1) Privatisation in India through Disinvestment

Disinvestment is the first step in the process of disinvestment. Disinvestment involves the sale of the public sector equity to the private sector and the public at large. In India the disinvestment started in 1991- 1992 when the government announced its new economic policy. The principles off governing public sector investments are as follows: The public sector should make investment only in those areas where investment is mainly infrastructural in nature and private sector are not likely to come forward. The public sector must withdraw from areas where no public purpose is served by its presence. The principle of market economy should be accepted as the main operative principle by all public sector enterprise unless the commodities and services produced and distributed are specially for protecting the poorest in the society. The overall objective of the disinvestment policy is to raise resources from within the public sector for meeting the following cost: Costs associated with the closure of enterprise declared as terminally sick by BIFR. Part of the revenues will be used for restructuring those enterprises which are on the verge of becoming chronically sick but are as yet not beyond redemption. For retaining workers displaced or affected as a result of the closure and internal restructuring involving down sizing. Another objective of disinvestment policy is to create conditions condusive to raising productive efficiency in all its dimensions, lowering costs of production, improving product quality and variety, improving innovative behavior, and fostering investment based on prospective profitability. There are two major reasons for disinvestment in India. One is to provide fiscal support and the other one is to improve the efficiency of the enterprise.

2) Reforms of the Banking Sector

Despite of heavy opposition from political parties and the bank unions in the country, the Government of India accepted all the major recommendations of the Narasimham Committee and started implementing them. The measures taken as the part of the banking reforms are listed below:

 Statutory Liquid Ratio- The SLR on incremental net demand and time liabilities were reduced from 38.5% to 25% and the SLR on outstanding net domestic demand a nd time liabilities were reduced from 38.5% to 27% In March 1997 and further to 25% in October 1997 and then to 25% in October 1997. Cash Reserve Ratio- It was the intention of the RBI to bring down the CRR from 15%, which was brought down to 14% in May 1993. Even the incremental cash reserve of 10% was abolished. The reason behind reducing the CRR was to release funds locked up with RBI for lending to the industrial and other sectors which were lacking bank credit Interest Rates- Interest rates were reduced from 20 t0 2 by 1994-1995. The prime lending rate of SBI and most other banks on general advances of over 2 lakhs has been reduced, interest rate on domestic term deposits above one year, and on non residential ,non repartiable rupee deposits was decontrolled, also the rate of interest on bank loans above 2 lakhs has been fully decontrolled, even the interest rates on deposits (except urban cooperative banks) have been deregulated subject to a minimum lending rate of 13% . Thos was to stimulate healthy competition among the banks and encourage their operational effieciency. Prudential Norms-Prudential Norms were started by RBI as a part of reformative process. This purpose of prudential system of recongnisation on income, classification of assets and provisioning of bad debts was to ensure that the books of commercial banks reflect their financial position more accurately and in accordance with internationally accepted accounting practices. Capital Adequacy Norms: Capital Adequacy Norms were fixed at 8% by the RBI in April 1992 and banks had to comply with it for more 3 years, A new capital framework was introduced for the Indian Scheduled Commercial Banks based on the Basle Committee recommendations presenting two tier of capital banks. The government of India amended the Banking Companies Act to enable the nationalized banks to access market for capital funds through public issues, subject to the provision that the holding of central government would not fall below 51% of the paid up capital. Freedom of operation- Scheduled commercial banks were now given freedom to open new branches and upgrade extension counters, after obtaining capital adequacy norms and prudential accounting standards.

 Supervision of Commercial Banks- Supervision on commercial banks was tightened by RBI. Recovery of Debts- The Government passed Recovery of Debts sue to banks and Financial Institution Act, 1993 to facilitate and speed up recovery of debts to banks and other financial institutions.

3) Convertibility in current account and capital account

Current account includes all transactions, which give rise to or use of our National income, while Capital Account consist of short term and long term capital transactions. As per FEMA "capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India. Those which are not Capital Account transactions are current Account transactions. Current Account Transactions covers the following. 1. 2. 3. 4. 5. All imports and exports of merchandise Invisible Exports and Imports (sale/purchase of services Inward private remittances to & fro Pension payments (to & fro) Government Grants (both ways)

Capital Account transactions consist of the following 1. 2. 3. 4. 5. Direct Foreign Investments (both inward & outward) Investment in securities (both ways) Other Investments (both ways) Government Loans (both ways Short-term investments on both directions.

The substance of convertibility is to dispense with the discretionary management of foreign exchange and exchange rates and to adopt a more liberal and market driven exchange allocation process. All transactions are still conducted within the framework of exchange controls, as prescribed by the RBI. Full convertibility on current account is manifested as below:

On trade account and on account of the receipt side of the invisibles, the rupee is fully convertible at market determined exchange rates. The payment side of the invisible and receipts and payments of capital account are subject to exchange control However, exchange rates for all these permissible transactions are undertaken at the free market exchange rates

Capital Account is deemed convertible when residents and non-residents are allowed to effect such transactions without any restrictions i.e. without prior permission of the RBI. In such a context without any restrictions Indians should be able to secured foreign direct investment from abroad. Foreigners at their discretion should be able to make portfolio investments in this country. Presently these transactions are subject to prior permission of R.B.I. However R.B.I. is following a constructive and promotional approach and encouraging foreign investments in India. Indian Industrialist having good projects for direct foreign investment or foreign institutional investors desiring to make portfolio investments in this country are encouraged and they do not face problems on account of exchange control by R.B.I. Exchange control is limited to exchange monitoring. In a strict sense a currency can be considered convertible, only if both residents and nonresidents have full freedom to use and exchange it for any purpose whatsoever, at some definite rate of exchange. However in practice large number of currencies are considered convertible with various degrees of restrictions and controls.

4) VAT, MODVAT and Service Tax.

VAT (Value Added Tax) VAT is regarded as the fastest growing tax. It is levied on the value added at various stages hence called as VAT. To impose the tax, it is essential to measure value added and the base on which the tax is levied. The VAT can be levied in three way The tax could be levied on sale of goods and services put to final consumption It may be gross product type in which case no capital outlays, depreciation etc. will be deductible from the base It can be net income type VAT, depreciation is deductible for purpose of estimation of base.

VAT can be computed by using either of the three methods detailed below

The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input. The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales VAT will replace the present sales tax in India. MODVAT

Modvat stands for "Modified Value Added Tax". It is a scheme for allowing relief to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them. eg ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for use in manufacture. POR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd. The scheme was first introduced with effect from 1 March 1986. Under this scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise element on raw materials and components used by him in his manufacture. Since it amounts to excise duty only on additions in value by each manufacturer at each stage, it is called valueadded-tax (VAT) The MODVAT credit can be utilized towards payment of excise duty on the final product. When the scheme was first introduced, it covered only some excisable goods. Gradually, the scope of the modvat scheme has been enlarged from time to time under various notifications. From 16 March 1995, all excisable goods can take the benefits. Service Tax In the budget of 1994-95 a tax on three specified services namely telephone, general insurance and stock brokerage was introduced. Today more than 40 specified services attract service tax levy. The prevailing rate of centres service tax is 5% of the value of taxable services. Reasons behind imposing service tax were to bring equity, to stop encouraging spending on services at the expense of goods etc.