Unit 2: Policy Regimes

Q. Critically discuss the major changes and reforms in Indian economy since 1991. What are its impact on Indian economy?           2022

Q. What are the positive and negative effects of Privatisation on Indian Economy.

Q. What are the positive and negative effects of liberalisation on Indian Economy.

Q. What are the positive and negative effects of Globalisation on Indian Economy.

Q. What is monetary policy? What are its objectives and role? Explain various instruments of monetary policy.

Q. What is fiscal policy? What are its objectives and role? Explain various instruments of fiscal policy.

Q. Distinguish between monetary policy and fiscal policy.

Q. What is Import Substitution policy? What are its objectives? Explain its impact on Indian Industry.

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The evolution of planning in India has been closely linked to the process of import substituting industrialization (ISI), which refers to the development of domestic industries in order to reduce reliance on imports.

During the early years of independence, the government of India adopted a policy of ISI in order to promote the development of domestic industries and to protect them from foreign competition. This policy was implemented through the use of tariffs, quotas, and other measures that restricted the import of goods and encouraged the production of domestic substitutes.

In order to support the process of ISI, the government of India also implemented a system of planning, with the establishment of the Planning Commission in 1950. The Planning Commission was responsible for developing and implementing a series of five-year plans that outlined the government’s economic and development goals. The focus of these plans was on the development of heavy industries, such as steel and cement, as well as on the expansion of infrastructure, such as roads and ports.

As the process of ISI progressed, the government of India began to shift its focus from the development of heavy industries to the development of more labour-intensive industries, such as textiles and consumer goods. The government also began to focus on the development of small and medium enterprises, as well as on the promotion of exports.

Import Substitution Policy

Import substitution policy is an economic policy that aims to reduce a country’s reliance on imports by promoting the domestic production of goods and services that are currently being imported. The main objectives of import substitution policy are to:

1. Increase the domestic production of goods and services: By promoting the domestic production of goods and services that are currently being imported, import substitution policy aims to increase the supply of these goods and services within the domestic market. This can help to reduce the country’s reliance on foreign suppliers and increase its self-sufficiency.

2. Create jobs and stimulate economic growth: By encouraging the domestic production of goods and services, import substitution policy can help to create jobs and stimulate economic growth. This can be particularly beneficial in countries with high unemployment rates or low levels of economic development.

3. Promote industrialization: By encouraging the development of domestic industries, import substitution policy can help to promote industrialization and the growth of a country’s manufacturing sector. This can be especially important for countries that are trying to transition from being primarily agricultural or resource-based economies to more industrialized ones.

4. Protect domestic industries: Import substitution policy can also be used to protect domestic industries from foreign competition by imposing tariffs or other barriers to imports. This can help to level the playing field for domestic firms and allow them to compete more effectively with foreign firms.

Impact of Import Substitution Policy

Import substitution policy was implemented in India in the 1950s and 1960s as a way to promote economic development and reduce the country’s reliance on imports. The policy had a significant impact on the Indian industrial sector, with a focus on the development of heavy industries such as steel, cement, and petrochemicals. Some of the key impact of import substitution policy on Indian industry are given below:

1. Industrial growth: Import substitution policy helped to stimulate the growth of the Indian industrial sector, as it encouraged the domestic production of goods and services that were previously being imported. This contributed to economic growth and development in the country, and it also helped to create new jobs and increase income levels.

2. Industrial structure: The policy also helped to change the structure of the Indian industrial sector, with a shift from a heavy reliance on small-scale and labour-intensive industries to a more diversified and capital-intensive industrial base. This had implications for the types of jobs that were available in the economy, as well as the level of productivity and competitiveness of firms.

3. Industrialization: By encouraging the development of domestic industries, import substitution policy helped to promote industrialization and the growth of the country’s manufacturing sector. This was especially important for India as it was trying to transition from being primarily agricultural or resource-based to a more industrialized economy.

4. Protectionism: Import substitution policy was also accompanied by protectionist measures such as tariffs and import quotas, which helped to protect domestic industries from foreign competition. While this helped to level the playing field for domestic firms, it also made it more difficult for them to access foreign technologies and markets.

Economic Reforms 1991

LPG Model – Liberalisation, Privatisation and Globalisation

Indian Economy Notes

In order to solve economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. The main objectives of India’s development plans were:

a) Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;

b) Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;

c) Reduce inequalities of income and wealth;

d) Adopt a socialist pattern of development based on equality and prevent exploitation of man by man.

