New conem'c, Refs oe a ‘Liberalisation, aye rivatisation and.” e Exot An Appraisal EARNING OBJECTIVES Lo OM 3.1. Introduction 3.6 Globalisation 3.2 Reasons for Economic Reforms 3.7 An Appraisal of LPG Policies 3.3 The New Economic Policy (Economic Reforms) 3.4 Liberalisation 3.8 Demonetisation 3.5 Privatisation 3.9 Goods and Services Tax (GST) 4 3.1 INTRODUCTION Since independence, India followed the mixed economic sy of the market economic system (cay (Socialist economy). ‘stem, by combining the advantages pitalist economy) with those of the planned economic system But in reality, the public sector dominated the control and regulation of our economy and private Sector was ignored. There was a huge investment in the public sector and very low investment in the private sector. The dominance of public sector for about 4 decades led to establishment of various rules and laws, which hampered the process of growth and development. According to some scholars, the increasing role of public sector has helped Indian economy to: (i) Achieve growth in savings; (ii) Develop a diversified industrial sector; and (iii) Achieve food. |security through sustained expansion of agricultural output. 4.3.2 REASONS FOR ECONOMIC REFORMS. The economic condition of India in the year 1991 was very miserable. It was due to the cumulative effect of number of reasons. Let us discuss the various reasons, which aroused the need for making major economic reforms in the country: 1. Poor Performance of Public Sector: In the 40 years Period (1951-90), public sector was assigned an importantrole to work for the economic development of India. However, except for few public enterprises, the overall performance was very disappointing, Ree Poor Performance of Public Sector Deficit in Balance of Payments Inflationary Pressures Fallin Foreign Exchange Reserves Huge Burden of Debts, Inefficient Management 34Considering the huge losses incurred by a good number pe Public secto, Government recognised the need for making, neon, 5s forms. Deficit in Balance of Payments (BOP): Deficit in Bor arises when forei med imports exceed foreign receipts from exports. Even afterimposing heavy tari, arag quotas, there was a sharp rise in imports. On the other hand, there w, a8 slow i i i i Bro exports due to low quality and high prices of Indian goods in the international < a My T entey a x ° . Inflationary Pressures: There was a consistent rise in the general price level ; ; I the eg, due to increase in money supply and shortage of essential goods. . . Fall in Foreign Exchange Reserves: Foreign Exchange Reserve (also ter Resernes or FX Reseros) ae external aes like convertible foreign currencies, cag Drawing Rights, ec.) held bythe Central Bank for direct financing ofexternal payment, nba’ 11991, foreign exchange reserves ello the lowest lev eland ited tothe foreign exchae crisis in the country. Foreign exchange reserves declined to a level that was not adequg * To finance imports for not more than two weeks; and * To pay the interest that needs to be paid to international lenders. Moreover, no country or international funder was willing to lend to India Huge Burden of Debts: The expenditure of the government was much hi Asa result, government had to borrow money from banks, public and financial institutions. med as igher than reveny. from internation, 2 ._ Inefficient Management: The origin of the financial crisis can be traced management of the Indian economy. * The governmenthad to generate surplus revenue to meet challenges like unemploymen, poverty and population explosion. However, there was no additional revenue duets continuous spending on development programmes by the government. Moreov government was not able to generate sufficient revenue from internal sources suchss taxation, running of public sector enterprises, etc. * Government expenditure be; became unsustainable. from the ineffiey 'gan to exceed its revenue by such large margins that * At times, the foreign exchange borrowed from other countries and internation! financial institutions was spent on meeting consumption needs. Moreover, neithe any attempt was made to reduce such profligate or reckless spending nor suffices attention was given to boost exports to pay for growing imports. (a of 1991 Forced India for Financial help from IMF and World Bank > To manage the economic crisis of 1991, Indian Government approached for loan from: a and Development (IBRD), popularly known as W truction and development); and * Intemational Monetary Fund (IMF) (to avail short-term loans to solve Balance of PAY problem). India aouiled $7 bilion loan from these agencies as loan. Dr. Manmobat Singh was the Ini Finance Minister in 1991 and he was reer awa Breatly acknowledged for his capabilities to stee the economic crisis looming large on the Indian Eeonont| sation, Privatisation and Globalisation: nw -wr Chapt eee SSS i P the et or aoailing the loan, these international agencies expected India toliberalise ‘and open up —Ffemoving restrictions on the private sector; + Reducing the role of the government in many areas; and + Removing trade restrictions. india agreed to the conditions of World Bank and IMF and ann conomy by; ounced the New Economic Polic 3 THE NEW ECONOMIC POLICY “ omic Poli ) was announced in July 1991. Lo deer ean mai aio the policy wa fo crete more competisvee” jn the economy and remove the barriers to entry and growth of firms. ‘The New Economic Policy can be broadly classified into two kinds of measures: 1, Stabilisation Measures: They refer to short-term measures which aim at 3 (i) Correcting weaknesses of the balance of payments by maintaining sufficient foreign exchange reserves; and (i) Controlling inflation by keeping the rising prices under control. 