Module 6: Industrial Policies 8 hours
Module 6: Industrial Policies 8 hours
6.1 Industrial Policies of India,
6.2 New Industrial Policy 1991;
6.3 Private Sector- Growth, Problems and Prospects,
6.4 SMEs –Significance in Indian economy-problems and prospects.
6.5 Fiscal policy and Monetary Policy. Foreign Trade: Trends in India’s Foreign
Trade,
6.6. Impact of WTO on India’s Foreign Trade.
6.1 Industrial Policies of India:
Industrial Policy:
Industrial Policy is the set of standards and measures set by the Government to evaluate the progress of
themanufacturing sector that ultimately enhances economic growth and development of the country.
The government takes measures to encourage and improve the competitiveness and capabilities of
variousfirms.
Objectives of Industrial Policy
1. To maintain steady growth in productivity.
2. To create more employment opportunities.
3. Utilize the available human resources better
4. To accelerate the progress of the country through different means
5. To match the level of international standards and competitiveness
Industrial Policy in India
The various industrial policy introduced by the Indian government are as follows:
Industrial Policy Resolution, 1948
•
It declared the Indian economy as Mixed Economy
•
Small scale and cottage industries were given the importance
•
The government-imposed restriction on foreign investments
Industrial Policy Resolution, 1956 (IPR 1956)
•
This policy laid down the basic framework of Industrial Policy
•
This policy is also known as the Economic Constitution of
IndiaIt is classified into three sectors
•
Schedule A – which covers Public Sector (17 Industries)
•
Schedule B – covering Mixed Sector (i.e. Public & Private) (12 Industries)
•
Schedule C – only Private Industries
This has provisions for Public-Sector, Small-Scale Industry, and Foreign Investment. To meet newchallenges,
from time to time, it was modified through statements in 1973, 1977 and 1980.
Industrial Policy Statement, 1977
•
This policy majorly focused on Decentralization
•
It gave priority to small scale Industries
•
It created a new unit called “Tiny Unit”
•
This policy-imposed restrictions on Multinational Companies (MNC).
Industrial Policy Statement, 1980
•
The Industrial Policy Statement of 1980 addressed the need for promoting competition
in the domestic market, modernization, selective Liberalization and technological
upgradation.
•
Due to this policy, MRTP Act (Monopolies Restrictive Trade Practices), FERA Act
(ForeignExchange Regulation Act, 1973) were introduced.
•
The objective was to liberalize the industrial sector to increase industrial productivity
andcompetitiveness of the industrial sector.
•
The policy laid the foundation for an increasingly competitive export-based and for
encouragingforeign investment in high-technology areas.
New Industrial Policy, 1991
The New Industrial Policy, 1991 had the main objective of providing facilities to market forces and to
increase efficiency.
Larger roles were provided by
•
L – Liberalization (Reduction of government control)
•
P – Privatization (Increasing the role & scope of the private sector)
•
G – Globalizations (Integration of the Indian economy with the world economy)
Because of LPG, old domestic firms have to compete with New Domestic firms, MNC’s and imported items
The government allowed Domestic firms to import better technology so as to improve efficiency and to
haveaccess to better technology. Foreign Direct Investment ceiling was increased from 40% to 51% in
selected sectors.
Maximum FDI limit is 100% in selected sectors like infrastructure sectors. Foreign Investment promotion
board was established. It is a single-window FDI clearance agency. The technology transfer agreement
wasallowed under the automatic route.
Phased Manufacturing Programme was a condition on foreign firms to reduce imported inputs and
usedomestic inputs, it was abolished in 1991.
Under Mandatory convertibility clause, while giving loans to firms, part of the loan will/can be converted
toequity of the company if the banks want the loan in a specified time period. This was also abolished.
Industrial licensing was abolished except for 18 industries.
Monopolies and Restrictive Trade Practices Act – Under his MRTP commission was established. MRTP
Actwas introduced to check monopolies. The MRTP Act was relaxed in 1991.
On the recommendation of SVS Raghavan committee, Competition Act 2000 was passed. Its
objectiveswere to promote competition by creating an enabling environment.
To know more about the Competition Commission of India, check the linked
article.Review of Public sector under this New Industrial Policy, 1991 are:
•
Public sector investments (Disinvestment of Public sector)
•
De-reservations –Industries reserved exclusively for the public sector were reduced
•
Professionalization of Management of PSUs
•
Sick PSUs to be referred to the Board for Industrial and financial restructuring (BIFR).
•
Scope of MoUs was strengthened (MoU is an agreement between a PSU and concerned ministry).
•
•
6.2 New Industrial Policy 1991;
The New Industrial Policy of 1991 comes at the center of economic reforms that launched during the early
1990s. All the later reform measures were derived out of the new industrial policy. The Policy has brought
comprehensive changes in economic regulation in the country. As the name suggests, these reform
measures were made in different areas related to the industrial sector.
As part of the policy, the role of public sector has been redefined. A dedicated reform policy for the public
sector including the disinvestment programme were launched under the NIP 1991. Private sector has given
welcome in major industries that were previously reserved for the public sector.
Similarly, foreign investment has given welcome under the policy. But the most important reform measure
of the new industrial policy was that it ended the practice of industrial licensing in India. Industrial licensing
represented red tapism.
Because of the large scale changes, the Industrial Policy of 1991 or the new industrial policy represents a
major change from the early policy of 1956.
The new policy contained policy directions for reforms and thus for LPG (Liberalisation, Privatisation and
Globalisation). It enlarged the scope of private sector participation to almost all industrial sectors except
three (modified). Simultaneously, the policy has given welcome to foreign investment and foreign
technology. Since 1991, the country’s policy on foreign investment is gradually evolving through the
introduction of liberalization measures in a phasewise manner.
Perhaps, the most welcome change under the new industrial policy was the abolition of the practice of
industrial licensing. The1991 policy has limited industrial licensing to less than fifteen sectors. It means that
to start an industry, one has to go for license and waiting only in the case of these few selected industries.
