Module 2 ( Current Economic Policies & Reforms in India )

Explain New Economic Policy ?

New Economic Policy of India was launched in the year 1991.

LPG which is also known as Liberalisation, Privatisation and Globalisation were the three major
measures that the Indian government had adopted under its New Economic Policy. For this, they
approached International Banks for development and the betterment of the country and economy.
When they approached these international banks and organisations, these agencies asked them to
open up our Indian economy to the world, remove trade restrictions and trade barriers and foster
the private sector.

Why New Economic Policy

• In 1991, India met with an economic crisis - relating to external debt.

• The government was not able to make repayments on its borrowings from abroad

• India received 7 billion dollars as loan from IMF and World Bank to solve the crisis.

• In return, IMF expected India to liberalise and open up the economy and remove trade restrictions

Factors which lead to 1991 economic reforms

(i). Rise in Prices: The inflation rate increased from 6.7% to 16.7% due to rapid increase in money
supply and the country’s economic position became worse.

(ii). Rise in Fiscal Deficit: Due to increase in non- development expenditure fiscal deficit of the Govt.
had been increasing. Fiscal deficit means difference between total expenditure and total receipts
minus loans. To cover the fiscal deficit, the Govt. has to raise loans and pay interest on it.

(iii). Increase in Adverse Balance of Payments: The difference between total exports and imports of
a country in called Balance of Payments. In 1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs.
17,367 crores. To cover this deficit large amount of foreign loans had to be obtained and interest
payment got increased.

(iv). Iraq War: In 1990-91, war in Iraq broke, and this led to rise in petrol prices. The flow of foreign
currency from Gulf countries stopped and this further aggravated the problem.

(v). Dismal Performance of PSU’s (Public Sector Undertakings): PSU’s are enterprises wholly owned
by Govt. have invested crores of Rs. in these enterprises. These are no performing well due to
political interference and became big liability for Govt.

(vi). Fall in Foreign Exchange Reserves: Indians foreign exchange reserve fell to low ebb in 1990-91
and it was insufficient to pay for an import bill for 2 weeks.
Benefits of New Economic Policy

The new economic policy has had a positive impact on society. By providing incentives for businesses
to invest in the country, jobs have been created, and the economy has begun to grow.

The policy also promotes entrepreneurship, so citizens have the opportunity to start their
businesses. This has led to more innovation and diversity in the workforce. In addition, the
government is working to improve education and healthcare, which will benefit all citizens.

Steps Taken in the New Economic Policy

The main outcome of the measures taken in this policy can be observed in achieving three major
milestones: privatization, liberalization, and globalization.

1. Privatization

Privatisation is a process of transferring ownership of the business, enterprise agency, or public

service from the public sector (government) to the private sector.

A major step was to allow private enterprises to set up industries and businesses in previously
reserved sectors and controlled by the government as the public sector. The main objective was to
improve the efficiency of public sector companies that were suffering losses and stagnation due to
the under-utilization of capacity and resources.

Features of privatization includes:

• To provide a variety of business units to consumers.

• To reduce labour problem.

• To bring about more efficiency.

• To ensure less political interference in running the business.

2. liberalization

Liberalisation of an economy is considered a key component of NEP. Before the New Economic Policy
of 1991, the private sector was in control of the government. Because of this, the domestic industries
were not allowed to take any decisions regarding the industry’s work without the government’s
interference. This resulted in a fall in professionalism and inefficiency of work within the industry.
With the introduction of the liberalisation policy, this sector gained the freedom of decision-making
without any interference from the government.

The government also decided to abolish the licensing system. Before 1991, a business needed to get
a license from the government to start any industrial activity. This resulted in a delay in getting a
license, as there was a long queue of people before the window of the government department,
seeking authorisation to get a license. This also resulted in corruption as the officers started taking
bribes to make the process faster. To end this, the government abolished the licensing system and
permitted individuals to start their industrial activities without any permission (however permission
is still required in industries, such as medicine, defense equipment, etc.).

