Unit-6 Economic Policies and Indian Foreign Trade Policy

Legal and Business Environment
18MBA24
UNIT-6
ECONOMIC POLICIES AND INDIAN FOREIGN TRADE POLICY
5/1/2020Prof. Kiran Kumar M., East West Institute of Technology., Dept. of MBA.,
1
Online Learning Session - 9

Learning Outcome
 Understanding Economic Policy and Its Objectives.
 Understanding Fiscal Policy- objectives and Instruments.
 Understanding Union Budget and Its Sources.
 Learning about Taxes and Role of government.
 Understanding Monetary Policy- Money and Money Supply.
 Understanding Monetary system in India.
 Learning about Tools for Credit control.
2

Economic Policies
 Governments generally accept the view that their key role is to create
appropriate public policies that promote economic growth. Experience has
proved that healthy economic growth is affected by many factors, thereby
requiring continuing efforts by government policies that encourage investment,
foster technology development, provide key services and create a capable
workforce through education and training each year dozens of laws are
proposed by legislature to improve the nation’s business climate and promote
economic growth.
Objectives of economic policy:
 To achieve faster economic growth.
 To reduce inequalities of economic and wealth.
 To achieve full employment.
 Price stability.
 Balance of payments equilibrium.
3

Fiscal Policy
 Fiscal policy is the government's schedule for spending and tax
implementation to influence the economy for the year. The fiscal policy is
concerned with the raising of government revenue and incurring of
government expenditure. To generate revenue and to incur expenditure,
the government frames a policy called budgetary policy or fiscal policy.
 According to G.K. Shaw, fiscal policy is a policy to encompass any decision
to change the level, composition and timing of government expenditure or
to vary burden, structure or frequency of tax payment.
4

Objectives & Instruments Of Fiscal Policy
 Full employment
 Price stability
 Accelerating the rate of economic
development
 Optimum allocation of resources
 Equitable distribution of income and
wealth
 Economic stability
 Capital formation and growth
 Encouraging investment
5
 Taxation.
 Public Borrowing.
 Forced savings or Deficit Financing.
 Public Expenditure.

Union Budget
 Definition: According to Article 112 of the Indian Constitution, the Union
Budget of a year, also referred to as the annual financial statement, is a
statement of the estimated receipts and expenditure of the government
for that particular year.
 Description: Union Budget keeps the account of the government's finances
for the fiscal year that runs from 1st April to 31st March. Union Budget is
classified into Revenue Budget and Capital Budget.
6

Allocation of Resources between the
Union and the State Governments
 Union Sources of Revenue:
 Taxes on income other than agricultural income
 Corporation tax
 Customs duties (except those on alcoholic liquors and narcotics)
 Estate and succession duties other than on agricultural lands
 Taxes on the capital value of assets (exclusive of agricultural land) of individuals and
companies
 Rates of stamp duty in respect of certain financial documents
 Taxes (other than stamp duties) on transactions on stock exchanges and futures markets
 Taxes on sales and purchases of newspapers and on advertisements, therein
 Taxes on railway freights and fares
 Terminal taxes on goods or passengers carried by railway, sea, or air
 Taxes on the sale or purchase of goods in the course of interstate trade.
7

Allocation of Resources between the
Union and the State Governments
 Sources of State Governments:
 Land revenue
 Taxes on the sale and purchase of goods, except newspapers
 Taxes on agricultural income
 Excise duties on liquors, opium, and other narcotics, and drugs
 Taxes on land and buildings
 Irrigation duties
 Succession duties and estate duty on agricultural land
 Taxes on betting and gambling entertainment and amusement
 Taxes on animals
 Taxes on professions and trades
 Taxes on road vehicles
 Taxes on consumption of electricity
 Taxes on the entry of goods into a local areas
 Tolls
8