This has ended the era of license raj or red tapism in the country. The 1991 industrial policy contained the
root of the liberalization, privatization and globalization drive made in the country in the later period. The
policy has brought changes in the following aspects of industrial regulation:
1. Industrial delicensing
2. Deregulation of the industrial sector
3. Public sector policy (dereservation and reform of PSEs)
4. Abolition of MRTP Act
5. Foreign investment policy and foreign technology policy.
1. Industrial delicensing policy or the end of red tapism: the most important part of the new industrial policy
of 1991 was the end of the industrial licensing or the license raj or red tapism. Under the industrial licensing
policies, private sector firms have to secure licenses to start an industry. This has created long delays in the
start up of industries. The industrial policy of 1991 has almost abandoned the industrial licensing system. It
has reduced industrial licensing to fifteen sectors. Now only 13 sector need license for starting an industrial
operation.
2. Dereservation of the industrial sector– Previously, the public sector has given reservation especially in
the capital goods and key industries. Under industrial deregulation, most of the industrial sectors was
opened to the private sector as well. Previously, most of the industrial sectors were reserved to the public
sector. Under the new industrial policy, only three sectors- atomic energy, mining and railways will continue
as reserved for public sector. All other sectors have been opened for private sector participation.
3. Reforms related to the Public sector enterprises: reforms in the public sector were aimed at enhancing
efficiency and competitiveness of the sector. The government identified strategic and priority areas for the
public sector to concentrate. Similarly, loss making PSUs were sold to the private sector. The government
has adopted disinvestment policy for the restructuring of the public sector in the country. at the same time
autonomy has been given to PSU boards for efficient functioning.
4. Foreign investment policy: another major feature of the economic reform measure was it has given
welcome to foreign investment and foreign technology. This measure has enhanced the industrial
competition and improved business environment in the country. Foreign investment including FDI and FPI
were allowed. Similarly, loan capital has also introduced in the country to attract foreign capital.
5. Abolition of MRTP Act: The New Industrial Policy of 1991 has abolished the Monopoly and Restricted
Trade Practice Act. In 2010, the Competition Commission has emerged as the watchdog in monitoring
competitive practices in the economy.
The industrial policy of 1991 is the big reform introduced in Indian economy since independence. The policy
caused big changes including emergence of a strong and competitive private sector and a sizable number
of foreign companies in India.
6.3 Private Sector- Growth, Problems and Prospects:
Private Sector of Indian Economy
The private sector of Indian economy is the past few years have delineated significant development in terms
of investment and in terms of its share in the gross domestic product. The key areas in private sector of
Indian economy that have surpassed the public sector are transport, financial services etc.
Indian government has considered plans to take concrete steps to bring affect poverty alleviation through
the creation of more job opportunities in the private sector of Indian economy, increase in the number of
financial institutions in the private sector, to provide loans for purchase of houses, equipments, education,
and for infrastructural development also. The private sector of Indian economy is recently showing its
inclination to serve the society through women empowerment programs, aiding the people affected by
natural calamities, extending help to the street children and so on. The government of India is being assisted
by a number of agencies to identify the areas that are blocking the entry of the private sector of Indian
economy in the arena of infrastructural development, like regulatory policies, legal procedures etc.
The most interesting fact about the private sector of India economy is that though the overall pace of its
development is comparatively slower than the public sector, still the investment of private sector in the
recent past, i.e. in the first quarter of 1990 registered approximately 56 % which rose to nearly 71 % in the
next quarter, accounting for an increase of 15 %. Certain steps taken by the Indian government are acting
as the stepping stone of the private sector continued journey to success, include industrial delicensing,
devaluation
that
was
implemented
previously.
The private sector of Indian economy is also adversely affected by the huge number of permits and
enormous time required for the processing of documents to initiate a firm, however the central government
has decided to abolish MRTP Act and incorporate a Competition Commission of India to bring the public
sector
and
the
private
sector
at
the
same
platform.
The participation of the private sector of Indian economy is desired by the government of India for
infrastructural development including specific sectors like power, development of highways and so on. As
the contribution of public sector in these sectors have been arrested due to the shift of the attention of the
Indian
government
to
issues
like
population
increase,
industrial
growth.
The main reasons behind the low contribution of the private sector in infrastructural development activities
are that:
• The small and medium scale companies in the private sector of Indian economy suffer from lack of
finances to welcome the idea of extending their business to other states or diversify their product
range.
•
The private sector of Indian economy also suffer from the absence of appropriate regulatory
structure, to guide the private sector and this speaks for its unorganized framework.
•
The unorganized framework of the private sector is interrupting the proper management of this
sector resulting in the slowdown of its development.
As of the figures of the last decade, India has had a remarkable growth in private sector
investment. The liberal trade and investment policies and the country's infrastructure have
provided the environment for higher investment and growth in private sector.
Recent Trends in Private Participation
Growth
in
Telecom
Sector
As of the figures of 2001-06, there has been an incredible increase in the investment in the
telecommunication sector in India and as a result there has been immense growth in the telecom
industry. 64% of the investment in this sector in South Asia has been in this sector. Various private
telecom companies as Airtel, Reliance Communications, Tata Indicom etc have been the major
investors in this field. The subscriber base has increased as a result which is reflected in their
figures:
• Bharti Airtel -3,280,658
• Reliance Communications 1,232,060
• Tata Teleservices 1, 289, 17
Growth
in
Energy
and
Water
Sectors
This sector also has attracted a large investment from the private industries. Figures as of 2001-06
registered 17% investment in the sector. However in the water sector there has not been any
major investment due to political issues, weak authority etc. In India, the power distribution has
been privatized in several cities as Delhi and states like Orissa. The western state of Maharashtra
is also keen on having larger investment from the private sector in the power division.
Growth
in
Transport
Sector
This sector has also become an important area of investment by the private enterprises. As of
figures of the year 2006, there has been an investment of 34% alone in the transport sector. The
driving force behind this success has been India's initiatives and policies encouraging partnerships
of
the
private
and
the
public
sectors
in
transport.
Private Sector and Public Sector in India
As of the last decade, the growth and investment in the private sector has well surpassed the
growth in the public sector. Figures suggest that the share of the private sector in the net sales of
manufacturing and services industry augmented from 48.83% in 2001-01 to 68.55% in 2009-10.
Subsequently the share of the public sector reached to 31.45% from a higher percentage of
51.17%.The shares of private sector in the net profit in the non-agricultural economy rose to
63.86% from 39.17%. The share of the public sector subsequently declined to 36.14% from 60.83%.
This increase in the private sector's share is largely due to the higher foreign direct inAs of the
figures of the last decade, India has had a remarkable growth in private sector investment. The
liberal trade and investment policies and the country's infrastructure have provided the
environment
for
higher
investment
and
growth
in
private
sector.
