Role of Government and

it’s policies in Indian

Economy
Unit – 2
Monetary Policy

• Monetary policy refers to that policy through which the central bank of the
country controls the supply of money, availability of money and the interest
rate.
• According to D. C. Rowan, “Monetary policy is defined as discretionary
action undertaken by the authorities designed to influence supply of
money, the cost of money and availability of money.”

2
Monetary Policy

• The Monetary Policy of the Reserve Bank of India (RBI) is the process through
which the central bank manages the supply of money and interest rates in the
economy to achieve macroeconomic goals like controlling inflation, ensuring
economic growth, stabilizing the currency, and managing employment levels.
• In simple terms, it is how the RBI controls the amount of money circulating in
the economy and the cost of borrowing money to ensure stability and growth.

3
Types of Monetary Policy

1. Expansionary Monetary Policy:

• Used when the economy is experiencing slow growth or recession. The RBI
lowers interest rates and increases the money supply to encourage borrowing,
investment, and spending.
2. Contractionary Monetary Policy:
• Used when the economy is growing too fast, leading to high inflation. The RBI
raises interest rates and reduces the money supply to slow down borrowing
and spending, helping to control inflation.

4
Objectives of Monetary Policy

1. Full Employment:
• It refers to the situation wherein all persons who are able to work at prevailing
wage rate, get work.
• To achieve it, level of demand and output need to be substantially raised.
• For this purpose, the GOV. adopts cheap money policy (E.M.P.) under which
rate of interest is lower in order to expand the availability of credit, both for
the purpose of investment as well as consumption.

5
Objectives of Monetary Policy

2. Economic Growth:
• It refers to the process of sustained rise in real income per capita.
• In UDC’s income and Std. of living of the people are low. This is associated with
low production capacity in these economies.
• Production capacity is low due to low rate of capital formation. On account of
low rate of capital formation these economies fail to utilize fully their natural
and human resource.
• Accordingly, the GOV. adopts such a monetary policy as may accelerate the
rate of capital formation.

6
Objectives of Monetary Policy

3. Price Stability:
• Price stability means control of wide fluctuations in the general price level in
the economy.
• Consistently upward trend of prices called inflation. Consistently downward
trend of prices called deflation.
• Inflation aggravates economic inequalities causing great hardship to poor and
economically weaker sections of society.
• Equally detrimental is the problem of deflation or fall in prices as it leads to fall
in production and eventually to unemployment.

7
Objectives of Monetary Policy
4. Exchange stability:
• It is linked with the stability of balance of payment (BOP) and monetary policy
seeks to regulate foreign exchange reserves in a manner that imports stability
to supply and demand parameters in the international money market.
5. Reduction in economic inequalities:
• In the capitalist and mixed economies, there are widespread inequalities in the
distribution of wealth and income. As a result, society is divided into two parts,
Rich & Poor.
• Rich class exploits poor. Monetary policy serves as an instrument of achieving
equitable distribution of income and wealth through faster delivery of credit to
weaker sections of the society at lower interest rate.
8
Targets of Monetary Policy

• Monetary policy target to control mainly 3 parameters.

1. Supply of Money:
• Supply of money refers to the currency issued by monetary authority and
demand deposits with the commercial banks.
• Optimum supply of money requires that the central bank of the country
adopts a flexible system of note issuing.
• Also banking institutions should be expanded to facilitate demand deposits
with the banks.

9
Targets of Monetary Policy

2. Rate of interest / Cost of money:

• Rate of interest is another important parameter of monetary policy. UDC’s
need to adopt cheap money policy in agricultural and industrial sectors.
• To avoid misuse of monetary incentives by the speculators and hoarders, it is
necessary that policy of discriminatory rates of interest is pursued.
• Low rate of interest are charged from the priority sectors i.e., SSI and high rate
of interest be charged on loans for unproductive purposes and availability of
money is reduced.
• Rate of interest is generally higher in the time of inflation and vice versa.

10
Targets of Monetary Policy

3. Availability of money:
• It refers to credit control.
• Invariably, people tend to identify monetary policy as the policy of credit
control.
• All instruments of monetary policy are often understood as instruments of
credit control.

11
Instruments of Monetary Policy

Quantitative Instruments:
• Those instruments which controls the quantity of money in an economy.
• It includes following
1. Bank rate
2. Repo rate
3. Reverse repo rate
4. Open market operations
5. CRR (cash reserve ratio)
6. SLR (statutory liquidity ratio)
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Instruments of Monetary Policy

Qualitative Instruments:
• It includes all those instruments which influence the allocation of money in an
economy.
• It incudes following
1. Margin requirement
2. Selective Credit Control
3. Moral suasion
4. Direct action

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Quantitative Instruments / Quantitative tools

1. Bank Rate:
• It refers to the rate of interest at which the central bank lends money to the
commercial banks, it deal with instant loan requirement of the commercial
banks. Under this loans are offered without any collateral.
• In the time of the inflation RBI increases bank rate to limit the supply of money
in the market and in the time of recession RBI decreases bank rate to increase
money supply in the market.