2. Structural Reform Measures: They refer to long-term measures which aim at: (i) Improving the efficiency of the economy; and (ii) Increasing international competitiveness by removing the rij segments of the Indian economy. Warsi Policies of New Economic Policy ‘The government initiated a variety of policies which fall under three heads: A iberalisation AGlobalisation rivatisation Liberalisation, Privatisation and Globalisation or ‘LPG’ are the supporting pillars, on which the structure of new economic policy of our Government has been erected and implemented since 1991. It consisted of wide range of vironment ies in various SU OCU Peeled tac} Economic Reforms of 1991 are often described as the New Econ. inplace of the policy of LOP. * eae * Liberalisation (L) instead of Licensing () for industries and trade, « Privatisation (P) instead of Quotas (Q) for industrialists, Globalisation (6) instead of Permits (P) for exports and imports. Leechs (Refers to 1 a bee removal of Entry and Growth | | (Refers to transfer of Globalisation * |__Rstictions onthe Private Sector) ‘management and control of Public (Refers ‘o integrating the National 5 Sector to Private Sector) Seenomy with Wd Economy) } Let us discuss them one by one.SS 43.4-LiBE RALISATION ae Prior to 1991, there were numerous government See Fn acs rs the areas F lice, impor and export rade, dealingsin foreign exchange, te Ta July FN tE OF gael reforms was announced, which marked the begmming Obiprocess of ‘Li eralisation, ing’ Liberalisation means removal of entry and growth restrictions on the private Sectop\ Mt * Liberalisation involves deregulation and reduction of government contro}; a autonomy (freedom) of private investment, to make economy more competitive * Under this process, business is given free hand and is allowed to run on commercial (+ The purpose of liberalisation was: ‘ ling + To unlock the economic potential of the country by encouraging Private sector multinational corporations to invest and expand; and * To introduce much more competition into the economy and cTeating, incentives fa increasing efficiency of operations. > Fhe économic reforms taken by the Government under liberalisation include the follo «< (i) Industrial Sector Reforms Gv) Foreign Exchange Reforms "® (ii) Financial Sector Reforms (v) Trade and Investment Policy (iii) Tax Reforms Reforms Let us now discuss each reform in detail. istrial Sector Reforms In order to make necessary reforms in the industrial sector, the Government introd: industrial policy on July 24, 1991. The se ee huced its ney arious measures under industrial policy reforms ince oo 5 *re: (i) Distillation and brewing of alcoholic drinks; (ii) Cigars and cigarettes of tobacr and manufactured tobacco substitutes; ii) Electronic Aerospace and Gv) Industrial explosives; (v) Specified Hazardous chemicals © licences were needed (i) To set up new units; or (ii) Expand or diversify the existing line-of manufacture, ea compulsory licensing is required for the above mentioned 5 industries on account of environmental, safety and strategic considerations, ‘ narDecenn in role of Public Sector: One of the striking features. Was the substantive reduction “in the role of the public sector in the future industrial development of the country. Unde fnew Heonomc Foley smumnber ot induatied served ee eaiite coca wae ete Oe di just three ‘in 2010-11) namely Atomic Energy; Railways and Defence Equipments.»)\ 7>— 3 — ——> defence equipments g g a 3 & o g E 5 Z g § z ie és fF aie dustries’Many goods produced by small sa industries were de-reservedliin many industrigS-the mrket vas allowed to determin® the prices through forces of the markeb\and not by directive policy of the government) A Monopolies and Restrictive Trade Practices (MRTP) Act: With the introduction # iMberalizatlonendlexpansion schemes} turer ieee large companies, to seek P™approval for expansion, establishment of new undertakings, merger, amalgamations, etc, were eliminated {MRTP Act has been replaced by Competition Act, 2002, which is more liberal. The Comy ‘was amended by the Competition (Amendment) Act, 2007 and again by the Competition (Amendment) Act, 2 _Birfancial Sector Reforms: Financial sector includes financial institutions like commercial banks, investment banks, stock exchange operations and foreign exchange market. The