Under the Liberalisation Policy, the government of India introduced various economic reforms.
3. Globalization

The main aim of globalisation was to integrate the Indian economy with the global economy. As a
result, there will be an unrestricted flow of information, goods and services, technologies, and even
people within countries, which will eventually enhance the development of the country. The
government allowed foreign companies to hold 51 percent or more shares of the Indian companies
in the case of collaboration so that they can function freely and as the owner. This also promoted the
transfer of the latest technologies into Indian territory due to collaboration with MNCs. The
reduction of the tariff and non-tariff barriers, adoption of policies to promote exports, increase in
Foreign Investments, increase of foreign currency in the country (Forex), growth of the IT industry in
India, and several other features came under the globalisation policy.

Explain Foreign Direct Investment ?

FDI is the process whereby residents of one country the acquire ownership of assets for the purpose
of controlling the production, distribution and other activities of a firm in another country as the host
country.

As mentioned above, an investor can make a foreign direct investment by expanding their business in
a foreign country. Amazon opening a new headquarters in Vancouver, Canada would be an example
of this.

•Home country- the country where Direct Investor resides/head-office.

• Host country- the Country where investment occurs

Factors influencing FDI in a country

1. Stability of the Government:

A stable Government is an essential for any investment. The investor will always look for a
government which is supporting investment. The investor should not have any fear of take over by
the government. This will enable him to go for expansion.

2. Scope of the market:

FDIs must be in a position to exploit the market and expand both in the domestic as well as the
foreign markets. This will reduce their cost of production and will give them ample scope for
diversification.

3. Other favorable location factors (including logistics and labor):

The productivity of labor in the country should be high. Adequate skilled labor should be available,
especially in technical areas. Different transport facilities with a proper coordination between land,
rail and air should be available.

4. Return on investment:

One of the major attractions for FDIs is the profit or the return they get for the investment made.
Unless the return is substantially higher than what they could have obtained in other countries, they
will not venture for investment.

5. Exchange rate

A weak exchange rate in the host country can attract more FDI because it will be cheaper for the
multinational to purchase assets.

6. Flexibility in the Government Policy:

Certain investments were not allowed in the hands of FDI but such a rigid policy will not help in the
growth of industries. With WTO regulation, government has to adopt flexible policies, permitting
FDIs in all areas including those in which they were prevented previously. For example, in India,
power generation was not permitted to private sector. Now, in Maharashtra, Dabhol Power Company
is allowed to do so.

7. Tax rates

Large multinationals, such as Apple, Google and Microsoft have sought to invest in countries with
lower corporation tax rates. For example, Ireland has been successful in attracting investment from
Google and Microsoft. In fact, it has been controversial because Google has tried to funnel all profits
through Ireland.

8. Transport and infrastructure

A key factor in the desirability of investment are the transport costs and levels of infrastructure. A
country may have low labour costs, but if there is then high transport costs to get the goods onto the
world market, this is a drawback.

Types of FDI

1. Inward & Outward FDI

 Inward FDI measures investments made in a country from another country.

 Inward FDI for an economy can be defined as the capital provided from a foreign direct investor
residing in a country, to that economy, which is residing in another country. Here, investment of
foreign capital occurs in local resources.
 EXAMPLE: General Motors decides to open a factory in Malaysia. They are going to invest some
capital. That capital is inward FDI for Malaysia.
 An outward direct investment (ODI) is a business strategy in which a domestic firm expands its
operations to a foreign country.

2. Vertical & Horizontal FDI

 Horizontal FDI

Horizontal FDI is the most common type of FDI. In a horizontal FDI, a company invests its funds in a
foreign company belonging to the same industry or business. Here, a company invests in another
company located in a different country but produces similar goods.

An example of horizontal FDI is Spain-based company Zara investing in the Indian company Fab India,
which produces similar products as Zara. Both these companies belong to the merchandise and
apparel industry.

 Vertical FDI

Vertical FDI is another common type of FDI which occurs when a company invests in the supply chain
of a foreign company, which may or may not belong to the same industry. Through vertical FDIs, a
company looks to invest in a foreign company that might become its supplier or buyer. Vertical FDIs
are further classified into backward vertical integrations and forward vertical integrations.

Vertical FDI is when a company invests internationally to provide input into its core operations
usually in its home country. A firm may invest in production facilities in another country. When a firm
brings the goods or components back to its home country (i.e., acting as a supplier), this is referred
to as backward vertical FDI. When a firm sells the goods into the local or regional market (i.e., acting
as a distributor), this is termed forward vertical FDI.