14
Quantitative Instruments / Quantitative tools

2. Repo Rate:
• It is the rate at which central bank offers short term loans to the commercial
banks by buying the government securities in the open market.
• it is also called ‘re purchase rate’ because an agreement is signed by both
parties stating that the securities will be re-purchased by commercial banks on
a given date at predetermined price.
• During the inflation RBI will increase repo rate to control credit creation and
during the recession RBI will decrease repo rate to boost credit creation.

15
Quantitative Instruments / Quantitative tools

3. Open Market Operations (OMO)

• This involves the buying and selling of government securities by the RBI in the
open market.
• Buying government securities: When the RBI buys securities, it releases money
into the economy, increasing liquidity.
• Selling government securities: When RBI sells securities, it absorbs money
from the economy, reducing liquidity.

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Quantitative Instruments / Quantitative tools

4. Reverse Repo Rate:

• The reverse repo rate is the rate at which the RBI borrows money from
commercial banks.
• When the RBI increases this rate, banks are encouraged to park their funds
with the RBI, reducing the money available in the market, which can help
control inflation. and vice versa.

17
Quantitative Instruments / Quantitative tools

5. Statutory Liquidity Ratio (SLR):

• SLR is the percentage of net demand and time liabilities (i.e., deposits) that
banks need to maintain in the form of gold, government securities, or other
approved securities.
• When the SLR is increased, banks have fewer funds to lend, which reduces the
money supply.
• Lowering the SLR gives banks more freedom to lend, increasing credit in the
economy.

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Quantitative Instruments / Quantitative tools

6. Cash Reserve Ratio (CRR):

• CRR is the percentage of total deposits that banks must hold as reserves with
the RBI.
• If RBI increases the CRR, banks have less money to lend, which reduces the
money supply in the economy.
• If CRR is decreased, banks have more money to lend, increasing liquidity in the
system.

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Qualitative Instruments / Qualitative tools

• Qualitative Credit Control Tools are methods used by the Reserve Bank of
India (RBI) to influence not just the amount, but also the direction of credit
flow in the economy.
• Instead of controlling the overall money supply (which is done through
quantitative tools), qualitative tools aim to regulate where the money goes,
often to specific sectors or industries.
• These methods are more selective in nature.

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Qualitative Instruments / Qualitative tools
1. Margin Requirements:
• Marginal Requirement are a tool used by the RBI to regulate the amount of
loan that can be secured against a given value of collateral (like stocks,
property, etc.). By increasing or decreasing the margin requirement, the RBI
can control how much money borrowers can receive relative to their
collateral.
• Objective: To control speculative activities and reduce excessive risk taking.
• How it works: A high margin requirement means that the borrower needs to
put up more of their own money, reducing the total loan amount. A low margin
requirement allows for more borrowing with less personal investment.
• Example: If margin requirements on stock market loans are increased,
investors would need to provide more capital upfront to get a loan,
discouraging excessive speculation in stock markets.
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Qualitative Instruments / Qualitative tools
2. Selective Credit Control (SCC)
• Selective Credit Control (SCC) refers to measures taken by the RBI to control
loans given for specific purposes. For example, the RBI might limit the amount
of credit banks can offer for speculative activities like stock market trading or
commodity hoarding.
• Objective: To prevent speculative bubbles and inflation in specific sectors.
• How it works: RBI directs banks to increase the margin requirement (the
amount a borrower must contribute in a loan), or impose restrictions on the
type of collateral that can be accepted for loans. This discourages excessive
borrowing in those sectors.

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Qualitative Instruments / Qualitative tools

3. Moral Suasion/ Moral Persuasion:

• Moral Suasion is a softer, advisory approach where the RBI persuades or
requests banks to follow certain policies or practices without legal
enforcement. The RBI may ask banks to restrict credit in areas where over-
lending could harm the economy or encourage lending to sectors like
agriculture or small businesses that need more credit.
• Objective: To influence banking behavior without imposing mandatory rules.

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Qualitative Instruments / Qualitative tools

• How it works: The RBI issues circulars, holds meetings with bank heads, or
publicly announces its preferences for specific credit policies. Banks, though
not legally bound, usually comply due to RBI’s authoritative position.
• Example: During an economic downturn, the RBI might ask banks to lend more
to small businesses or agricultural sectors to support the economy, even if
banks might prefer to lend to large corporations with lower risk.

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Qualitative Instruments / Qualitative tools

4. Direct Action:
• Central bank may initiate direct action against the commercial bank for not
following its directions.
• RBI may impose strict restrictions on the functioning of defaulting banks
including denial of loans.

25
Effects of Monetary Policy on Business Environment

• Generally monetary policy is related with the supply of money. That simply
means any changes in the monetary policy leads to change in supply of money
in the market.
• Supply of money includes cash money and also credit money.
• Now in India cash money supply is restricted by the RBI. To control credit
money, monetary policy becomes useful. Thus, total supply of money can be
regulated by monetary policy.
• Monetary policy’s quantitative and qualitative instruments / tools can be used
to change proportion of availability of credit and also reduce or increase the
supply of money required in economy.
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Effects of Monetary Policy on Business Environment

A) Effects of quantitative means of monetary policy:

1. Bank rate:
• If bank rate is increased, then commercial bank will also raise the rates of
interest. As a result, demand for credit decreases. As demand reduces,
production, employment and income also decreases. Some business unit may
close down. And there can be many challenges to start a new business.
• If bank rate is decreased then vice versa.

