

The policy also made the special Economic Zones (SEZs) more attractive by

extending income tax benefits to the units in SEZs.

Setting up SEZs units would be able to import capital goods and raw materials dutyfree.

SEZs units shall be deemed to be foreign territory for the purpose of trade

operations and tariffs. Goods going t the SEZ area would be treated as ddemed

exports.

Reduction in interest rate from 24 to 15 % in case of non-fullfillment of export

obligations by exporters under the various schemes. This measure is likely to tap

immense export potential.

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EVALUATION OF EXIM POLICY 2002-2007

Due to pressure of USA, which carried on acrusade against QRs by India, a casewas filed by USA in WTO gave its verdict against India in 1997.

Government of India filed an appeal, but the verdict went against India. India thus

forced to lift QRs.

Government of India is conscious of the fact that removal of QRs can open the

floodgates of foreign goods in the Indian market.

The removal of QRs on the import of second hand automobiles also posed a threat

to automobile manufacturers, but by imposing two conditions that only cars above

1000 c.c. capacity and automobiles, which are not more than 3 years old, can be

imported, the govt. claims to have protected the interests of the automobile industry.

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Due to pressure of USA, which carried on a

crusade against QRs by India, a case was filed by USA in

WTO gave its verdict against India in 1997.

Government of India filed an appeal, but the verdict went

against India. India thus forced to lift QRs.

Government of India is conscious of the fact that removal of

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The removal of QRs on the import of second hand automobiles also posed a threat

to automobile manufacturers, but by imposing two conditions that only cars above

1000 c.c. capacity and automobiles, which are not more than 3 years old, can be

imported, the govt. claims to have protected the interests of the automobile industry.

The critics felt that government has opened the doors of the Indian market for a

variety of goods used by Upper and Indian middle classes.

USA and other advanced countries had an eye on 250 million members of the

middle class who are prone to follow foreign styles.

There is a strong fear that by opening the floodgates of imports in all kinds of goods,

India may be faced with the prospect of closure of lakhs of small scale industries.


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Critics, therefore allege that very dangerous situation is likely to emerge in the very

near future which may give a serious set back to Indian producers.

The nationalist government developed since 1947 policies to protect Indians from

the onslaught of Foreigners by imposing restrictions on the import of a very largenumber of items.

The slogan of Government was BE INDIAN, BUY INDIAN

The danger posed by the EXIM policy is expressed in the new paradigm shift BE

INDIAN, BUY FOREIGN

This will be negating the chief objective of the national struggle for independence.


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UNION BUDGET

BudgetGovernments annual estimate or plan of revenue andexpenditure.

Union budget is an important event which has great significance forthe entire nation and is normally introduced in the last week of

February every year.

The budget is prepared and present by finance minister before theparliament .

The finance bill has to be cleared to authorise expenditure.

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UNION BUDGET

Tax revenue comes broadly from three sources:

A) Taxes on income and expenditure

B) Taxes on property and capital or property transactionsand

C) Taxes on commodities and services.

Non tax revenue consists of:

1. Currency, coinage and mint

2. interest receipts and dividends

3. other tax revenue

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UNION BUDGET

The Budget of Government of India, for any year, gives a complete picture of theestimated receipts and expenditures of the Government for that year on the basis oftwo previous years.

Every Budget, for instance, gives three sets of figures :

A. actual figures for preceding year. B. budget and revised figures for the current year

C. Budget estimate for the following year

For instance, the budget estimate for the year2006-07 contains:

A) actuals or accounts for the year 2005-06

B) budget for the revised figures for the year 2006-07

C) budget estimates for 2007-08.


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UNION BUDGET

Revenue receipts include direct taxes likecorporation tax, income tax, wealth tax ,gift tax andso on.

Indirect taxes like customs duty,excise duty,sales taxetc.,

Non tax revenue like net income by public sectorundertakings are also accounted under Revenue

Receipts Capital receipts: Money include governments

market borrowings, provident fund, small savings

and the external assistance like loans grants etc.,

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BUDGET

Revenue Expenditureare those which neither addto the governments assets nor reduce the liabilities.

- Salaries of Government employees, purchase ofof stationery, maintenance of public utilities etc arepart of revenue expenditure.

Capital Expenditurerefers to items that involvesacquisition of assets.

Ex: investment in railways, roads, bridges, powerprojects and irrigation works.

When total expenditure exceeds the total receipts is

Budget deficit.

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UNION BUDGET

The excess of the total expenditure over the revenue receipts arefinanced by borrowings of the Government under Domestic Capital

Receipts and External Capital Receipts

The Market borrowings, small borrowings, provident funds etc., comeunder domestic capital receipts.

The loans and other assistance received from international agencies

come under external capital receipts.

Deficit in the revenue account implies that the Government is living

beyond its means and that its forced to borrow even to meet its current

expenditure.

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CHELLIAH COMMITTEE RECOMMENDATIONS

The Committee, set up in August 1991, submitted its Interim Report

in February 1992, and final report in two parts in August 1992 and

January 1993.

The recommendations made by the committee have been made with a

view to make the tax-system generate revenue in an efficient and

equitable manner.

For this the committee has suggested some major changes in direct

and indirect taxes.

