MUMBAI

PROJECT REPORT ON

“ECONOMIC POLICIES”

SUBMITTED BY:
Ayanica Sree (10BSP )
Saurabh Chaudhari(10BSPO991
Sonali Narbariya(10BSP)
Soman Choudhary(10BSP)
 ACKNOWLEDGEMENT

We hereby regard our sincere thanks to Prof. Swaha Shome of IBS

Mumbai under whose guidance this project was undertaken.
 1. INTRODUCTION
Global economic activity remained buoyant for the year during 2010,after the global financial
crisis as the economies are trying to come out of the aftermaths of the recession and available
information suggests that the growth momentum is likely to continue during 2011, albeit with
some moderation. A positive feature of the global economic activity during 2010 was the
broadening of growth across major regions/countries. The impact of the subprime crisis in the
US has been largely offset by the acceleration of economic activity in the emerging and
developing countries, led by China and India, which have provided stable support to the global
economy with sustained high growth. The rising global activity is, however, leading to closing of
output gaps in many countries; strong demand, in conjunction with strong gains recorded by
global commodity prices, was reflected in inflationary pressures in major economies. With
headline inflation crossing the targets/comfort zones in major countries, many central banks
pursued monetary tightening to contain inflationary expectations.

In order to strengthen the domestic economic activity over the past few years has been
underpinned by proactive policy measures to improve the productivity and competitiveness of
the Indian economy. A number of steps covering the various sectors of the economy – monetary,
fiscal, industrial, foreign trade, technology and environmental sectors – were taken during the
year to improve and sustain the current growth momentum, and make it more inclusive in an
environment of macroeconomic and financial stability.
 2. FISCAL POLICY
2.1. UNDERSTANDING THE FISCAL POLICY

Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known
as Keynesian economics, this theory basically states that governments can influence
macroeconomic productivity levels by increasing or decreasing tax levels and public spending.
This influence, in turn, curbs inflation increases employment and maintains a healthy value of
money.

Fiscal policy basically means by which a government adjusts its levels of spending in order to
monitor and influence a nation's economy. It is the sister strategy to monetary policy, with which
a central bank influences a nation's money supply. These two policies are used in various
combinations in an effort to direct a country's economic goals.

It refers to the union government's use of its annual budget to affect the level of economic
activity, resource allocation and income distribution. The budget strategy can also influence the
achievement of the government's objectives of internal and external balance and economic
growth.

The two main instruments of fiscal policy are government spending and taxation. Changes in
the level and composition of taxation and government spending can impact on the following
variables in the economy:

Aggregate demand and the level of economic activity;

1. The pattern of resource allocation; and

2. The distribution of income.

  EXAMPLE OF FISCAL POLICY

Let's say that an economy has slowed down. Unemployment levels are up, consumer spending
is down and businesses are not making any money. A government thus decides to fuel the
economy's engine by decreasing taxation, giving consumers more spending money while
increasing government spending in the form of buying services from the market such as building
roads or schools. By paying for such services, the government creates jobs and wages that are in
turn pumped into the economy.

The three possible stances of fiscal policy are neutral, expansionary and contractionary.

1. A neutral stance of fiscal policy implies a balanced budget where G = T Government

spending = Tax revenue. Government spending is fully funded by tax revenue and overall
the budget outcome has a neutral effect on the level of economic activity.

2. An expansionary stance of fiscal policy involves a net increase in government spending

(G > T) through a rise in government spending or a fall in taxation revenue or a
combination of the two. This will lead to a larger budget deficit or a smaller budget
surplus than the government previously had a balanced budget. Expansionary fiscal
policy will lead to an increase in economic activity. Expansionary fiscal policy is usually
associated with a budget deficit.

3. Contractionary fiscal policy (G < T) occurs when net government spending is reduced
either through higher taxation revenue or reduced government spending or a combination
of the two. This would lead to a lower budget deficit or a larger surplus than the
government previously had, or a surplus if the government previously had a balanced
budget. Concretionary fiscal policy is usually associated with a surplus
2.2. GOVERNMENT SPENDING

Government spending can be broken down into three main categories:

1. General government expenditure - consists of the combined capital and current

spending of central government including debt interest payments to holders of
government debt

2. General government final consumption - is government expenditure on current goods

and services excluding transfer payments

3. Transfer payments – transfers are transfers from taxpayers to benefit recipients through
the working of the social security system.

 EXPENDITURE

Government expenditure comprises expenditure on economic, social and general services.

The pattern in government expenditure since the Eighties has been mainly influenced by a
change in role of the government in the growth process, financing pattern of the deficits
(debt and interest payments) and the need for fiscal consolidation.

Main areas of expenditures:-

1. INTEREST PAYMENTS

The widening of fiscal deficit and consequent rise in debt stocks during last two decades have
resulted in mounting expenditure on interest payments.

2. SUBSIDIES

Expenditure on subsidies is a crucial element of government expenditure particularly in the

light of targeting poverty alleviation and the growing need to rationalize expenses for fiscal
consolidation. The total burden of subsidies on government finances should take into
account, in addition to the explicit subsidies, several implicit subsidies in the form of lower
user charges for economic and social services provided by the government.
 3. WAGES, SALARIES AND PENSIONS

The rising bill in respect of wages, salaries and pensions is considered to be an important
element in the fiscal health of the government, particularly in the recent years. These components
partly represent the committed expenditure obligations of the government.

4. CAPITAL OUTLAYS

Capital outlays represent the expenditure undertaken by the government to build its
investments. These investments enhance the productive capacity of the economy through
provision of the infrastructure and capital goods. The actual impact of these investments on the
growth process is magnified by the “crowding-in” impact on private investment.

5. DEFENCE

The central government also undertakes revenue and capital expenditures for defense purposes
which act as a public good at the national level.

2.3. METHODS OF RAISING FUNDS

Governments spend money on a wide variety of things, from the military and police to
services like education and healthcare, as well as transfer payments such as welfare benefits.

This expenditure can be funded in a number of different ways:

1. Taxation

2. Seignorage, the benefit from printing money

3. Borrowing money from the population, resulting in a fiscal deficit.

 TAXATION
 I. INCOME TAX

It is a tax levied on the financial income of persons, corporations, or other legal entities.
Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be
progressive, proportional, or regressive. When the tax is levied on the income of companies, it is
often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax
the total income of the individual (with some deductions permitted), while corporate income
taxes often tax net income (the difference between gross receipts, expenses, and additional write-
offs).

II. PAYROLL TAX

It generally refers to two kinds of taxes: Taxes which employers are required to withhold from
employees' pay, also known as withholding, Pay-As-You-Earn (PAYE) or Pay-As-You-Go
(PAYG) tax; or taxes directly related to employing a worker paid from the employer's own
funds: these may be either fixed charges or proportionally linked to an employee's pay.

III. CAPITAL GAIN TAX

It is a tax charged on capital gains, the profit realized on the sale of an asset that was
purchased at a lower price. The most common capital gains are realized from the sale of stocks,
bonds, precious metals and property.

IV. VALUE ADDED TAX

 Value Added Tax (VAT), or Goods and Services Tax (GST), is tax on exchanges. It is levied
on the added value that results from each exchange. It differs from a sales tax because a sales tax
is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the
number of passages that there are between the producer and the final consumer. A VAT is an
indirect tax, in that the tax is collected from someone other than the person who actually bears
the cost of the tax (namely the seller rather than the consumer). To avoid double taxation on final
consumption, exports (which by definition, are consumed abroad) are usually not subject to VAT
and VAT charged under such circumstances is usually refundable.

V. SALES TAX

A Sales Tax is a consumption tax charged at the point of purchase for certain goods and
services. The tax is usually set as a percentage by the government charging the tax. There is
usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the
point of sale (tax-exclusive).

