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Tuesday 2 June 2020
NEW ECONOMIC POLICY - PART 4
CHAPTER –
3
ECONOMIC
REFORMS IN INDIA SINCE 1991
PART - 4
(Liberlisation – Foreign Exchange Reforms)
(Liberlisation – Trade and
Investment Policy reforms)
FOREIGN EXCHANGE REFORMS
EXTERNAL SECTOR REFORMS
The country faced a serious foreign exchange crisis in 1991. To
overcome from this situation, government has taken two steps:
(1) DEVALUATION OF RUPEES
Devaluation refers to reduction (lower) in the value of
domestic currency (in terms of foreign currencies) by the government.
$ 1 = Rs. 08 (Revaluation – If govt. done)
$ 1 = Rs. 10
$ 1 = Rs. 12 (Devaluation –
If govt. done)
$ 1 = Rs. 08 (Appreciation – If market forces done)
$ 1 = Rs. 10
$ 1 = Rs. 12 (Depreciation –
If market forces done)
As a result of this policy, exports become cheaper in
international market and imports become costlier in domestic market. This would
help to increase exports and decrease import and finally the situation of
Balance of Payments.
To overcome from the Balance of Payment crisis, the government
devaluated the rupee by 18-19 percent against foreign currencies in July 1991.
This led to an increase in the inflow of foreign exchange.
* 1947-1971 - PAR value system of exchange rate / Pagged Exchange Rate with
$.
* 1971-75 - Pagged Exchange Rate with £
* 1975-1992 - Fixed exchange rate system with basket of 5 major trading
partner’s currency.
* 01.03.1992 - Liberlised Exchange Rate Management System (LERMS)
* 01.03.1993 - Unified Exchange Rate System (UERS)
DEVALUATION OF INDIAN CURRENCY
(2) MARKET DETERMINATION OF EXCHANGE RATE
The government allowed rupee value to be free from its control.
Now the exchange rate of rupee will be determined by the market forces of
demand and supply of currency. However, to ensure orderly condition in the
foreign exchange market, the RBI keeps intervening from time to time. This has
been termed as ‘managed floating regime’. Under managed floating, the exchange
rate is allowed to ‘float’ according to the forces of demand and supply in the
market but such ‘float’ is managed by the RBI to ensure that is does not get
out of hand.
TRADE AND INVESTMENT POLICY REFORMS
Prior to 1991, India has adopted the policy of import substitution /
protectionism.
To protect domestic industries, India has imposed a lot of restrictions
(high tariffs and quotas) on imports. However, this protection reduced the
efficiency and competitiveness of domestic industries and led to their slow
growth.
Objectives of Trade and Investment Policy Reforms:
(i) To promote foreign investment and technology into the economy;
(ii) To promote efficiency of local industries and adoption of modern technology;
(iii) To increase the international competitiveness of industrial production.
FOREIGN TRADE REFORMS
(1) REDUCTION IN IMPORT DUTIES
As a first step towards
gradual reduction in the import tariffs, the 1991-92 Budget reduced the peak
rate of import duty from more than 300% to 150%. This process of reducing
import duties was carried further in subsequent budgets. The 2007-08 Budget
reduced the peak rate of import duty to 10%.
(2) RELAXATION IN IMPORT LICENSING
Import licensing has been abolished except in case of hazardous
goods and environmentally sensitive industries. Now domestic industries can import
raw material at better price.
(3) REMOVAL OF
QUANTITATIVE RESTRICTIONS
Quantitative restrictions on imports were reduced in stages
and totally withdrawn in Export-Import policy 2000-01.
(4) DECANALISATION OF IMPORT AND EXPORT
Pre-reforms period, most of the export and import used to be canalized
through public sector agencies like STC (State Trading Corporation), MMTC
(Minerals and Metals Trading Corporation) etc. Decanalistion of imports and exports is an important step towards
opening up more areas of external sector to the private sector.
(5) LIBERLISATION IN EXPORT TRADE
Now exporters have a self assessment system to facilitate
trade. Currently, about 80% transactions are cleared without intervention by
customs and 98% of documents are processes electronically.
FOREIGN INVESTMENT REFORMS
(1) The number of products in which foreign investment is freely permitted
has been significantly raised.
