positive vs normative economics

Economics is a social science that deals with the production, distribution, and consumption of
goods and services. Its purpose is to explain how economies work and the interaction between its
various agents. There are several dimensions of economics, namely:
Microeconomics examines the behavior of the consumers, producers, buyers, and sellers.
Macroeconomics examines issues that can affect the entire economy like unemployment,
inflation, monetary and fiscal policy.
Economic theory provides a research outlet of economics with the use of theoretical
reasoning and mathematical solutions.
Applied economics application of economic theory
Rational economics formulation of a framework the understanding of economic behavior.
Behavioral economics uses social and emotional factors in understanding the decisions of
individuals and business entities in the performance of their economic functions.
Positive economics is the study of what and why an economy operates as it does. It is also
known as Descriptive economics and is based on facts which can be subjected to scientific
analysis in order for them to be accepted. It is based on factual information and uses
statistical data, and scientific formula in determining how an economy should be. It deals
with the relationship between cause and effect and can be tested. Positive economic
statements are always based on what is actually going on in the economy and they can
either be accepted or rejected depending on the facts presented.
Normative economics is the study of how the economy should be. It is also known as Policy
economics wherein normative statements like opinions and judgments are used. It
determines the ideal economy by discussion of ideas and judgments.In normative
economics, people state their opinions and judgments without considering the facts. They
make distinctions between good and bad policies and the right and wrong courses of action
by using their judgments.

SEBI
It was officially established by The Government of India in the year 1988 and given statutory
powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament. SEBI has its
Headquarters at the business district of Bandra Kurla Complex in Mumbai, and has Northern,
Eastern, Southern and Western Regional Offices in New Delhi, Kolkata, Chennai and
Ahmedabadrespectively.
Controller of Capital Issues was the regulatory authority before SEBI came into existence; it
derived authority from the Capital Issues (Control) Act, 1947.
Initially SEBI was a non statutory body without any statutory power. However in the year of 1995,
the SEBI was given additional statutory power by the Government of India through an
amendment to the Securities and Exchange Board of India Act, 1992. In April, 1988 the SEBI was
constituted as the regulator of capital markets in India under a resolution of the Government of
India.
The SEBI is managed by its members, which consists of following: a) The chairman who is
nominated by Union Government of India. b) Two members, i.e. Officers from Union Finance
Ministry. c) One member from The Reserve Bank of India. d) The remaining 5 members are

nominated by Union Government of India, out of them at least 3 shall be whole-time members.
The office of SEBI is situated at SEBI Bhavan, Bandra Kurla Complex, Bandra East, Mumbai400051, with its regional offices at Kolkata, Delhi,Chennai & Ahmadabad. It has recently opened
local offices at Jaipur and Bangalore and is planning to open offices at Guwahati, Bhubaneshwar,
Patna, Kochi and Chandigarh in Financial Year 2013 - 2014.
Functions and responsibilities
The Preamble of the Securities and Exchange Board of India describes the basic functions of the
Securities and Exchange Board of India as "...to protect the interests of investors in securities and
to promote the development of, and to regulate the securities market and for matters connected
therewith or incidental thereto".
SEBI has to be responsive to the needs of three groups, which constitute the market:

the issuers of securities

the investors

the market intermediaries.

SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive.
It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in
its executive function and it passes rulings and orders in its judicial capacity.
For the discharge of its functions efficiently, SEBI has been vested with the following powers:

to approve bylaws of stock exchanges.

to acquire the stock exchange to amend their bylaws.

inspect the books of accounts and call for periodical returns from recognized stock

exchanges.

inspect the books of accounts of financial intermediaries.

compel certain companies to list their shares in one or more stock exchanges.

Registration of brokers.

Functions of WTO
The former GATT was not really an organization; it was merely a legal arrangement. On the other
hand, the WTO is a new international organization set up as a permanent body. It is designed to
play the role of a watchdog in the spheres of trade in goods, trade in services, foreign investment,
intellectual property rights, etc. Article III has set out the following five functions of WTO;
(i) The WTO shall facilitate the implementation, administration and operation and further the
objectives of this Agreement and of the Multilateral Trade Agreements, and shall also provide the
frame work for the implementation, administration and operation of the plurilateral Trade
Agreements.
(ii) The WTO shall provide the forum for negotiations among its members concerning their
multilateral trade relations in matters dealt with under the Agreement in the Annexes to this
Agreement.

(iii) The WTO shall administer the Understanding on Rules and Procedures Governing the
Settlement of Disputes.
(iv) The WTO shall administer Trade Policy Review Mechanism.
(v) With a view to achieving greater coherence in global economic policy making, the WTO shall
cooperate, as appropriate, with the international Monetary Fund (IMF) and with the International
Bank for Reconstruction and Development (IBRD) and its affiliated agencies.
Objectives of WTO
Important objectives of WTO are mentioned below:
(i) to implement the new world trade system as visualized in the Agreement;
(ii) to promote World Trade in a manner that benefits every country;
(iii) to ensure that developing countries secure a better balance in the sharing of the advantages
resulting from the expansion of international trade corresponding to their developmental needs;
(iv) to demolish all hurdles to an open world trading system and usher in international economic
renaissance because the world trade is an effective instrument to foster economic growth;
(v) to enhance competitiveness among all trading partners so as to benefit consumers and help in
global integration;
(vi) to increase the level of production and productivity with a view to ensuring level of
employment in the world;
(vii) to expand and utilize world resources to the best;
(viii) to improve the level of living for the global population and speed up economic development
of the member nation

Equilibrium Price......meeting point of DD & SS determines Market Prevailing PRICE........

i) Market demand is the sum total of demand for a commodity by all the buyers in the market. Its
curve slopes downwards due to operation of law of demand.
(ii) Market supply is the sum total of supplies of a commodity by all the producers in the market.
Its curve slopes upwards due to operation of law of supply.
Both market demand and market supply act as the counteracting forces, which move in the
opposite directions. Market Equilibrium is determined when the quantity demanded of a
commodity becomes equal to the quantity supplied. The price determined corresponding to

market equilibrium is known as equilibrium price and the corresponding quantity is known as
equilibrium quantity.Let us understand the determination of market equilibrium of chocolates
Market
Demand

Market Supply

(units) of

(units) of

Price of Chocolate (Rs.)