financial sector in India is controlled by the Central Bank - Reserve Bank of India (RBI). RBI is known as the apex (supreme) body as it occupies the top most position in the monetary and banking system of the country. RBI decides the amount of money (i.e. deposits) that the banks can keep with themselves, fixes interest rates and nature of lending to various sectors. me introduced under financial sector are: AC Change in the Role of iS role of RBI was reduced from regulator to facilitator of financial sector. Asa result, financial sector was allowed to take decisions on many matters, without consulting the RBL . Asa regulator (prior to liberalisation), RBI used to fix interest rate structure for the Commercial Banks. After changing the role as a facilitator (post-liberalisation), RBI now facilitates the free market forces to act accordingly. In the post liberalisation era, greater autonomy has been ensured for financial institutions for their functioning. _—-X Origin of Private B: reform policies led to the establishment of private sector banks, Indian as well as foreign) For example, Indian banks like ICICI and foreign banks like HSBC increased the competition and benefitted the consumers through lower interest rates and better services. S. Increase in imit of Foreign investment{ The limit of foreign investment in banks was raised to around, so korcien Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds were now allowed to invest in Indian financial markets) Though banks have been given permission to generate resources from India and abroad, certain aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation. \4eFisse in Expansion Proce: ‘were given freedom to set up new branches (after fulfillment _f certain conditions) without the approval of the RBI “Tax Reforms : Tax. reforms refer to reforms in “fe taxation and public expenditure policies, which are collectively known as its “Fiscal Policy) Taxes are of two types: Direct Taxes consist of taxon incomes of individuals as well as profits of business enterprises. For example, Income tax, (taxes on individual incomes) and Corporate tax (taxes on profits of companies). «_Iffdirect Taxes refer to those taxes which affect the income and property of persons through their consumption expenditure. Indirect taxes are generally imposed on goods and services. For example, Goods and Services Tax (GST). Meme:e major Tax Reforms made are: ae TE ional ee eee 2 Tee tion in i i it reason for tax evasion) It income and corporate tax as high ta rates were an importan' Siete is now widely accepted that moderate rates of income tax encourage ry ( Foresters Pepa eee eee and welfare expenditure of government.) owever a 2. Reforms in Indirect Taxes: Considerable reform have been made in dines tn facilitate establishment of common national market fr goods — 3. Simplification of Proc In order to ge better compliance on ‘Part of taxpayers, many procedures have been simplif a The Goods and Sava Te (6ST Acton passed the PANES oR i omy nd introduce a unified indirect tax system in India. The Act came into effect on 1' July, 2017. GST has been successful in generating additional revenue for the government, reducing tax and creating ‘one nation, one tax and one market \foréign Exchange Reforms The important reforms made in the foreign exchange market are: ~1-Devaluation of Rupee:(Devaluation refers to deliberate reduction, in the value of domestic currency vis-a-vis any irrency by the government of a count Toor Balance of Payments crisis in 1991, the rupee was deyalued against foreign caren led to an increase in the inflow of foreign \e Market Determination of Exchange Rate:(The Government allowed rupee value to be free 4 from its control. Asaresult, market forces of demand and supply determine the exchange + 4ébavalue of the Indian rupee in terms of foreign ri SK : Trade and Investment Policy Reforms £ Before 1991, a lot of restrictions (high tariffs and quotas) were im, on imports to protect the domestic industries. However, this protection reduced the efficiency and competitiveness of domestic industries and led to their slow growth. So, the reforms in the trade and investment policy were initiated: + To increase the international competitiveness of industrial production. + To promote foreign investments and technology into the economy. * To promote efficiency of local industries and adoption of modern technologies, FC important trade and investment policy reforms include: 4-Removal of Quantitative restrictions on Imports and Exports{Under the New Economic Policy, quantitative restrictions on imports and exports were greatly reduced ‘or example, quantitative restrictions on imports of manufactured consumer and agricultural Products were fully removed from April 2001. _2-Removal of Export Duties Export duties were Temoved to increase the ‘competitive position of Indian goods in the international markets.)Chapter 3. © Libers 4-Relaxation in Import Licensing system(The Import licensing was abolished, except in case of hazardous and environmentally