Recent Trends in Private Participation
Growth
in
Telecom
Sector
As of the figures of 2001-06, there has been an incredible increase in the investment in the
telecommunication sector in India and as a result there has been immense growth in the telecom
industry. 64% of the investment in this sector in South Asia has been in this sector. Various private
telecom companies as Airtel, Reliance Communications, Tata Indicom etc have been the major
investors in this field. The subscriber base has increased as a result which is reflected in their
figures:
Bharti Airtel -3,280,658
Reliance Communications 1,232,060
Tata Teleservices 1, 289, 17
Growth
in
Energy
and
Water
Sectors
This sector also has attracted a large investment from the private industries. Figures as of 2001-06
registered 17% investment in the sector. However in the water sector there has not been any
major investment due to political issues, weak authority etc. In India, the power distribution has
been privatized in several cities as Delhi and states like Orissa. The western state of Maharashtra
is also keen on having larger investment from the private sector in the power division.
Growth
in
Transport
Sector
This sector has also become an important area of investment by the private enterprises. As of
figures of the year 2006, there has been an investment of 34% alone in the transport sector. The
driving force behind this success has been India's initiatives and policies encouraging partnerships
of
the
private
and
the
public
sectors
in
transport.
Private Sector and Public Sector in India
As of the last decade, the growth and investment in the private sector has well surpassed the
growth in the public sector. Figures suggest that the share of the private sector in the net sales of
manufacturing and services industry augmented from 48.83% in 2001-01 to 68.55% in 2009-10.
Subsequently the share of the public sector reached to 31.45% from a higher percentage of
51.17%.The shares of private sector in the net profit in the non-agricultural economy rose to
63.86% from 39.17%. The share of the public sector subsequently declined to 36.14% from 60.83%.
This increase in the private sector's share is largely due to the higher foreign direct investment over
the last decade. Over the last decade or so, with the liberalisation of the economic policies, India
has been able to achieve higher investment from the private sector. For instance due to
modifications and changes in the economic policies the transport and telecommunication industry
witnesses a higher percentage of growth and investment in the private sectorvestment over the
last decade. Over the last decade or so, with the liberalization of the economic policies, India has
been able to achieve higher investment from the private sector. For instance due to modifications
and changes in the economic policies the transport and telecommunication industry witnesses a
higher percentage of growth and investment in the private sector
•
6.4 SMEs –Significance in Indian economy-problems and prospects.
Introduction to Indian SMEs
There is a silent revolution happening in India. In fact, if you look around the corner, you may just about get
a glimpse of an India that is changing right before your eyes. This is the India powered by SMEs, more
commonly known as Small & Medium Enterprises.
When we talk about companies that drive change, it is always the larger corporations that come to mind.
Billion dollar businesses that are driven to change, and may be even disrupt the existing business models &
practices. On the other hand, the SME sector with about 36 million units, each trying to push the envelope
a little further. It seems as if a few million drops of water have joined together to form an ocean of change.
SMEs are defined differently in different parts of the world depending upon their net worth, assets,
employee strength, shareholders, and funding structure, etc. In India, SMEs are classified into two main
categories, based on the nature of business. These categories are:
•
Manufacturing Enterprises: Which are engaged in the production of goods (pertaining to any
industry), within this, the enterprises are classified based on their investment levels, such as:
• Micro: Upto INR 25 Lacs
•
Small: Above INR 25 Lacs, but less than INR 5 Crores
•
Medium: Above INR 5 Crores, but less than INR 10 Crores
•
Services enterprises: Which are engaged in rendering of services (in terms of investment in
equipment). Within this, the enterprises are classified based on their investment levels such as:
• Micro: Upto INR 10 Lacs
•
Small: Above INR 10 Lacs, but less than INR 2 Crores
•
Medium: Above INR 2 Crores, but less than INR 5 Crores
Role of SMEs in the Indian Economy
SMEs employ around 40% of India’s workforce, which is an estimated 80 million people, who are given an
opportunity for livelihood and employment via low-skilled jobs. Around 1.3 million SMEs contribute 45% to
India’s manufacturing output and 40% of India’s total export. In a way, they form the backbone of the Indian
economy. At 48 million, India has the second largest number of SMEs in the world, edging close to China
which has around 50 million SMEs.
There are around 6000 products manufactured by 31.7% SMEs while the remaining 68.2% are engaged in
delivering various services. This sector, if extended the right support, has the potential to spread industrial
growth throughout the country.
Despite employing 40% of India’s workforce, SMEs are also the bane of India’s economic problems. Though
the volume numbers work in their favor, they currently contribute to about 17% of India’s GDP.
Challenges Faced by Indian SMEs
MAny SMEs are reluctant to grow, resulting in reduced productivity. Others cling firmly to the concept of
staying small and comfortable – thereby avoiding regulatory and taxation related hurdles.
Those who choose to grow, have a different set of problems to deal with – starting with financing. In an
earlier survey conducted with over 15000 listed and unlisted companies from diverse sectors such as textile,
power, agriculture and IT&ITES, a common trend showed that SMEs’ exposure to bank credit was drastically
falling due to the high interest rates.
Another reason to shun bank credit, originates due to repayment timelines. While most big companies who
buy from SMEs get an interest-free repayment timeline of 120 days, SMEs get only 60 days to pay back their
interest-loaded bank loans. Because of this, most SMEs have now chosen to reduce their exposure to bank
credit.
In addition, individual sectors face their own challenges. Real estate, for example, saw a slowdown in the
past few years after a decade of growth. Similarly, exports have also seen a quarter-on-quarter reduction
as demand has been slowing in European countries, and disturbances in West Asian countries have caused
the tables to turn unfavorably for SMEs.
Because these companies are not market leaders in their segments, they are unable to hold a bargaining
power in the price battle. They struggle to maintain quality while coping with reducing profit margins.
Supply chain inefficiencies, global and local competition and insufficient skilled manpower can choke out
SMEs that aren’t ready to take the bull by the horns and create their own path for growth.
Exploring Financing Opportunities for SMEs
One of the key ways to ensure the survival of SMEs is to make sure they don’t run out of financing options.
Let’s look at a few new/ alternative funding options for SMEs:
•
Foreign Banks: A healthy competition can be a win-win for most people, especially customers.