As a part of economic reforms, the Government of India announced a new industrial policy in July 1991. The main objective of the new economic policy is to improve the efficiency of the business mechanism involving multitudes of control, fragmented capacity and reduced competition in the private sector. The thrust of new economic policy is creating a more competitive environment in the economy as a means to improving the productivity and efficiency of the system.

The broad features of this policy were as follows:

a) The Government reduced the number of industries under compulsory licensing to six.

b) Policy towards foreign capital was liberalized. The share of foreign equity participation was increased to 51% and in many activities 100 per cent Foreign Direct Investment (FDI) was permitted.

c) Government will encourage foreign trad­ing companies to assist Indian exporters in export activities.

d) Foreign Investment Promotion Board (FIPB) was set up to promote and channelize foreign investment in India.

e) Automatic permission was now granted for technology agreements with foreign companies.

f) Relaxation of MRTP Act (Monopolies and Restrictive Practices Act) which has almost been rendered non-functional.

g) Dilution of foreign exchange regulation act (FERA) making rupee fully convertible on trade account.

h) Disinvestment was carried out in case of many public sector industrial enterprises incurring heavy losses.

i) Abolition of wealth tax on shares.

j) General reduction in customs duties.

k) Provide strength to those public sector enterprises which fall in reserved areas of operation or in high priority areas.

l) Constitution of special boards to negoti­ate with foreign firms for large investments in the development of industries and import of technol­ogy.

Objectives of the New Industrial Policy, 1991:

The New Industrial Policy,1991 seeks to liberate the industry from the shackles of licensing system Drastically reduce the role of public sector and encourage foreign participation in India’s industrial development. The broad objectives of New Industrial Policy are as follows:

1. Liberalizing the industry from the regulatory devices such as licenses and controls.

2. Enhancing support to the small scale sector.

3. Increasing competitiveness of industries for the benefit of the common man.

4. Ensuring running of public enterprises on business lines and thus cutting their losses.

5. Providing more incentives for industrialisation of the backward areas, and

6. Ensuring rapid industrial development in a competitive environment.

7. Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty;

8. Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries;

9. Reduce inequalities of income and wealth;

10. Adopt a socialist pattern of development based on equality and prevent exploitation of man by man.

Steps taken to initiate these objectives (Major changes and reforms in Indian economy since 1991)

The government announced a New Industrial Policy on July 24, 1991. This new policy deregulates the industrial economy in a substantial manner. The major objectives of the new policy are to build on the gains already made, correct the distortions or weaknesses that might have crept in, maintain a sustained growth in productivity and gainful employment, and attain international competitiveness. In pursuit of these objectives, the government announced a series of initiatives in the new industrial policy as outlined below:

1. Abolition of Industrial Licensing: In a major move to liberalise the economy, the new industrial policy abolished all industrial licensing irrespective of the level of investment except for certain industries related to security and strategic concerns, and social reasons. Now there are only 6 industries for which licensing is compulsory as amended in February 1999. These are alcohol, cigarettes, hazardous chemicals, drugs and pharmaceuticals, electronics, aerospace and defense equipments, and industrial explosives.

2. Public Sector’s Role Diluted: The number of industries reserved for the public sector since 1956 was seventeen. This number has now been reduced to three. They are arms and ammunition and allied items of defense equipment, atomic energy and rail transport.

3. Abolition of Phased Manufacturing Programmes: Devaluation of currency and increasing FDI led government to liberalise local content requirement for indigenous firms.

4. MRTP Act: MRTP Act has been amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. The new industrial policy also states that the government will undertake review of the existing public enterprises in low technology, small-scale and non-strategic areas. Sick units will be referred to the Board for Industrial and Financial Reconstruction for advice about rehabilitation and reconstruction. For enterprises remaining in the public sector it is stated that they will be provided a much greater degree of management autonomy through the system of Memorandum of Understanding (MOU).

5. Free Entry to Foreign Investment and Technology: The Government is committed to promote increased flow of Foreign Direct Investment (FDI) for better technology, modernisation, exports and for providing products and services of international standards.

6. Industrial Location Policy Liberalised: The new industrial policy provides that in locations other than cities of more than 1 million populations, there will be no requirement of obtaining industrial approvals from the centre, except for industries subject to compulsory licensing.

7. Removal of Mandatory Convertibility Clause: A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions have followed a mandatory practice of including a convertibility clause in their lending operations for new projects.

1. Increasing competition: As a result of changes in the rules of industrial licensing and entry of foreign firms, competition for Indian firms has increased especially in service industries like telecommunications, airlines, banking, insurance, etc. which were earlier in the public sector.