sensitive industries. This encouraged domestic industries to import raw.materials at better prices, which raised their efficiency and made, them more competitive, Another important feature of new economic policy was the promotion of the policy of *Privatisation’. A 3.5 PRIVATISATION “Privatisation refers to shedding of the ownership or management of a government owned enterprise) Gourrmmtnt € EGE chon Compo Privatisation implies greater role of the private sector in the economic activities of the country. a Over the years, Indian Government has diluted its stake in several public enterprises, including, IPCL, IBP, Maruti Udyog, ete. _Pritgtisation can be done in two ways: 1 Put acetoe 9% —? Govermrunt For’Argumentsin se tear ee Privatisation’ weler Power Booster Section. rien "The government also made attempts to improve the efficiency of public sector undertakings by giving them autonomy in taking managerial decisions. + For instance, some PSUs have been granted special status as navratnas and miniratnas. inorder to infuse professionalism and enable PSU's to compete more inthe liberalised {global environment, government started granting 'Navratnas’ status to PSUS. \(They were given greater managerial and operational autonomy in taking various decisions, to | Syur'the company efficiently and to increase their: | _ A -Demonetisation is viewed as a tration Cash holdings arising from i Jaclared income was readily deposited in banks and exchanged for new notes. However, (ee holding black money had to declare their unaccounted wealth and pay taxes at 2 Todicake ty rate.) A ieee interpreted as a shift on the part of government indicating that Tax. ‘on will no longer be tolerated or accepted) Crows _-4(Demonetisation also led to channelizing savings into the {formal financial system) Though, eh of the cash deposited in the banking system is bound to be withdrawn. But, some Of the new deposits schemes offered by the banks will continue to provide base loans, at lower interest rates. 48. mnetisation also aims to create a less-casit OF csi sono) ie, channeling more formal financial system and improving taxompliance. savings through the Jac * However, digital transactions require internet connectivity as they need cell phones ji for customers and Point-of-Sale (PoS) machines for merchants. “or Qy On the contrary, these disadvantages are counterbalanced by an understanding that it financial saving and reducing "3 helps people into the formal economy, thereby increasing tax evasion.|} Impact of Digitalization Digitalization has broadly impact three sections of society: 1. The poor, who are largely outside the digital economy; 2. The less affuent, who are becoming part ofthe digital economy have been covered under Jan Dhan Accounts and RuPay cards; and i 3. The affluent, who are fully conversant with digital transactions. inipact of Demonetisation _leMoney/Interest rates | 1, Decline in cash transactions. ii, Bank deposits increased. ili, Increase in financial savings. i 2, Private wealth Declined since some high demonetised notes were not returned and real estate prices fell. -3-Public sector wealth | No effect. _BeDisitization Digital transactions amongst new users and use of RuPay Cards and Aadhar Enabled Payment System (AEPS) increased. Demonetisation has increased the popularity of e-wallets. “B. Realestate Prices declined. Taxcollection Rise in income tax collection because of increased disclosure. ‘A 3.9 GOODS AND SERVICES TAX (GST) GST or “Goods and Ser Tax” is a comprehensive Indirect Tax which has replaced many direct Taxes in a 5 Goods and Services Tax Act was ct 3 passed in the Parliament on_29" : ou in, effect on 1° July, 2017,)It is a comprehensive, multi-stage, tion-based tax that is levied on every value pal GST has been identified as one of t important tax reforms post-independence. March, 2017. The at each stage of value addition and ; : in the previous stages of value chain through the tox ee ote sets the levy on inputs+ The last dealer in the supply chain passes on the added GST to the consumer, making GST a destination-based consumption tax. + The provision of availing input credit at each stage of value chain helps in avoiding the cascading effect (tax on tax) under GST, which is expected to reduce prices of commodities and benefit the consumers. CAST & SST Ge Tmmplernudrc ‘Types of Taxes under GST On THbna- Shute THOM tac er ‘The types of taxes levied under GST are: otis ‘entral Goods and Services Tax.(CGST): It is the GST levied on the “Intra-State’ supply of goods or services by the Centre. 9% _ \Giy’State Goods and Services Tax (SGST):It is the GST levied on the ‘Intra-State’ supply of goods or services by the State (including Union Territories with legislature). 