In this case, bringing down restrictions on foreign banks on extending their number of branches
can work in favor of SMEs, who may then see an influx of local banks clamoring for attention.
Foreign banks are currently allowed to open only 12 branches a year. Change this to a 100 and
see the magic work in favor of SMEs.
• Equity Funding: This type of funding has been a great success with startups, and it works well
especially if you plan to bring in senior management who can help in significantly improving
revenue & market share over a relatively short period of time.
• Debt Funding: Stepping away from known banks and exploring other debt funding options may
work well for SMEs. Depending on business size, age, etc. the government has formulated
schemes like collateral free loans up to INR 1 Cr.
• Mezzanine Debt Funding: This is a mix of equity and debt funding now offered by domestic as
well as foreign investors
• LIBOR for Exports: Pre-shipment and post-shipment credits for exporters are available in LIBOR
based regimes that offer highly competitive interest rates.
• NBFC Loans: There are a few NBFCs which currently offer debt-backed PE funding for SMEs
• Grants: India has developed bilateral trade ties with other countries where the trade/ finance
associations offer grants to proven sectors, to gain an advantage from their growth. (Example:
Renewable & Clean Energy, etc.)
SMEs & Technology
SMEs have been accused of living in an obsolete era in terms of technology. Access to internet, resources,
virtual skilled workers and client opportunities can help them grow by leaps and bounds. They are now
waking up to the fact that technology and culture of innovation can be high potential growth drivers. In a
recent global study with Oxford Economics over 2300 SME executives, over 60% agreed that tech can be a
key differentiator for their SME and over one third agreed that creating a culture of innovation is a top
priority in their strategic growth plan.
Tech can be used in multiple spheres. It can make SMEs agile, improve innovation, fortify customer
relationships and help explore new markets while reducing the cost of expansion. Specifically speaking, Big
Data Analytics and MobiTech were named as the two biggest drivers of change.
•
•
•
MobiTech: World over, as businesses move from being product-centric to customer-centric, it
has become increasingly important for SMEs to focus on enterprise mobility as a key driver of
innovation. Using mobile tech efficiently, helps to drive better customer experiences, especially
for B2C SMEs in retail. For example, mobile apps can change the way SMEs do business. They
can enable streamlining order flow, forecasting warehouse inventory & allow for better
communication processes.
Cloud Computing: Using the Cloud to handle a substantial chunk of their IT related aspects can
be a great way for SMEs to save on IT costs, and instead use these savings to drive product
innovation. This would allow SMEs to scale and gain expertise from any part in the world without
having to invest in infrastructure and offices. It helps streamlining sales, inventory and financials
especially for SMEs without huge capital reserves.
Big Data & SMEs: Analytics can be a great way to know more about your customers, and will
allow you to gain insights on what your customers are buying, how they’re buying it (or not) and
•
•
where exactly in the sales funnel are they dropping off. All this information can help in creating
a better customer experiences and nurture leads to close sales.
Exclusive Telecom for SMEs: In recent years, many telecom technologies like VoIP, WiFi and
other Compression Technologies have become affordable for SMEs. Telecom companies did take
a bit of time understand the price-sensitive SME market, and have started offering technology
which can implemented relatively quickly and can be upgraded on demand. One such example
is a network service between branch offices which will enable SMEs to save on call costs.
Tech Improvements for the SME Support Systems: It's not just SMEs that need a boost in
technology, but also those who offer their services to them. Banks, for example, charge lesser
for electronic/ branchless transactions vs. those transactions which are conducted within branch
premises.
Government’s Role in Promoting SMEs
A few of the recent initiatives by Government of India have a given a boost to SMEs. In a direct move to
increase the GDP share of SMEs, the Government has allocated 20,000 Cr to this sector through the Micro
Units Development Refinance Agency Bank (MUDRA).
Similarly, in a move to promote ‘Zero-Defect’ manufacturing that has ‘Zero-Effect’ on the environment, the
Government has set up the performance and credit rating system for SMEs called the ZED rating. SMEs will
be classified into bronze, silver, gold, diamond and platinum categories. The idea is to help SMEs grow
bigger, gain economies of scale and improve the quality of their products. Here are some of the other
popular schemes for SMEs in India.
• Credit Guarantee Fund Scheme: Applicable to both existing and new enterprises, this scheme
provides collateral-free credit to Indian MSMEs. The ministry in association with SIDBI
established the trust that facilitates a working capital loan of up to Rs. 100 Lakh per borrowing
unit
• Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS): The Ministry of Small
Scale Industries (MSSI) created the CLCSS which provides upfront capital subsidy of 15% (max 15
Lakh) to SSI units which can be used for plant & machinery modernization.
• Financial Assistance on International Participation: This scheme offers funding to SMEs for
participate at international trade fairs, exhibitions and also promotes sector specific market
studies by industry associations. It also offers reimbursement of 75% on one-time registration
fee and 75% on annual fees (recurring) paid to GSI by SMEs for the first three years for barcode.
It also facilitates tech upgradation, creation of joint ventures and foreign collaborations.
• Technology & Quality Upgradation Support to SMEs: This scheme helps SMEs gain benefit from
energy efficient technologies and manufacturing processes to reduce their carbon footprint. It
provides them with 75% expenditure to buy such technologies.
• Mini Tools Room & Training Center Scheme: The govt. provides grant / aid that equals to the
cost of the machinery/ equipment (max 9 Cr.) to create a new mini tool room and 75% of the
cost if an existing room has to be upgraded. The scheme aims to create a skilled workforce which
would also benefit the region in the long run.
With low investment requirements, operational flexibility and the capacity to develop appropriate
indigenous technology, SMEs have the power to propel India to new heights. Imagine an India that has
empowered SMEs to maximize their growth propulsion, resulting in a significant boost to the growth of
India as a whole. Looking at the current trends, it’s seems as if India may one day overtake China in its SME
volume. However, it’s crucial for India’s SMEs to ramp up the quality of their product offering and transfer
benefits to the end consumer.
Starting a business today is a lot simpler than before. There are accelerators, incubators, investors and
mentors available to handhold a business to ensure they see the light of day. The ever-growing internet/
mobile penetration have opened up both the international and rural markets like never before. While the
atmosphere is rife with challenges it’s also ripe with opportunities. The time is right for us as a nation to
sow the seeds, and build a support system, which would allow our SMEs to achieve their full potential.