For example, McDonald’s – an American fast-food company – might invest in a meat processing
company in India to bolster its meat supply chain. Since an investing company invests in a supplier
company, which is ranked lower in the supply chain, this type of FDI is known as backward vertical
integration.

3. Greenfield & Brownfield FDI

 Greenfield FDI

a greenfield investment (GI) refers to a type of foreign direct investment (FDI) where a company
establishes operations in a foreign country. In a greenfield investment, the company constructs new
(“green”) facilities (sales office, manufacturing facility, etc.) from the scratch.

A greenfield investment is a form of market entry commonly used when a company wants to achieve
the highest degree of control over its foreign activities.
Real-world examples of greenfield investment include

In 2015, Toyota Motor Corporation announced plans to establish a new manufacturing facility in
Mexico through an investment of about US$1 billion. Slated to open in 2019, the facility is expected
to produce up to 200,000 units per year in conjunction with the currently established Tijuana plant.

Advantages of a Greenfield Investment:

• High level of control over business operations

• High level of quality control over the manufacturing and sale of products and/or services

• High control over brand image and staffing

• Bypassing trade restrictions

• Creating jobs for the economy where the greenfield investment is taking place

 Brownfield FDI

A brownfield (also known as "brown-field") investment is when a company or government entity

purchases or leases existing production facilities to launch a new production activity. This is one
strategy used in foreign direct investment.

The alternative to this is a greenfield investment, in which a new plant is constructed. The clear
advantage of a brownfield investment strategy is that the buildings are already constructed. The
costs and time of starting up may thus be greatly reduced and the buildings already up to code.

One application of this strategy is where a commercial site used for an "unclean" business purpose,
such as a steel mill or oil refinery, is cleaned up and used for a less polluting purpose, such as
commercial office space or a residential area. Brownfield investment is usually less expensive and can
be implemented faster; however, a company may have to deal with many challenges, including
existing employees, outdated equipment, entrenched processes, and cultural differences.

FDI in India

FDI is one of the important tools of economic growth for a developing nation like India. So to boost
the flow of foreign investment the process of liberalization is undertaken.

In 2012, developing countries took over the developed countries first time ever in attracting FDI (IMF,
2013).

India was the third attractive destination to FDI in the world in the year 2012 (IMF, 2013).

India has attracted highest FDI in the world in the year 2015 (leaving behind US and

China).

There are a few industries where FDI is strictly prohibited under any route. These industries are
Atomic Energy Generation, Any Gambling or Betting businesses, Lotteries, Housing and Real Estate,
Cigarettes, or any related tobacco industry.
Routes for FDI

Basically, there are two routes for FDI in India.

• There is the Automatic Route, where no approval or authority is required by the private foreign
investor. He can invest in any company it wishes with no need for government approval.

• And then there is the Government Route. In this route, there is no investment without the prior
approval of the Government of India.

How Government Discourage or Restrict FDI

In most cases, governments seek to limit or control foreign direct investment to protect local
industries and key resources (oil, minerals, etc.), preserve the national and local culture, protect
segments of their domestic population, maintain political and economic independence, and manage
or control economic growth. A government use various policies and rules:

• Ownership restrictions:

Host governments can specify ownership restrictions if they want to keep the control of local
markets or industries in their citizens' hands.

• Tax rates & Sanctions

How Government Encourage FDI

Governments seek to promote FDI when they are eager to expand their domestic economy and
attract new technologies, business know-how, and capital to their country. In these instances, many
governments still try to manage and control the type, quantity, and even the nationality of the FDI to
achieve their domestic, economic, political, and social goals.

Financial incentives: Host countries offer businesses a combination of tax incentives and loans to
invest. Home-country governments may also offer a combination of insurance, loans, and tax breaks
in an effort to promote their companies' overseas investments.

Infrastructure: Host governments improve or enhance local infrastructure in energy, transportation,

and communications to encourage specific industries to invest. This also serves to improve the local
conditions for domestic firms.

Invest in education: Countries seek to improve their workforce through education and job training.
An educated and skilled workforce is an important investment criterion for many global businesses.