(2) Simplification of the FDI policy to provide ease of doing business climate
in the country.
(3) The foreign investors are free to compete with the domestic producers in
the Indian Market.
(4) Upto 51% foreign investment was permitted in high priority industries.
For industries in service sector, the limit of foreign investment was raised
from 51% to 74% and then 100%.
(5) Special Economic Zones (SEZs) are being setup to attract foreign
investment. Companies, that setup production units in SEZs, do not have to pay
taxes for an initial period of five years.
REFERENCE VIDEO
(Foreign
Exchange Reforms / Trade and Investment Policy Reforms)
Please like, Share
Subscribe and download app from play store by link given in description.
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Regards
Dr. Asad Ahmad
KV IIM, Lucknow
##pls share other
educational / official school group, so that more students will get benefit.
Thanks a lot.
To get link text
on
08770981320/ 09451927636
Facebook page - https://m.facebook.com/madeeconomicseasy/?ref=bookmarks
Blog -
http://drahmadasad.blogspot.com/?m=1
Monday 1 June 2020
NEW ECONOMIC POLICY - PART 3
CHAPTER –
3
ECONOMIC
REFORMS IN INDIA SINCE 1991
PART - 3
(Liberlisation – Financial Sector Reforms)
Financial sector includes financial
institutions like commercial banks, investment banks, stock exchange, foreign
exchange market etc. A vibrant, efficient and competitive financial sector is
necessary to support the structural reforms in the real economy. Some of the
reforms introduced in India post 1991 period.
(1) CHANGE IN THE ROLE OF R.B.I. –
Prior to 1991, The RBI decides the amount of money that the
banks can keep with themselves, what should be their interest rate structure,
what sectors they should lend to, etc. Under financial sector reforms, the role
of RBI was reduced from regulator to facilitator of financial sector. As a
result, the financial sector had been allowed to take decision on the following
matters without consulting the RBI.
* Amount of money keeps
with themselves;
* Interest rate structure;
* What sectors should be lend
money;
In other words, financial institutions are being given more
freedom to take decision in many matters without consulting the Reserve Bank of
India.
(2) OPENING OF PRIVATE SECTOR AND FOREIGN SECTOR BANKS –
The Narsinham Committee recommended to allowed setup of
private sector banks and foreign banks. Axis Bank (1993), Indusind Bank (1994),
HDFC Bank (1994) and ICICI (1994) are some India’s private sector banks were
established after permission from government. Standard Chartered Bank, City
Bank, HSBC Bank etc. are foreign sector banks.
Again on the recommendation of Narsinham Committee, in 1998,
few more private sector banks (Kotak Mahindra Bank – 2001, Yes Bank – 2004,
IDFC Bank and Bandhan Bank – 2014) have been established. At present there are
22 private sector banks and 46 foreign sector banks are in India. (As per RBI
Website)
(3) INTRODUCTION OF SMALL FINANCE
BANK AND PAYMENT BANKS –
To further increase competition in
the Indian banking industry and promote financial inclusion, the RBI started
issuing license to two types of new banks, i.e., Small Finance Banks and
Payment Banks on recoomendation of Narsinham Committee. After the announcement
during Union Budget for the year 2014-15, RBI issued the guidelines of Small
Finance Bank in November 2014. 72 entities from across segments applied for the
license while only 10 of these were provided the license on 24th November
2014.
Small Finance Banks – Small Finance Banks is a specific segment of banking created by RBI
under the guidance of Government of India with an objective of furthering financial inclusion by primarily undertaking
basic banking activities to un-served and underserved sections including small
business units, small and marginal farmers, micro and small industries and
unorganized entities. Like other
commercial banks, these banks can undertake all basic banking activities
including lending and taking deposits.