27
Effects of Monetary Policy on Business Environment

2. Open market policy:

• If RBI sells securities in the open market, individuals or financial institutions
buy them and money supply with them decreases. Credit creation process
becomes slow as total supply of money reduces as a result economic activities
in the business does not expand but shrinks.
• If RBI purchases securities, then vice versa.
3. Repo rate
4. Reverse repo rate
5. SLR
6. CRR
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Effects of Monetary Policy on Business Environment

B) Effects of qualitative means of monetary policy:

1. Margin requirement
2. Selective Credit Control
3. Moral suasion
4. Direct action
• This tools are used to decide whether credit facilities should be given or not, if
yes then in what proportion.
• It affects to certain goods or services only and it do not affect all kinds of
business.
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Effects of Monetary Policy on Business Environment

• If there is credit control for consumers, consumers would get finance in limited
manner only. The business under credit control would not flourish. And vice
versa.
• If there is less margin for credit, more credit can be provided as a result
employment and income increases. This cause positive impact on business
environment. And vice versa.

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Current Scenario as on 17th December 2024
• Bank rate = 6.75%
• Repo rate = 6.50%
• Reverse repo rate = 3.35%
• SLR = 18%
• CRR = 4.00%, effective in two phases on December 14 and December 28, 2024.
• As of December 11, 2024, Sanjay Malhotra serves as the 26th Governor of the
Reserve Bank of India (RBI), succeeding Shaktikanta Das.

(just for knowledge purpose only, if you want you can write this in your answers too. Also, there can be
question ‘discuss current monetary policy of RBI’)

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Fiscal Policy Meaning & Definition

• Fiscal policy deals with the public expenditure and public revenue.
• According to D. C. Rowan, “Fiscal policy is defined as the discretionary
action by the government to change,
1. The level of government expenditure on goods and services and
transfer payments.
2. The yield of taxation at any given level of output”
• According to Keynes, “A policy that uses public finance as a balancing
factor in development of economy is called fiscal policy.
• Prof. Williams stated that, “Fiscal policy was created to supplement and
strengthen monetary policy”
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Fiscal Policy Meaning & Definition

• Fiscal policy refers to the use of government spending and tax policies to
influence economic conditions, especially macroeconomic conditions.
• These include aggregate demand for goods and services, employment,
inflation, and economic growth.
• During a recession, the government may lower tax rates or increase spending
to encourage demand and spur economic activity.
• Conversely, to combat inflation, it may raise rates or cut spending to cool down
the economy.

33
Types of Fiscal Policy

1. Expansionary Fiscal Policy

• It involves all the actions taken by the government to invest more money
back into the economy.

• Putting more money back into the economy creates more demand for
services and products.

• It also expands the job opportunities and increases the profit for the
people and government.

• In other words, it stimulates economic growth.

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Types of Fiscal Policy

2. Contractionary Fiscal Policy

• Contractionary fiscal policy is the second type of fiscal policy, and it is
normally used at the time of a boom in the economy.

• Sometimes expansion in the economy can also be dangerous, so in this

case, the government tries to slow down the expansion so that it could not
become so intense.

• This type of fiscal policy helps make the growth of the economy
manageable and controls inflation.

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Types of Fiscal Policy

3. Neutral Fiscal Policy

• Neutral fiscal policy is generally used when the economy of the country is
in equilibrium.

• So, in a neutral fiscal policy, the spending of the government is funded by

the department of tax revenue, and it will have a neutral effect on the
levels of economic activity.

36
 Importance of Fiscal Policy in concept of welfare of state

1. Economic stability
2. Equal distribution of wealth
3. Provision for public goods & services
4. Employment generation
5. Poverty reduction
6. Crisis management
7. Economic growth
8. To reduce regional disparities
9. Environmental sustainability

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 BUDGET: A Medium of Execution of Fiscal Policy

• A budget in the context of fiscal policy is a financial plan prepared by the

government for a specific period, usually a year. It outlines expected revenues
(like taxes) and planned expenditures (on public services, infrastructure, etc.).
• Main Objectives of Budget:
o Control inflation and recession
o Promote economic growth
o Efficient resource allocation
o Income redistribution
o Public welfare
o Fiscal discipline

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 BUDGET: A Medium of Execution of Fiscal Policy

• Types of Budget:
1. Balanced Budget:
• Revenues are equal to expenditures.
• Promotes financial discipline.
• Prevents unnecessary borrowing.
• May not be suitable during economic crises (e.g., recession).
• Example: If the government earns ₹100 crore and spends ₹100 crore, it’s a
balanced budget.