VI. STAMP DUTY

Stamp duty is a form of tax that is levied on documents. Historically, a physical stamp (a tax
stamp) had to be attached to or impressed upon the document to denote that stamp duty had been
paid before the document became legally effective. More modern versions of the tax no longer
require a physical stamp.

 SEIGNORAGE

It is the net revenue derived from the issuing of currency. Seignorage derived from coins
arises from the difference between the face value of a coin and the cost of producing, distributing
and eventually retiring it from circulation. Seignorage is an important source of revenue for some
national banks. Seignorage derived from notes is the difference between the interest earned on
the government's securities portfolio, and the costs of producing and distributing bank notes.

 FUNDING OF DEFICITS
 A fiscal deficit is often funded by issuing bonds, like Treasury bills or Consols. These pay
interest, either for a fixed period or indefinitely. If the interest and capital repayments are too
great, a nation may default on its debts, usually to foreign debtors.

2.4 IMPLICATION OF FISCAL POLICY

Fiscal policy is used by governments to influence the level of aggregate demand in the
economy, in an effort to achieve economic objectives of price stability, full employment and
economic growth.

Keynesian economics suggest that adjusting government spending and tax rates, are the best
ways to stimulate aggregate demand. This can be used in times of recession or low economic
activity as an essential tool in providing the framework for strong economic growth and working
toward full employment. The government can implement these deficit-spending policies due to
its size and prestige and stimulate trade. In theory, these deficits would be repaid for by an
expanded economy during the boom that would follow the basis for the New Deal.

During periods of high economic growth, a budget surplus can be used to decrease activity in
the economy. A budget surplus will be implemented in the economy if inflation is high, in order
to achieve the objective of price stability. The removal of funds from the economy will, by
Keynesian Theory, reduce levels of aggregate demand in the economy and contract it, bringing
about price stability.

Despite the importance of fiscal policy, a paradox exists. In the case of a government running
a budget deficit, funds will need to come from public borrowing (the issue of government
bonds), overseas borrowing or the printing of new money. When governments fund a deficit with
the release of government bonds, an increase in interest rates across the market can occur. This is
because government borrowing creates higher demand for credit in the financial markets,
causing a higher aggregate demand (AD) due to the lack of disposable income, contrary to the
objective of a budget deficit. This concept is called crowding out. Alternatively, governments
may increase government spending by funding major construction projects. This can also cause
crowding out because of the lost opportunity for a private investor to undertake the same project.
However, the effects of crowding out are usually not as large as the increase in GDP stemming
from increased government spending.

Another problem is the time lag between the implementation of the policy, and visible effects
seen in the economy. It is often contended that when an expansionary Fiscal policy is
implemented, by way of decrease in taxes, or increased consumption (keeping taxes at old level),
it leads to increase in aggregate demand; however, an unchecked spiral in aggregate demand will
lead to inflation. Hence, checks need to be kept in place.

2.5 INDIAN FISCAL POLICIES

India was a latecomer to economic reforms, embarking on the process in earnest only in 1991,
in the wake of an exceptionally severe balance of payments crisis. The need for a policy shift had
become evident much earlier, as many countries in East Asia achieved high growth and poverty
reduction through policies which emphasized greater export orientation and encouragement of
the private sector. India took some steps in this direction in the 1980s, but it was not until 1991
that the government signaled a systemic shift to a more open economy with greater reliance upon
market forces, a larger role for the private sector including foreign investment, and a
restructuring of the role of government. India’s economic performance in the post-reforms period
has many positive features. The average growth rate in the ten year period from 1992-93 to
2001-02 was around 6.0 percent, which puts India among the fastest growing developing
countries in the 1990s. This growth record is only slightly better than the annual average of 5.7
percent in the 1980s, but it can be argued that the 1980s growth was unsustainable, fuelled by a
buildup of external debt which culminated in the crisis of 1991. In sharp contrast, growth in the
1990s was accompanied by remarkable external stability despite the East Asian crisis. Poverty
also declined significantly in the post-reform period, and at a faster rate than in the 1980s
according to some studies (as Ravallion and Datt discuss in this issue). However, the ten-year
average growth performance hides the fact that while the economy grew at an impressive 6.7
percent in the first five years after the reforms, it slowed down to 5.4 percent in the next five
years. India remained among the fastest growing developing countries in the second sub-period
because other developing countries also slowed down after the East Asian crisis, but the annual
growth of 5.4 percent was much below the target of 7.5 percent which the government had set
for the period. Inevitably, this has led to some questioning about the effectiveness of the reforms.
Opinions on the causes of the growth deceleration vary. World economic growth was slower in
the second half of the 1990s and that would have had some dampening effect, but India’s
dependence on the world economy is not large enough for this to account for the slowdown.
Critics of liberalization have blamed the slowdown on the effect of trade policy reforms on
domestic industry (for example, Nambiar, 1999; Chaudhuri, 2002). However, the opposite view
is that the slowdown is due not to the effects of reforms, but rather to the failure to implement the
reforms effectively. This in turn is often attributed to India’s gradualist approach to reform,
which has meant a frustratingly slow pace of implementation. However, even a gradualist pace
should be able to achieve significant policy changes over ten years. This paper examines India’s
experience with gradualist reforms from this perspective. We review policy changes in five
major areas covered by the reform program: fiscal deficit reduction, industrial and trade policy,
agricultural policy, infrastructure development and social sector development. Based on this
review, we consider the cumulative outcome of ten years of gradualism to assess whether the
reforms have created an environment which can support 8 percent GDP growth, which is now
the government target.
 1. GDP GROWTH RATE:

9.4
(Re)

6.9
5.7 11
(Re)

2 .POVERTY REDUCTION

* Sources : CENSUS REPORT 2001

3.

3.LITERACY RATE

*26Sources : CENSUS REPORT 2001

16
80

52
 3. MONETARY POLICY OF THE RBI With the

introduction of the Five year plans, the need for appropriate adjustment in monetary and fiscal policies to
suit the pace and pattern of planned development became imperative. The monetary policy since 1952
emphasized the twin aims of the economic policy of the government:

(a) spread up economic development in the country to raise national income and standard of
living, and

(b) To control and reduce inflationary pressure in the economy.

This policy of RBI since the First plan period was termed broadly as one of controlled expansion, i.e.; a
policy of “adequate financing of economic growth and at the same time the time ensuring reasonable
price stability”. Expansion of currency and credit was essential to meet the increased demand for
investment funds in an economy like India which had embarked on rapid economic development.
Accordingly, RBI helped the economy to expand via expansion of money and credit and attempted to
check in rise in prices by the use of selective controls.

Monetary policy is the management of money supply and interest rates by central banks to
influence prices and employment. Monetary policy works through expansion or contraction of
investment and consumption expenditure.

3.1 RBI’s ANTI INFLATIONARY MONETARY POLICY SINCE

1972:-

Since 1972, the Indian economy has been working with considerable inflationary potential ------ rapid
increase in money with the public and with the banking system. There was also expansion of bank credit
to finance trade and industry. RBI was forced to abandon ‘controlled expansion’ and adopt the policy of
credit restraint or tight monetary policy. RBI has generally followed this kind of monetary policy with
varying degrees of success till today.
 3.2 AN EVALUATION OF THE MONETRY POLICY:-

The objective of monetary policy was at one time characterized by RBI itself as ‘controlled expansion.’
On the one hand, RBI was thinking steps such as the bill market scheme to expand bank credit to industry
and trade and thus help in economic development. On the either hand, RBI was using both quantities
(general credit restraint) and selective credit controls so that the deployment of loans and advances by the
commercial banks for speculative purposes was under control. There was necessary to keep the rising
prices under check.

Thus, the monetary policy had twin aims- expansion of the economy and control of inflationary
pressure. Monetary policy RBI has certain inherent constraints and obviously limited in its usefulness.