2. More demanding customers: Customers today have become more demanding because they are well-informed. Increased competition in the market gives the customers wider choice in purchasing better quality of goods and services.

3. Rapidly changing technological environment: Increased competition forces the firms to develop new ways to survive and grow in the market. New technologies make it possible to improve machines, process, products and services. The rapidly changing technological environment creates tough challenges before smaller firms.

4. Threat from MNC Massive entry of multi nationals in Indian marker constitutes new challenge. The Indian subsidiaries of multi-nationals gained strategic advantage. Many of these companies could get limited support in technology from their foreign partners due to restrictions in owner ships. Once these restrictions have been limited to reasonable levels, there is increased technology transfer from the foreign partners

5. Investment: The policy encouraged foreign investment and technology adoption, which attracted a significant amount of investment into the country. This helped to modernize and upgrade the industrial sector, and it also contributed to the development of new industries and the expansion of existing ones.

6. Small businesses: The policy also had a focus on small businesses and entrepreneurship, and it aimed to create a favourable environment for these sectors. This included measures such as reducing the number of industries that were reserved for the small scale sector, and providing support for small businesses through credit, training, and other programs.

7. Efficiency: The policy also aimed to increase efficiency in the industrial sector by encouraging the adoption of new technologies, promoting the use of modern management practices, and relaxing regulations on the operation of firms. This helped to improve the competitiveness of Indian firms and increase their productivity.

8. Necessity for change: In a regulated environment of pre-1991 era, the firms could have relatively stable policies and practices. After 1991, the market forces have become turbulent as a result of which the enterprises have to continuously modify their operations.

Liberalization Meaning

The economic reforms that were introduced were aimed at liberalizing the Indian business and industry from all unnecessary controls and restrictions. They indicate the end of the license-permit-quota raj. Liberalization of the Indian industry has taken place with respect to:

a) Abolishing licensing requirement in most of the industries except a short list,

b) Freedom in deciding the scale of business activities i.e., no restrictions on expansion or contraction of business activities,

c) Removal of restrictions on the movement of goods and services,

d) Freedom in fixing the prices of goods services,

e) Reduction in tax rates and lifting of unnecessary controls over the economy,

f) Simplifying procedures for imports and experts, and

g) Making it easier to attract foreign capital and technology to India.

Advantages of Liberalisation

Liberalisation can well be considered an investment in the future financial well-being of a nation. It helps the banking industry as a whole by providing:

1. Increased financial flexibilities of firms.

2. Reduced transaction costs.

3. Improved allocation efficiency.

4. Attraction of new capital to financial intermediaries.

5. Stronger and more competitive banking institutions.

6. Better and diversified portfolios.

7. More effective conduct of monetary policy.

8. Meaningful competition in banking services by allowing greater role to private sector and foreign banks.

9. Technological up-gradation of banks through wide use of computers and modern communication systems.

10. Removing major regulatory impediments to profitable working of banks.

11. Relaxation in the regulations covering foreign investment and foreign exchange.

12. Easy access to foreign capital.

Problems with Liberalisation

It would be incorrect to expect that liberalization and deregulation will solve all problems just by the initiation of these relaxed policies, it is not so. The major problems concerned with liberalization can be summarized as under:

1. In so far as fiscal deficits are financed by money creation and growing, financial liberalization serves to accelerate inflation which coupled with an over- valued exchange rate, promotes capital flight.

2. Liberalisation does raise real interests and results in an increased diversity of financial instruments. Innocent investors may be taken in by the rather fanciful terms offered.

3. Competition is not automatically enhanced. It can lead to domination by big institution that has market controlling powers.

4. Distortions in credit allocation or self-dealing by banks can produce efficiency gains.

5. Deregulation can shorten the horizons of savers and investors, leading to a drawing up of long-term finance.

6. Sometimes there can be problems of moral hazard.

7. Pressure on profits and profitability can lead to speculation and create problems of systemic failures.

8. With fewer entry restrictions, it has been possible for many entrants to make inroads into this lucrative sector, some antisocial elements can enter the field directly or indirectly.

9. A number of companies can incorporate their own finance companies to make finance available on easy terms for purchase of their products, this phenomenon can also be used against the interest of the society.

10. It should also be noticed that liberalization can also result in the increase in instability. In general, financial liberalization represents a profound change in the economic rules. It can “increase the riskiness of traditional behaviour or introduce new inexperienced players.” In these circumstances, disasters can also take place.