Taxes
 Taxation is the central part of public finance in modern times. It is regarded
as the single biggest source of public revenue throughout the world. Indian
tax structure was highly disturbed by exigencies of World Wars.
 The tax system which emerged from war time manipulation of public
finance was haphazard and no attempt was made for eliminating its
repressive nature. After independence, Government of India realized the
importance to reorient tax system to fulfil requirements of developmental
planning.
 Taxes have been classified in the following ways on different bases like
form, nature, aim as well as methods of taxation. Most important
classifications are as follows:
9

Proportional, Progressive, Regressive and
Digressive Taxes
 Proportional Taxes: Taxes in which rate of tax remains constant, through the
tax base changes are called proportional taxes.
 Progressive Taxes: Progressive taxation implies that rate of taxation should
increase with increase in income, i.e., higher the income, higher should be
rate of tax.
 Regressive Taxes: Where rate of tax decreases or tax base increase, taxes
are called regressive taxes.
 Digressive Taxes: Taxes which are mildly progressive, hence not very steep,
in such away that high income earners do not make a due sacrifice on the
basis of equity are called digressive.
10

Specific and Ad Valorem Taxes
 Specific Taxes: Specific taxes are generally assessed on the weight, number
or volume of commodity taxed.
 Ad Valorem Taxes: Taxes which are levied entirely on the basis of money
value of goods are called ad valorem taxes. Thus, price of every grade of
article is to be verified before the levy of tax.
 Direct Taxes: Direct tax is a tax which is paid by a person upon when it is
legally imposed and burden of which cannot be shifted to pay any other
person is termed on direct tax.
 Indirect Taxes: Indirect taxes are a taxation system, burden of which can
be shifted to others. Alternatively, indirect taxes are those which are
demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another.
11

Role of Government
 Developing nations face with the core problem of a rapid rise in capital
formation, so savings and investments should be promoted. Taxation system
is helpful to mobilise resources. Under economic planning in a mixed
economy, government assumes the role of an entrepreneur.
 So, government should mobilise more and more resources to undertake
public sector investments. Thus, for mobilisation of resources, both direct
and indirect taxes are significant.
 Direct Tax
 Indirect Tax
12

Money
 In ordinary usage, -what we use to pay for things is referred to as money. Thus,
the rupee in India, the pound in England, the dollar in U.S.A. is money. Thus, it is
still an unresolved issue of monetary economics. Broadly, these are two
approaches to define money, viz.,
 1. The Traditionalists’ approach
 2. Empiricists’ approach
 M1 = Currency with public, i.e., coins and currency notes + demand deposits of
public (narrow money).
 M2 = M1+ Post office saving deposits.
 M3= M1+ Time deposits of public with banks, Broad Money.
 M4 = M3 + Post office deposits of various maturities with post offices in addition
to saving deposits.
13

Measures of Money supply
 Money Supply or Narrow Money M1
 It is narrow measure of money supply as clarified above and is comprised of
following items:
 M1 = C +DD + OD.
 Where,
 C = Currency with public.
 DD = Demand deposits with public.
 OD — Other deposit with public.
 Money Supply M2
 Apart from three items of M1, concept of money supply M2 comprises savings
deposits with post office savings bank. Hence, M2 = M1 + Savings deposits with
post office savings bank.
14

Measures of Money supply Cont.
 Money Supply M3
 It is termed as Broad Money. Along with items of M1 net time deposits of
banks are also included in M3 and it was called aggregate monetary
resource (AMR). Hence,
 M3 = M1+ Net time deposits of banks.
 Money Supply M4
 Measures M4 of money supply comprises not only all items of M3 explained
above but also total deposits with post office savings deposits excluding
contributions by public to national savings certification. Hence,
 M4 = M3+ Deposits of post office savings deposits.
15