Finally, the weapons and the powers available to RBI are such that they cover only organized banking
sector viz, commercial banks and cooperative banks. To the extent inflationary pressure is the result of
bank finance, Reserve Banks general and selective controls will have positive effect. But if inflationary
pressure is really brought about by deficit financing and shortage of goods, RBI’s control may not have
effect at all. This is what is probably happening in Indian in recent years. Besides, it should always be
kept in mind that RBI has no power over non-banking financial institutions as well as indigenous bankers
who play such major role in financing trade and industry.

 When is the Monetary Policy announced?

Historically, the Monetary Policy is announced twice a year - a slack season policy (April-
September) and a busy season policy (October-March) in accordance with agricultural cycles.
These cycles also coincide with the halves of the financial year.

Initially, the Reserve Bank of India announced all its monetary measures twice a year in the
Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as RBI
reserves its right to alter it from time to time, depending on the state of the economy.

However, with the share of credit to agriculture coming down and credit towards the industry
being granted whole year, the RBI since 1998-99 has moved in for just one policy in April-end.
However a review of the policy does take place later in the year.
  How is the Monetary Policy different from the Fiscal Policy?

Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy.

The Monetary Policy regulates the supply of money and the cost and availability of credit in
the economy. It deals with both the lending and borrowing rates of interest for commercial
banks.

The Monetary Policy aims to maintain price stability, full employment and economic growth.

The Reserve Bank of India is responsible for formulating and implementing Monetary Policy.
It can increase or decrease the supply of currency as well as interest rate, carry out open market
operations, control credit and vary the reserve requirements.

The Monetary Policy is different from Fiscal Policy as the former brings about a change in the
economy by changing money supply and interest rate, whereas fiscal policy is a broader tool
with the government.

The Fiscal Policy can be used to overcome recession and control inflation. It may be defined
as a deliberate change in government revenue and expenditure to influence the level of national
output and prices.

For instance, at the time of recession the government can increase expenditures or cut taxes in
order to generate demand.

On the other hand, the government can reduce its expenditures or raise taxes during
inflationary times. Fiscal policy aims at changing aggregate demand by suitable changes in
government spending and taxes.

The annual Union Budget showcases the government's Fiscal Policy.

 3.3 SOME MONETARY POLICY TERMS
 INFLATION

Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money
and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices
are pushed up.

The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce
the supply of money or increase interest rates to reduce inflation.

 MONEY SUPPLY

This refers to the total volume of money circulating in the economy, and conventionally
comprises currency with the public and demand deposits (current account + savings account)
with the public.

The RBI has adopted four concepts of measuring money supply. The first one is M1, which
equals the sum of currency with the public, demand deposits with the public and other deposits
with the public. Simply put M1 includes all coins and notes in circulation, and personal current
accounts.

The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts
- plus government deposits and deposits in currencies other than rupee.

The third concept M3 or the broad money concept, as it is also known, is quite popular. M3
includes net time deposits (fixed deposits), savings deposits with post office saving banks and all
the components of M1.

 STATUTARY LIQUID RATIO (SLR)

Banks in India are required to maintain 25 per cent of their demand and time liabilities in
government securities and certain approved securities.
 These are collectively known as SLR securities. The buying and selling of these securities laid
the foundations of the 1992 Harshad Mehta scam.

 REPO

A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan
by one bank to another against government securities.

Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that
at the end of the borrowing term, it will buy back the securities at a slightly higher price, the
difference in price representing the interest.

 OPEN MARKET OPERATIONS

An important instrument of credit control, the Reserve Bank of India purchases and sells
securities in open market operations.

In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to
increase the supply of money, RBI purchases securities.

3.4 OBJECTIVES OF MONETARY POLICY: -

 PRICE STABILITY

The 'Chakravarty committee' argued that, in the context of planned economic development, monetary
authorities should aim at “price stability” in the broadest sense. Price stability here does not mean
constant price level but it is consistent with an annual rise of 4% in the wholesale price index. To achieve
this objective, the government should aim at raising output levels, while RBI should control the expansion
in reserve money and the money supply.
  MONETARY TARGETING:-

Emphasizing the inter-relation between money, output and prices, the Chakravarty committee has
recommended the formation of a monetary policy based on monetary targeting. According to the
committee, target for growth in money supply in a broad sense during a given year should be in terms of a
range.

(A). Based on anticipated growth in output, and

(B). In the light of the price situation.

 The target range should be announced in advance, the target for money supply should be
reviewed in the course of the year to accommodate revisions, if any, in the anticipated growth in
output and any change in the price situation.
 CHANGE IN THE DEFINITION OF BUDGETARY DEFICIT

Till now the budgetary deficit of the central government essentially took from increase in treasury bills
outstanding. Not all the treasury bills were held by RBI but part of treasury bills were absorbed by the
public. Since the present concept of budget deficit did not distinguish between the amounts held by RBI,
it overstated the extent of monetary impact of fiscal operation. Accordingly, the Chakravarty committee
suggested a change in the definition of budgetary deficit, so that there could be clear distinction between
revenue deficit, fiscal deficit and overall budgetary deficit.

 INTEREST RATE POLICY

At present the interest rate structure is completely administered by the monetary authorities under the
general direction of the government. According to the Chakra arty committee, the present system of
administered interest rates has become unduly complex and needs to be modified the committee has
mentioned some of the important aspects of interest rate policy which need to be taken into account,
while modifying the administered interest rate structure as for example increasing the pool of financial
savings, providing a reasonable return on saving of small savers, reinforcing anti-inflationary policies the
need to provide credit at concessional rate of interest to the priority sector and the profitability of banks ,
etc.

Thus, the Chakra arty committee envisaged a strong supportive role for interest rate policy in monetary
regulating based on monetary targeting.
  RESTRUCTURING OF THE MONEY MARKET IN INDIA

The committee envisage (predicted) an important role in treasury bill market, the call money market,
the commercial bills market and the inter-corporate funds market in the allocation of short term resources,
with minimum of cost and minimum of delay, further, according to the committee, a well-organized
money market provided an efficient mechanism for the transmission of the monetary regulation to the rest
of economy. Accordingly, the committee has recommended that RBI should take measures to develop an
efficient.

 OTHER OBJECTIVES OF MONETARY POLICY

In certain periods, RBI may be seriously concerned with other short-term objectives and problems.
For instance, during in two years 1994-96, RBI had to enter the foreign exchange market in a big way to
prevent heavy depreciation of the rupee. This was also done during January 1998 and later to prevent the
rupee following the experience of South Asian currencies. Bimal Jalan, the Governor of RBI came out
strongly with a series of measures to check the rapid sliding of his rupee against the dollar.

These objectives can be taken as short-term objectives of monetary policy of RBI. The long-term
policies of RBI, however reflects the banks firm commitment to pursue a low and stable order of
inflation-----the assumption is that real growth would be in jeopardy (danger), if inflation goes beyond the
margin of tolerance.

3.5 WEAPONS OF MONETARY POLICY

3.5.1 CREDIT CONTROL

a) GENERAL CREDIT CONTROLS

Since 1955-56 and particularly after 1973-74 the inflationary rise in prices has been steadily
mounting. Increased government expenditure financed through deficit spending has the direct
effect of pushing up the prices, wages and incomes.

RBI has various weapons of control and, trough using them; it hopes to achieve its monitory
policy.

These weapons of control are broadly two: quantitative and qualitative controls.
 Quantitative controls are used to control volume of credit and, indirectly, to control the
inflationary and deflationary pressures caused by expansion and contraction of credit.

Qualitative controls are also known as general credit controls and consist of bank rate policy,
open market operation and cash reserve ratio.