Chocolate

Chocolate

100

20

Shortage (-)
or
Surplus (+)
Remarks
B80

Excess Demand
(As Market demand > Market

80

40

(-)40

supply)
Equilibrium Level (As Market

60

60

demand = Market supply)

40

80

(+) 40

Excess Supply
(As Market supply > Market

10

20

100

(+) 80

demand)

Diagrammatic Explanation

As seen in above, both buyers and sellers are negotiating to buy and sell chocolates. Both have
different prices to offer. Buyers will like to pay as low as possible and sellers will like to charge as
high as possible. But market equilibrium will be determined only when both agree to a common
price and a common quantity at that price.
With increase in price from Rs. 2 to Rs. 4, market demand falls from 100 to 80 chocolates and

market supply rises from 20 to 40 chocolates. Market demand curve DD and market supply curve
SS intersect each other at point E, which is the market equilibrium. At this point, f 6 is determined
as the Equilibrium Price and 60 chocolates as the Equilibrium Quantity. This equilibrium price and
quantity has a tendency to persist.
Why any other price is not the Equilibrium Price?
i. Any price above Rs. 6 is not the equilibrium price as the resulting surplus, i.e. excess supply
would cause competition among sellers. In order to sell the excess stock, price would come down
to the equilibrium price of Rs. 6.
ii. Any price below Rs. 6 is also not the equilibrium price as due to excess demand, buyers would
be ready to pay higher price to meet their demand. As a result, price would rise upto the
equilibrium price of Rs. 6.
Important Points about Market Equilibrium under Perfect Competition:

Each firm is a price-taker and industry is the price-maker.

Each firm earns only normal profits in the long rim.

Decisions of consumers and producers in the market are coordinated through free flow of
prices known as price mechanism.

It is assumed that both law of demand and law of supply operate.

Equilibrium Price is the price at which quantity demanded of a commodity is equal to the
quantity supplied.

At equilibrium price, there is neither shortage nor excess of demand and supply.

Equilibrium Quantity is the quantity demanded and supplied equal price.

Excess Demand:
Excess demand refers to a situation, when quantity demanded is more than quantity supplied at

the prevailing market price. Under this situation, market price is less than the equilibrium price,
i.e. excess demand occurs at price of Rs. 2 and Rs. 4, when market demand is more than market
supply.
In the Fig, market equilibrium is determined at point E at which OQ is the equilibrium quantity
and OP is the equilibrium price. However, if market price is OP1 then market demand of OQ1 is
more than market supply of OQ2. This situation is termed as excess demand.

i. The excess demand of Q1Q2 will lead to competition amongst the buyers as each buyer wants
to have the commodity.
ii. Buyers would be ready to pay higher price to meet their demand, which will lead to rise in
price.
iii. With increase in price, market demand will fall due to law of demand and market supply will
rise due to law of supply.
iv. The price will continue to rise till excess demand is wiped out. This is shown by arrows in the
diagram. Eventually, price will increase to a level where market demand becomes equal to market
supply at OQ and equilibrium price of OP is attained.
Excess Supply:
Excess supply refers to a situation, when the quantity supplied is more than the quantity

demanded at the prevailing market price. Under this situation, market price is more than
equilibrium price,i.e. excess supply occurs at price of Rs. 8 and 10, when market supply is more
than market demand.
In the Fig. if market price is OP1 (more than equilibrium price of OP), then market supply of OQ,
is more than market demand of OQ2. This situation is termed as excess supply.

i. Excess supply of Q1Q2 will lead to competition amongst sellers as each seller wants to sell his
product.
ii. Sellers would be ready to charge lower price to sell the excess stock, which will lead to fall in
price.
iii. With decrease in price, market supply will fall due to law of supply and market demand will
rise due to law of demand.
iv. The price will continue to fall till excess supply is wiped out. This is shown by arrows in the
diagram. Price decreases where market demand equals to market supply at equilibrium price,OP.
Balance of Payment (BoP)
Balance of Payment (BoP) of a country is defined as, "Systematic record of all economic
transactions between the residents of a foreign country" Thus balance of payments includes all
visible and non-visible transactions of a country during a given period, usually a year. It
represents a summation of country's current demand and supply of the claims on foreign
currencies and of foreign claims on its currency.[1]

Balance of payments accounts are an accounting record of all monetary transactions between a
country and the rest of the world.[2] These transactions include payments for the country's
exports and imports of goods, services, financial capital, and financial transfers. The BOP
accounts summarize international transactions for a specific period, usually a year, and are
prepared in a single currency, typically the domestic currency for the country concerned. Sources
of funds for a nation, such as exports or the receipts of loans andinvestments, are recorded as
positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are
recorded as negative or deficit items.
When all components of the BOP accounts are included they must sum to zero with no overall
surplus or deficit. For example, if a country is importing more than it exports, its trade balance
will be in deficit, but the shortfall will have to be counterbalanced in other ways such as by
funds earned from its foreign investments, by running down central bank reserves or by receiving
loans from other countries.
While the overall BOP accounts will always balance when all types of payments are included,
imbalances are possible on individual elements of the BOP, such as the current account, the
capital account excluding the central bank's reserve account, or the sum of the two. Imbalances
in the latter sum can result in surplus countries accumulating wealth, while deficit nations
become increasingly indebted. The term "balance of payments" often refers to this sum: a
country's balance of payments is said to be in surplus (equivalently, the balance of payments is
positive) by a specific amount if sources of funds (such as export goods sold and bonds sold)
exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased)
by that amount. There is said to be a balance of payments deficit (the balance of payments is said
to be negative) if the former are less than the latter.
Under a fixed exchange rate system, the central bank accommodates those flows by buying up
any net inflow of funds into the country or by providing foreign currency funds to theforeign
exchange market to match any international outflow of funds, thus preventing the funds flows
from affecting the exchange rate between the country's currency and other currencies. Then the
net change per year in the central bank's foreign exchange reserves is sometimes called the
balance of payments surplus or deficit. Alternatives to a fixed exchange rate system include a
managed float where some changes of exchange rates are allowed, or at the other extreme a
purely floating exchange rate (also known as a purely flexible exchange rate). With a pure float
the central bank does not intervene at all to protect or devalue its currency, allowing the rate to
be set by the market, and thecentral bank's foreign exchange reserves do not change.
Historically there have been different approaches to the question of how or even whether to
eliminate current account or trade imbalances. With record trade imbalances held up as one of
the contributing factors to the financial crisis of 20072010, plans to address global imbalances
have been high on the agenda of policy makers since 2009.
The current account shows the net amount a country is earning if it is in surplus, or spending if it
is in deficit. It is the sum of the balance of trade (net earnings on exports minus payments for
imports), factor income (earnings on foreign investments minus payments made to foreign
investors) and cash transfers. It is called the current account as it covers transactions in the "here
and now" those that don't give rise to future claims.