39
 BUDGET: A Medium of Execution of Fiscal Policy

• Types of Budget:
2. Surplus Budget:
• Revenues exceed expenditures.
• Helps in controlling inflation.
• Reduces public debt.
• May result in reduced government spending, leading to slower economic
growth.
• Example: If the government earns ₹120 crore but spends ₹100 crore, it’s a
surplus budget.
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 BUDGET: A Medium of Execution of Fiscal Policy

• Types of Budget:
3. Deficit Budget:
• Expenditures exceed revenues.
• Useful for stimulating economic growth during a recession.
• Encourages investments in infrastructure and development.
• Leads to increased public debt.
• May cause inflation if overused.
• Example: If the government earns ₹100 crore but spends ₹120 crore, it’s a
deficit budget.
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 1. Economic Growth
2. Employment generation
Objectives of 3. Reduction of income inequality
Fiscal Policy 4. Controlling inflation & recession
5. Poverty reduction
6. Infrastructure development
7. Fiscal discipline
8. Promoting self-reliance
9. Environmental sustainability
10. Public welfare
11. Reduction in regional disparity
12. To improve the balance of payments
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 Achievement of Fiscal Policy in Indian Economy

1. Fiscal Deficit Management

• India has consistently worked to reduce its fiscal deficit, which is critical for
maintaining economic stability.
• Official Data:
• 2022-2023: The fiscal deficit was 5.6% of GDP. This was slightly higher than
the target due to increased pandemic-related spending.
• 2023-2024: The government aimed to reduce the fiscal deficit to 5.1% of
GDP, a step towards fiscal consolidation.
• 2024-2025: The fiscal deficit target was further lowered to 4.9% of GDP,
indicating progress in reducing government debt and promoting fiscal
discipline. 43
 Achievement of Fiscal Policy in Indian Economy

2. Economic Growth
• Fiscal policy has aimed at boosting economic growth through increased public
spending on infrastructure, manufacturing, and technology.
• Official Data:
• 2022-2023: India’s GDP grew at 7.4%, making it one of the fastest-growing
major economies in the world.
• 2023-2024: The economy continued to grow with a 7.8% growth rate in the
March quarter.
• 2024-2025: The government anticipates a growth rate of 6.5%-7%,
supported by reforms in infrastructure, digital economy, and investment
policies. 44
 Achievement of Fiscal Policy in Indian Economy

3. Infrastructure Development
• India’s fiscal policy has focused heavily on infrastructure development, as it is
crucial for long-term growth and job creation.
• Official Data:
• 2023-2024: The government maintained a record infrastructure
investment of ₹11.11 trillion, equivalent to 3.4% of GDP.
• 2024-2025: The infrastructure spending target remained unchanged at
₹11.11 trillion, focusing on long-term projects to support economic growth
and job creation.

45
 Achievement of Fiscal Policy in Indian Economy

4. Employment Generation and Rural Development:

• The government has focused on creating employment through public projects
and development in rural areas.
• Official Data:
• 2024-2025: The government’s budget included ₹2.66 trillion for rural
development programs aimed at generating jobs, especially in agriculture
and rural industries.

46
 Achievement of Fiscal Policy in Indian Economy

5. Social Welfare Programs:

• Fiscal policy in India has focused on increasing welfare spending, especially for
the poor, elderly, and children.
• PM Kisan Yojana: Direct cash transfers of ₹6,000 annually to over 10 crore
farmers to help with their agricultural expenses.
• PM Awas Yojana: Allocation of ₹48,000 crore for providing affordable housing
for all by 2022.
• Ayushman Bharat: The PMJAY (Pradhan Mantri Jan Arogya Yojana) has
provided ₹5 lakh health insurance coverage to over 50 crore citizens.

47
 Achievement of Fiscal Policy in Indian Economy

6. Green Economy and Environmental Sustainability:

• India's fiscal policies are increasingly focused on promoting green
technologies and reducing environmental damage.
• Official Data:
• ₹19,500 crore was allocated for renewable energy projects in the 2024-25
budget.
• The government is issuing green bonds to fund clean energy projects and
environmental sustainability programs.

48
 Achievement of Fiscal Policy in Indian Economy

7. Foreign Direct Investment (FDI):

• Fiscal policies have encouraged foreign investments through liberalization of
rules and creation of a more investor-friendly environment.
• India received $84 billion in FDI in 2022, a 20% increase from the previous
year, largely due to policies like “Make in India” and FDI policy reforms.

49
 Achievement of Fiscal Policy in Indian Economy

8. Response to Economic Crises:

• Fiscal policy has been effective in addressing crises like the COVID-19
pandemic, where the government implemented relief packages to support
businesses and individuals.
• The Atmanirbhar Bharat Package included ₹20 lakh crore in financial
support, offering credit guarantees, cash transfers, and food security
measures.

50
 Effects of Fiscal Policy on Business Environment

1. Encouraging Economic Growth:

• When the government spends more on infrastructure like roads, railways, and technology, it
boosts the economy. This helps businesses grow.
• In 2024-2025, India set aside ₹11.11 trillion for infrastructure projects.
• Better infrastructure lowers costs for businesses and improves their efficiency.
2. Reducing Corporate Taxes:
• The government lowers taxes on companies so they can save money and invest more.
• In 2019, corporate tax was cut from 30% to 22%.
• Companies have more profits to expand their businesses and hire more workers.