 BANK RATE

In accordance with the general tradition of the 1930s, RBI started with the cheap money
policy and has fixed a low bank rate (3%) and did not change it till Nov 1953 when it raised the
bank rate to 3.5%. the bank rate gradually rose to 10% in July 1981 – these were only changes
during this period.

The bank rate remained unchanged at 10% for another 10years (1981-1991). It was revised
upwards to 11% in July 1991 and further to 12% in October 1991.

However, the role of bank rate as an instrument of monetary policy has been very limited in
India because of these basic factors,

 The structures of interest rates are administered by RBI – they are not automatically
linked to the bank rates.
 Commercially banks enjoy specific refinance facilities, and not necessarily rediscount
their eligible securities with RBI at bank rates.
 The bill market is underdeveloped and the different sub markets or the money markets
are not influenced by the bank rate.

Since the later part of 1955, India passed through a severe liquidity crunch and as a result the
prime lending rates were ruling high. Industrial production was affected adversely. One step
which RBI took was to reduce the bank rate from 12 to11 percent in April 1997, And gradually
to 6.5%. The reduction of the bank rate was to help in reduction of the other interest rates and
thus stimulate borrowing from banks.
  CASH RESERVE RATIO

Another weapon available to RBI for credit control is the use of variable cash reserve
requirements. Under the RBI act, 1934, every commercial bank has to keep certain minimum
cash reserves with RBI- initially, it was 5% against demand deposits and 2% against time
deposits-these are known as the statutory cash reserves. Since 1962, RBI was empowered to vary
the cash reserves requirement between 3% and 15% of the total demand and time deposits.
During 1973, RBI exercised the power twice, as a form of cred8it squeeze- the statutory reserves
were raised from 3 to 5% in June 1973 and to 7% in September 1973. Since then, RBI has raised
or reduce C.R.R. a number of times (and ultimately raised to the maximum limit of 15% of net
demand and time liabilities) to influence the volume of cash with the commercial banking system
and thus influence there volume of credit.

(b). SELECTIVE AND DIRECTIVE CREDIT CONTROLS

Under the banking Regulation Act 1949 section 21 empowers RBI to issue directives to the
banking companies regarding their advances. These directives may relate to:

 The purpose for which advances may or may not be made;

 The margins to be maintained in respect of secured advances;

 The maximum amount of advantages to any borrower;

 The maximum amount up to which guarantees may be given by the company on behalf
of any firm, company etc.; and

 The rate of interest and other terms and conditions for granting advances.

Generally RBI uses three kinds of selective credit controls:

1. minimum margins for lending against specific securities;

2. ceiling on the amounts of credit for certain purposes; and

3. Discriminatory rate of interest charged on certain types of advances.

 While imposing selective controls RBI generally takes great care that bank credit for
production and transportation of commodities and exports is not affected. Selective controls are
focused mainly on credit to traders for financing inventories (for purposes of hoarding and
speculation).

3.5.2 OPEN MARKET OPERATIONS OF RBI

In economies with well developed money markets, central market use open market
operations- i.e. buying and selling eligible securities by the central bank in the money market- to
influence the volume of cash reserves with commercial banks and thus influence the volume of
loans and advances they can make to the industrial and commercial sectors. RBI has not used
this weapon for many years.

Since 1991, the enormous inflow of foreign funds into India created the problem of excess
liquidity with the banking sector and RBI undertook large scale open market operations. When
RBI sells government securities in the market, it withdraws the part of the cash reserves of
commercial banks and, thereby, reduces the ability of bank to lend to the industrial and
commercial sectors.

The commercial banks will find that they have surplus cash- they will create more credit and
more banks deposits. The supply of money will expand. Such a policy of buying government
securities will be adopted to reserve economic recession in the country. It appears that RBI will
actively use open market operations as an instrument of monetary policy and not simply to
support the market for government bonds.

3.6 EFFECTS
 ON INDIVIDUALS

In recent years, the policy had gained in importance due to announcements in the interest rates.

Earlier, depending on the rates announced by the RBI, the interest costs of banks would
immediately either increase or decrease.
 A reduction in interest rates would force banks to lower their lending rates and borrowing
rates. So if you want to place a deposit with a bank or take a loan, it would offer it at a lower rate
of interest.

On the other hand, if there were to be an increase in interest rates, banks would immediately
increase their lending and borrowing rates. Since the rates of interest affect the borrowing costs
of corporate and as a result, their bottom lines (profits), the monetary policy is very important to
them also.

 ON DOMESTIC INDUSTRY AND EXPORTERS

Exporters look forward to the monetary policy since the central bank always makes an
announcement on export refinance, or the rate at which the RBI will lend to banks which have
advanced pre-shipment credit to exporters.

A lowering of these rates would mean lower borrowing costs for the exporter.

3.7 CONCLUSIONS

Thus we have gone through the entire monetary policy and its importance and how it affects
the people of INDIA.
 4. FOREIGN TRADE POLICIES
4.1. INTRODUCTION

International trade or foreign trade fundamentally arises out of what is known as comparative
trade advantages. To understand this principle, let us go back in time during the days of
Independence. During those days, the products in which India had a comparative advantage were
jute products.

A country like France on the other hand was strong in manufacturing wines. Apart from wine,
France was also in need of jute products for its industrial activities. Given the ground realities, it
made sense that instead of manufacturing jute products in France, the country would be better off
manufacturing wines and import its jute requirements from India. Likewise India too would be
better off manufacturing jute products and import its wine requirements from France.

So, the basic principle underlying Foreign Trade is specialization in production by exporting
countries and cost effectiveness of imports. As the globalization process is inevitable,
international trade has become more competitive.

This is how foreign or world trade is driven…

Hence, the Exim policy is required to promote exports under global competition, with the
purpose of contributing to national income while keeping in view the long-term objectives of
economic development.

The Exim Policy has identified areas in which we have competitive advantage and also deleted
from its thrust focus, items in which we no longer hold competitive advantage.

For agricultural exports the government has permitted private participation in agricultural
export processing zones (AEZ). Companies investing in AEZs have been promised income tax
benefits.
 An export processing zone is essentially a demarcated area or a cluster where exporters
operating in this area are given special concessions and facilities like offshore banking units
which enable the exporters bring down their transaction costs and to work in a hassle-free
environment. This is a concept which has worked successfully in China and other countries and
today about 25 per cent of a country's export trade come from their special export processing
zones. It is also worth mentioning that in China; nearly 40 per cent of the country's export comes
from these zones.

This Exim Policy has made the import of second hand capital goods that are the main vehicles
of investment in this country easier. The government has also announced duty concessions,
which will make the cost of import of capital goods cheaper. For importing capital goods the
manufacturer had to earlier undertake an export obligation, meaning that the manufacturer will
export a certain percentage of his product to make good the amount of foreign exchange spent
while importing. Relaxations have now been considered in such export obligations which will
make the manufacturer breathe easier.

4.2. FDI POLICIES

India with its consistent growth performance and abundant highly skilled manpower provides
enormous opportunities for investment. India is the largest democracy and tenth largest economy
in the world. India is the fourth largest economy in the world in terms of purchasing power
parity.

In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated
economic growth of the country, Government of India initiated a slew of economic and financial
reforms in 1991. India is now ushering in the second generation reforms aimed at further and
faster integration of Indian economy with the global economy. As a result of the various policy
initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and
FDI is encouraged in almost all the economic activities under the automatic route.

India, among the emerging economies of the world has the most liberal and transparent
policies on FDI. FDI up to 100% is allowed under the automatic route in all activities/sectors
except the following, which require prior approval of the Government:-
 1. Sectors prohibited for FDI

2. Activities/items that require an industrial license

3. Proposals in which the foreign collaborator has an existing financial/technical

collaboration in India in the same field

4. Proposals for acquisitions of shares in an existing Indian company in financial service

sector and where Securities and Exchange Board of India (substantial acquisition of
shares and takeovers) regulations, 1997 is attracted.