The Capital Account records the net change in ownership of foreign assets. It includes the reserve
account (the foreign exchange market operations of a nation's central bank), along with loans and
investments between the country and the rest of world (but not the future regular
repayments/dividends that the loans and investments yield; those are earnings and will be
recorded in the current account). The term "capital account" is also used in the narrower sense
that excludes central bank foreign exchange market operations: Sometimes the reserve account is
classified as "below the line" and so not reported as part of the capital account.[4]
The International Monetary Fund (IMF) use a particular set of definitions for the BOP accounts,
which is also used by the Organisation for Economic Co-operation and Development (OECD), and
the United Nations System of National Accounts (SNA).[6]
The IMF uses the term current account with the same meaning as that used by other
organizations, although it has its own names for its three leading sub-divisions, which are:
The goods and services account (the overall trade balance)
The primary income account (factor income such as from loans and investments)
The secondary income account (transfer payments)
Causes of BOP imbalances
There are conflicting views as to the primary cause of BOP imbalances, with much attention on
the US which currently has by far the biggest deficit. The conventional view is that current
account factors are the primary cause[13] these include the exchange rate, the government's
fiscal deficit, business competitiveness, and private behavior such as the willingness of consumers
to go into debt to finance extra consumption. An alternative view, argued at length in a 2005
paper by Ben Bernanke, is that the primary driver is the capital account, where a global savings
glut caused by savers in surplus countries, runs ahead of the available investment opportunities,
and is pushed into the US resulting in excess consumption and asset price inflation. The Balance
of Payments account of a country is made on the principle of double entry book-keeping. Each
transaction is entered either on the credits or on the debits side of the balance sheet. The Credits
are entered on left side and Debits are entered on right side of Balance Sheet. Payments received
from a foreign country is credit transaction whereas payment to a foreign country is a debit
transaction. Therefore, the Balance of Payments is always balanced.

Difference.....BOP & BOT

The Balance of Trade includes only visible imports and exports, i.e. imports and exports of
merchandise, the difference of imports and exports is called Balance of Trade. If imports are
more than exports, it is unfavorable balance of trade. If exports exceeds imports, it is
favorable balance of trade.
The Balance of Payments includes all those visible and invisible items exported from and
imported into the country in addition to exports and imports of merchandise.
Balance of Trade includes revenues received or paid on account of imports and exports of

merchandise. It shows only revenue items.

Balance of Payments includes all revenue and capital items whether visible or non-visible.
Balance of Trade thus form a part of Balance of Payments.
Balance of Trade can be favorable or unfavorable. If imports are more than exports, it is
unfavorable balance of trade. If exports exceeds imports, it is favorable balance of trade.
Balance of Payments is always balanced just like Trading and Profit and Loss A/c of a
business.
In case of Balance of Trade, there is no deficit or surplus balance. The balance shows
favorable or non-favorable. So, external assistance is not required.
In case of Balance of Payments, any balance, deficit or surplus is to be financed by external
source or assistance or be utilized.

Tax Structure in INDIA

An overview of the tax structure and current tax rates in India. The tax regime in India has
undergone elaborate reforms over the last couple of decades in order to enhance rationality,
ensure simplicity and improve compliance. The tax authorities constantly review the system in
order to remain relevant. India has a federal system of Government with clear demarcation of
powers between the Central Government and the State Governments. Like governance, the tax
administration is also based on principle of separation therefore well defined and demarcated
between Central and State Governments and local bodies.
The tax on incomes, customs duties, central excise and service tax are levied by the Central
Government. The state Government levies agricultural income tax (income from plantations only),
Value Added Tax (VAT)/ Sales Tax, Stamp Duty, State Excise, Land Revenue, Luxury Tax and Tax On
Professions. The local bodies have the authority to levy tax on properties, octroi/entry tax and tax
for utilities like water supply, drainage etc.
DIRECT TAXES
Individual Income Tax & Corporate Tax
The provisions relating to income tax are contained in the Income Tax Act 1961 and the Income
Tax Rules 1962. The Income Tax Department is governed by the Central Board for Direct Taxes
(CBDT) which is part of the Department of Revenue under the Ministry of Finance. In terms of the
Income Tax Act, 1961, a tax on income is levied on individuals, corporations and body of persons.
Tax rates are prescribed by the government in the Finance Act, popularly known as Budget, every
year.
The Government of India has recently taken initiatives to reform and simplify the language and
structure of the direct tax laws into a single legislation the Direct Taxes Code (DTC). After public
consultation the Direct Taxes Code 2010 was placed before the Indian Parliament on 30 August
2010, when passed DTC will replace the Income Tax Act of 1961. The DTC consolidates the
provisions for Direct Tax namely the income tax and wealth tax. When it comes into effect,
probably April 2012, it is likely to have significant impact on the tax payers especially the business
community.
In the case of Individuals, incomes from salary, house and property, business & profession, capital
gains and other sources are subject to tax. Women and Senior citizens are extended some special

privileges. Individuals incomes are subjected to a progressive rate system. Tax treatment differs
depending on the residence status.
Income of the company is computed and assessed separately in the hands of the company.
Income of company is subjected to a flat rate plus a surcharge. In addition to these, an education
cess is also charged on the tax amount. Dividends distributed are subjected to special tax and the
distributed income is not treated as expenditure but as appropriation of profits by the company.
Tax treatment differs depending on the residence status.
A company is liable to pay tax on the income computed in accordance with the provisions of the
Income Tax Act. Although many companies have huge profits, and declare substantial dividends,
they are relieved from tax liabilities because their income when computed as per provisions of
the Income Tax Act is either nil or negative or insignificant. Therefore a provision called Minimum
Alternative Tax (MAT) was introduced by an amendment in 1997. As per the MAT provision such
companies are required to pay a fixed percentage (presently 18% for 2011-2012) of book profit as
minimum alternate tax.
Additionally, by an amendment in 2005 companies are required to pay Fringe Benefit Tax (FBT) on
value of fringe benefits provided or deemed to have been provided to the employees.
In addition to income tax chargeable in respect of total income, any amount declared, distributed
or paid by a domestic company by way of dividend shall be subjected to dividend tax. Only a
domestic company is liable for the tax.
Wealth Tax
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits
derived from property ownership. The tax is to be paid year after year on the same property on
its market value, whether or not such property yields any income. Similar to income tax the
liability to pay wealth tax also depends upon the residential status of the assessee. The assets
chargeable to wealth tax are Guest house, residential house, commercial building, Motor car,
Jewelry, bullion, utensils of gold, silver, Yachts, boats and aircrafts, urban land, cash in hand (in
excess of INR 50,000 for Individual & HUF only),etc. But in reality majority of the potential tax
payers do not pay this tax as most of the movable items such as jewelry, bullion etc are stashed
away from accounting. Invariably they just pay tax for the immovable wealth such as real estate.
Capital Gains Tax
The central government also charges tax on the capital gains that is derived from the sale of the
assets. The capital gain is the difference between the money received from selling the asset and
the price paid for it. To restrict the misuse of this provision, the definition of capital asset is being
widened to include personal effects such as archaeological collections, drawings, paintings,
sculptures or any work of art.
Capital gain also includes gain that arises on transfer (includes sale, exchange) of a capital asset
and is categorized into short-term gains and long-term gains. The Long-term Capital Gains Tax is
charged if the capital assets are kept for more than three years or 12 months in the case of