List of Small Finance Banks (SFB)
|
||
1
|
Equitas Small Finance Bank Ltd
|
2016
|
2
|
Capital Small Finance Bank Ltd
|
2016
|
3
|
Fincare Small Finance Bank Ltd.
|
2017
|
4
|
Au Small Finance Bank Ltd.
|
2017
|
5
|
ESAF Small Finance Bank Ltd.
|
2017
|
6
|
Suryoday Small Finance Bank Ltd.
|
2017
|
7
|
Ujjivan Small Finance Bank Ltd.
|
2017
|
8
|
Utkarsh Small Finance Bank Ltd.
|
2017
|
9
|
North East Small finance Bank Ltd
|
2017
|
10
|
Jana Small Finance Bank Ltd
|
2018
|
Payments
banks – Payment bank is
an Indian new
model of banks conceptualised by the Reserve Bank of India (RBI). These banks can accept a restricted deposit,
which is currently limited to Rupees 100,000 per customer and may be
increased further. These banks cannot issue loans and credit cards.
Both current account and savings accounts can be operated by such banks.
Payments banks can issue ATM cards or debit cards and provide online or mobile
banking.
List of Payments Banks (PB)
|
||
1
|
Airtel Payments Bank
Ltd
|
2017
|
2
|
FINO Payments Bank Ltd
|
2017
|
3
|
Paytm Payments Bank
Ltd
|
2017
|
4
|
India Post Payments
Bank Ltd
|
2018
|
5
|
Aditya Birla Idea
Payments Bank Ltd.
|
2018
|
6
|
Jio Payments Bank Ltd
|
2018
|
7
|
NSDL Payments Bank
Limited
|
2018
|
Local Area Bank – The Local
Area Banks (LABs) are small private banks, conceived as low cost
structures which would provide efficient and competitive financial
intermediation services in a limited area of operation, i.e.,
primarily in rural and semi-urban areas, comprising three contiguous
districts.
List of Local Area Banks (LAB)
|
|
Sr. No
|
Name of the Bank
|
1
|
Coastal Local Area Bank Ltd
|
2
|
Krishna Bhima Samruddhi LAB Ltd
|
3
|
Subhadra Local Bank Ltd
|
Financial Institutions
List of Financial Institutions in India
|
||
Sr. No
|
Name of the Bank
|
Year
|
1
|
National Bank for
Agriculture and Rural Development
|
12.07.1982
|
2
|
Export-Import Bank of
India
|
01.01.1982
|
3
|
National Housing Bank
|
09.07.1988
|
4
|
Small Industries
Development Bank of India
|
02.04.1990
|
(4) EASE IN EXPANSION PROCESS –
Banks were now given freedom top setup new branches (after
fulfillment of certain conditions) without the approval of Reserve Bank of
India.
(5) REDUCTION IN C.R.R. AND S.L.R. –
With the objective of enabling banks to create more credit in
the economy, The Reserve Bank of India has reduced Cash Reserve Ratio (certain
percentage of bank’s deposits that banks are required to maintain with the RBI
in their specified current account) and Statutory Liquidity ratio (required to
maintain a minimum percentage of their deposits with them at the end of every
business day in the form of gold, government bonds or other approved
securities) in recent times.
Cash Reserve Ratio
|
Statutory Liquidity ratio
|
||
YEAR
|
RATE
|
YEAR
|
RATE
|
1989
|
15.0%
|
1990
|
38.5%
|
2013
|
04.0%
|
2017
|
19.5%
|
30.04.2020
|
03.0%
|
30.04.2020
|
18.0%
|
(6) OPENING OF STOCK MARKET FOR FOREIGN INVESTORS AND
INCREASE IN LIMIT OF FOREIGN INSTITITIONAL INVESTMENT (FII) –
The limit of foreign investment in banking sector was raised
to around 51%. India opened its stock market in September 1992 for foreign
investors. Foreign Institutional Investors (FIIs) like merchant bankers, mutual
funds and pension funds, etc. are now allowed to invest in India’s stock
market.
(7) ESTABLSIHMENT OF NATIONAL STOCK EXCHANGE –
With a view to increasing participation of more people in the
capital market:
* SEBI (Securities and Exchange Board of India) given statutory
recognition in 1992. SEBI aims at creating an environment which would
facilitate mobilization of adequate resources through the securities market and
its efficient allocation.
* Setting up National Stock Exchange (NSE) in November 1992. NSE
has enabled the conduct of online transactions in the capital market throughout
the country at the very fast speed.