5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is
not permitted

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could
be made without approval of the central government. The sectors that are not in the automatic
route, investment requires prior approval of the Central Government. The approval is granted by
Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed.

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route,
FDI could take place after taking necessary regulatory approvals from the state governments and
local authorities for construction of building, water, environmental clearance, etc.

 PROCEDURE UNDER AUTOMATIC ROUTE

FDI in sectors/activities to the extent permitted under automatic route does not require any prior
approval either by the Government or RBI. The investors are only required to notify the Regional
Office concerned of RBI within 30 days of receipt of inward remittances and file the required
documents with that office within 30 days of issue of shares of foreign investors

 PROCEDURE UNDER GOVERNMENT APPROVAL

For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall
be necessary: -
(I) All proposals that require an Industrial License which includes (1) the item requiring an
Industrial License under the Industries (Development & Regulation) Act, 1951; (2) foreign
Investment being more than 24 per cent in the equity capital of units manufacturing items
Reserved for small scale industries; and (3) all items which require an Industrial License in terms
of the location policy notified by Government under the New Industrial Policy of1991.

(ii) All proposals in which the foreign collaborator has a previous venture/tie up in India. The
modalities prescribed in Press Note No. 18 dated 14.12. Of 1998 Series, shall apply to such
cases. However, this shall not apply to investment made by multilateral financial institutions
such as ADB, IFC, CDC, DEG, etc. as also investment made in IT sector.

(iii) All proposals relating to acquisition of shares in an existing Indian company in favor of a
Foreign/NRI/OCB investor.

(iv) All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is
not permitted.

(v) Areas/sectors/activities hitherto not open to FDI/NRI/OCB investment shall continue to be so

unless otherwise decided and notified by Government.

(vi) Any change in sectoral policy/sectoral equity cap shall be notified by the Secretariat for
Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion.

 PROHIBITED SECTOR

The extant policy does not permit FDI in the following cases:

1. Gambling and betting

2. Lottery Business

3. Atomic Energy

4. Retail Trading
 5. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture,
Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables,
Mushrooms etc., under controlled conditions and services related to agro and allied
sectors) and Plantations (other than Tea Plantations)

 GENERAL PERMISSION OF RBI UNDER FIPB

Indian companies having foreign investment approval through FIPB route do not require any
further clearance from RBI for receiving inward remittance and issue of shares to the
foreign investors.
The companies are required to notify the concerned Regional Office of the RBI of receipt of
inward remittances within 30 days of such receipt and within 30 days of issue of shares to the
foreign investors or NRIs.

 FOREIGN INVESTMENT IN THE SMALL SCALE SECTOR

Under the small scale policy, equity holding by other units including foreign equity in a small
scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity
holding for foreign investment if the unit is willing to give up its small scale status. In case of
foreign investment beyond 24 per cent in a small scale unit which manufactures small scale
reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent
would need to be obtained.

 FOREIGN INVESTMENT POLICIES FOR TRADING ACTIVITIES

Foreign investment for trading can be approved through the automatic route up to 51% foreign
equity, and beyond this by the Government through FIPB. For approval through the automatic
route, the requirement would be that it is primarily export activities and the undertaking
concerned is an export house/trading house/ super trading house/star trading house registered
under the provisions of the Export and Import policy in force.
4.3. SEZ POLICIES

“SEZ” is a geographical region that has economic laws that are more liberal than a country's
typical economic laws. An SEZ is a trade capacity development tool, with the goal to promote
rapid economic growth by using tax and business incentives to attract foreign investment and
technology. Today, there are approximately 3,000 SEZs operating in 120 countries, which
account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged
terms, SEZs attract investment and foreign exchange, spur employment and boost the
development of improved technologies and infrastructure.

The SEZ policy was first introduced in India in April 2000, as a part of the Export-Import
(“EXIM”) policy of India. Considering the need to enhance foreign investment and promote
exports from the country and realizing the need that level playing field must be made available to
the domestic enterprises and manufacturers to be competitive globally, the Government of India
in April 2000 announced the introduction of Special Economic Zones policy in the country
deemed to be foreign territory for the purposes of trade operations, duties and tariffs. To provide
an internationally competitive and hassle free environment for exports, units were allowed be set
up in SEZ for manufacture of goods and rendering of services. All the import/export operations
of the SEZ units are on self-certification basis. The units in the Zone are required to be a net
foreign exchange earner but they would not be subjected to any pre-determined value addition or
minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ units are
subject to payment of full Custom Duty and as per import policy in force. Further Offshore
banking units are being allowed to be set up in the SEZs.

With a view to augmenting infrastructure facilities for export production it has been decided to
permit the setting up of Special Economic Zones (SEZs) in the public, private, joint sector or by
the State Governments. The minimum size of the Special Economic Zone shall not be less than
1000 hectares. Minimum area requirement shall, however, not be applicable to product specific
and port/airport based SEZ. This measure is expected to promote self-contained areas supported
by world-class infrastructure oriented towards export production. Any private/public/joint sector
or State Government or its agencies can set up Special Economic Zone (SEZ). The government
of India has also converted existing Export Processing Zones into SEZs.
  RATIONALE FOR SEZ SCHEME:

The main objectives of SEZ scheme can be briefly stated as:

» Attract Foreign Direct Investment (FDI)

»  Earn foreign exchange and contribute to exchange rate stability

»  Boost the export sector, especially non -traditional exports

»  Create employment opportunities

»  Introduce new technology

»  Develop backward regions

»  Stimulate sectors such as electronics, information technology, R & D, tourism, infrastructure

and human resource development that are regarded as strategically important to the economy

»  Create backward & forward linkages to increase the output and raise the standard of local
enterprise that supply goods and services to the zone.

 ADMINISTRATIVE SET UP FOR SEZS:

SEZs is governed by a three tier administrative set up

a) The Board of Approval is the apex body in the Department,

b) The Unit Approval Committee at the Zonal level dealing with approval of units in the SEZs
and other related issues, and

c) Each Zone is headed by a Development Commissioner, who also heads the Unit Approval
Committee.
  APPROVAL MECHANISM OF SEZS:

Any proposal for setting up of SEZ in the Private/Joint/State Sector is routed through the
concerned State government who in turn forwards the same to the Department of Commerce
with its recommendations for consideration of the Board of Approval. On the other hand, any
proposals for setting up of units in the SEZ are approved at the Zonal level by the Approval
Committee consisting of Development Commissioner, Customs Authorities and representatives
of State Government.
Approvals have so far been given for setting up of 117 new Special Economic Zones
(including 3 Free Trade Warehousing Zones) spread over 15 States and 2 Union Territories in
the Private/Joint Sector or by the State Governments and its agencies. Of the 117 SEZs approved
for establishment, 7 SEZs have already become operational, 6 SEZs are now getting ready for
operation and the other are at various stages of implementation.

5. EXIM POLICY

EXIM Policy is the export import policy of the government that is announced every five years.
It is also known as the Foreign Trade Policy. This policy consists of general provisions regarding
exports and imports, promotional measures, duty exemption schemes, export promotion
schemes, special economic zone programs and other details for different sectors. Every year the
government announces a supplement to this policy.

The EXIM Policy of 2002-2007 emphasized the importance of agricultural exports and
announced measures like the setting up of agri export zones, removal of procedural restrictions
and marketing cost assistance. Agri Export Zones are considered the most important creation of
this policy -

Agri Export Zones - were formed as a result of this policy. These zones are meant to promote
agricultural exports from the country and provide remunerative returns to the farming
community regularly. They are to be identified by the State Government, which would evolve a
comprehensive package of services to be provided by all State Government agencies, State
Agriculture Universities and all institutions and agencies of the Union Government for intensive
delivery in these zones. Corporate sector companies with proven credentials would be
encouraged to sponsor new agri export zones or take over already notified agri-export zones.