securities and shares that are listed under any recognized Indian stock exchange or mutual fund.
Short-term Capital Gains Tax is applicable if the assets are held for less than the aforesaid period.
In case of the long term capital gains, they are taxed at a concession rate. Normal corporate
income tax rates are applicable for short term capital gains. In case of the short term and long
term capital losses, they are allowed to be carried forward for 8 consecutive years.
INDIRECT TAXES
Excise Duty
The central government levies excise duty under the Central Excise act of 1944 and the Central
Excise Tariff Act of 1985. Central Excise duty is an indirect tax levied on goods manufactured in
India and meant for domestic consumption. The Central Board of Excise and Customs under the
Ministry of Finance, administers the excise duty. Central Excise Duty arises as soon as the goods
are manufactured. It is paid by a manufacturer, who passes on its incidence to the customers.
Excisable goods have been defined as those, which have been specified in the Central Excise Tariff
Act as being subjected to the duty of excise.
There are three main types of excise duty Basic Excise Duty is charged on all excisable goods other than salt at the rates mentioned
in the said schedule
Additional Duties of Excise is charged on goods of special importance, in lieu of sales Tax
and shared between Central and State Governments
Special Excise Duty is charged on all excisable goods on which there is a levy of Basic
excise Duty. Every year the annual Budget specifies if Special Excise Duty shall be or shall not
be levied and collected during the relevant financial year.
Note: Under the Cenvat (Central Value Added Tax) Scheme, introduced under The Cenvat Credit
Rules, 2004, a manufacturer of product or provider of taxable service shall be allowed to take
credit of duty of excise as well as of service tax paid on any input received in the factory or any
input service received by manufacturer of final product. Such credits can be used to set off any
excise duty tax payable.
In the recent budget, a number of tax exemptions have been initiated. Specific goods enjoy
concessional duty rates. Exemptions are allowed to tax payers engaged in the manufacture of
certain goods such as, water treatment, bio-diesel, processed food etc and certain types of
establishments such as small scale industries, cottage industries that create jobs are also
exempted.
Customs Duty
Customs duty in India falls under the Customs Act 1962 and Customs Tariff Act of 1975. Customs
duty is the tax levied on goods imported into India as well as on goods exported from India.
Taxable event is import into or export from India. Additionally educational cess is also charged.
The customs duty is evaluated on the value of the transaction of the goods. The Central Board of
Excise and Customs under the Ministry of Finance manages the customs duty process in the

country. The rate at which customs duty is applicable on the goods depends on the classification
of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with
the Harmonized System of Nomenclature (HSL). It should be noted that preferential/concessional
rates of duty are also available under the various Trade Agreements.
Service Tax
Service tax was introduced in India way back in 1994 and started with mere 3 basic services viz.
general insurance, stock broking and telephone. Subsequent Budgets have expanded the scope of
the service tax as well as the rate of service tax. More than 100 services are subjected to tax
under this provision. An education cess is also charged on the tax amount. The Central Board of
Excise and Customs under the Ministry of Finance manages the administration of service tax.
Every service provider of a taxable service is required to register with the Central Excise Office in
the concerned jurisdiction. Exemptions are available for services that are exported, small service
providers whose revenue fall below the prescribed level, services provided to UN and
International Agencies and supplies to SEZ(Special Economic Zones). Subject to conditions,
service tax is not payable on value of goods and material supplied while providing services.
Securities Transaction Tax (STT)
Transactions in equity shares, derivatives and units of equity-oriented funds entered in a
recognized stock exchange attract Securities Transaction Tax. Service Tax, Surcharge and
Education Cess are not applicable on STT. Taxation of profit or loss from securities transactions
depends on whether the activity of purchasing and selling of shares / derivatives is classified as
investment activity or business activity. Treatment of STT also depends upon whether the income
from these securities transactions are included under the head Income from Capital Gains or
under the head Profits and Gains of Business or Profession.
NOTE: The Indian Government is keen on merging all taxes like Service Tax, Excise and VAT into a
common Goods and Service Tax (GST). GST system has been proposed in order to simplify
current indirect tax system which is very tedious and complicated. All goods and services will be
brought into the GST base. There will be no distinction between goods and services. Alcohol,
tobacco, petroleum products are likely to be out of the GST regime. The state and central
combined tax rate is speculated to be between 16%-20% in line with the global trend. Originally
slated for implementation by the year 2010 it has been postponed twice and now scheduled for
the year 2012. The central and state tax authorities which had locked horns earlier are seemingly
nearing a consensus. If implemented this will be the most outstanding reform ever to the Indian
tax system.
STATE TAXES
Apart from the central taxes, the states also levy taxes on various good and services. Main state
taxes consist of:
Value Added Tax (VAT)
Sales tax charged on the sales of movable goods has been replaced with VAT in most of the Indian

states since 2005. This was introduced to counter the rampant double taxation issues and
resultant cascading tax burden that occurred due to the flaws inherent in the previous sales tax
system.
VAT, chargeable only on goods and does not include services, is a multi-stage system of taxation,
whereby tax is levied on value addition at each stage of transaction in the supply chain. The term
value addition implies the increase in value of goods and services at each stage of production or
transfer of goods and services. VAT is a tax on the final consumption of goods or services and is
ultimately borne by the consumer. VAT comes under the state list. Tax payers can claim credit for
the taxes paid at earlier stages and purchases known as Input Tax Credit, by producing relevant
tax invoices. The credit can be used to set off any VAT tax liability.
Different rates of VAT are charged depending on the category to which the goods belong. Rates
vary for essential commodities, bullion and valuable stones, industrial inputs and capital goods of
mass consumption, and others. Petroleum tobacco, liquor and so on are subjected to higher rate
and differ from state to state.
Notably, there is no VAT on imports and export sales are not subjected to VAT. Therefore VAT
charged on inputs purchased and used in the manufacture of export goods or goods purchased
for export, is available as a refund.
Note: The Central Sales Tax which is levied on inter-State sales would be eliminated gradually.
Stamp Duty
It is a tax that is levied on the transaction performed by means of a document or instrument as
per the regulations of Indian Stamp Act, 1899. It is collected by the government of the state
where the transaction is carried out. Stamp duty rates vary between the states.
Stamp duty is paid on instruments, which are essentially a document to create, transfer, limit,
extend, extinguish or record a right or liability. Document acquires legality once it is stamped
properly after the payment of the requisite stamp duty charges. Stamp duty is payable for
transfer of shares, share certificate, partnership deed, bill of exchange, shares, share transfer,
leave and license agreement, debentures, gift deed, bank guarantee, bonds, demat shares,
development agreement, demerger, power of attorney, home loans, houses & house purchase,
lease deed, loan agreement and lease agreement.
State Excise
Power to impose excise on alcoholic liquors, opium and narcotics is granted to States under the
Constitution and it is called State Excise. The Act, Rules and rates for excise on liquor are
different for each State.
In addition to the above taxes by the Central and State Governments the local bodies have the
authority to levy tax on properties, octroi/entry tax etc...
Deficit Financing in India :Purpose, Advantages Defects and adverse effects...