•
6.5 Fiscal policy and Monetary Policy.
Fiscal Policy vs. Monetary Policy: Pros and Cons
When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two
primary courses of action: monetary policy or fiscal policy.
Monetary policy involves the management of the money supply and interest rates by central banks. To
stimulate a faltering economy, the central bank will cut interest rates, making it less expensive to borrow
while increasing the money supply. If the economy is growing too rapidly, the central bank can implement
a tight monetary policy by raising interest rates and removing money from circulation.
Fiscal policy, on the other hand, determines the way in which the central government earns money
through taxation and how it spends money. To stimulate the economy, a government will cut tax
rates while increasing its own spending; while to cool down an overheating economy, it will raise taxes
and cut back on spending.
There is much debate as to whether monetary policy or fiscal policy is the better economic tool, and each
policy has pros and cons to consider.
KEY TAKEAWAYS
•
Central banks use monetary policy tools to keep economic growth in check and stimulate
economies out of periods of recession.
• While central banks can be effective, there could be negative long-term consequences that stem
from short-term fixes enacted in the present.
• Fiscal policy refers to the tools used by governments to change levels of taxation and spending to
influence the economy.
• Fiscal policy can be swayed by politics and placating voters, which can lead to poor decisions that
are not informed by data or economic theory.
• If monetary policy is not coordinated with a fiscal policy enacted by governments, it can undermine
efforts as well.
An Overview of Monetary Policy
Monetary policy refers to the actions taken by a country's central bank to achieve
its macroeconomic policy objectives. Some central banks are tasked with targeting a particular level of
inflation. In the United States, the Federal Reserve Bank (the Fed) has been established with a mandate to
achieve maximum employment and price stability.
This is sometimes referred to as the Fed's "dual mandate." Most countries separate the monetary
authority from any outside political influence that could undermine its mandate or cloud its objectivity. As
a result, many central banks, including the Federal Reserve, are operated as independent agencies.1 2 3
When a country's economy is growing at such a fast pace that inflation increases to worrisome levels, the
central bank will enact restrictive monetary policy to tighten the money supply, effectively reducing the
amount of money in circulation and lowering the rate at which new money enters the system. Raising the
prevailing risk-free interest rate will make money more expensive and increase borrowing costs, reducing
the demand for cash and loans.
During and after the Great Recession, the Federal Reserve made use of quantitative easing as a means to
spur the economy.4
The Fed can also increase the level of reserves commercial and retail banks must keep on hand, limiting
their ability to generate new loans. Selling government bonds from its balance sheet to the public in the
open market also reduces the money in circulation. Economists of the Monetarist school adhere to the
virtues of monetary policy.
When a nation's economy slides into a recession, these same policy tools can be operated in reverse,
constituting a loose or expansionary monetary policy. In this case, interest rates are lowered, reserve limits
loosened, and bonds are purchased in exchange for newly created money. If these traditional measures
fall short, central banks can undertake unconventional monetary policies such as quantitative easing (QE).
Monetary Policy Pros and Cons
Pros
• Interest Rate Targeting Controls Inflation
A small amount of inflation is healthy for a growing economy as it encourages investment in the
future and allows workers to expect higher wages. Inflation occurs when the general price levels
of all goods and services in an economy increase. By raising the target interest rate, investment
becomes more expensive and works to slow economic growth a bit.
•
Can Be Implemented Fairly Easily
Central banks can act quickly to use monetary policy tools. Often, just signaling their intentions to
the market can yield results.
•
Central Banks Are Independent and Politically Neutral
Even if monetary policy action is unpopular, it can be undertaken before or during elections
without the fear of political repercussions.
•
Weakening the Currency Can Boost Exports
Increasing the money supply or lowering interest rates tends to devalue the local currency.
A weaker currency on world markets can serve to boost exports as these products are effectively
less expensive for foreigners to purchase. The opposite effect would happen for companies that
are mainly importers, hurting their bottom line.
Cons
•
Effects Have a Time Lag
Even if implemented quickly, the macro effects of monetary policy generally occur after some time
has passed. The effects on an economy may take months or even years to materialize. Some
economists believe money is "merely a veil," and while serving to stimulate an economy in the
short-run, it has no long-term effects except for raising the general level of prices without boosting
real economic output.
•
Technical Limitations
Interest rates can only be lowered nominally to 0%, which limits the bank's use of this policy tool
when interest rates are already low. Keeping rates very low for prolonged periods of time can lead
to a liquidity trap. This tends to make monetary policy tools more effective during economic
expansions than recessions. Some European central banks have recently experimented with
a negative interest rate policy (NIRP), but the results won't be known for some time to come.
•
Monetary Tools Are General and Affect an Entire Country
Monetary policy tools such as interest rate levels have an economy-wide impact and do not
account for the fact some areas in the country might not need the stimulus, while states with high
unemployment might need the stimulus more. It is also general in the sense that monetary tools
can't be directed to solve a specific problem or boost a specific industry or region.
•
The Risk of Hyperinflation
When interest rates are set too low, over-borrowing at artificially cheap rates can occur. This can
then cause a speculative bubble, whereby prices increase too quickly and to absurdly high levels.
Adding more money to the economy can also run the risk of causing out-of-control inflation due to
the premise of supply and demand: if more money is available in circulation, the value of each unit
of money will decrease given an unchanged level of demand, making things priced in that money
nominally more expensive.
An Overview of Fiscal Policy
Fiscal policy refers to the tax and spending policies of a nation's government. A tight, or restrictive fiscal
policy includes raising taxes and cutting back on federal spending. A loose or expansionary fiscal policy is
just the opposite and is used to encourage economic growth. Many fiscal policy tools are based on
Keynesian economics and hope to boost aggregate demand.
Fiscal Policy Pros and Cons
Pros
•
Can Direct Spending To Specific Purposes
Unlike monetary policy tools, which are general in nature, a government can direct spending
toward specific projects, sectors, or regions to stimulate the economy where it is perceived to be
needed most.
•
Can Use Taxation to Discourage Negative Externalities
Taxing polluters or those that overuse limited resources can help remove the negative effects they
cause while generating government revenue.
•
Short Time Lag
The effects of fiscal policy tools can be seen much quicker than the effects of monetary tools.
Cons
•
•
May Be Politically Motivated
Raising taxes can be unpopular and politically dangerous to implement.