Services that would be managed and coordinated through this scheme include the provision of
pre/post harvest operations, plant protection, processing, packaging, storage and related research
and development. APEDA will supplement, within its schemes and provisions, the efforts of
State Governments for facilitating exports. Click here for a list of the Agri Export Zones.

After, a change of government at the centre, a new EXIM Policy of 2004 - 2009 was
announced. This policy came up with export promotional measures such as Towns of Export
Excellence, Target Plus, Free Trade and Warehousing Zones and the Vishesh Krishi Upaj
Yojana.

Here are details on these schemes -

a. TOWNS OF EXPORT EXCELLENCE: Here, towns in specific areas that produce

goods of Rs. 250 crores and above in the handloom, agriculture, handicraft and fisheries
sector will be notified as Towns of Exports Excellence on the basis of their potential for
growth in exports. They will be granted this recognition to maximize their potential,
enable them to move higher in the value chain and tap new markets.

b. TARGET PLUS: In this scheme, exporters who have attained a large increase in
growth of exports would be allowed duty free credit based on incremental exports
substantially higher than the general actual export target fixed. Rewards will be granted
according to a tiered approach. For incremental growth of over 20, 25 and 100 per cent,
the duty free credits would be 5, 10 and 15 per cent of Free on Board (FOB) value of
incremental exports.

c. VISHESH KRISHI UPAI YOJNA:- It aims to promote exports of fruits, vegetables,

flowers, fruits, and other value-added products. This year it has been expanded to include
soybean and coconut oil as well as food preparations such as soups. Plus, the benefit of
the scheme has been extended to 100 per cent export-oriented units.
4.5 CONCLUSION

Thus we have gone through whole foreign trade policy, its facets and changes.
 5. INDUSTRIAL TRADE POLICY
5.1. INDUSTRIAL POLICY

In 1948, immediately after Independence, Government introduced the Industrial Policy

Resolution. This outlined the approach to industrial growth and development. It emphasized the
importance to the economy of securing a continuous increase in production and ensuring its
equitable distribution. After the adoption of the Constitution and the socio-economic goals, the
Industrial Policy was comprehensively revised and adopted in 1956. To meet new challenges,
from time to time, it was modified through statements in 1973, 1977 and 1980.

The Industrial Policy Resolution of 1948 was followed by the Industrial Policy Resolution of
1956 which had as its objective the acceleration of the rate of economic growth and the speeding
up of industrialization as a means of achieving a socialist pattern of society. In 1956, capital was
scarce and the base of entrepreneurship not strong enough. Hence, the 1956 Industrial Policy
Resolution gave primacy to the role of the State to assume a predominant and direct
responsibility for industrial development.

The Industrial Policy statement of 1973, inter alia, identified high-priority industries where
investment from large industrial houses and foreign companies would be permitted.

The Industrial Policy Statement of 1977 laid emphasis on decentralization and on the role of
small-scale, tiny and cottage industries.

The Industrial Policy Statement of 1980 focused attention on the need for promoting
competition in the domestic market, technological up gradation and modernization. The policy
laid the foundation for an increasingly competitive export based and for encouraging foreign
investment in high-technology areas.
 These policies created a climate for rapid industrial growth in the country. Thus on the eve of
the Seventh Five Year Plan, a broad-based infrastructure had been built up. Basic industries had
been established. A high degree of self-reliance in a large number of items - raw materials,
intermediates, finished goods - had been achieved.

The accent was on opening the domestic market to increased competition and readying our
industry to stand on its own in the face of international competition. The public sector was freed
from a number of constraints and given a larger measure of autonomy. The technological and
managerial modernization of industry was pursued as the key instrument for increasing
productivity and improving our competitiveness in the world. The net result of all these changes
was that Indian industry grew by an impressive average annual growth rate of 8.5% in the
Seventh Plan period.

While Government will continue to follow the policy of self-reliance, there would be greater
emphasis placed on building up our ability to pay for imports through our own foreign exchange
earnings. Government is also committed to development and utilization of indigenous
capabilities in technology and manufacturing as well as its upgradation to world standards.

Government will provide enhanced support to the small-scale sector so that it flourishes in an
environment of economic efficiency and continuous technological upgradation.

Foreign investment and technology collaboration will be welcomed to obtain higher

technology, to increase exports and to expand the production base.

Government will endeavor to abolish the monopoly of any sector or any individual enterprise
in any field of manufacture, except on strategic or military considerations and open all
manufacturing activity to competition.

In pursuit of the above objectives, Government has decided to take a series of initiatives in
respect of the policies relating to the following areas.
5.2. INDUSTRIAL LICENSING POLICY

Industrial Licensing is governed by the Industries (Development & Regulation) Act, 1951.
The Industrial Policy Resolution of 1956 identified the following three categories of industries:
those that would be reserved for development in public sector, those that would be permitted for
development through private enterprise with or without State participation, and those in which
investment initiatives would ordinarily emanate from private entrepreneurs. Over the years,
keeping in view the changing industrial scene in the country, the policy has undergone
modifications. Industrial licensing policy and procedures have also been liberalized from time to
time. A full realization of the industrial potential of the country calls for a continuation of this
process of change.

Industrial licensing will henceforth be abolished for all industries, except those specified,
irrespective of levels of investment. These specified industries (Annex-II), will continue to be
subject to compulsory licensing for reasons related to security and strategic concerns, social
reasons, problems related to safety and over-riding environmental issues, manufacture of
products of hazardous nature and articles of elitist consumption. The exemption from licensing
will be particularly helpful to the many dynamic small and medium entrepreneurs who have been
unnecessarily hampered by the licensing system

6. FOREIGN INVESTMENT

In order to invite foreign investment in high priority industries, requiring large investments
and advanced technology, it has been decided to provide approval for direct foreign investment
up to 51% foreign equity in such industries. There shall be no bottlenecks of any kind in this
process. This group of industries has generally been known as the “Appendix I Industries” and is
areas in which FERA companies have already been allowed to invest on a discretionary basis.
investment. Foreign investment would bring attendant advantages of technology transfer,
marketing expertise, introduction of modern managerial techniques and new possibilities for
promotion of exports.

7. FOREIGN TECHNOLOGY AGREEMENT

With a view to injecting the desired level of technological dynamism in Indian industry,
Government will provide automatic approval for technology agreement related to high priority
industries within specified parameters. Similar facilities will be available for other industries as
well if such agreements do not require the expenditure of free exchange. Indian companies will
be free to negotiate the terms of technology transfer with their foreign counterparts according to
their own commercial judgement. The predictability and independence of action that this
measure is providing to Indian industry will induce them to develop indigenous competence for
the efficient absorption of foreign technology. Greater competitive pressure will also induce our
industry to invest much more in research and development and they have been doing in the past.

8. PUBLIC SECTOR POLICY

There must be a greater commitment to the support of public enterprises which are essential
for the operation of the industrial economy. Measures must be taken to make these enterprises
more growth oriented and technically dynamic. Units which may be faltering at present but are
potentially viable must be restructured and given a new lease of life. The priority areas for
growth of public enterprises in the future will be the following.

 Essential infrastructure goods and services.

 Exploration and exploitation of oil and mineral resources.

 Technology development and building of manufacturing capabilities in areas which are

crucial in the long term development of the economy and where private sector
investment is inadequate.
  Manufacture of products where strategic considerations predominate such as defence
equipment.

At the same time the public sector will not be barred from entering areas not specifically
reserved for it.