The new set of economic reforms aimed at giving greater role to the private sector in the nation building process and a reduced role to the public sector. To achieve this, the government redefined the role of the public sector in the New Industrial Policy of 1991. The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernization. It was also observe that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs. The government has also made attempts to improve the efficiency of PSUs by giving them autonomy in taking managerial decisions.

Benefits of Privatisation:

1. Improved Efficiency: The main argument for privatization is that private companies have a profit incentive to cut costs and be more efficient. If we work for a government run industry, managers do not usually share in any profits. However, a private firm is interested in making profit and so it is more likely to cut costs and be efficient.

2. Lack of Political Interference: It is argued that governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense.

3. Short Term view: A government many think only in terms of next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election.

4. Shareholders: It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A government owned firm doesn’t have this pressure and so it is easier for them to be inefficient.

5. Increased Competition: Often privatization of state owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest motivation for improvements in efficiency. However, privatization doesn’t necessarily increase competition; it depends on the nature of the market.

6. Government will raise revenue from the sale: Selling government owned assets to the private sector raised significant sums for government.

Disadvantages of Privatisation

1. Natural Monopoly: A natural monopoly occurs when the most efficient number of firms in an industry is one. Privatisation would create a private monopoly which might seek to set higher prices which exploit consumers. Therefore it is better to have a public monopoly rather than a private monopoly which can exploit the consumer.

2. Public Interest: There are many industries which perform an important public service, e.g. health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry.

3. Government loses out on potential dividends: Many of the privatized companies in the India are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders.

4. Problem of regulating private monopolies: Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still need for government regulation.

5. Fragmentation of industries: In India, rail privatization would lead to breaking up the rail network into infrastructure and train operating companies. This led to areas where it was unclear who had responsibility.

6. Short-Term view of Firms: As well as the government being motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects.

Globalizations are the outcome of the policies of liberalisation and privatization. Globalisation is generally understood to mean integration of the economy of the country with the world economy, it is a complex phenomenon. It is an outcome of the set of various policies that are aimed at transforming the world towards greater interdependence and integration. It involves creation of networks and activities transcending economic, social and geographical boundaries.

Globalisation involves an increased level of interaction and interdependence among the various nations of the global economy.  Physical geographical gap or political boundaries no longer remain barriers for a business enterprise to serve a customer in a distant geographical market.

In simple words, The term globalization can be defined as the opening one’s economy toward the world economy. It means to integrate the domestic economy with world economy. The govt. of India under the prime minister ship of P. V Narasimham introduced liberalisation, privatization and globalization during 1991. Due to globalization the multinational corporations have been very popular. These corporations transact their business activities more than one countries.

Globalisation and India

Indian economy had experienced major policy changes in early 1990s. The new economic reform, popularly known as, Liberalization, Privatization and Globalization (LPG model) aimed at making the Indian economy as fastest growing economy and globally competitive. The series of reforms undertaken with respect to industrial sector, trade as well as financial sector aimed at making the economy more efficient.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.

This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values held since Independence in 1947, such as self-reliance and socialistic policies of economic development, which mainly due to the inward looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems. This, despite the fact that India has always had the potential to be on the fast track to prosperity.

Benefits of Globalisation

a) Increased Competition: One of the most visible effects is the improved quality of products due to global competition. Customer service and the ‘customer is the king’ approaches to production have led to improved quality of products and services. As the domestic companies have to fight out foreign competition, they are compelled to raise their standards and customer satisfaction levels in order to survive in the market.

b) Employment: With globalization, companies are moving towards the developing countries and hence generated employment for them. It has given an opportunity to invest in the emerging markets and tap up the talent which is available there. In developing countries, there is often a lack of capital which hinders the growth of domestic companies and hence creates unemployment. In such cases, due to global nature of the businesses, people of developing countries too can obtain gainful employment opportunities.

c) Investment and Capital Flows: A lot of companies have directly invested in developing countries like Brazil and India by starting production units. Companies which perform well attract a lot of foreign investment and thus push up the reserve of foreign exchange.

d) Spread of Technical Know-How: While it is generally assumed that all the innovations happen in the Western world, the know-how also comes into developing countries due to globalization. Without it, the knowledge of new inventions, medicines would remain cooped up in the countries that came up with them and no one else would benefited. The spread of know –how can also be expanded to include economic and political knowledge, which too has spread far and wide.

e) Spread of Culture: Not all good practices were born in one civilization. The world that we live in today is a result of several cultures coming together. People of one culture, if receptive, tend to see the flaws in their culture and pick up the culture which is more correct or in tune with the times. Societies have become larger as they have welcomed people of other civilization and backgrounds and created a whole new culture of their own. Cooking styles, languages and customs have spread all due to globalization. The same can be said about movies, musical styles and other art forms. They too have moved from one country to another, leaving impression on a culture which has adopted them.