•
Tax Incentives May Be Spent on Imports
The effect of fiscal stimulus is muted when the money put into the economy through tax savings or
government spending is spent on imports, sending that money abroad instead of keeping it in the
local economy.
•
Can Create Budget Deficits
A government budget deficit is when it spends more money annually than it takes in. If spending is
high and taxes are low for too long, such a deficit can continue to widen to dangerous levels.
6.6 Foreign Trade: Trends in India’s Foreign Trade:
Foreign Trade: Definition, Types of Foreign Trade
Foreign trade is the exchange of capital, goods, and services across international borders or territories.
In most countries, it represents a significant share of gross domestic product (GDP). Industrialization,
advanced transportation, globalization, multinational corporations, and outsourcing are all having a major
impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization. International trade is a major
source of economic revenue for any nation that is considered a world power.
Without international trade, nations would be limited to the goods and services produced within their
borders.
What is Foreign Trade?
Foreign trade is the exchange of goods across national boundaries. Prof. J.L. Hanson said, “An exchange of
various specialized commodities and services rendered among the corresponding countries is known as
foreign trade.”
Foreign trade is, in principle, not different from domestic trade as the motivation and the behavior of parties
involved in a trade does not change fundamentally depending on whether a trade is across a border or not.
The main difference is that international trade is typically more costly than domestic trade. The reason is
that a border typically imposes additional costs such as tariffs, time costs due to border delays, and costs
associated with country differences such as language, the legal system, or a different culture.
Foreign trade is all about imports and exports. The backbone of any foreign trade between nations is those
products and services which are being traded to some other location outside a particular country’s borders.
Some nations are adept at producing certain products at a cost-effective price.
Perhaps it is because they have the labor supply or abundant natural resources which make up the raw
materials needed. No matter what the reason, the ability of some nations to produce what other nations
want is what makes foreign trade work.
Types of Foreign Trade
1. Import
Importing is the purchasing of goods or services made in another country. For example, importing edible
oil from Chinese producers to sell in Africa.
2.Export
Exporting is selling domestic-made goods in another country. For example, Hameem Garments exports
Readymade Garments (RMG) products to Western Countries.
3. Re-export
When goods are imported from a foreign country and are re-exported to buyers in some other foreign
countries, it is called re-export.
For example, Firm/ Readymade Garments located at EPZs imports raw materials (cotton) from Korea and
produces Readymade Garments products by Thai cotton and then those products to Canada.
Reasons / Need / Importance / Advantages of Foreign Trade
The following points explain the need and importance of foreign trade to a nation.
1. Division of Labor and Specialization
Foreign trade leads to the division of labor and specialization at the world level. Some countries have
abundant natural resources.
They should export raw materials and import finished goods from countries which are advanced in skilled
manpower. This gives benefits to all the countries and thereby leading to the division of labor and
specialization.
2.Optimum Allocation and Utilization of Resources
Due to specialization, unproductive lines can be eliminated, and wastage of resources avoided. In other
words, resources are canalized for the production of only those goods, which would give the highest
returns.
Thus there is rational allocation and utilization of resources at the international level due to foreign trade.
3.Equality of Prices
Prices can be stabilized by foreign trade. It helps to keep the demand and supply position stable, which in
turn stabilizes the prices, making allowances for transport and other marketing expenses.
4. Availability of Multiple Choices
Foreign trade helps in providing a better choice to the consumers. It helps in making available new varieties
to consumers all over the world.
5. Ensures Quality and Standard Goods
Foreign trade is highly competitive. To maintain and increase the demand for goods, the exporting countries
have to keep up the quality of goods.
Thus quality and standardized goods are produced.
6. Raises Standard of Living of the People
Imports can facilitate the standard of living of the people. This is because people can have a choice of new
and better varieties of goods and services.
By consuming new and better varieties of goods, people can improve their standard of living.
7. Generate Employment Opportunities
Foreign trade helps in generating employment opportunities by increasing the mobility of labor and
resources. It generates direct employment in the import sector and indirect employment in other sectors
of the economy.
Such as Industry, Service Sector (insurance, banking, transport, communication), etc.
8. Facilitate Economic Development
Imports facilitate the economic development of a nation. This is because, with the import of capital goods
and technology, a country can generate growth in all sectors of the economy, agriculture, industry, and
service sector.
9. Assistance During Natural Calamities
During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the
problem of shortage of essential goods.
Foreign trade enables a country to import food grains and medicines from other countries to help the
affected people.
10. Maintains Balance of Payment Position
Every country has to maintain its balance of payment position.
Since every country has to import, which results in an outflow of foreign exchange, it also deals in export
for the inflow of foreign exchange.
11. Brings Reputation and Helps Earning Goodwill
A country which is involved in exports earns goodwill in the international market.
For example, Japan has earned a lot of goodwill in foreign markets due to its exports of quality electronic
goods.
12. Promotes World Peace
Foreign trade brings countries closer. It facilitates the transfer of technology and other assistance from
developed countries to developing countries. It brings different countries closer due to economic relations
arising out of trade agreements.
Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace
as such countries try to maintain friendly relations among themselves.
Features of Foreign Trade (Export/ Import)
1. Import dependency (our country foreign trade depend on import because of high demand and low
supply),
2. Import capital goods and industrial goods,
3. Export of readymade garments (RMG), RMG and Knitwear 74% export,
4. Export of agricultural raw materials and products,
5. Unfavorable balance of payment ( More import but less export),
6. Operate most business by sea/ocean,
7. More import from Asia (China, Singapore, India ) and export in Western countries (USA, England),
8. Government initiation and control (By TCB and EPB govt control foreign trade and operate helpful
initiative),
9. Export of jute and jute goods,
10. Export of manpower,
11. Private initiative,
12. Diversity of import goods (necessary goods and unnecessary luxurious goods ).
13. Effect of free trade economy (for open market economy unnecessary luxurious goods are imported
in our country, and our country’s money went to another country)
14. Business with all countries.
•
6.7. Impact of WTO on India’s Foreign Trade:
WTO GENESIS:
•
The General Agreement on Trade and Tariff (GATT) came into existence in 1947
•
It sought substantial reduction in tariff and other barriers to trade and to eliminate discriminatory
treatment in international commerce.
