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MODULE 1 EMERGING TRENDS IN INDIAN ECONOMY

5.1 INDIAS ECONOMIC REFORMS


LIBERALIZATION MEASURES
The New Industrial Policy (NIP) is the first part of the liberalization
measures. Under the NIP, industrial licensing has been greatly
liberalized. In addition, substantive changes have been introduced in
matters like FDI & Technology import. Third, MRTP & FERA have
been relaxed significantly. And lastly, the role of the public sector has
been significantly curtailed.

NIP: MAIN CONCEPTS

Liberalization of Industrial
licensing

De-licensing
De-control
De-regulation
Broad-banding
Abolition of registration

FERA Liberalization

Liberalization of FDI
Liberalization of technology
import

MRTP Liberalization

Abolition of threshold assets limit


No MRTP clearance needed for
expansions, mergers
Several industries hitherto
reserved for public sector opened
up to private sector
Only 8 core industries remain
reserved for the public sector
Purview of Board for Industrial &
Finance Reconstruction (BIFR)
extended to public sector

Curtailment of Public Sector

MODULE 1 EMERGING TRENDS IN INDIAN ECONOMY


5.2 INDIAS ECONOMIC REFORMS

LIBERALIZATION OF INDUSTRIAL LICENSING


All industries, except a few specified ones, have been de-licensed under
the NIP & liberated from the clutches of control in a bid to eliminate the
obstacles to industrial growth. E-licensing of passenger car industry,
white goods industry, bulk-drugs industry, consumer electronics
became landmarks & several new players entered these industries.
At present, only sectors like alcohol, cigarettes, industrial explosives,
hazardous chemicals, defense & atomic energy need industrial license.

FERA LIBERALIZATION- ENCOURAGEMENT TO FDI


With a view to attract Foreign Direct Investment (FDI), the NIP
introduced many changes in Foreign Exchange Regulation Act (FERA),
which had incorporated over the years a plethora of controls on
companies whose foreign equity exceeded 40%. Some of the
liberalizations are:
Automatic clearance for foreign equity upto 51%.
Expansion of automatic clearance route.
Automatic clearance for capital goods & technology import &
royalty payments.
Removal of restrictions on functioning of Indian companies abroad.
Overseas investment liberalized further.
External Commercial Borrowing (ECB) liberalized
Foreign Exchange Management (FEMA) replaces FERA.

MODULE 1 EMERGING TRENDS IN INDIAN ECONOMY


5.3 INDIAS ECONOMIC REFORMS (CONTD)

MRTP Liberalization
The Monopolies & Restrictive Trade Practices Act (MRTP) has been a
growth restricting regulation. Under the NIP, sweeping changes have
been made in MRTP regulations. The MRTP Act has been amended to
altogether do away with the threshold assets limit which rendered a
firm an MRTP company or a dominant undertaking.
MRTP clearance is now not required for neither investment
applications; nor is any approval needed for establishing new
undertakings, or for implementing expansions, mergers, amalgamations
& takeovers. The existing restrictions on acquisition/transfer of shares
have also been removed.

PSUs Curtailment & Pvt Sector Enlargement


The NIP curtailed public sectors pre-eminent role in industry & threw
open the industrial arena to the private sector in almost full measure.
Public sectors exclusive domain now stands limited to 8 core industries
like arms & ammunition, atomic energy, railways, mining & coal.
And with this, more than 75%of the total industrial activity of the
country is now available to the privates sector. Though reservation is
retained for the public sector in 8 industries, there is no bar against
even these industries being opened up to the private sector.

Scope of SICA extended to public sector


The government amended the Sick Industrial Companies Act (SICA) &
armed itself with powers to tackle sick PSUs. Through this route, even
the closure of PSUs became possible.
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MODULE 1 EMERGING TRENDS IN INDIAN ECONOMY


5.4 INDIAS ECONOMIC REFORMS (CONTD)
NIP Total departure from earlier industrial policies
The NIP almost amounted to be the polar opposite of all the earlier
industrial policies. The NIP was novel when compared to earlier
policies. While the earlier policies encouraged industry to remain
wrapped up in the cocoon of an excessively protected economy, the new
policies compelled industry to acquire competitive strength & pursue
business excellence. It envisaged a more efficient & quality conscious
industrial sector, equipped to face global competition.