Impact of Globalisation of Various Sector of Indian Economy or Role of Globalisation

1) Impact of Globalization on Agricultural Sector

Agricultural Sector is the mainstay of the rural Indian economy around which socio-economic privileges and deprivations revolve and any change in its structure is likely to have a corresponding impact on the existing pattern of Social equity. The liberalization of India’s economy was adopted by India in 1991. Facing a severe economic crisis, India approached the IMF for a loan, and the IMF granted what is called a ‘structural adjustment’ loan, which is a loan with certain conditions attached which relate to structural change in the economy. Essentially, the reforms sought to gradually phase out government control of the market (liberalization), privatize public sector organizations (privatization), and reduce export subsidies and import barriers to enable free trade Globalization has helped in:

Ø Raising living standards,

Ø Alleviating poverty,

Ø Assuring food security,

Ø Generating buoyant market for expansion of industry and services, and

Ø Making substantial contribution to the national economic growth.

2) Impact of Globalization on Indian trade and industry:

Globalization has its impact on India which is a developing country. The positive impact of globalization can be analysed as follows:

1. Access to Technology:Globalization has drastically, improved the access to technology. Internet facility has enabled India to gain access to knowledge and services from around the world. Use of Mobile telephone has revolution used communication with other countries.

2. Growth of international trade:Tariff barriers have been removed which has resulted in the growth of trade among nations. Global trade has been facilitated by GATT, WTO etc.

3. Increase in production:Globalization has resulted in increase in the production of a variety of goods. MNCs have established manufacturing plants all over the world.

4. Employment opportunities:Establishment of MNCs have resulted in the increase of employment opportunities.

5. Free flow of foreign capital:Globalization has encouraged free flow of capital which has improved the economy of developing countries to some extent. It has increased the capital formation.

6. Products of superior quality: Products of superior quality are available in the market due to increased competition, efficiency and productivity of the businesses and this leads to increased consumer satisfaction.

7. Free flow of finance enable the banking and financial institutions in a country to fulfill financial requirements through internet and electronic  transfers easily and help businesses to flourish.

3) Impact on Financial Sector

Reforms of the financial sector constitute the most important component of India’s programme towards economic liberalization. The recent economic liberalization measures have opened the door to foreign competitors to enter into our domestic market. Innovation has become a must for survival. Financial intermediaries have come out of their traditional approach and they are ready to assume more credit risks. As a consequence, many innovations have taken place in the global financial sectors which have its won impact on the domestic sector also. The emergences of various financial institutions and regulatory bodies have transformed the financial services sector from being a conservative industry to a very dynamic one. In this process this sector is facing a number of challenges. In this changed context, the financial services industry in India has to play a very positive and dynamic role in the years to come by offering many innovative products to suit the varied requirements of the millions of prospective investors spread throughout the country. Reforms of the financial sector constitute the most important component of India’s programme towards economic liberalization.

Growth in financial services (comprising banking, insurance, real estate and business services), after dipping to 5.6% in 2003-04 bounced back to 8.7% in 2004-05 and 10.9% in 2005-06 The momentum has been maintained with a growth of 11.1% in 2006-07. Because of Globalization, the financial services industry is in a period of transition. Market shifts, competition, and technological developments are ushering in unprecedented changes in the global financial services industry.

4) Impact on Export and Import

India’s Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362 million respectively. Many Indian companies have started becoming respectable players in the International scene. Agriculture exports account for about 13 to 18% of total annual of annual export of the country. In 2000-01 Agricultural product valued at more than US $ 6 million were exported from the country 23% of which was contributed by the marine products alone. Marine products in recent years have emerged as the single largest contributor to the total agricultural export from the country accounting for over one fifth of the total agricultural exports. Cereals (mostly basmati price and non-basmati rice), oil seeds, tea and coffee are the other prominent products each of which accounts from nearly 5 to 10% of the country’s total agricultural exports.