•
India became a signatory to GATT in 1947 along with twenty two other countries
•
Reasons for GATT to be carved into WTO
GATT faced many problems, with the world trade becoming more and more complex, GATT was unable to
deal with it. Eg. In the agriculture sector, loopholes in the multilateral system were heavily exploited, and
efforts at liberalizing agricultural trade met with little success. In the textiles and clothing sector, an
exception to GATT’s normal disciplines was negotiated in the 1960s and early 1970s, leading to the
Multifibre Arrangement. Even GATT’s dispute settlement systems were causing concern. The Uruguay
round negotiations lasted for about seven and a half years, twice the time originally planned for.
But economists conclude that it was worth the trouble, basically all issues related to trade were discussed
in these negotiations, GATT’s articles were reviewed and most importantly the Final Act concluding the
Uruguay Round and officially establishing the WTO regime was signed during the April 1994 ministerial
meeting at Marrakesh, Morocco, and hence is known as the Marrakesh Agreement.
WTO kept the basic objectives of GATT same, while worked on their implementation.
WTO
•
WTO on paper came into existence on 1-1-1995 with the conclusion of Uruguay Round Multilateral
Trade Negotiations at Marrakesh. Finally, enforced on 1-1-2005: For Transparent, free and rulebased trading system
•
To provide common institutional framework for conduct of trade relations among members To
facilitate the implementation, administration and operation of Multilateral Trade Agreements
•
Follow rules and Procedures Governing Dispute Settlement
•
Trade Policy Review Mechanism
•
Concern on Non-trade issues such as Food Security, environment, health, etc.
What INDIA seeks from WTO
Protecting our food and livelihood security by having sufficient flexibility for domestic policy measures.
Protecting domestic producers from the surge in imports or significant decline in import prices. Substantial
reduction in export subsidies to other countries and domestic support to agriculture in the developed
countries for greater market access to products of India as a developing country. Finally, a more equitable
& fair trading framework for agricultural commodities
India and its Non-Trade Concerns
The issue of non-trade concerns was articulated as under:
The Article of Association provides an enabling environment for the countries to address the concerns
relating to food security and livelihoods. Non-trade concerns were adequately reflected in the decisions,
particularly those related to market access and domestic support. The relevant decisions of the World Food
Summit on food security and livelihoods were taken as the integral part of the negotiations.
IMPACT OF WTO ON WORLD ECONOMY
SYNTHESIS OF WTO - WORLD TRADE ORGANISATION
One of the most eventful time that the world witnessed was the culmination of GATT 1947 into WTO, which
came
into
force
on
1st
January
2005.
This
WTO
had
set very high expectations in various member countries regarding increase in world trade where India had
insignificant share i.e. only 0.75% at the most. Even in IT exports the share of Indian exporters was just
peanuts in view of overall world market.
PROBLEMS FACED BY INDIA IN WTO & ITS IMPLEMENTATION:
Predominance of developed nations in negotiations extracting more benefits from developing and least
developed countries Resource and skill limitations of smaller countries to understand and negotiate under
rules of various agreements under WTO - Incompatibility of developed and developing countries resource
sizes thereby causing distortions in implementing various decisions
Questionable effectiveness in implementation of agreements reached in past and sincerity - Non-tariff
barriers
being
created
by
developed
nations.
Regional cooperation groups were posing threat to utility of WTO agreement itself, which is multilateral
encompassing all member countries - Agriculture seemed to be the bone of contention for all types of
countries where France, Japan and some countries were just not willing to budge downwards in matter of
domestic support and export assistance to farmers and exporters of agriculture produce.
Implications for India
IMPACT OF W.T.O ON INDIAN AGRICULTURAL SECTOR
Trade is an engine of economic development. The establishment of W.T.O is an important landmark in the
history of international trade. When developing countries were liberalizing their economies, they felt the
need for better export opportunities. The W.T.O provides opportunities for countries to grow and realize
their export potentials, with appropriate domestic policies in place. The issue of globalization in the Indian
context has occurred in the patterns of trade and capital flow in recent years; unfortunately, so far we have
not made much use of it. At one time a country’s trade pattern was determined by its natural resources
and the productivity of its land. Leaving aside political and institutional factors, a country’s level of
income was also largely determined by the global demand for its natural resources and its relative efficiency
in exploiting them. The importance of land as a source of comparative advantage, however, changed
dramatically after the industrial revolution. Today, it is almost insignificant. After the industrial revolution,
the availability of “capital” became the most dominant source of comparative advantage.
The concept of India being a member of WTO evolved with the objective of expanding its exports of
agricultural products in which it had tremendous comparative advantage(i.e. ability of a country to produce
a particular good or service at a lower opportunity cost than another) The provisions of W.T.O offered
ample opportunities to India to expand its export market. Contrary to this, the price situation changed
drastically after 1996, which was the first year after implementation of Urguay Round Agreement and
formation of W.T.O. International price of agricultural commodities have since then plummeted(fallen
drastically), because of which domestic price turned higher than international price, which made India an
attractive market for import of most agricultural commodities. This situation resulted in a wide spread
decline in agricultural export and had also pressurized domestic prices. The impact of W.T.O on agriculture
was severely felt by India as cheap imports were frequently hitting the Indian market that caused shock
waves among the agriculture producers. The changes in the agricultural sector reveal that during pre W.T.O
period i.e. just before the culmination of GATT into WTO there was significant increase in the exports of
India rendering it remarkable than the post W.T.O period which could not sustain the rising import trends
whereas the exports rose steadily.
ANALYSIS - IMPACT OF WTO ON VARIOUS SECTORS
The global agriculture trade regime under the World Trade Organization (WTO), that came into force 10
years ago in 1995, has led to an increase in the import of farm products into India rather than boosting
exports.
Barring the first three years after the enforcement of the agreement, (1995-1998) agriculture imports
continued to grow faster than exports. Between 1998 and 2000-01, the average annual import of farm
products rose by about 64 per cent, while exports declined by 7 per cent. Though the years 2002-03 have
seen some buoyancy in farm exports, imports have also continued to grow.
A study on this particular aspect reports that the annual import of agriculture goods rose from $1,190
million in the three years preceding the WTO to $1,996 million in the first triennium after the WTO. In the
same period, exports increased from $3,725 million to $6,530 million. But, this favourable trend in the initial
years of the WTO did not last long and the next three years witnessed a whopping rise in imports and a
slight decline in exports.
This crash was due partly to the cyclical nature of international prices partly due to increased global
competition in agro-export because of liberalising trade.