Controls Goodbye & Competition Welcome


All earlier formulations on industrial policy basically revolved around
the Industrial Policy Resolution (IPR) of 1956. Control & regulation has
been the crux of these policies. They had presumed that the government
would be the major operator in industries. In contrast to such earlier
policies, the NIP said goodbye to controls & regulations.
Similarly, it said goodbye to import substitution. In all the past
formulations, protecting domestic industry from global competition &
import substitution-cum-preservation of foreign exchange was a major
theme. Against this, liberal imports & exposing domestic industry to
global competition is the theme of the new policy. It envisages a more
open, efficient & quality conscious industrial sector equipped to face
global competition.
In short, through NIP, the country cast away the extreme caution that
had surrounded the industrial & foreign investment policy all these
years. Moreover, for over 40 years, a commanding role for the public
sector had formed the cornerstone of Indias industrial policy. In
contrast, the NIP has voted for a substantive reduction in the role of the
public sector in the industrial scene of the country.

MODULE 1 EMERGING TRENDS IN INDIAN ECONOMY


5.5 INDIAS ECONOMIC REFORMS (CONTD)

Trade Policy Liberalization/NTP


The trade policy reforms were brought forth through the New Trade
Policy (NTP), Like NIP, liberalization has been the crux of NTP too:
Free Trade & a more Open Exim Regime: The NTP changed countrys
foreign trade scene, liberating export-import trade from government controls.

Imports liberalized & De-Canalized, Licenses abolished, Tariffs


lowered: Licensing hassles for imports have been reduced, except for a small
non-permitted list of items. Imports have also been de-canalized for the most
part; the canalization agencies will henceforth act as any other trading house.

Phasing out of QRs, Relying on Exchange rates/Tariffs for controlling


trade flow: As per new trade policy, tariffs & exchange rates will serve as
instruments for controlling trade flow instead of quantitative restrictions (QRs).
This had become a pressing requirement in the context of WTO negotiations.

Exports encouraged: Achieving good growth in exports on a sustainable basis


has been another major aim of the NTP. The policy offers several incentives for
exports, including abolition of export duties, cheaper export credit & cuts in
import duty. The government also enhanced duty drawback for large # of items.

Rupee made convertible: The government brought in partial convertibility of


the rupee in 1992-93 & full convertibility on the trade account in 1993-94. The
move supported the intention to give exchange rate mechanism its due role in
regulating the trade flow, apart from encouraging exports.

EPCGS/EPZ/FTZ: The government also liberalized the Export Promotion


Capital Goods Scheme (EPCGS), which provided for import of capital goods at
the concessional duty of 15% with a built-in export obligation. The government
liberalized the Export Oriented Units (EOU) scheme & the Export Processing
Zone (EPZ) scheme & introduced special incentives for them. Subsequently, the
government stipulated that Free Trade Zones (FTZ) would replace exportprocessing zones & FTZ are to be treated as outside countrys customs territory.

MODULE 1 EMERGING TRENDS IN INDIAN ECONOMY


5.6 MACROECONOMIC REFORMS & STRUCTURAL ADJUSTMENTS
The government brought about a series of macroeconomic corrections,
reforms of economic institutions & structural adjustments. These
include the following:
Fiscal Reforms Reduction of Fiscal Deficit, Taxation Reforms.
Banking Reforms Freedom & Flexibility in Operations.
Capital Market Reforms Insurance Sector, Capital markets open to FDIs.
Containment of Inflation & Public Debt.
Phasing out Subsidies, Market-driven Price Environment.
Public Sector Restructuring.
Exit Policy VRS, Rigidity of Labor Laws.
Direct Tax Reforms: Main Measures

Moderate rate.
Higher exemption limits.
Wider tax base.
Presumptive tax on small traders.
Abolishment of wealth-tax on productive assets.

Reforms regarding excise duties (Taxation Reforms)


ED changed from specific to ad valorem rates in many cases.
Duty structure simplified by merging special & basic duty rates.
3 special excise duty rates of 8%, 16% & 24% were consolidated into
one special excise duty (Cenvat) of 16%. The 8% rate applies to
certain essential items like kerosene.
Manufacturers now need not maintain separate records for ED
After almost 4 decades, the central rules were atlast re-codified & the
new rules took effect from July 2001. Re-codification of central
excise rules meets along-standing demand of the industry. The new
rules are expected to remove complexities in the current set of rules.