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Direct taxes: In respect of direct taxes, the committee stressed the

importance of lower/moderate rates of taxation, a narrower spread

between the rate and the maximum marginal rate, and the fewest

special exemptions and deductions.

Income tax: In terms of personal income tax, it means lower tax rates,

fewer slabs, a higher exemption limit, and reductions in the savings

linked tax exemptions.

It has also been recommended that agricultural income in excess of

Rs. 25,000 accruing to the non-agriculturists be taxed by aggregating

it with non-agricultural income.

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Corporate tax:Committees recommendations are reduction in thecorporate rate: reduction in the differential between the rates on

domestic and Foreign companies .

INDIRECT TAX: As for the reform of indirect taxes is concerned, thecommittee made the following important recommendations: customs

tariffs on finished goods should be higher than on basic raw materials

and those on components and machinery should be in between:

agricultural imports should be subject to some import duty.

MODVAT: ultimately, of course the full fledged VAT (as a

replacement of various indirect taxes) is to be introduced.

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NEW INDUSTRIAL POLICY

RESOLUTION OF 1991

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In line with liberalization measures announced during the1980s, the then congress government announced a new

industrial policy on July 24,1991.

Architects behind industrial policy of 1991 were the then

prime minister PV Narasimha Rao and finance minister

Manmohan Sing.

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OBJECTIVES

The major objectives of the policy was to build onthe gains which was already made and correct the

weakness that had crept in.

Maintenance of a sustained growth in productivity

and gainful employment and international

competitiveness.

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In pursuit of these objectives, the governmentannounced a series of initiatives like

Industrial Licensing Foreign Investment

Foreign Technology agreements

Public Sector Policy MRTP Act

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ABOLITION OF INDUSTRIAL LICENSING

Industrial licensing policy in India is governed by the

Industrial development and Regulation Act of 1951.

Industrial licensing policy which was being resented by

entrepreneurs as it led to unnecessary governmental

interference, which delayed in investment decisions and

bureaucratic red tapism, corruption etc.,

And also Industrial licensing policy failed to achieve the

objective laid down by the government.

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Thus bearing all the above factors and also to liberalize the

economy, the industrial policy of 1991 abolished industrial

licensing for all but 18 industries.

The industries under licensing policy act were coal and lignite;

distillation and brewing of alcoholic drinks; sugar; animal fats

and oil; cigars and cigarettes; asbestos and asbestos basedproducts; plywood and other wood based products; raw hides,

skins and leather; tanned or dressed fur skins; motor cars;

paper and newsprint; electronics aerospace and defense

equipments; industrial explosive; hazardous chemicals; drugs

and pharmaceuticals; entertainment electronics; and white

goods domestic refrigerators, washing machines etc.).

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With the passage of time most of these industries have also

been delicenced except for alcohol, cigarettes, hazardous

chemicals, electronic aerospace and defense equipment,

drugs and pharmaceuticals and industrial explosives.

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DILUTION OF PUBLIC SECTOR INDUSTRIES


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DILUTION OF PUBLIC SECTOR INDUSTRIES

As many as 17 public sector industries was reduced to 8, they were

Arms and ammunition

Atomic energy

Coal and lignite

Mining of iron ore, manganese, chrome, gypsum, sulphur, gold, diamond,copper, lead, zinc, tin, molybdenum, and wolfram.

Minerals specified in the scheduled in the atomic energy.

Rail transport

Till date many have been deleted from reserved list only a total of 3industries are reserved for the public sector.

Public sector enterprises were reviewed and sick units was referred to theBoard for Industrial and Financial Reconstruction for rehabilitation andreconstruction.

The government also announced to offer a part of government shareholdingin the public sector enterprises to mutual funds.

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RELAXATION OF MRTP ACT

Under this act all the firm with assets worth rupees 100crore(since 1985) were classified as MRTP firms.

Such firms were permitted to enter selected industries only ona case by case approval basis.

The government realizing the effect of this restrictions on thepath of growth and diversification of this firms has scrappedthe threshold limit of assets.

After many such amendments the MRTP Act gives moreemphasis to the prevention and control of monopolistic,restrictive and unfair trade practices, so that consumers aresafeguarded from such practices.

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FREE ENTRY TO FOREIGN INVESTMENT AND


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FREE ENTRY TO FOREIGN INVESTMENT AND

TECHNOLOGY

The new industrial policy has prepared a specified list of hightechnology and high investment priority industries wherein automaticpermission was made available for foreign direct investment up to51% foreign equity.

The various industries with automatic approval are metallurgicalindustries, entertainment , electronics, food processing, and theservice sectors having export potential.

There is a total ban on FDI in handful of sectors like arms andammunitions, atomic energy, railway transport, coal and lignite,mining of iron, manganese, chrome, gypsum, sulphur, gold,diamonds, cooper and zinc.

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OTHER LIBERALIZATION MEASURES

Liberalization for obtaining approval from the centre, forestablishing of industries of non polluting nature in cities

with a population of more than 1 million.

Abolition of phased manufacturing programmes for new

projects.

Removal of mandatory convertibility clause imposed byfinancial institutions.

Macro Economic Policy MBA PPT

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