Explain Monetary Policy ?

Under the terms of the RBI Act, this monetary policy was developed in 1934. This strategy, which can
be either contractionary or expansionary. Expansionary policy is used when there is a sudden
increase in the overall amount of money. Contractionary policy is used when there is a slower rate of
growth or decline in the money supply.
The central bank uses monetary policy, a procedure, to control the money supply in order to
accomplish particular objectives including preventing inflation, preserving a fair exchange rate,
generating employment, and fostering economic progress. Changing interest rates through open
market operations, reserve requirements, or foreign exchange trading is part of monetary policy,
whether it be directly or indirectly.

Monetary policy refers to the steps taken by a country’s central bank to control the money supply for
economic stability.

The RBI implements the monetary policy through open market operations, bank rate policy, reserve
system, credit control policy, and through many other instruments. Using any of these instruments
will lead to changes in the interest rate, or the money supply in the economy.

Central banks conduct monetary policy by adjusting the supply of money, usually through buying or
selling securities in the open market. When central banks lower interest rates, monetary policy is
easing. When they raise interest rates, monetary policy is tightening.

Explain Monetary Policy Committee ( MPC ) ?

The Monetary Policy Committee (MPC) is a committee constituted by the Central Government and
led by the Governor of RBI. The committee was set up by the Union government to set the policy
interest rates as a part of its monetary policy.

Types of Monetary Policy

There are two main kinds of monetary policy: contractionary and expansionary.

Contractionary monetary policy:

This type of policy is used to decrease the amount of money circulating throughout the economy,
typically by selling government bonds, raising interest rates, and increasing the reserve requirements
for banks. The government uses this method when it wants to avoid inflation.

Expansionary monetary policy:

This type of monetary policy can increase the economy’s money supply through decreasing interest
rates, lowering reserve requirements for banks, and the purchase of government securities by central
banks. This policy helps lower unemployment rates as well as stimulate business activities and
consumer spending. The overall goal of this policy is to fuel economic growth.
Tools of Monetary Policy

When setting monetary policy, the Federal Reserve has several tools at its disposal, including open
market operations, the discount rate, reserve requirements and interest rates on excess reserves.

1. Open Market Operation

Open market operations refer to central bank purchases or sales of government securities in the
open market by the Federal Reserve (Fed) in order to expand or contract money in the banking
system and influence interest rates.

The objective of OMO is to regulate the money supply in the economy.

2. Bank Rate

Bank rate is the lending rate at which commercial banks can borrow from the RBI without providing
any security.

3. Repo Rate & Reverse Repo Rate

Repo rate is the interest rate at which the RBI lends short term financial requirements to commercial
banks in the country by purchasing securities.

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of
India) borrows money from commercial banks within the country. It is a monetary policy instrument
which can be used to control the money supply in the country.

4. Variations in Reserve Ratios

Varying reserve requirements refers to the various reserves which the commercial bank has to
maintain with itself as well as with the central bank. These includes:

 Cash Reserves Ratio (CRR)

CRR is the percentage of total deposits, which a commercial bank has to keep as reserves in the form
of cash with the RBI. The banks are not allowed to use that money, kept with RBI, for economic and
commercial purposes. It is a tool used by the bank to regulate the liquidity in the economy and
control the flow of money in the country.

 Statutory Liquidity Ratio (SLR)

It is the compulsory ratio of the deposit, that the bank maintains in the form of cash, gold, and other
securities prescribed by RBI. In short, it is kept by the bank in form of liquid assets.

5. Credit Rationing

Credit rationing is a situation when banks limit the supply of loans to consumers.
6. Margin Lending

Margin lending is a type of loan that allows you to borrow money to invest, by using your existing
shares, managed funds and/or cash as security.

What Is a Liquidity Adjustment Facility?

A liquidity adjustment facility (LAF) is a tool used in monetary policy, primarily by the Reserve Bank of
India (RBI) that allows banks to borrow money through repurchase agreements (repos) or to make
loans to the RBI through reverse repo agreements.

Fiscal Policy, Union Budget Of India

Explain Union Budget of India ?

The Union Budget of India, also referred to as the Annual Financial Statement in Article 112 of the
Constitution of India, is the annual budget of the Republic of India.