9. MONOPOLIES AND RESTRICTIVE TRADE

PRACTICES ACT (MRTP ACT)

With the growing complexity of industrial structure and the need for achieving economies of
scale for ensuring high productivity and competitive advantage in the international market, the
interference of the Government through the MRTP Act in investment decisions of large
companies has become deleterious in its effects on Indian industrial growth. The pre-entry
scrutiny of investment decisions by so called MRTP companies will no longer be required.
Instead, emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade
practices rather than making it necessary for the monopoly house to obtain prior approval of
Central Government for expansion, establishment of new undertakings, merger, amalgamation
and takeover and appointment of certain directors. The thrust of policy will be more on
controlling unfair or restrictive business practices. The principal objectives sought to be achieved
through the MRTP Act are as follows:

i. Prevention of concentration of economic power to the common detriment, control of

monopolies, and

ii. Prohibition of monopolistic and restrictive and unfair trade practices.

10. CONCLUSION

Thus we have gone through whole industrial trade policy, its facets, changes and collaboration.
 6. TECHNOLOGY POLICY
Technology is an essential ingredient in the economic development of the country. Developing nations
like India, which embarked on programme of reconstructing its economy after independence had the
choice between emphasizing indigenous technology, developing and exporting technology from the
advanced countries. India has chosen the middle ground of investing in domestic technology development
while at the same time keeping the door open to foreign technology wherever it found to be useful.
However the aspect of sophisticated technology or foreign technology is very much interlinked with the
other aspects like foreign direct investment, external aid, foreign technology agreements and the
economic policy of the country.

11. OBJECTIVES OF TECHNOLOGY POLICY:-

 TECHNOLOGICAL SELF RELIABILITY

The cornerstone of technology policy is said to be the technological self-reliance. This means neither
self-sufficiency nor autarky. Rather it seems to imply that while import of latest technology will be
permitted there will be compulsions to absorb and adapt that technology so that the need for the imported
material, equipments, and technical services does not extend beyond a certain limit. Thus domestic
technology base is to be continuously expanded and refined but there will be always be a gap between the
domestic know-how and frontiers of international technology.

 APPROPRIATENESS

Appropriateness of imported technology has been much stressed. The premise is that foreign
technologies unless suitably adapted are not appropriate for our factor endowments-abundance of labor
and scarcity of capital. Thus abundance of human resource and their proper utilization is to be kept in
mind as a goal in designing technology policy of India.
  UNPACKING

In the initial years of development the concern of policy planners was largely with the cost of imported
technology and what is called ‘Unpackaging’. A technology package consists of product and process
know-how materials etc. Unpacking implies importing only such of these items that cannot be produced
domestically.

Lately broader issues like appropriateness, scope of adaptation, restrictive practices associated with the
transfer agreements and the ability of developing countries to absorb and eventually export the
technology have concerned the policy makers.

12. FACETS OF RECENT DEVELOPMENT:-

 DEVELOPMENT OF INDEGENOUS & IMPORTED TECHNOLOGY

The accent will continue to be on balanced development of indigenous and imported technology.
However in certain areas like electronics, telecommunications etc where technological developments
are taking place very rapidly, liberal imports of technology will be permitted.

 COMPETITIVENESS

While a number of areas have been identified in which the level of domestic technology is deemed
to be adequate, imported technology may nonetheless be permitted wherever possible. International
competitiveness of our exports is a major consideration. Injections of foreign technology will be
encouraged to improve efficiency, reduced costs and make our exports more competitive.

 INCLUSION OF FOREIGN TECHNOLOGY

While emphasis on Import substitution, comprehensive protection to domestic industry etc might
have been appropriate in earlier phase of planned development, it is no more the case in present
scenario of liberalization.

Foreign technology can come in the form of FDI, in a subsidiary of foreign company; it can also
come in the form of collaboration with domestic firm, in the form of purchase of technical know-how
drawings, design etc. Finally domestic personnel can be trained to absorb foreign technology.
  TECHNOLOGCAL IMPORTS

Since technology is continuously evolving, technology imports will be permitted to limited extent in
areas where the country possesses know-how.

 FOREIGN PARTICIPATION

In permissible areas foreign participation up to 51% will be allowed. However in special cases
where the technology is highly sophisticated or where sources of technology are limited or the project
is export oriented, higher levels of foreign participation can be permitted. As far as possible Indian
Technical and Consultancy Services should be utilized in implementing the project.

13. POLICY CHANGES:-

As a part of new Industrial policy, 1991 announced by the government, there are some policy changes
with regards to FDI and import of technology.

The changes are outlined as below:

 Foreign investment and technology collaboration will be welcomed to obtain higher technology
to increase exports and to expand production base.

 In order to invite foreign investment in high priority industries, requiring large investments and
advanced technology it has been decided to provide approval of FDI up to 51% foreign equity in
such industries. Now foreign equity up to 100% is also allowed. Proposals involving foreign
equity up to 51% in high priority industries received automatic approval within 2 weeks from
RBI.

 Indian companies will be free to negotiate the terms of technology transfers with their foreign
counterparts according to their own commercial judgment.

 Automatic permission will be given for foreign technology agreements in high priority industries
up to a lump sum payment of 1 crore, 5% royalty for domestic sales and 8% for exports subject of
total payment of 8% of sales over a 10 year period from the date of agreement.
  As regards to 100% export oriented units, automatic approval will be given to NRI investments
proposals provided they meet the criteria stipulated by the government and terms of payment are
within the prescribed limits and the items of manufacture are covered under annexure III of
statement on Industrial Policy.

 No permission shall be for hiring of foreign technicians, foreign testing of indigenous raw
materials and products.

 Extension of foreign technical collaboration agreements will need the approval of the
government.

14. POLICY FOR FOREIGN COLLABORATION:-

The following are the main features of present policy on foreign technology:

 Requirements for foreign equity being accompanied by foreign technology have been
removed.

 Dividend balancing requirement against exports removed for all but specified lists of
consumers.

 Use of foreign brands/names in respect of domestic sale permitted.

 Procedure for foreign investment and transfers has been streamlined. It gets automatic
approvals from RBI within 15 days.

 No permission is needed in hiring foreign technicians.

15. CONCLUSION

Thus we have gone through whole Technology policy, its facets, changes and foreign collaboration.
 7.ENVIRONMENT POLICY
7.1 INTRODUCTION

With its geographic, climatic and biological diversity, India has a unique environmental
heritage. The country represents almost all types of habitats of the world and the land mass of the
country and its water bodies sustain an extremely rich variety of plants and animals.

Today ,under the UPA govt , since Jayram Ramesh has taken over the Environment Ministry ,the
environment are being implemented more seriously and any floating of the
environment ministry’s norm is dealt with strict action.This shows change in the
attitude of the government towards the environment and finally we can say
environment issues are given the importance they deserve.

This Chapter aims at reviewing the current state of the environment and identifying policy
issues for promoting sustainable development. It is broadly divided into five sections:
environment-economy linkages; review of our major environmental concerns; the underlying
causes of environmental degradation; discussion on policy response and current initiatives in this
area; and the challenges/issues in environment policy which have a bearing on promoting
sustainable development.

7.2 ENVIRONMENT ECONOMY LINKAGES

All economic activities either affect or are affected by natural and environmental resources.
Activities such as extraction, processing, manufacture, transport, consumption and disposal
change the stock of natural resources add stress to the environmental systems and introduce
wastes to environmental media. Moreover, economic activities today affect the stock of natural
resources available for the future and have inter-temporal welfare effects. From this perspective,
the productivity of an economic system depends in part on the supply and quality of natural and
environmental resources.