Monetary System in India
 India is engaged in the process of economic development and thus
monetary policy of R.B.I. must be development oriented. Its major aim
should be mobilisation of productive resources on a large-scale and also
efficient allocation of resources. To achieve high rate of capital formation
monetary authority should stimulate savings and canalize them into
productive investment. Alternatively, monetary policy has to be operated
for sustained and accelerated economic growth.
 According to the R.B.I. Act, 1934, object of set up banking system is for
regulation of bank notes and maintaining reserve to secure monetary
stability. It is only a single aspect of the R.B.I., i.e., regulatory role. But after
the planning period, i.e., since 1951 R.B.I. also performing promotional role
along with its regulatory function.
16

Tools for Credit Control:
 Quantitative Method:
 Bank Rate
 Open Market Operations
 Variable Reserve Ratios
 Qualitative Method
 Margin Requirements
 Credit Rationing
 Regulation of Consumer Credit
 Moral Suasion
17

Effectiveness of Credit Control Measures
 The effectiveness of credit control measures in an economy depends upon
a number of factors. First, there should exist a well-organised money market.
Second, a large proportion of money in circulation should form part of the
organised money market. Finally, the money and capital markets should be
extensive in coverage and elastic in nature.
 Extensiveness enlarges the scope of credit control measures and elasticity
lends it adjustability to the changed conditions. In most of the developed
economies a favourable environment in terms of the factors discussed
before exists, in the developing economies, on the contrary, economic
conditions are such as to limit the effectiveness of the credit control
measures.
18

Summary
 Understood Economic Policy and Its Objectives.
 Understood Fiscal Policy- objectives and Instruments.
 Understood Union Budget and Its Sources.
 Learnt about Taxes and Role of government.
 Understood Monetary Policy- Money and Money Supply.
 Understood Monetary system in India.
 Learnt about Tools for Credit control.
19

Legal and Business Environment
18MBA24
UNIT-6
ECONOMIC POLICIES AND INDIAN FOREIGN TRADE POLICY
20
Online Learning Session - 10

Learning Outcome
 Understanding Structure of Banking system.
 Understanding RBI and its function.
 Understanding Banking Structure reforms- Naraasimham Committee
Recommendation.
 Learning about India Foreign trade policy.
 Understanding Objectives, Features and Policy of 2015-2020- salient features
21

Banking structure in India
 There are multiple layers in today’s banking structure to cater to the
specific and varied requirements of different customers and borrowers. The
structure of banking in India played a major role in the mobilization of
savings and promoting economic development.
 In the post-financial sector reforms (1991) phase, the performance and
strength of the banking structure improved perceptibly. Financial soundness
of the Indian commercial banking system compares favorably with most of
the advanced and emerging countries.
 Indian banking industry has been divided into two parts, organized and
unorganized sectors. The organized sector consists of Reserve Bank of India,
Commercial Banks and Cooperative Banks, and Specialized Financial
Institutions (IDBI, ICICI, IFC etc.).
22

23

Reserve Bank of India
 The Reserve Bank of India came into existence in the year 1935 simply as a
shareholder’s bank. But, later on 1949, it was nationalized with the object of
efficient coordination of monetary economic as well as financial policies. It
performs both traditional as well as regulatory functions.
 However, in 1951 when our country implement planning era, objectives of
the R.B.I. underwent an absolute change so that it can make effective role
for all round economic advancement of our country changes in our
economy.
 Hence to attain our predetermined economic objectives close
coordination between monetary and fiscal policy is mandatory so that they
can act as complementary with one another instead of competitive
nature.
24

Functions of R.B.I.
 A. Traditional Central Banking
Function
 Monopoly Issue of Currency Notes
 Banker to the government
 Exchange Management and Control
 Controller of Credit
 Banker’s Bank
 Agricultural Finance
 Collection and Publication of Data
25
B. Promotional Function
 National Rural Credit (Stabilisation) Fund.
 National Industries Credit (Long-term Operations) Fund.
 National Housing Credit (Long-term Operations) Fund.
 National Rural Credit (Long-term Operations) Fund.
C. Supervisory Function
• Licensing and establishment.
• Branch expansion.
• Liquidity of their assets.
• Management and methods of working.
• Amalgamation.
• Reconstruction.
• Liquidation.