(8) FREEDOM IN DETERMINING THE WORKING CAPITAL OF BORROWER –
Under reforms, the maximum permissible bank finance have been
made more flexible. Banks now have greater freedom in determining the working
capital needs of the borrowers.
(9) LIBERLISATION IN
INTEREST RATES –
Interest rates in the banking system have been liberlised.
The rationale for liberliseing interest rate in the banking system is to allow
banks greater flexibility and encourage competition.
(10) Banks can raise resources from domestic capital market and international
capital market subject to certain conditions.
(11) JAN-DHAN YOJNA – Pradhan Mantri Jan-Dhan Yojna (PMJDY) was launched in
2014. The main objective to launch this yojna is to provide various financial
services to weaker section and low income groups.
Consequent upon these changes,
financial sector in India has shown a multi-dimensional growth and is playing a
significant role in the growth and development of the country.
TAX
REFORMS / FISCAL REFORMS
Tax reforms refer to reforms in government’s taxation and
public expenditure policies, which are collectively known as its ‘Fiscal
Policy’. There are two types of taxes: Direct Taxes and Indirect Taxes.
Direct Tax – Direct taxes are those taxes which impact and incidents lies
on the same person. It is mainly imposed on the income of individuals (income
tax) as well as profits of companies (corporate tax).
Indirect Taxes – Indirect taxes are those taxes which impact and incident
lies on the different person. Indirect taxes can be shifted to others. It is
generally imposed on goods and services. Like Goods and Services (GST). Now
there are only two type of indirect tax: GST and Custom duty.
Important fiscal reforms measures introduced in NEP are:
(1) REDUCTION IN TAXES
In pre-reforms period, income tax rates were very high. This
led to large scale tax evasion and generation of black money. Since 1991, there
has been a continuous reduction in income tax as well as corporation tax. The
income tax rates have been brought down and tax slabs were also reduced.
INCOME TAX
|
|
Year
|
Tax Rates
|
1992-93
|
20%, 30%, 40%
|
1997-98
|
10%, 20%, 30%
|
2017-18
|
5%, 20%, 30%
|
2020-21
|
5%, 10%, 15%, 20%, 25%, 30%
|
CORPORATION TAX
|
|
Year
|
Tax Rates
|
1994-95
|
40%
|
1997-98
|
35%
|
2005-06
|
30%
|
2017-18
|
25%
|
2019-20
|
25%*
|
* Medium and Small enterprises with annual turnover of upto rupess 400
Crore.
Government claims that reduction in income tax rates has
improved tax compliance as now there is less incentive to evade taxes.
(2) REFORMS IN INDIRECT TAXES –
Efforts are being made to ensure uniform application of VAT
in all states. There are two main steps taken under indirect tax reforms.
Custom duties have been reduced considerably in post reform period. Custom
duties reduced to 10% in union budget 2007-08.
(3) SIMPLIFICATION OF PROCESS
A number of steps have been taken to simplify and improve tax
administration.
* IT has been employed extensively to reduce physical interface between
the tax payers and tax department.
* The process of registration, return filing and tax payments can now be
transacted electronically.
* Self assessment of tax liability is now available for a number of taxes
and income sources.
* Filing of import and export documents and their processing and tracking
is now conducted electronically.
(4) INTRODUCTION OF GST
Recently Goods and Service Tax Act passed in 2016, which came
in to effect from 01 July 2017. Under GST a single tax is levied on goods and
services across the nation. All type of indirect taxes (excise duty, VAT, service
tax, luxury tax, sell tax etc.), except custom duty, subsumed in GST. The moto
of GST is ‘One Tax, One Market, One Nation.’
Reference Videos
(Financial
Sector Reforms / Tax Reforms)
Please like, Share
Subscribe and download app from play store by link given in description.
https://play.google.com/store/apps/details?id=com.theappsstation.android5c3989dd91d21
Regards
Dr. Asad Ahmad
KV IIM, Lucknow
##pls share other
educational / official school group, so that more students will get benefit.
Thanks a lot.
To get link text
on
08770981320/ 09451927636
Facebook page - https://m.facebook.com/madeeconomicseasy/?ref=bookmarks
Blog -
http://drahmadasad.blogspot.com/?m=1
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