The budget is presented by the Finance Minister of India in the Parliament.

The budget is an annual financial statement that lays out the government’s proposed expenditures
and revenues for the upcoming fiscal year, which begins on April 1st and ends on March 31st of the
following year.

Classification of Union Budget

 Revenue budget includes the government's revenue receipts and expenditure. There are two
kinds of revenue receipts - tax and non-tax revenue. Revenue expenditure is the expenditure
incurred on day to day functioning of the government and on various services offered to citizens.
If revenue expenditure exceeds revenue receipts, the government incurs a revenue deficit.
 Capital Budget includes capital receipts and payments of the government. Loans from public,
foreign governments and RBI form a major part of the government's capital receipts. Capital
expenditure is the expenditure on development of machinery, equipment, building, health
facilities, education etc. Fiscal deficit is incurred when the government's total expenditure
exceeds its total revenue.

Importance of Union Budget:

1. Ensuring structured allocation of resource

2. Keep an eye on the prices

3. Changes in the Tax System

4. Reduce unemployment in poverty level

Types Of Funds Of Government Of India

The Indian government’s funds are kept in three parts, which are listed below:

1. Consolidated Fund of India

This is the most important of all accounts of the government. This fund comprises all revenues
received by the State Government, all loans raised by the State Government (market loans, bonds,
loans from the Central Government, loans from Financial Institutions, Special Securities issued to
National Small Savings Fund, etc.

The Consolidated Fund comprises two sections: Revenue and Capital (including Public Debt, Loans
and Advances). These are further categorized under ‘Receipts’ and ‘Expenditure’.

The Revenue Receipts section is divided into three sectors, viz., ‘Tax Revenue’, ‘Non Tax Revenue’ and
‘Grants in aid and Contributions’. These three sectors are further divided into sub-sectors like ‘Taxes
on Income and Expenditure’, ‘Fiscal Services’, etc.

The Capital Receipts section does not contain any sectors or sub-sectors. The Revenue Expenditure
section is divided into four sectors, viz., ‘General Services’, ‘Social Services’, ‘Economic Services’ and
‘Grants in Aid and Contributions’.

2. The Public Account

All other public moneys received by or on behalf of the Government, where the Government acts as
a banker or trustee, are credited to the Public Account. The Public Account includes repayable like
Small Savings and Provident Funds. The net cash balance available with the Government is also
included under the Public Account.

3. Contingency Account

This fund is used to meet unexpected or unforeseen expenditure. Each state can have its own
contingency fund established under Article 267(2). Its corpus is Rs. 500 crores. It is in the nature of
an imprest (money maintained for a specific purpose).

Explain Fiscal Policy ?

Fiscal policy is the governmental decision to increase or decrease taxation and spending. These
actions are primarily intended to stabilize the economy.

Everything relating to the government’s income and expenditures is covered under Fiscal Policy.

The three components of fiscal policy in India are as follows. Public Debt, Government Expenditures,
and Government Revenues.
Fiscal Policy Objectives

1. Price Stability

This policy primarily controls the absolute regulation of prices for all goods or things. It regulates
prices while the nation is through an economic crisis.

2. Complete Employment

Employment should be the top priority in every nation that needs to better its economic situation.
India has the highest number of young people, which increases the likelihood of development.

3. Economic Growth

Specific fiscal policy initiatives can boost the nation’s growth rate and aid in meeting its needs. The
establishment of heavy industries like steel, chemicals, fertilisers, and industrial machinery is one
way the government promotes economic growth.

Tools of Fiscal Policy or components of Fiscal Policy

Government Receipts

These government receipts take into account the government’s income, which has been achieved
through the collection of taxes, interest

 Capital Receipts

Capital Receipts are those receipts of the government which either create liability or cause any
reduction in the assets of the government. The major sources of capital receipts of the central
government are: Borrowings. Recovery of Loans and.

 Revenue Receipt

Revenue receipts are current income receipts from all sources such as taxes, profits of public
enterprises, grants, etc.