Banking Sector Reforms
 Certain recommendation were given by the Chakravarty Committee in the
year 1985 for the purpose of development of Indian banking sector. In the
year August 1991, again Government of India appointed a committee on
financial system under the Chairmanship of M. Narasimham and submitted
its report within three months.
 Further, government also appointed a committee as Banking Sector
Reforms under Chairmanship of M. Narasimham and delivered its report in
April 1998.
 Following are some strategies of Banking Sector Reforms:
 Rehabilitation of Public Sector Banks
 Reduction in SLR and CRR
 Prudential Regulation and Supervision
 Deregulating Interest Rate
 Directed Credit Systems
26

Narsimham Committee Report I (1991)
 The Narsimham committee was setup by Mr. Manmohan Singh on 14th
August 1991.
 A nine member committee was setup under the chairmanship of Mr. M.
Narsimham, former Governor of RBI.
 The committee submitted its report in November 1991, passed by
parliament on 17th Dec. 1991.
 Recommendations on:
 Structure of banks
 Organisation of banks
 Functions of banks
 Procedures.
27

Narsimham committee Report I (1991)
Cont.
 Structural reorganization of banks- substantial reduction. Freedom
to foreign banks to open offices- as branches or subsidiaries. Special
tribunal for recovery of loans- granted by banks.
 Statutory Liquidity Ratio(SLR) & Cash Reserve Ratio(CRR).
 -SLR should be reduced from present 38.5% to 25% over next 5 years.
 -CRR should be reduced from present 15% to 3-5%.
 Removal of duality of control over bank- only RBI should control, not
banking division of ministry of finance.
 Adoption of uniform accounting practices- full disclosure of assets and
liabilities as per international accounting standards.
28

Narsimham committee Report II
(1998)
 The Narsimham committee was made by Mr. P Chidambaram in1997.
 Committee submitted report to finance minister Mr. Yashwant Sinha in April
1998.
 It was known as committee on Banking sector reforms. Mainly focused on:
 Capital Adequacy Ratio(CAR).
 Size of banks.
 Review progress and implementation of reforms.
29

Narsimham committee Report II
(1998) Cont.
 Greater Autonomy in banking in both Ownership and management.
 Reformation of role of RBI.
 - Segregate regulatory and supervisory role of RBI.
 - Withdraw its day treasury bill from market.
 Stronger banking system by merger of strong banks.
 Capital Adequacy Ratio and tightening of provisioning norms.
 -Raising the CAR to 9% by 2000 and 10% by 2002.
 Non Performing Assets.
 - Need for “zero” NPA for all Indian banks.
 -Creation of Asset Reconstruction Funds to take over the bad debts.
 Need for more computerization process in banks.
30

India’s Foreign Trade Policy (FTP)
 India’s Foreign Trade Policy (FTP) provides the basic framework of policy and
strategy for promoting exports and trade. It is periodically reviewed to adapt to
the changing domestic and international scenario.
 The Department is also responsible for multilateral and bilateral commercial
relations, special economic zones (SEZs), state trading, export promotion and
trade facilitation, and development and regulation of certain export oriented
industries and commodities.
 The current Foreign Trade Policy (2015-20) focusses on improving India’s market
share in existing markets and products as well as exploring new products and
new markets. India’s Foreign Trade Policy also envisages helping exporters
leverage benefits of GST, closely monitoring export performances, improving
ease of trading across borders, increasing realization from India’s agriculture-
based exports and promoting exports from MSMEs and labour intensive sectors.
31