7.3 MAJOR ENVIRONMENTAL CONCERNS

A country’s environmental problems vary with its stage of development, structure of its
economy, production technologies in use and its environmental policies. While some problems
may be associated with the lack of economic development (e.g. inadequate sanitation and clean
drinking water), others are exacerbated by the growth of economic activity (e.g. air and water
pollution). Poverty presents special problems for a densely populated country with limited
resources. The major concerns are as follows:

 LAND/SOIL Degradation
 Deforestation
 Bio-Diversity
 Atmospheric pollution
 Water Pollution
 Solid Wastes
 Coastal and Marine pollution

7.4 MAJOR ENVIRONMENT POLLUTION CONTROL

ACTIVITIES:
 Policy initiatives to improve environment like the National Conservation Strategy and
Policy Statement for Environment & Development, 1992, Policy Statement for
Abatement of Pollution, 1992 and National Forest Policy, 1988.
  Notification and implementation of emission and effluent standards for air, water and
noise levels. Standards are formulated by a multidisciplinary group keeping in view the
international standards, existing technologies and impact on health and environment.
 Identification and Action Plans for 17 categories of major polluting industries.
 Identification of 24 critically polluted areas for pollution abatement and improving
environment.
 Use of beneficiated coal with an ash content not exceeding 34% irrespective of their
distance from pit head.
 Action Plans for 141 polluted river stretches to improve quality of river water.
 For controlling vehicular pollution, progressive emission norms at the manufacturing
stage have been notified, cleaner fuels like unleaded petrol, low sulphur diesel and
compressed natural gas (CNG) introduced.
 Identification of clean technologies for large industries and clean
technologies/processes for small scale industries.
 Setting up of Common Effluent Treatment Plants (CETPs) for clusters of SSI units.
 Implementation of an Eco-mark scheme to encourage production/consumption of
environment friendly products.
 Preparation of a Zoning Atlas, indicating status of the environment at district levels to
guide environmentally sound location/setting of industries.
 Mandatory submission of annual Environmental Statement which could be extended
into environmental audit.
 Initiation of environmental epidemiological studies in seven critically polluted areas to
study the impact of environment on health.
 Setting up of authorities like the Environment Pollution (Prevention & Control)
Authority for the National Capital Region for protecting and improving the quality of
environment and preventing, controlling and abating environmental pollution.
 Provision of fiscal incentives for installation of Pollution control equipment and also
for shifting of industries from congested areas.

7.5 UNDERLYING CAUSES OF ENVIRONMENTAL

DEGRADATION
 Environmental degradation is a result of the dynamic inters play of socio-economic,
institutional and technological activities. Environmental changes may be driven by many factors
including economic growth, population growth, urbanization, intensification of agriculture,
rising energy use and transportation. Poverty still remains a problem at the root of several
environmental problems. The causes of environmental degradation are as follows:-

 SOCIAL FACTORS
a. Population
b. Poverty
c. Urbanization
 ECONOMIC FACTORS
 INSTITUTIONAL FACTORS

7.6 CURRENT POLICY THRUSTS

The on-going initiatives of the Government to improve environment include preventive as

well as promotional measures. Various fiscal and monetary incentives are provided by the
Government to encourage the installation of appropriate pollution abatement equipment. At the
same time, various punitive measures including legal action are taken against the defaulting
units. To achieve the goal of pollution abatement, emission and effluent standards for air, water
and noise have been notified. Regular monitoring is carried out and the enforcement efforts have
been intensified. Majority of identified units have already installed the requisite pollution control
equipment. According to the latest data collected by CPCB, out of 1551 units belonging to 17
categories of major polluting industries, 1266 units had facilities to comply with the
environmental standards, 130 were closed and 155 were not having adequate facilities.

Apart from notification of effluent and emission standards for the major categories of
polluting industries, national ambient air quality standards including ambient noise standards
have been notified. Industries have been directed to install necessary pollution control equipment
within a stipulated time frame. The programme for control of vehicular pollution presently being
implemented by the Government involves a progressive tightening of emission norms for new
vehicles, introduction of cleaner fuels, effective enforcement and implementation of an
inspection and maintenance programme for in- use- vehicles, an effective road network, mass
transport system and traffic management.

The forest conservation strategy has evolved, from dependence on strict regulation of access to
and exploitation of forest areas, to incorporating a range of instruments and approaches tailored
to specific local situations. The National Forest Policy explicitly recognizes the multiple use
nature of forest, the rights of local population including the inadvisability of protecting forest
resources without their active participation, and the role that forests play in the survival strategies
of the poor. The task of regenerating the degraded forest areas and land adjoining forest areas
and other protected and ecologically fragile areas and implementation of eco-development
programmes is being undertaken by the National Afforestation & Eco- Development Board.

Management strategies adopted to implement the Forest Policy include new initiative like
participatory Forest Management, involving sharing of products, responsibilities, control and
decision making authority over forest land between forest department and local user groups
based on a formal agreement. Another innovative strategy being tried is the Eco-Development
approach, whereby alternative resources and source of income are developed for local
communities dependent on protected area resources. Major schemes in the Wildlife sector
concentrate on in-situ conservation, protection and development of wildlife and its habitats with
ex-situ efforts complementing these thrusts.

 OTHER INITIATIVES

The Policy Statement for Abatement of Pollution indicates adoption of best available clean
and practicable technologies, rather than end-of-the-pipe treatment, as the key elements for
pollution prevention. As a part of this thrust, the Ministry of Environment & Forests has set up a
Clean Technologies Division for identifying cleaner technologies that can be introduced in
different development sectors and techniques like coal beneficiation are being promoted.
 Prior environmental clearance of development projects based on impact assessment is being
increasingly emphasized. Such clearance has been made mandatory for 29 specified categories of
development projects through statutory notification issued in January, 1994. Public hearings
have been made mandatory for all these projects prior to submission of project proposal to the
Ministry of Environment and Forests to decide on environmental clearance .The success of the
Ganga Action Plan has encouraged its replication for water pollution abatement in tributaries of
the Ganga (Yamuna, Gomti and Damodar) under Ganga Action Plan Phase-II (GAP-II). A wider
scheme called the National River Conservation Plan (NRCP) covering pollution abatement
works for grossly polluted stretches in 18 major rivers in 10 States of the country has also been
launched. Further, a programme for conservation of selected lakes (NLCP) has been approved
for implementation.

The National Environmental Tribunal Act providing relief, compensation and restitution to
victims of accidents, while handling hazardous substances and for environmental damages has
come into force from June, 1995. The Government has also set up a National Environmental
Appellate Authority with a view to bring in transparency in the process, accountability and to
ensure smooth and expeditious implementation of developmental schemes and projects. The
other Authorities set up by the Ministry include an Environmental Impact Assessment Authority
for National Capital Region, a Loss of Ecology (Prevention and Payments of Compensation)
Authority for the State of Tamil Nadu, an Authority for Environmental Planning for Thane and a
Dahanu Taluka Environmental Protection Authority in the State of Maharashtra.

ISSUES IN ENVIROMENT POLICY

 Consumption versus preservation of environmental resources

 Valuation of environmental damages
 Natural resources accounting
 Use of Economic instruments/ price mechanism
 Removing subsidies that encourage unsustainable use
 Extension of property rights
 Trade and environment
 Development that can reduce poverty
  Peoples participation- green’s movements
 Participation in global dimensions environment
 Financing sustainable developments

7.7 ENVIRONMENT POLICY OUTLOOK

Large scale industrialization , spread of transport, communications and other modern

infrastructure combined with the pressures of population growth have added to the difficulties of
preserving clean environment and healthy natural resource base. These have been exerting
pressures on the environment as witnessed in growing incidence of air and water pollution; and
land degradation. Sustainable development is, therefore, a formidable task and calls for
integration of environment aspects with development aspirations. Choice of policies and
investment should be such as to harmonies economic growth with environmental conservation.
 REFERENCES

 WEBSITES
 www.google.com
 www.monetarypolicy.com
 www.economicstimes.com
 www.businessstandard.com
 www.rbi.org
 www.mint.com
 www.money.com

 BOOKS
 MACROECONOMICS ( ICMR PUBLICATIONS)
 THE ECONOMIST
 BUSSINESS WEEKLY