Government Expenditure

 Revenue expenditures

Revenue Expenditure is the part of government spending that does not result in the production of
assets. Salaries, wages, pensions, subsidies, and interest payments are all instances of revenue
expenditures.
 Capital Expenditure

Investments made by the government in capital to run or grow its operations and bring in more
money. Purchasing long-term assets, such as equipment, and purchasing fixed assets, which are
tangible assets.

New Education Policy

On 29th July 2020, the Union Cabinet of India approved the New Education Policy, which replaced
the old Education Policy of India. The NEP 2020 is based on a few fundamentals, such as Access,
Equity, Quality, Affordability and Accountability.

There have been three education policies after India got its independence, the NEP 2020 being the
newest addition to bring reform in the education sector.

The basic aim and objective of NEP 2020 are to make education universally accessible from primary
to secondary level by the year 2030. It helps in building a relationship between the learner and
society at large. Every child is special and has the right to get basic education, for which the
government should make better provisions.

As per the National Education Policy 2020, Exams will also be made ‘easier’. Students will be allowed
to take Board Exams twice in any given year, to eliminate the high stakes of board exams.

Principles of New Education Policy

• Spend money on public education.

• Improve education quality

• Introduce children to Indian culture.

• Do excellent research, teach good governance, and empower children

• Transparency in education policy

• Emphasize the usage of technology and evaluate

• Teach many languages

• Improve your child’s creativity and logical thinking.

Explain Aatmanirbhar Bharat Abhiyan ?

Aatmanirbhar Bharat Abhiyan is the mission started by the Government of India on 13th May 2020,
towards making India Self-reliant. The Hon'ble Prime Minister, Shri Narendra Modi announced an
economic package of INR 20 lakh crore as aid to support the country in the times of pandemic.

The aim is to make the country and its citizens independent and self-reliant in all senses. He further
outlined five pillars of Aatma Nirbhar Bharat - Economy, Infrastructure, System, Vibrant Demography
and Demand.

The Ministry of Tribal Affairs (MoTA) has been actively pursuing the Atma Nirbhar Bharat Abhiyan
and are self-generating for the tribal community of India.

MoTA with Sri Sri Institute of Agricultural Sciences and Technology (SSIAST) has launched its Centre
of Excellence for natural farming to making tribal farmers self-reliant. The project will train 10,000
tribal farmers in sustainable Natural Farming techniques and will introduce them to marketing
opportunities.

On Oct. 2nd 2020, MoTA and ASSOCHAM launched the 'Tribal Entrepreneurship Development
Program' a three year long initiative focused on socio-economic development of Tribal groups in
India. MoTA with FICCI Social Economic and Development Foundation undertook a study on Tribal
welfare and Entrepreneurship Development in Jharkhand with the focus of the study was to
understanding the present means of livelihood of the tribal community

Explain GST ?

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect
taxes in India such as the excise duty, VAT, services tax, etc

The advantage of having one single tax means every state follows the same rate for a particular
product or service. Tax administration is easier with the Central Government deciding the rates and
policies. Common laws can be introduced, such as e-way bills for goods transport and e-invoicing for
transaction reporting.

Components of GST

There are three taxes applicable under this system: CGST, SGST & IGST.

CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction
happening within Maharashtra)

SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction
happening within Maharashtra)

IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to
Tamil Nadu)
Features of GST

• Single tax on supply of goods & services

• Input Tax credit

• Efficient use of resources

• Maintenance of Records

• Reduce errors & increase efficiency

•Destination Based Tax

Explain Make in India ?

Make in India is a Government of India scheme launched by Prime Minister Narendra Modi in 2014
intended to boost the domestic manufacturing sector, entrepreneurship in India and also other
sectors.

Make in India’ has identified 25 sectors in manufacturing, infrastructure and service activities and
detailed information is being shared through interactive web-portal and professionally developed
brochures. FDI has been opened up in Defence Production, Construction and Railway infrastructure
in a big way.

The 4 pillars of the Make in India initiative are new thinking, new sectors, new infrastructure, and
new processes.

Make in India" had three stated objectives:

 To increase the manufacturing sector's growth rate to 12-14% per annum

 To create 100 million additional manufacturing jobs in the economy by 2022
 To ensure that the manufacturing sector's contribution to GDP is increased to 25% by 2022 (later
revised to 2025).