51
 Effects of Fiscal Policy on Business Environment

3. Controlling Inflation:
• By managing spending and deficits, the government keeps prices stable. Stable prices help
businesses plan better.
• The government is reducing its fiscal deficit to 4.9% of GDP in 2024-2025.
• Stable prices mean customers can afford more, which increases sales for businesses.
4. Creating Jobs:
• The government starts programs that create jobs, putting more money in people's hands.
• The 2024-2025 budget includes ₹2.66 trillion for rural development and job creation
programs.
• More jobs mean people spend more money, boosting demand for goods and services.

52
 Effects of Fiscal Policy on Business Environment

5. Improving Infrastructure:
• The government invests in transport, power, and technology, which helps
businesses run smoothly.
• Faster transportation and better facilities reduce costs for businesses.
6. Attracting Foreign Investment:
• The government offers incentives to foreign companies to invest in India.
• India received $84 billion in foreign investment in 2022, up 20% from the
previous year.
• Foreign investment brings in money, technology, and jobs, boosting the
economy.
53
 Effects of Fiscal Policy on Business Environment

7. Helps Small Businesses:

• The government supports small businesses with subsidies and lower taxes.
• The 2024-2025 budget provides extra support to Micro, Small, and Medium
Enterprises (MSMEs).
• Small businesses can grow, creating jobs and strengthening the economy.
8. Encouraging Digital & Technological Growth:
• Investments in digital infrastructure help businesses operate online and reach
more customers.
• Programs like Digital India focus on improving connectivity and e-services.
• Businesses can adopt new technologies
54 and expand their reach.
 Industrial Policy Meaning & Definition

• An Industrial Policy is a set of guidelines, principles, and strategies framed

by a government to regulate, promote, and develop industrial sectors in
the economy.
• It outlines the role of public and private sectors, provides support for
infrastructure development, encourages investment, and ensures
balanced regional growth.
• It shows Government’s attitudes towards private & public sectors.
• It reflects the government’s vision for economic growth, modernization,
self-reliance, and employment generation through the development of
industries.
55
 Industrial Policy Meaning & Definition

• India introduced its first Industrial Policy in 1948, followed by the

landmark Industrial Policy of 1991, which focused on liberalization,
privatization, and globalization (LPG reforms).
• Industrial policies shape a country’s economic structure, influence job
creation, and ensure sustainable development.

56
 History of Industrial Policy

1. Industrial Policy of 1948: India gained independence in 1947, and this policy
marked the first step in shaping the industrial sector.
2. Industrial Policy of 1956:Post-First Five-Year Plan, this policy was influenced
by the socialist framework and the need for rapid industrialization.
3. Industrial Policy of 1977: Introduced under the Janata Party government,
emphasizing decentralization and rural industrialization.
4. Industrial Policy of 1980:The government realized the need to modernize
industries and improve productivity.

57
 History of Industrial Policy

5. Industrial Policy of 1991:

• In 1991 India had economic crisis due to high fiscal deficits, low foreign
reserves, and stagnant industrial growth.
• Government introduced Liberalization, Privatization, and Globalization
(LPG).
• Abolished the industrial licensing system (except for a few industries like
defense, few chemical industries).
• Encouraged foreign direct investment (FDI) by relaxing regulations.
• Focused on disinvestment in PSUs to improve efficiency.
• Reduced the role of the public sector, emphasizing private sector
58
participation.
 History of Industrial Policy

6. Industrial Policies Post-1991:

• Focus shifted to fostering competitiveness, innovation, and sustainability
in industries.
• Policies encouraged Make in India (2014) to promote domestic
manufacturing.
• Emphasis on ease of doing business, digital transformation, and
sustainable practices.
• Recent initiatives focus on fostering startups, small businesses, and
advanced technology sectors like AI, robotics, and green energy.

59
 Objectives of Industrial Policy

1. Encourage Industrial Growth:

• The policy aims to develop industries to boost the economy and create
employment. For instance, the automobile industry in Pune and Chennai has
grown significantly, contributing to India’s industrial development.
2. Promote Small-Scale Industries:
• Support is given to small businesses like Gujarat’s textile weaving units and
the handloom sector in Tamil Nadu, creating jobs and reducing poverty.
3. Attract Investments:
• The Make in India initiative attracts global companies such as Foxconn and
Tesla to set up manufacturing plants, increasing foreign direct investment
(FDI). 60
 Objectives of Industrial Policy

4. Reduce Regional Imbalance:

• Industrial zones like Kutch in Gujarat and the North-East Industrial
Development Scheme (NEIDS) encourage industries in underdeveloped areas,
reducing disparities.
5. Increase Exports:
• Sectors like IT in Bengaluru and pharmaceuticals in Hyderabad have made
India a global exporter of services and medicines.
6. Boost Innovation:
• Initiatives like Startup India encourage innovative companies like Ola and
Paytm to develop new-age technologies.
61
 Objectives of Industrial Policy