The implications of globalization for a national economy are many. Globalization has intensified interdependence and competition between economies in the world market. This is reflected in Interdependence in regard to trading in goods and services and in movement of capital. As a result domestic economic developments are not determined entirely by domestic policies and market conditions. Rather, they are influenced by both domestic and international policies and economic conditions. It is thus clear that a globalizing economy, while formulating and evaluating its domestic policy cannot afford to ignore the possible actions and reactions of policies and development in the rest of the world. This constrained the policy option available to the government which implies loss of policy autonomy to some extent, in decision-making at the national level.

Negative effect of globalization:

Negative effects of globalization on Indian industry have been: 

1. Rise in demand for labor and the rise in wage rates leading to some increase in costs. 

2. Weakening power of the trade unions over labor in emerging industries and growth sectors like IT, entertainment, internet and mobile services, airlines, banking, insurance, banking services. 

3. Too much competition in the market leading to continuous pressure on raising productivity, enhancing consumer service, improving product quality, in order to survive. 

4. Voluntary retirement for many public sector units. 

5. Too many sales person chasing customers. 

6. Too many cars on the road and traffic congestion. 

7. Growth of consumerism. 

8. Instability in profits due to too much choice among customers. 

9. Shortage power and infrastructure affecting industrial expansion. 

10. Closure of inefficient units supplying costly and shoddy products and loss of jobs. 

11. Two years of large increase in textile industry jobs followed by large loss of jobs due to Rupee appreciation making Indian industry uncompetitive. 

12. Problems of dealing with uncertainty in the international market in terms of demand, supply and prices.

Obstacles of Globalisation

The Indian business suffers from many disadvantages in respect of globalization of business. The important problems are following:

a) Government Policy & Procedures: Government policy procedure in India is among the most complex, confusing and cumbersome in the world. Even after the much publicized liberalization, they do not present a very conducive situation. Government policy and the bureaucratic culture in India in this respect are not that encouraging.

b) High Cost: High cost of many vital input and factors like raw material and intermediates, power, finance, infrastructure facilities like port etc. tent reduce the international competitiveness of the Indian business.

c) Poor Infrastructure: Infrastructure in India is very inadequate and insufficient and they for very costly this is the serious problem affecting the growth and competitiveness.

d) Resistance to Change:  There are several socio-political factors which resist change and this comes in the way of modernization, rationalization and efficiency improvement. Technological resist due to fear of unemployment. The extend labors employed by Indian industry is alarming because of labors of production is low and this may come in offsets the advantages of cheap labors.

e) Poor quality image: Due to various reasons, the quality of many Indian products is poor. Even when the quality is good, the poor quality image, India has become a handicap.       

f) Supply problem: Due the various reason like low production, infrastructure like power, port facilities.

g) Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with the giants of other counties. Even the largest   Indian companies are small compared to the multinational giants.

h) Limited R&D and marketing Research: Marketing research and R&D in other areas are vital inputs for development of international business. However, these are poor in Indian business. Expenditure on R&D in Indian is less than one percentage of the GNC while it is two to three percent in most of the developed counties. In 1994-95, Indian’s per capital R&D expenditure was less than $3 when it was between $100 and $825 for most of the developed nation.

i) Growing competition: The competition is growing not only from the firm in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to Indian’s International business.

j) Trade Barriers: Although the tariff barriers to trade have been progressively reduced thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the developed counties.

Monetary Policy is a strategy used by the Central Bank to control and regulate the money supply in an economy. It is also known as credit policy. In India, the Reserve Bank of India looks after the circulation of money in the economy.

There are two types of monetary policies, i.e. expansionary and contractionary. The policy in which the money supply is increased along with minimization of interest rates is known as Expansionary Monetary Policy. On the other hand, if there is a decrease in money supply and rise in interest rates, that policy is regarded as Contractionary Monetary Policy.

According to A.G. Hart “A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy.” From the above discussion, it is clear that a monetary policy is related to the availability and cost of money supply in the economy in order to attain certain broad objectives.

Objectives of monetary policy

The objectives of a monetary policy in India are similar to the objectives of its five year plans. In a nutshell planning in India aims at growth, stability and social justice.

1. Rapid Economic Growth: It is the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the investment level in the economy can be encouraged. This increased investment can speed up economic growth.

2. Price Stability: All the economics suffer from inflation and deflation. It can also be called as Price Instability. Both inflation and deflation are harmful to the economy. Thus, the monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities.

3. Exchange Rate Stability: Exchange rate is the price of a home currency expressed in terms of any foreign currency. If this exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate.

4. Balance of Payments (BOP) Equilibrium: Many developing countries like India suffer from the Disequilibrium in the BOP. The Reserve Bank of India through its monetary policy tries to maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the ‘BOP Surplus’ and the ‘BOP Deficit’. The former reflects an excess money supply in the domestic economy, while the later stands for stringency of money. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.