Deficit financing is a method of meeting government deficits through the creation of new money.
The deficit is the gap caused by the excess of government expenditure over its receipts. The
expenditure includes disbursement on revenue as well as on capital account. The receipts
similarly comprise revenues on current account as well as capital account. Creation of new
money to meet the deficit in use for a long time. But it has now being given up. Instead a new
scheme called ways and Means Advances is being ushered in with effect from April 1997. Under
this system the government can get only temporary loans to overcome the mismatch between its
receipts and expenditures.
Objectives of deficit financing :
1. To finance war:- Deficit financing has generally being used as a method of financing war
expenditure. During the war time through normal methods of raising resources. It becomes
difficult to mobilize adequate resources. Therefore government has to adopt deficit financing.
2. Remedy for depression :- In developed countries deficit financing is used as on instrument of
economic policy for removing the conditions of depression. Prof. Keynes has also advocated for
deficit financing as a remedy for depression and unemployment.
3. Economic development:- The main objective of deficit financing in an under developed country
like India is to promote economic development. The use of deficit financing in fact becomes
essential for financing the development plan especially in underdeveloped countries.
4. Mobilization of Resources :- deficit financing is also used for the mobilization of surplus, ideal
and unutilized resources in the country.
5. For granting subsidies :- In a country like India government grants subsidies to the producers to
encourage them to produce a particular type of commodity, granting subsidies is a very costly
affair which we cannot meet with the regular income this deficit financing becomes must for it.
6. Increase in aggregate demand :- Deficit financing loads to increase in aggregate demand
through increased public expenditure. This increase the income and purchasing power of the
people as a consequence there is an increase availability of goods and services and the production
and employment level also increase.
7. For payment of interest:- Loan which are taken by the govt. are supposed to be repaid with their
interest for that government needs money deficit financing is an important tool to get the income
for the repayment of loan along with the interest.
8. To overcome low tax receipts.
9. To overcome the losses of public sector enterprises
10. For implementing anti poverty programme.
Purpose of Deficit Financing: In India, the deficit financing resorted mainly to enable the
government to obtain the necessary resources for the plans. The levels of outlay laid down are of
an order which cannot be met only by taxation and borrowing from the public. The gap in
resources is made up partly through external assistance, but when external assistance is not
enough to fill the gap; deficit financing has to be resorted to. The targets of production and
employment in the plans are fixed primarily with reference to what is considered as the desirable
rate of growth for the economy. When these targets cannot be achieved by levels of expenditure
possible with resources obtained from taxation and borrowing, additional resources have to be
found.

Advantages of Deficit Financing: When the Government resorts to deficit financing, it usually
borrows from the Reserve Bank. The interest paid to the Reserve Bank actually comes back to the
Government in the form of profits. Through deficit financing, resources are used much earlier
than they can be otherwise. The development is accelerated. This technique enables the
Government to get resources without much opposition.
Defects of Deficit Financing:
(i) It leads to increase in inflationary rise of prices of goods and services in the country.
(ii) Inflationary forces created by deficit financing are reinforced by increased credit credition by
banks.
(iii) Investment caused by inflation may not be of the pattern sought under the plan. It normally
changed.
(iv) If as a result of deficit financing inflation goes too far, it becomes self-defeating.
ADVERSE EFFECTS OF DEFICIT FINANCING
1. Leads to inflation :- Deficit financing may lead to inflation. due to deficit financing money
supply increases & the purchasing power of the people also increase which increases the aggregate
demand and the prices also increase.
2. Adverse effect on saving:- Deficit financing leads to inflation and inflation affects the habit of
voluntary saving adversely. Infect it is not possible for the people to maintain the previous rate of
saving in the state of rising prices.
3. Adverse effect on Investment ;- deficit financing effects investment adversely when there is
inflation in the economy trade unions make demand for higher wages for that they go for strikes
and lock outs which decreases the efficiency of Labour and creates uncertainty in the business
which a decreases the level of investment of the country.
4. Inequality :- in case of deficit financing income distribution becomes unequal. During deficit
financing deflationary pressure can be seen on the economy which make the rich richer and the
poor, poorer. The fix wage earners are badly effected and their standard of living detoriates thus no
gap b/w rich & poor increases.
5. Problem of balance of payment :- Deficit financing leads to inflation. A high price level as
compared to other countries will make the exports more expensive and thus they start declining.
On the other hand rise in domestic income and price may encourage people to import more
commodities from abroad. This will create a deficit in balance of payment and the balance of
payment will become unfavorable.
6. Increase in the cost of production :- When deficit financing leads to the rise in the price level
the cost of development projects also rises this means a larger dose of deficit financing is required

on the port of government for completion of these projects.

7. Change in the pattern of investment:- Deficit financing leads to inflation. During inflation prices
rise and reach to a very high level in that case people instead of indulging into productive
activities they start doing speculative activities.
Public expenditure refers to Government expenditure i.e. Government spending. It is incurred by
Central, State and Local governments of a country.
Public expenditure can be defined as, "The expenditure incurred by public authorities like central,
state and local governments to satisfy the collective social wants of the people is known as public
expenditure."
Classification of Public Expenditure
Classification of Public expenditure refers to the systematic arrangement of different items on
which the government incurs expenditure.
1. Functional Classification
2. Revenue and Capital Expenditure
3. Transfer and Non-Transfer Expenditure
1. Transfer expenditure
2. Non-transfer expenditure
4.Productive and Unproductive Expenditure
5. Grants and Purchase Price
6. Classification According to Benefits
Public expenditure can be classified on the basis of benefits they confer on different groups of
people.
1. Common benefits to all : Expenditures that confer common benefits on all the people.
For example, expenditure on education, public health, transport, defence, law and order,
general administration.
2. Special benefits to all : Expenditures that confer special benefits on all. For example,
administration of justice, social security measures, community welfare.
3. Special benefits to some : Expenditures that confer direct special benefits on certain
people and also add to general welfare. For example, old age pension, subsidies to weaker
section, unemployment benefits.
7. Hugh Dalton's Classification of Public Expenditure
Hugh Dalton has classified public expenditure as follows :1. Expenditures on political executives : i.e. maintenance of ceremonial heads of state, like
the president.
2. Administrative expenditure : to maintain the general administration of the country, like
government departments and offices.
3. Security expenditure : to maintain armed forces and the police forces.
4. Expenditure on administration of justice : include maintenance of courts, judges,
public prosecutors.
5. Developmental expenditures : to promote growth and development of the economy, like
expenditure on infrastructure, irrigation, etc.
6. Social expenditures : on public health, community welfare, social security, etc.