5 7 \. (ii~Integrated Goods and Services Tax (IGST):|tis the GST levied on the ‘Inter-State’ supply of goods or services and is collected by the Centre. IGST is equivalent to the sum total of CGST and SGST. \BY, TOST Wy teaplumnunt d m Int - Sete AemeFactsaboutsst Thommalins qe] L2ASLs [Ouija \a-Single Tax Structure(GsT aims to @ multiple taxes into one single tax across the country and make goods uniformly priced across India)Though, in this process, some goods become costly and some become cheaper. —2-Fffect on Prices(With the implementation of GST, luxury goods have become costlier, while items of mass consumption have become cheaper. ~4< Consumption Based reget is a ‘Consumption Based Tax’, i.e. the tax is received by the state in which the goods or services are consumed and not by the state in which such goods are Sear Bak example, if a product is manufactured in Tamil Nadu and travels through the country before it reaches Delhi, where the buyer or consumer pays tax forit. Both the Centre and the State have their share in this tax. 4, Invoice Matching: The Indian GST will have a mechanism of matching of invoices. Input ‘Tax Credit of purchased services and goods will be available only when the inward supply details filed in by buyer matches the outward supplies details filed in by supplier. GST network is a self-regulating mechanism, which not only checks tax frauds and tax evasion, but also brings in more and more businesses into the formal economy. 5. Anti-Profiteering Measure: It is one of the key features of the recently implemented GST law. These measures prevent entities from making excessive profits. As per the Anti- Profiteering rules, the benefit of reduced GST tax rates and increased input tax credit should be passed on to the consumer in the form of reduced price. A National Anti-Profiteering ‘Authority (NAA) has been constituted for efficient administration of these provisions. wa Regeitien under GST{A business whose aggregate turnover ina financial year exceeds %20 lakhs has to compulsorily register under Goods and Services Tax}This limit is set at %10 lakhs for North Eastern and hilly states flagged as special category states. ) As per Budget Estimates 2023-24, GST ‘collection is expected to be % 9,56,600 crores.me Indian Economic Development ~—Tnput Tax Credit under GST input Tax Credit means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods are supplied toa taxable person, the GST charged is known as Input Tax) The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods and /or services and can set off this credit against the GST payable on the supply of goods and services to be made by him. Thus, the final consumer bears the GST charged by the last supplier in the supply chain, with set-off benefits at all the previous stages. Hence, the tax will be levied only _oncthe value added, which results in avoiding double taxation. (For example, if tax payable by a manufacturer on the output, ie. final product is € 450 and he has already paid tax of ¥ 300 on input, i.e. purchases, then he can claim ‘Input Credit’ of & 300 and he needs to deposit only & 150 in we) INPUTS (A Band) paid on purchase of ® k input A=%70 GST paid on purchase of GsTon input B= 130 Output =% 450 GST paid on purchase of input C= 100, eS Features of GST \AAPplicability of GST: The territorial spread of GST is the whole country. 2. Applicable on Supply of Goods and Services: GST is applicable on the ‘supply’ of goods or services as against the earlier concept of tax on the manufacture or sale of goods or on the provision of services. \e7Consumption Based TTaxiltis based on the Principle of destination-based consumption tax against the earlier principle of origin-based taxation.Chapter 9 = serene west on Briers eared of goods and services is treated as i be subject to IGS’ ition to the applicable customs dut _-5 GST Rates: CGST, SGST and IGST are levied at rates mutually agreed upon by the Centre and the States under the aegis of the GST Council There are four tax slabs namely,5%, 12%, 18% and 28% for all goods or services. Exports and supplies to SEZ are zero-rated. fayment of GST: Chere are various modes of payment of tax available to the taxpayer, including Internet banking, debit/credit card and National Electronic F (NEFT)/Real Time Gross Settlement (R GST Council Goods and Services Tax Council is a constitutional body for mi Union and State Government on issues related to Goods and Services Tax. _ Constitution: As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members: _ Chairperson: Finance Minister. | “Vice Chairperson: Chosen amongst the Ministers of State Government. | S+-Members: MoS (Finance) and all Ministers of Finance / Taxation of each State. | \_2-Ouorum:50% of the total number of Members of the Goods and Services Tax Council shall constitute the quorum at its meetings. \_s Majority required for taking Decisions: Every decision of the GST Council shall be taken Fa meeting, by a majority of not less than 75% of the weighted votes of the members present and voting, in accordance with the following principles, namel; \2-Wote of the Central Government shall have a weightage of one-third of the total votes er-State supplies and would aking recommendations to the cast, and \2-Afotes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast, in that meeting.