5. Full Employment: Full Employment refers to absence of involuntary unemployment. In simple words ‘Full Employment’ stands for a situation in which everybody who wants jobs get jobs. However, it does not mean that there is Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment.

6. Equal Income Distribution: Many economists used to justify the role of the fiscal policy are maintaining economic equality. However, in recent years’ economists have given the opinion that the monetary policy can help and play a supplementary role in attaining an economic equality.

Role of Monetary Policy (Impact of monetary policy on Indian economy)

Monetary policy refers to the use of monetary instruments by the central bank (in India, the Reserve Bank of India or RBI) to influence the level of money supply in the economy and to achieve specific economic goals such as controlling inflation, stabilizing the exchange rate, and promoting economic growth. The impact of monetary policy on the Indian economy can be significant, as it can affect a wide range of economic variables such as inflation, interest rates, exchange rates, and credit availability.Here are a few ways in which monetary policy can impact the Indian economy:

1. Inflation: Monetary policy can be used to control inflation by influencing the level of money supply in the economy. If the central bank increases the money supply, it can lead to higher inflation, as there is more money available to spend on goods and services. Conversely, if the central bank reduces the money supply, it can help to curb inflation.

2. Interest rates: Monetary policy can also affect interest rates, which are the cost of borrowing money. If the central bank raises interest rates, it can make borrowing more expensive, which can discourage borrowing and help to reduce inflation. On the other hand, if the central bank lowers interest rates, it can make borrowing cheaper and encourage borrowing and economic activity.

3. Exchange rates: Monetary policy can also impact the exchange rate. Exchange rate is the value of one country’s currency relative to other currencies. If the central bank raises interest rates, it can make the country’s currency more attractive to foreign investors, which can cause the exchange rate to appreciate. Conversely, if the central bank lowers interest rates, it can make the currency less attractive, which can cause the exchange rate to depreciate.

4. Credit availability: Monetary policy can also affect credit availability, which is the amount of money that is available for borrowing. If the central bank increases the money supply, it can make it easier for businesses and individuals to access credit, which can stimulate economic activity. On the other hand, if the central bank reduces the money supply, it can make credit less available, which can dampen economic activity.

5. Economic growth: Monetary policy can also impact economic growth over time. If the central bank lowers interest rates, it can encourage borrowing and investment, which can stimulate economic growth. On the other hand, if the central bank raises interest rates, it can discourage borrowing and investment, which can slow down economic growth.

6. Investment: Monetary policy can also affect investment, which is the purchase of goods and services that are used to produce other goods and services in the future. If the central bank lowers interest rates, it can make borrowing cheaper and encourage investment. Conversely, if the central bank raises interest rates, it can make borrowing more expensive and discourage investment.

7. Consumer spending: Monetary policy can also impact consumer spending, which is the purchase of goods and services by households. If the central bank lowers interest rates, it can make borrowing cheaper and encourage consumers to spend more. On the other hand, if the central bank raises interest rates, it can make borrowing more expensive and discourage consumer spending.

8. Employment: Monetary policy can also have an impact on employment, as it can affect the demand for goods and services in the economy. If monetary policy stimulates economic activity, it can lead to an increase in demand for labour and help to create jobs. On the other hand, if monetary policy slows down economic activity, it can reduce the demand for labour and lead to job losses.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

1. Bank Rate: It is the rate at which the Reserve Bank is ready to buy or re-discount bills of exchange or other commercial papers.

2. Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL). The Reserve Bank may notify CRR from time to time in the Gazette of India.

3. Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.

4. Open Market Operations (OMOs): These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.

5. Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

6. Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.

7. Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions. It is used to make temporary and swift adjustments in liquidity within the banking system mainly using the repo and reverse repo rates.

8. Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank. This provides a safety valve against unanticipated liquidity shocks to the banking system.

9. Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

10. Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills.

When the government of a country employs its tax revenue and expenditure policies to influence the overall demand and supply for commodities and services in the nation’s economy is known as Fiscal Policy. It is a strategy used by the government to maintain the equilibrium between government receipts through various sources and spending over different projects.

If the revenue exceeds expenditure, then this situation is known as fiscal surplus, whereas if the expenditure is greater than the revenue, it is known as the fiscal deficit. The main objective of the fiscal policy is to bring stability, reduce unemployment and growth of the economy. The instruments used in the Fiscal Policy are the level of taxation & its composition and expenditure on various projects.