7. Pubic debt charges : include payment of interest and repayment of principle amount
EFFECTS
Ability to work, save and invest : Socially desirable public expenditure increases
community's productive capacity. Expenditure on education, health, communication, increases
people's productivity at work and therefore their incomes. With rise in income savings also
increase and this in turn has a beneficial effect on investment and capital formation.
Willingness to work, save and invest : Public expenditure, sometimes, brings adverse effects
on people's willingness to work and save. Government expenditure on social security facilities
may bring such unfavorable effects. For e.g. Government spends a considerable portion of its
income towards provision of social security benefits such as unemployment allowances old
age pension, insurance benefits, sickness benefit, medical benefit, etc. Such benefits reduce
the desire to work. In other words they act as disincentive to work.
Effect on allocation of resources among different industries & trade : Many a times the
government expenditure proves to be an effective instrument to encourage investment on a
particular industry. For e.g. If government decides to promote exports, it provides benefits like
subsidies, tax benefits to attract investment towards such industry. Similarly government can
also promote a particular region by providing various incentives for those who make
investment in that region.
Effects on Distribution
The primary aim of the government is to maximize social benefit through public expenditure.
The objective of maximum social welfare can be achieved only when the inequality of income
is removed or minimized. Government expenditure is very useful to fulfill this goal.
Government collects excess income of the rich through income tax and sales tax on luxuries.
The funds thus mobilized are directed towards welfare programmes to promote the standard
of poor and weaker section. Thus public expenditure helps to achieve the objective of equal
distribution of income.
Expenditure on social security & subsidies to poor are aimed at increasing their real income &
purchasing power. Public expenditure on education, communication, health has a positive
impact on productivity of the weaker section of society, thereby increasing their income
earning capacity.
Effects on Consumption
Public expenditure enables redistribution of income in favour of poor. It improves the capacity
of the poor to consume. Thus public expenditure promotes consumption and thereby other
economic activities. The government expenditure on welfare programmes like free education,
health care and housing certainly improves the standard of the poor people. It also promotes
their capacity to consume and save.
Effects on Economic Stability
Economic instability takes the form of depression, recession and inflation. Public expenditure
is used as a mechanism to control instability. The modern economist Keynes advocated public
expenditure as a better device to raise effective demand & to get out of depression. Public
expenditure is also useful in controlling inflation & deflation. Expansion of Public
expenditure during deflation & reduction of public expenditure during inflation control money
supply & bring price stability.

Effects on Economic Growth

The goals of planning are effectively realised only through government expenditure. The
government allocates funds for the growth of various sectors like agriculture, industry,
transport, communications, education, energy, health, exports, imports, with a view to achieve
impressive growth.
Government expenditure has been very helpful in maintaining balanced economic growth.
Government takes keen interest to allocate more resources for development of backward
regions. Such efforts reduces regional inequality and promotes balanced economic growth.
Conclusion
Modern economies have all experienced tremendous growth in public expenditure. So it is
absolutely necessary for governments to formulate rational public expenditure policies in order to
achieve the desired effects on income, distribution, employment and growth
Public debt refers to the loans raised by government from within or outside the country. Every
govt. has to borrow when its expenditure exceeds its revenue. The borrowing or taking loans by
the govt Is known as public debt.
Need for public debt :
In recent times government have been borrowing huge sums both internally and externally for the
following reasons.
Deficit budget: - The government may borrow to cover budgetary deficit on account of large
expenditure incurred on administration and for financing unforeseen events like floods famines
epidemics.
To finance war: - Modern wars are very costly they cannot be financed unwarily through taxation
thus public debt becomes necessary.
Natural calamities :- Natural calamities like earthquake, flood, famines etc. lead to increase in
government expenditures in order to provide relief to the victims. It necessitates huge public
borrowing by the government.
Economic development :- Public debt is considered a very important tool for the development of
a country. Both developed and developing countries borrow for economic development.
Developing countries do not have sufficient resources to finance their plan they therefore borrow
not only from within the country but also from foreign sources for the development of agriculture,
industry, power, transport communication etc. Developed countries also borrow to modernized
their infrastructure facilities like roads, railways power plant etc.
To finance Public enterprise :- Every country whether a socialist economy or missed economy
runs certain public enterprises like railways, postage and telegrams, power work et. Which require
large funds The government can meet them only through public borrowing rather than by taxation.
To check economic stability :- Government borrows to stabilize, to control inflationary
conditions. The govt. borrows to take away excess money supply from the public. Since public
borrowing is voluntary. This is a better method then raising taxes. Because loans from public do
not increase the cost of production. Public borrowing also helps to lift the economy from
depression. During a depression ideal funds lying with the bank govt. borrows in order to spend on
public work programmers.
To provide foreign exchange :- In case of deficit in the balance of payment. Foreign exchange is
needed to correct it. In such a condition government borrow from foreign countries as well as
from international financial institution in the form of foreign exchange..

Soft Revenue option :- With increase in public expenditure government needs a lot of fund.
Taxation is a source of income for the government but it cannot be increased at a very high rate to
meet the expenses because it pinches a lot to the people. Therefore many a limes government
chooses soft loan option of meeting its increasing expenditure by raising loans and thereby saving
itself from public opposition.
Sources of Public debt :
There are 2 main sources. (1)Internal (2) external
Sources of internal debt :- It refers to govt. loans floated in capital markets within the political
boundaries of the country . the main sources of internal borrowing are:
i) Individuals.
ii) Banking & non-banking institutions.
iii) Central Bank.
Sources of external debts:- It refers to govt. loans floated in foreign capital market. The main
sources are.
i) Foreign governments.
ii) International Monetary agency like world bank IMF, International finance corporation
international development association.
Structure or classification of Public debt :
(1) Internal & external debt
(2) Productive & unproductive debt:Productive debt is defined as a loan, which is used for project which yields an income to the
government like railways, construction, irrigation, power etc.
Unproductive debt is defined as that loan which does not yield any income to the govt. like debt
for natural calamities and to finance war etc. this debt is also known as dead weight debt.
(3) Redeemable & Irredeemable debt :
Redeemable debt refers to that loan which govt. promises to pay off at some future date. The
interest on this loan is paid by the government regularly half yearly or annually. When the debt
matures the govt. pays back the principal amount to the lender.
Irredeemable debt is that loan in which the principle amount is never returned by the government
although the interest is paid regularly for the period of its duration.
(4) Short term and long term debt.:Short term debt is defined as that debt which may mature within a period of 3 to 4 months. This
debt is like treasury bills & advances from central bank. Interest on such loans is generally low.
Long term loans are repaid in a long period say roughly after 10 years or more. Usually such debt
bears a higher rate of interest.
Debt Redemption or Debt Management :
Redemption of public debt means repayment of debt. Public debt is to be repaid by the
government within the time limit fixed for its repayment. The various methods of debt redemption
are.
(1) Repudiation of debt :- it means refusal to pay a debt all together. The government refuses to
pay the interest as well as the principle amount. This method of debt redemption is not practical
because the government reputation may be at stake the consequences of this method may be
dangerous. Debt repudiation is not popular in modern times. Russia did so in 1971.
(2) Debt conversion :- In this method the debt with high interest rate is converted into new debt