Objectives of India’s
Foreign Trade Policy 2015-20
 FTP 2015-20 provides a framework for increasing exports of goods and services as well as
generation of employment and increasing value addition in the country, in line with the
‘Make in India’ programme.
 The Policy aims to enable India to respond to the challenges of the external environment,
keeping in step with a rapidly evolving international trading architecture and make trade
a major contributor to the country’s economic growth and development.
 To arrest and reverse declining trend of exports is the main aim of the policy. This aim will
be reviewed after two and half years.
 Simplification of the application procedure for availing various benefits.
 To set in motion the strategies and policy measures which catalyze the growth of exports.
 To encourage exports through a mix of measures including fiscal incentives, institutional
changes, procedural rationalization and efforts for enhance market access across the
world and diversification of export markets.
32

Highlights of Foreign Trade policy
2015 - 2020
 Increase exports to $900 billion by 2019-20, from $46 billion in 2013-14.
 Raise India's share in world exports from 2% to 3.5%.
 Merchandise Export from India Scheme (MEIS) and Service Exports from India Scheme
(SEIS) launched.
 Served From India Scheme (SFIS) will be replaced with Service Export from India Scheme
(SEIS).
 For grant of rewards under MEIS, the countries have been categorized into 3 Groups,
whereas the rates of rewards under MEIS range from 2 per cent to 5 per cent. Under SEIS
the selected Services would be rewarded at the rates of 3 per cent and 5 per cent.
 FTP to be aligned to Make in India, Digital India and Skills India initiatives.
 Duty credit scrips made freely transferable and usable For payment of custom duty, excise
duty and service tax.
 Export promotion mission to take on board state Governments
 Unlike annual reviews, FTP will be reviewed after two-and- Half years.
33

2015 – 2020 Cont.
 Higher level of support for export of defence, farm Produce and eco-friendly products.
 Nomenclature of Export House, Star Export House, Trading House, Premier Trading House
certificate changed to 1,2,3,4,5 Star Export House. The criteria for export performance for
recognition of status holder have been changed from Rupees to US dollar earnings.
 Online procedure to upload digitally signed document by Chartered
Accountant/Company Secretary/Cost Accountant to be developed.
 Validity period of SCOMET export authorization extended from present 12 months to 24
months.
 Chapter-3 incentives extended to units located in SEZs.
 Export obligation under EPCG scheme reduced to 75% to Promote domestic capital
goods manufacturing.
 E-Commerce exports of handloom products, books/periodicals, leather footwear, toys and
customized fashion garments through courier or foreign post office would also be able to
get benefit of MEIS (for values up to INR 25,000).
34

2015 – 2020 Cont.
 Inter-ministerial consultations to be held online for issue of various licences.
 No need to repeatedly submit physical copies of documents available on
Exporter Importer Profile.
 108 MSME clusters have been identified for focused interventions to boost
exports. Accordingly, ‘Niryat Bandhu Scheme’ has been galvanized and
repositioned to achieve the objectives of ‘Skill India’.
 Trade facilitation and enhancing the ease of doing business are the other major
focus areas in this new FTP. One of the major objective of new FTP is to move
towards paperless working in 24x7 environment.
 Manufacturers, who are also status holders, will now be able to self-certify their
manufactured goods in phases, as originating from India with a view to
qualifying for preferential treatment under various forms of bilateral and
regional trade agreements. This ‘Approved Exporter System’ will help
manufacturer exporters considerably in getting fast access to international
markets.
35

Summary
 Understood Structure of Banking system.
 Understood RBI and its function.
 Understood Banking Structure reforms- Naraasimham Committee
Recommendation.
 Learnt about India Foreign trade policy.
 Understood Objectives, Features and Policy of 2015-2020- salient features
36
Best PDF Encryption Reviews

Unit-6 Economic Policies and Indian Foreign Trade Policy

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Unit-6 Economic Policies and Indian Foreign Trade Policy

Similar to Unit-6 Economic Policies and Indian Foreign Trade Policy (20)

More from Kiran M

More from Kiran M (9)

Recently uploaded

Recently uploaded (20)

Unit-6 Economic Policies and Indian Foreign Trade Policy