7. To promote sustainability:
• Policies focus on renewable energy industries, such as the Adani solar plant in
Gujarat and wind energy farms in Tamil Nadu, reducing reliance on fossil fuels.
8. Support Industrial Modernization:
• The government helps industries upgrade technology. For example, steel
plants like JSW Steel in Vijayanagar have adopted advanced manufacturing
technologies.
9. Encourage Private Sector Participation:
• Public-private partnerships (PPPs) in sectors like infrastructure (e.g., Delhi
Metro) bring efficiency and investment from private players.
62
 Objectives of Industrial Policy

10. Encourage Women Entrepreneurs:

• Initiatives like the Mahila Coir Yojana promote industries run by women,
especially in rural areas, encouraging gender equality in industrial growth.
11. Strengthen Infrastructure for Industries:
• Industrial corridors like the Delhi-Mumbai Industrial Corridor (DMIC) and
dedicated freight corridors improve logistics and attract industries to these
zones.
12. Promote Research and Development (R&D):
• Industries are encouraged to invest in R&D. For instance, ISRO’s advancements
in space technology have been supported by industrial collaboration.
63
 Present Industrial Policy: 1991

Provisions:
A). Policy related to public sector enterprise:
1. Investment in certain special Industries:
• As per the new policy GOV. will make investment only in some
special industries like arms & weapons, mining, atomic energy,
railway etc.
2. Reserved sectors:
• 8 reserved factors are there before it was 17, …
64
 Present Industrial Policy: 1991

1. Weapons, canons, army fighter plane, ships (DEFENCE)

2. Atomic energy
3. Coal & Lignite
4. Mineral oil
5. Iron, chrome, gypsum, Sulphur, gold, diamond mines
6. Copper, zinc, lead, tin
7. Minerals used in atomic energy
8. Rail transport

65
 Present Industrial Policy: 1991

3. Public partnership:
• Some shares of public company are available to purchase for public in the
capital market.
4. Reforms in management
5. Policy related to sick industrial unit
6. Efforts to improve performance of public sector units
7. Protection of workers

66
 Present Industrial Policy: 1991

B). Policy related to private sector:

1. Scope of PVT. Sector
2. Changes in the licensing policy (coal & lignite, print papers
sugar, wine etc.)

67
 Present Industrial Policy: 1991

C. Policy related to small industries:

1. Extending the limit for investment:
• till 5 lakh tiny industry, till 60 lakh small, till 75 lakh ancillary
industry.
2. Reservation:
• 836 products will be reserved for small industries only.
• For example, cycle, tent, safety pins …

68
 Present Industrial Policy: 1991

3. Complete exemption from license

4. Can give 24% of their holdings to big industries to increase capital
5. Credit facility for SSI for their project is extended till 20 lakhs.
6. To encourage exports ‘export promotion center’

69
 Present Industrial Policy: 1991

D. Foreign capital and technology reletaed policy:

1. In high priority industries the share of foreign capital was increased
up to 51%.
2. For the above industries RBI will keep watch over dividends sent to
foreign to maintain balance b/w dividend sent and export income.
3. Changes to attract foreign investors were made

70
 Present Industrial Policy: 1991

E. Exemption to industries from legal and administrative

restrictions.
F. Population, Environment & Industries:
• City with the population not more than 10 lakhs will be given
sanction to set up the industry that do not cause pollution.
• The other industry must be 25kms away from the limits of city.
G. Policy related labors

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 Recent Changes in Present Industrial Policy: 1991

1. Focus on Self-Reliance: "Aatmanirbhar Bharat" Initiative:

• Launched in 2020, the objective is to make India a global manufacturing hub while
reducing dependency on imports.
• Introduction of incentives like Production-Linked Incentive (PLI) schemes across key
sectors such as electronics, pharmaceuticals, textiles, and renewable energy.
2. Make in India:
• A revised and more targeted approach to boost local manufacturing and exports.
• Focus sectors include defense manufacturing, automobiles, electronics,
pharmaceuticals, and medical devices.
• Incentives for setting up and expanding manufacturing units.
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 Recent Changes in Present Industrial Policy: 1991

3. Privatization and Disinvestment:

• Strategic disinvestment in PSUs to improve efficiency.
• Key privatization moves include sectors like airlines (Air India) and proposed
moves for banks and insurance companies.
• The government retains a limited presence in only strategic sectors.
4. Ease of Doing Business:
• Simplified compliance procedures for industries.
• Decriminalization of minor technical or procedural violations in corporate laws.
• Introduction of single-window clearance systems and digitization of approvals.
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 Recent Changes in Present Industrial Policy: 1991

5. Foreign Direct Investment Reforms:

• Increased FDI limits in sectors such as defense (up to 74% through automatic
route), insurance (up to 74%), and civil aviation.
• Relaxation of conditions in e-commerce and construction sectors.
• Promotion of joint ventures between Indian and foreign companies.
6. Start-up and Innovation Support:
• Initiatives like "Start-up India" and tax incentives for budding enterprises.
• Establishment of incubation centers and innovation hubs to support start-ups.
• Encouraging R&D investments through government-backed grants and
partnerships. 74
 Recent Changes in Present Industrial Policy: 1991
7. Digital and Green Industrial Policies:
• Emphasis on digitization of industries and adoption of Industry 4.0
technologies.
• Green energy initiatives, such as incentives for electric vehicles (EVs) and
renewable energy manufacturing.
• Encouragement for industries to adopt sustainable practices.
8. Labor Law Reforms:
• Introduction of four labor codes merging 29 labor laws to simplify and
modernize regulations.
• Focus on improving worker benefits, reducing compliance burdens, and
promoting industrial harmony.
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 Recent Changes in Present Industrial Policy: 1991