when the market rate of interest falls. The government borrows at low rate of interest and repays
the past debt even before it matures. The lender is free to take his money back or get his loan
converted into a fresh loan. However conversion can be successfully carried out ,if the credit of
the govt.is good.
(3) Budgetary surplus A policy of surplus budget may be followed annually for clearing of public
debt gradually instead of creating a fund for its repayment on maturity. But in recent years due to
rapidly increasing public expenditure ,surplus budget is a rare phenomenon
(4) Terminal annuities: - under this method the physical authorities clear off. Part of public debt on
the basis of terminal annuities into equal annual installments including interest along with the
principle amount. This is the easiest method similar to sinking fund. According to this method ,the
burden of debt goes on diminishing and by the time of maturity ,it is already fully paid off.
(5) Refunding:- In this method. There is issue of new bonds and securities by the government in
order to repay the matured loans. refunding is the process by which the maturing bonds are
replaced by new bonds .A major drawback of this method is that the govt. would be tempted to
postpone its obligations of debt redemption and the total burden of debt would continue to
increase in future.
(6) Sinking fund :- In this system the government establishes a separate fund known as sinking
fund. A fixed amount of money is credited by the government to this fund every year. By the time
one debt matures. There is enough amount in fund to pay off loans along with the rate of interest.
In practice sinking funds are not accumulated, Government do not create such fund if even if they
create they utilize it for the other purposes whenever they are in need of funds.
(7) Reduction of rate of interest : sometimes the govt. takes statuary decision to reduce the rate of
interest. Payable on its public debt. The creditors are forced to accept the reduced rate of interest.
This method is normally used by the govt. during financial crisis.
Burden of public debt : It tells both internal & external debt may be direct money burden,
indirect money burden, direct real burden and indirect real burden.
i. Direct Money Burden :- It refers to the amount of money to be raised to meet the revenue
requirements. In case of internal public debt there is no direct money burden because in this case
money changes hands only. But in case of external debt money burden is heavy.
ii. Indirect money burden :- When govt. spends the loans it result in the creation demand for
certain commodities as a consequences the prices of goods and services rise imposing additional
burden on the society.
iii. Direct Real burden :- It is in the form of reduction in economic welfare and this strains and
stresses tax payers.
iv. Indirect Real burden :- The indirect real burden of a debt is also felt through the ultimate effects
on production when the govt. imposes taxes to repay loans and interest it discourages the
willingness of the tax payers to work more & save more, thus it adversely affect the production in
a country and the indirect real burden of a tax will be heavy.
POSITIVE EFECTS OF PUBLIC DEBT :merits
1 Mobilization of resources: - Public borrowing is very helpful in implementing 5 year plans and
various other projects. with the help of borrowing govt. can easily make various types of plans to
mobilizes the resources efficiently.
2 Increase in the productive capacity :- With increase in borrowing productive capacity of a
country can easily be increased. Borrowing is very much helpful in using capital intensive

techniques to increase the productive capacity of a country.

3 To promote Investments: - Public borrowing helps in promoting investments, borrower fund can
be utilized for strengthening infrastructure and promoting economic development of country.
4 Developmental expenditure: - Borrowing can be used to meet the developmental expenditure
like roads, communication system, railways telecom, finance etc.
5 Obtaining foreign exchange:- Borrowing in the form of foreign exchange can be used to meet
developmental activities. For development purpose govt. tries to acquire money capital, raw
material from foreign countries. It can then only be possible if we have good stock of foreign
exchanges with us.
ADVERSE AFFECTS OF PUBLIC DEBT :Demerits
1) Inflationary impact :- With increase in the public borrowing money supply in the market also
increases which increases the prices of the commodity.
2) Additional tax burden :- To repay the old loans. Government has to impose new taxes on people
which will be extra tax burden on the people and it pinches a lot.
3) Adverse effect on saving and in vest anent :- for the repayment of loan when govt. imposes new
taxes on the people there will be adverse effect on saving and investment b/c more saving & more
investment means more tax.
4) Effects on distribution of income :- Public debt may sometime effect distribution of income
among people. Govt. raises loans from higher income group people and the return of it is also
given to them only. Thus rich becomes richer and poor becomes poorer.
5) Unproductive debt:- a part of the loan taken by the govt. is used to meet the non developmental
expenditure which never helps in increasing the production in the country. Thus it is called dead
weight debt which is very difficult to repay.
6) Debt servicing burden :- The annual interest paid by the govt. in lieu of debt increase is known
as debt servicing burden. There is very large increase in debt servicing burden in every country in
modern times which has very dangerous consequences
BALANCE OF PAYMENTS
Balance of Payments (BoP) statistics systematically summaries
the economic transactions of an economy with the rest of the World for a specific period. The
Reserve Bank of India (RBI) is responsible for compilation and dissemination of BoP data. BoP is
broadly consistent with the guidelines contained in the BoP Manual of the International
Monetary Fund. Balance of payment (BoP) comprises of current account, capital account, errors
and omissions and changes in foreign exchange reserves. Under current account of the BoP,
transactions are classified into merchandise (exports and imports)and invisibles. Invisible
transactions are further classified into three categories, namely (a) Services-travel, transportation,
insurance, Government not included elsewhere (GNIE) and miscellaneous (such
as, communication, construction, financial, software, news agency, royalties, management and
business services); (b) Income; and (c)Transfers (grants, gifts, remittances, ets.)
Under the Capital Account, capital inflows can be classified by instrument (debt or equity) and
maturity (short or long term).The main components of the capital account include foreign
investment, loans and banking capital. Foreign investment, comprising Foreign Direct Investment
(FDI) and Portfolio Investment consisting of Foreign Institutional Investors (FIIs) investment,
American Depository Receipts/Global Depository Receipts (ADRs/GDRs) represents non-debt
liabilities, while loans (external assistance, external commercial borrowings and trade credit) and

banking capital, including non-resident Indian (NRI) deposits are debt liabilities.
....... The data on merchandise trade are available from two sources namely; (a) from the
Directorate General of Commercial Intelligence and Statistics (DGCI&S) on customs basis; and (b)
from RBI on payments (which includes both receipts and payments) basis. The Daily Trade
Return (DTR) is the primary source of recording exports data at DGCI&S, while RBI relies
mainly on the R-return furnished by Authorized Dealers (Ads) to compile the exports and imports
data. The
data on merchandise exports in BoP are compiled on the basis of information available from the
DGCI&S, after adjusting for time and exchange rate differences. The merchandise export data is
recorded on free on board (F.O.B.) basis. It may be noted that export of software in physical form
is captured by DGCI&S.
The customs record data on imports on the basis of the Bill of Entry prepared for goods entering in
the customs area. The data on imports under BoP statistics are compiled mainly on the basis of
returns submitted by Ads supplemented by information on the transactions not passing through the
banking channel such as imports financed through credit taken abroad. Imports under the BoP data
are recorded on the basis of date of payment or date of disbursal of loans, which may differ
significantly from the recording of imports at the Customs end on the basis of actual arrival of
goods.
Under the Capital Account, both equity and debt flows are covered. Debt flows comprise
commercial borrowings, external assistance, short-term trade credits and Non-Resident Indian
(NRI) deposits, while the equity flows comprise Foreign Direct Investment (FDI) and Portfolio
Investment. At present, direct investment into the country by non-residents is freely allowed in
most sectors subject to certain sectoral ceilings on equity holdings. The FDI within the prescribed
sectoral ceilings is freely allowed under RBI automatic route, FDI in restricted activities and in
excess of the prescribed sectoral ceilings requires prior Government approval through the
Secretariat for Industrial Assistance (SIA) and the Foreign Investment Promotion
Board (FIPB). The non-resident FDI investors are also allowed to raise their stakes through
acquisition of shares. The portfolio investment consists of the amount raised by Indian corporate
through Global Depository Receipts (GDRs) or American Depository Receipts ,investments in
Indian stock markets by foreign institutional investors (FIIs) and high net worth individuals and
offshore funds.
Indias trade structure
From the 1950s onwards Indias trade structure has exhibited marked changes. A major
shift in the production structure within the domestic economy towards manufacturing and
service-oriented sectors during this period has led to this significant change in the composition of
foreign trade i.e. the composition of exports and imports. Before planning was initiated Indias
export basket primarily consisted of jute, tea, cotton, hides and skins, manganese ores, mica etc
while the manufactured products constituted the bulk of imports. But it was increasingly
recognized that the possibilities of increasing export earnings through expansion of primary
exports was severely limited. Fluctuations in prices, growth substitutes, changes in technology,
low exportable surplus, and imposition of tariffs contributed to this. The implementation of the
industrialization programme starting from the Second Plan and consequently the diversification
and modernization in the production structure resulted in a significant change in the composition
of the export basket. While the share of agriculture and allied products in total export has declined