The situation was aggravated by an increase in the already high farm subsidies in the developed countries.
The Indian non-Basmati rice and wheat could not face global competition. The export of oilmeal, the second
biggest export item after marine products, also suffered a set back due to a decline in global prices.
The export earnings from traditional export commodities like tea, coffee, spice and tobacco suffered mainly
due to a sharp fall in international prices, as the quantum of exports in most cases did not drop.
Exports of marine products, livestock and horticulture items maintained the tempo of growth that was build
up in the pre-WTO period. This implies that the post-WTO situation was favourable for the export of highvalue food products.
In case of imports, liberalisation of trade in the initial years after the WTO did not result in any perceptible
spurt because global prices were high. But subsequently, when global prices began to fall, India's imports
started
rising. The level of imports nearly doubled in the three years between 1996-97 and 1999-2000. This
downturn in global prices continued even in the subsequent years.
The international prices of cereals in the years 2000 and 2001 were almost half of what they were in the
beginning of the WTO-era.
The composition of items in the import basket indicates that edible oils accounted for the bulk of the
increase in total agro-imports. The other items clocking significant increase in imports include pulses, spices,
cotton, wood and wood products.
The study has also revealed that the spurt in the imports vegetable oils, and wood and its products has
depressed their domestic prices, adversely impacting indigenous production.
What India should do?
The agricultural products from India can be made competitive in international market and the prices of
agricultural goods in the domestic market can be improved by taking serious steps of reform. It appears
that India does not stand to gain much by shouting for agriculture reforms in developed countries because
the overall tariff is lower in those countries. India will have to tart major reforms in agriculture sector in
India to make Agriculture globally competitive. In Pharma-sector there is need for major investments in
Research ; Development and mergers and restructuring of companies to make them world class to take
advantage. India has already amended patent Act and both product and Process are now patented in India.
India has solid strength, at least for mid term (5-7 years) in services sector primarily in IT sector, which
should be tapped and further strengthened. It should rather focus on Textile industry modernization and
developing international Marketing muscle and expertise, developing of Brand India image, use its
traditional arts and designs intelligently to give competitive edge, capitalize on drug sector opportunities,
and develop selective engineering sector industries like automobiles ; forgings ; castings, processed foods
industry
and
the
high
end
outsourcing
services.
It
wont be a bad idea if Indian textile and garment Industry go multinational setting their foot in western
Europe, North Africa, Mexico and other such strategically located areas for large US and European markets.
The petroleum sector has to be boosted to tap crude oil and gas resources within Indian boundaries and
entering into multinational contracts to source oil reserves.
General improvements required by all sections of economy
Our tariffs are still high compared to Developed countries and there will be pressure to reduce them further
and faster. India must improve legal and administrative infrastructure, improve trade facilitation through
cutting down bureaucracy and delays and further ease its financial markets. India has to downsize non-plan
expenditure in Subsidies (which are highly ineffective and wrongly applied) and Government salaries and
perquisites like pensions and administrative expenditures. Corruption will also have to be checked by
bringing in fast remedial public grievance system, legal system and information dissemination by using egovernance. The most important things for India to address are speed up internal reforms in building up
world-class infrastructure like roads, ports and electricity supply. The performance of India in attracting
major FDI has also been poor and certainly needs boost up, if India has to develop globally competitive
infrastructure and facilities in its sectors of interest for world trade.
The Objective of WTO Reiterated:
It is very clear that the intention of the negotiators was to use trade as an instrument for development, to
raise standards of living, expand production, keeping in view, particularly, the needs of developing countries
and least-developed countries. The WTO must never lose sight of this basic principle. Every act of
implementation and of negotiation, every legal decision, has to be viewed in this context. Trade, as an
instrument for development, should be the cornerstone of all our deliberations, decisions and actions.
Besides, the system should be seen to be equitable and fair. It must be used in such a manner that the letter
and spirit of the Agreements is fully observed. The WTO Members must mutually support and encourage
each other to achieve the final goal. It must be recognized that all Members should assume a negotiating
rather than an adversarial posture. It should also be recognized that different economies have different
features and structures, different problems, different cultures. The pace of change must be carefully
calibrated to take into account such differences. All Members should guard against unilateral action that
cuts at the root of multilateral agreement and consensus. Developing countries have generally been
apprehensive in particular about the implementation of special and differential treatment provisions (S;D)
in various Uruguay Round Agreements. Full benefits of these provisions have not accrued to the developing
countries, as clear guidelines have not been laid down on how these are to be implemented. " The first
Ministerial Conference held in 1996 in Singapore saw the commencement of pressures to enlarge the
agenda of WTO. Pressures were generated to introduce new Agreements on Investment, Competition
Policy, Transparency in Government Procurement and Trade Facilitation. The concept ofCore Labor
Standards was also taken up for introduction. India and the developing countries, which were already under
the burden of fulfilling the commitments undertaken through the Uruguay Round Agreements, and who
also perceived many of the new issues to be non-trade issues, resisted the introduction of these new
subjects into WTO. They were partly successful. The Singapore Ministerial Conference (SMC) set up openended Work Program to study the relationship between Trade and Investment; Trade and Competition
Policy; to conduct a study on Transparency in Government Procurement practices; and do analytical work
on simplification of trade procedures (Trade Facilitation).
Most importantly the SMC clearly declared on the Trade-Labor linkage as follows: " We reject the use of
labor standards for protectionist purposes, and agree that the comparative advantage of countries,
particularly low-wage developing countries, must in no way be put into question. In this regard we note
that the WTO and ILO Secretariat will continue their existing collaboration". Not many people in this country
are aware that there is a dispute settlement system in the WTO. This is at the heart of the WTO and sets it
apart from the earlier GATT. Countries like the USA and the European Union have brought cases against us
and won these cases like in pharmaceutical patents. India too has complained against the US and Europe
and it too has won its fair share of disputes in areas like textiles.
India must effectively use this mechanism to extract fair share in world markets. It would be advantageous
for India to give concrete shape to SAARC economic forum or Free market and align itself with ASEAN.
CONCLUSION
“Globalize or Perish” is now the buzzword synonymous to “Do or Die” which conveys that there is no
alternative to globalization and everybody should learn to live with it. India, being a signatory to the
agreement that led to W.T.O, can no way step backwards. This is not the time to curse the darkness but to
work for making India emerge as a global market leader.