9. Skill Development and Employment Generation:

• Initiatives like "Skill India" and "Digital India" to create a skilled workforce.
• Training programs to match the needs of modern industries, such as robotics,
data analytics, and AI.
10. Infrastructure Development for Industrial Growth:
• National Infrastructure Pipeline (NIP) for boosting industrial connectivity.
• Development of industrial corridors and logistics hubs.
• Expansion of road, rail, port, and air connectivity to support manufacturing
and trade.
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 Recent Changes in Present Industrial Policy: 1991

11. Sector-Specific Reforms:

Defense: Increased private sector involvement and promotion of indigenous
manufacturing.
Textiles: Introduction of mega textile parks under the PM Mega Integrated
Textile Region and Apparel (PM MITRA) scheme.
Agriculture: Creation of agro-industrial hubs to support processing and exports.

77
 Effects of Present Industrial Policy on
Business Environment
1. The scope of public sector decreased
2. Increase in dominance of private sector
(Reserved industry from 8 to 3 in 2002)
3. The process of liberalization accelerated (only 5 industry require license and
SSI are completely exempted from licensing)
4. Regional economic disparity (promotes setting up industries in remote &
backward area)
5. Encouragement to infrastructure facilities (acceptance of foreign capital,
tax concession, etc.)
6. Services related to trade and commerce (consumer-oriented changes in
services) 78
 SEZ = Special Economic Zone

• A geographical bond zone where there are more liberal laws related to
export and import as compared to other parts of the country.
• A region that has economic laws different from a country’s typical
economic laws.
• The goal is to increase foreign investments.
• Main purpose = to create hassle-free environment for the promotion of
exports.
• SEZ policy in India first came into inception on April 1, 2000.

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 SEZ

FINANCIAL SUPPORT:
• 100% income tax exemption on export income for SEZ units under section
10AA, for first 5 years, 50% for next 5 years.
• Exemption from,
 Central tax
 Service tax
 State sales tax

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 SEZ

SEZ ACT, 2005:

• Passed in parliament in may 2005 & president assent on 23rd June 2005.
• Main objectives,
 Generation of additional economic activity.
 Promotion of export of goods and services.
 Promotion of investment from domestic and foreign sources.
 Creation of employment opportunities.
 Development of infrastructure facilities.

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 SEZ

Main Characteristics:
• Geographically demarked area with physical security.
• Administered by single authority.
• Financial & procedural benefits.
• Have separate custom area
• Liberal economic laws
• No license required to import
• Full freedom of subcontracting

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 SEZ

SEZ includes,
• Free trade zone
• Export processing zone
• Free ports
• Industrial parks etc.

83
 Import – Export Policy

• Import Export Policy, also known as Foreign Trade Policy (FTP), is a set of
guidelines and regulations implemented by a country to facilitate and
manage its international trade.
• It outlines the legal framework, rules, and procedures for importing and
exporting goods and services, aiming to promote exports, regulate
imports, and enhance the country's global trade relations.
• It is designed to boost the competitiveness of domestic industries, ensure
a balance of trade, and attract foreign investments.
• In India, the Ministry of Commerce and Industry formulates and
announces the Foreign Trade Policy, typically for five-year periods.

84
 Import – Export Policy 2009-2014

 Key Objectives of the Policy:

1. Export Growth: To achieve 25% annual growth in exports, despite the global
financial crisis of 2008.
2. Market Diversification: Reduce dependence on traditional markets like the
US and EU by exploring new regions such as Latin America, Africa, and Asia.
3. Employment Generation: Create additional jobs in export-oriented sectors
like textiles, agriculture, and handicrafts.
4. Infrastructure Support: Improve trade-related infrastructure, including ports
and logistics.

85
 Import – Export Policy 2009-2014

 Achievements of the 2009-2014 Policy:

1. Export Growth: Despite global challenges, India's exports grew from USD 168
billion in 2008-09 to USD 312 billion in 2013-14.
2. Diversification of Markets: Significant growth in exports to regions like Africa
(40% growth) and Latin America (35% growth).
3. Boost to Employment: Export-led growth supported the creation of millions
of jobs in labor-intensive industries.
4. Improved Competitiveness: Through multiple schemes, enhanced the
competitiveness of Indian industries globally.

86
 Import – Export Policy 2009-2014

 Challenges:
1. Global Financial Crisis: The recession of 2008-09 negatively impacted
demand in key markets.
2. Rupee Volatility: Fluctuations in the value of the Indian Rupee affected trade
margins.
3. Inadequate Infrastructure: Limited improvements in ports, logistics, and
storage facilities restricted export growth.
4. Compliance Issues: Many exporters struggled to meet the stringent quality
standards of developed nations.