considerably from 44.2% in 1960-61 to 14.4% in 2000-01, the share of manufacturing products
has increased from 45.3% to 83% over the same period.
At the time of independence jute, tea and cotton textiles, the principal items in the export basket
accounted for 50% of total export earnings. In 1997-98, the combined share of these items
substantially reduced to 11%. On the other hand, the commodities which registered a substantial
increase in export earnings and gradually became principal export items over the years were
handicrafts, engineering goods, readymade garments and chemicals and allied products. Between
1960-61 and 1997-98 the contribution of handicrafts export in total export earnings rose from
4.7% to 17.8% while during the same period the contribution of readymade garments went up
from 0.1% to 11%. Consequent upon the programmes of industrialization initiated during the plan
period the export of engineering goods and chemical and allied products increased substantially.
The share of engineering goods rose from 3.4% in 1960-61 to 14.8% in 1997-98 while for
chemical products the share increased from 1.1% to 10.7% during the same period.
During the decade of 1990s the Indian Government have emphasized on opening up the trade and
foreign investments with a view to reaping the potential benefits from external liberalization and
greater integration with the world economy which marked a significant departure from the earlier
policy of import substitution. Although Government had begun to undertake less interventionist
policies regarding foreign trade through rudiments of trade reforms by mid the 1980s, the process
of liberalization and globalization got momentum only after adoption of the economic reforms in
1991. The external liberalization measures underlying this reform process included removal of
non tariff barriers to import, reduction of import tariff, removal of restrictions, and active
encouragement of foreign investment and technical imports, more market oriented determination
of foreign exchange rates. Almost all capital goods, intermediate goods and raw materials were
made free to be imported. Customs duties were drastically reduced to an average of 28% in
1997-98 from higher than 50% at the beginning of the reforms.
Consequent upon the measures of external liberalization combined with robust growth of world
trade Indian exports performed well during the reform period. Indias export to GDP ratio has
increased by 5.8% in 1991-92 to 10.1% in 2000-01 and the export growth rate has increased from
-1.5% to 21% during this period, even though the rate has not been steady throughout the decade.
After the initial spurt in export growth of 18%-21% between 1993-94 and 1995-96, it has declined
sharply to only 5.3% in 1996-97 and become negative in 1998-99 due to South East Asian crisis
and world wide recession. The growth rate has recovered and reached 21% in 2000-01 but it once
again fell sharply during 2001-02 on account of global economic recession and September 11
crisis. A compositional change has also been witnessed in the export basket with the opening up.
While the share of manufactured goods in total export of India has increased from 75% in 1991-92
to 83% in 2000-01, the share of agriculture has declined from 18% to 13% during this period.
However the share of agricultural exports has reached as high as 18%-20% between 1995-96 and
1998-99. It has been also observed that in 1990s agriculture has contributed significantly to
Indias export whereas in 1980s the export of agriculture had remained almost stagnant and the
manufactured products accounted for the almost entire growth in total exports. The export of
minerals has reduced from 5.2% in 1991-92 to 2.6% in 2000-01. Within the manufacturing sector
gems and jewelry has become the second most important constituent in the export basket in 1990s
moving from an insignificant position in 1980s while the other export items which have also
grown fast during this period are drugs and pharmaceuticals, readymade garments and yarn,

inorganic chemicals, handicrafts, rubber products, glass products. A steady growth in export has
been registered by electronic goods, machinery, coat tar products, transport equipments.
On the import side, the shares of food grains and edible oils which constituted a significant
proportion in total imports at the beginning years of economic planning, have declined remarkably
while the shares of raw materials and intermediate manufactures in total import expenditure have
increased over the years. There has been a substantial rise in the import expenditure on POL
import. The share of petroleum and lubricants in total import expenditure has increased from 6.1%
in 1960-61 to 20.2% in 1997-99 with a dramatic increase to 41% in 1980-81 due to two-fold hike
in oil prices in the seventies. The import expenditure on iron and steel has accounted for 11% of
the total in 1960-61 and the share has declined to 3.7% in 1997-98. Pearls and precious stones, the
other principal item in the import basket has registered an increasing share in the total import
expenditure over the years due to the increasing demand of the gems and jewelry on the export
front. The share of the capital goods which primarily consists of non electrical machinery,
electrical machinery, transport equipments etc in total import expenditure was around 31% in
1960-61 on account of the programme of industrialization. However the dependence on imported
capital goods needed for industrialization has been reduced substantially as the share of this
category in total import expenditure has declined to only 17% in 1997-98.
During the first half of 1990s no such significant change has been observed regarding the
composition of import while during the second half there has been a shift in the goods
composition of major items of import. The proportion of import items related to export production
like pearls, precious and semi precious stones and electronic goods has increased substantially
during this period. The share of value of petroleum to total import has gone up by nearly 10%
mostly on account of rise in oil prices. Thus with the change in exports and imports the structure
of Indias foreign trade has undergone a significant change over the last five decades after
Independence.
Conclusion
A few studies related to the structural basis of Indias trade have been conducted during
pre-liberalization period. But liberalization and trade reform in the 1990s have led to a significant
positional change in the export and import basket. Analysis of our export basket indicates an
increase in the share of the manufactured goods along with an overall widening and diversification
of exports. The export of agriculture and allied activities has also contributed significantly in the
overall export growth in the nineties as compared the previous decade. On the import side, a shift
in the goods composition of major items of export has been observed during the second half of the
nineties. Thus two important factors of production, labour and capital,(natural resources),
skilled/unskilled labour influence the course of foreign trade considerably.
In other words the trade structure of India during reform period is one of a labour abundant
country. The composition of Indias foreign trade has changed over the years resulting from the
diversification in the production structure during different plans. Industrialization, trade policies
within the domestic economy or movement of international capital could have possibly affected
the structure of trade to some extent but Indias pattern of trade seems to be predominantly by its
endowment of factors during the reform period.