87
 Import – Export Policy 2015-2020

 Key Objectives
1. Increase Export Competitiveness: Improve India's share in global trade by
providing incentives for exporters and streamlining processes.
2. Make in India: Align with the "Make in India" initiative to promote
manufacturing and value addition in exports.
3. Ease of Doing Business: Simplify trade regulations and processes, reducing
transaction costs and time.
4. Digital Initiatives: Promote paperless trade through electronic platforms for
export-import operations.

88
 Evaluation of
Import – Export Policy 2015-2020
 Achievement of Policy:
1. Export Promotion
• Introduction of schemes like Merchandise Exports from India Scheme
(MEIS) and Services Exports from India Scheme (SEIS) provided much-
needed support to exporters.
2. Ease in Business
• Simplification of export and import processes, along with online systems,
reduced procedural bottlenecks.
• Digitalization of trade procedures, like e-issuance of trade licenses, helped
improve efficiency.
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 Evaluation of
Import – Export Policy 2015-2020
3. Growth in Services Exports
• India saw steady growth in the export of services, especially in IT and IT-
enabled services, despite challenges.
4. Export Growth in Some Sectors
• Sectors like pharmaceuticals, electronics, and agricultural commodities
experienced notable export growth.
5. Employment Generation
• The policy contributed to employment generation in labor-intensive industries
like textiles, gems, and jewelry by promoting exports.

90
 Evaluation of
Import – Export Policy 2015-2020
 Limitations and Challenges:
1. Missed Export Targets
• The target of USD 900 billion by 2020 fell significantly short as India’s total
exports (goods and services) reached only around USD 526 billion in 2019-20.
2. Over-reliance on Incentives
• Export growth was largely driven by incentive schemes rather than structural
improvements in trade practices or competitiveness.
3. Inadequate Infrastructure Development
• Despite policy measures, India’s trade-related infrastructure, such as ports,
warehousing, and transportation, remained underdeveloped, leading to high
transaction costs. 91
 Evaluation of
Import – Export Policy 2015-2020
4. Slow Diversification of Exports
• The policy failed to diversify India’s export basket significantly, with continued
dependence on a few traditional sectors like textiles and gems.
• Emerging sectors like electronics and high-tech manufacturing saw limited
policy focus.
5. Impact of COVID-19 Pandemic
• Towards the end of the policy period, the COVID-19 pandemic disrupted global
supply chains and demand, further limiting the policy’s effectiveness.

92
 Evaluation of
Import – Export Policy 2015-2020
 Key Learnings from the Policy:
1. Need for Global Competitiveness
• Focus should shift from short-term incentives to enhancing the global
competitiveness of Indian goods and services through quality improvements
and cost reductions.
2. Diversification of Exports
• Encouraging exports from emerging industries like electronics, renewable
energy, and high-tech manufacturing is crucial.

93
 Evaluation of
Import – Export Policy 2015-2020
3. Strengthening Trade Infrastructure
• Investments in trade infrastructure, such as faster customs clearances,
efficient ports, and transportation networks, are vital for reducing costs.
4. Alignment with WTO Rules
• Future policies need to ensure compliance with WTO norms to avoid disputes
over export incentives.
5. Focus on Services
• Greater emphasis on services exports, particularly in non-IT sectors like
healthcare and education, can diversify India’s trade portfolio.

94
 Provision of import export policy 2015-2020
with reference to globalization
1. Merchandise Exports from India Scheme (MEIS)
2. Services Exports from India Scheme (SEIS)
3. Trade Infrastructure for Export Scheme (TIES)
4. E-Commerce Exports(Digital Trade)
5. Free Trade Agreements (FTAs)
6. Integration with Global Value Chains (GVCs)
7. Ease of Doing Business
8. Make in India Initiative

95
 Import – Export Policy & Business Environment
1. Favorable changes in business environment:
• Countries like India import many things from foreign countries for that foreign
exchange is required.
• The FTP have certain changes time to time to maintain BOP.
• These changes are also favorable for economic growth in business
environment.
2. Development of export-oriented industries:
• Export industry produces product keeping in mind the demand of foreign
markets.
• Total export was increased from 8,45,534 crore INR in 2009-10 to 18,92,892
crore INR in 2013-14.
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 Import – Export Policy & Business Environment

3. Development-inducing imports:
• Import export policy that induce development creates imports also.
• Total import was increased from 13,63,736 crore INR in 2009-10 and reached to
27,19,206 crore INR in 2013-14.
4. Deficit in BOP is reduced:
• The changes in FTP are made in a manner by which we can reduce
unnecessary imports and increase exports.

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 Import – Export Policy & Business Environment

5. Value of currency of country:

• External value of currency depends on the proportion of import export.
• If imports exceeds exports, demand for foreign currency exceeds supply of
foreign currency. Therefore, the currency of foreign country goes up in
comparison of value of country’s currency.
6. Impact of globalization:
• Indian economy become more and more open, with the time policies become
more liberal.

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 Import – Export Policy & Business Environment

7. Market system in Import Export policy:

• Now our economy is part of global economy. The changes in the economy of
world have effects on Indian economy also.
• So generally, in the current era the global market system controls import
export policy.
• There are chances that in future the import export policy itself may become
useless due to dependency on market system.

99