Difference between Fiscal Policy and Monetary Policy

The economic position of a country can be monitored, controlled and regulated by the sound economic policies. The fiscal and monetary policies of the nation are the two measures, which can help in bringing stability and developing smoothly. Fiscal policy is the policy relating to government revenues from taxes and expenditure on various projects. Monetary Policy, on the other hand, is mainly concerned with the flow of money in the economy.

Fiscal policy alludes to the government’s scheme of taxation, expenditure and various financial operations, to attain the objectives of the economy. On the other hand, monetary policy, scheme carried out by the financial institutions like the Central Bank, to manage the flow of credit in the country’s economy. The common difference between Fiscal policy and monetary policy are given below:

Basis	Fiscal Policy	Monetary Policy
Meaning	The tool used by the government in which it uses its tax revenue and expenditure policies to affect the economy is known as Fiscal Policy.	The tool used by the central bank to regulate the money supply in the economy is known as Monetary Policy.
Nature	The fiscal policy changes every year.	The change in monetary policy depends on the economic status of the nation.
Administration	Fiscal policy is administered by Ministry of Finance.	Monetary Policy is administered Central Bank
Related to	Government Revenue & Expenditure	Banks & Credit Control
Focus	Economic Growth	Economic Stability
Instruments	Tax rates and government spending are key instruments of monetary policy.	Interest rates, CRR and SLR are key instruments of monetary policy.

Objectives of Fiscal Policy

1. Increase in Savings: This policy is also used to increase the rate of savings in the country. In the developing countries rich class spends a lot of money on luxuries. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.

2. To Encourage Investment: The government can encourage the investment by providing various incentives like the tax holiday in the various sectors of the economy. The capital can be shifted from less productive sectors to more productive sectors. So the resources of the country can be utilized maximum.

3. To Achieve Equal Distribution of Wealth: Fiscal policy is very useful for the achievement of equal distribution of wealth. When the wealth is equally distributed among the various classes then their purchasing power increases which ensures the high level of employment and production.

4. To Control Inflation: Fiscal policy is very useful weapon for controlling the rate of inflation. When the expenditure on non-productive projects is reduced or the rate of taxes are increased then the purchasing power of the people reduces.

5. To Reduce the Regional Disparity: In the less developing countries the regional disparity is found. Some areas are more developed while the others are less developed. Government provides the infrastructure facilities in less developed areas. The tax holiday incentive is also provided in these areas which is very useful in increasing the per capita income.

6. Stabilization of Price Level: Fiscal policy is also used to achieve desirable level of prices in the country. It means the cost and price should be at such level that production and employment may increase.

Role of Fiscal Policy (Impact of fiscal policy on Indian economy)

Fiscal policy refers to the use of government spending and taxation to influence the level of economic activity in an economy. In India, fiscal policy is implemented by the central government, and it can have a significant impact on the economy.Here are a few ways in which fiscal policy can impact the Indian economy:

1. Economic growth: Fiscal policy can impact economic growth, which is the increase in the production of goods and services in an economy over time. If the government increases spending, it can stimulate economic activity and help to boost growth. On the other hand, if the government reduces spending, it can slow down economic activity and reduce growth.

2. Employment: Fiscal policy can also have an impact on employment, as it can affect the demand for goods and services in the economy. If fiscal policy stimulates economic activity, it can lead to an increase in demand for labour and help to create jobs. On the other hand, if fiscal policy slows down economic activity, it can reduce the demand for labour and lead to job losses.

3. Inflation: Fiscal policy can also influence the level of inflation in the economy. If the government increases spending, it can lead to higher demand for goods and services, which can put upward pressure on prices and lead to higher inflation. On the other hand, if the government reduces spending, it can reduce demand for goods and services, which can help to curb inflation.

4. Investment: Fiscal policy can also impact investment, which is the purchase of goods and services that are used to produce other goods and services in the future. If the government increases spending, it can stimulate demand for goods and services and encourage investment. On the other hand, if the government reduces spending, it can reduce demand for goods and services and discourage investment.

5. Distribution of income: Fiscal policy can also impact the distribution of income in an economy, as it can affect the taxes that individuals and businesses pay and the benefits that they receive. For example, if the government increases taxes on the wealthy and uses the revenue to provide benefits to low-income households, it can help to reduce income inequality. On the other hand, if the government reduces taxes on the wealthy and reduces benefits for low-income households, it can increase income inequality.

6. Public debt: Fiscal policy can also impact the level of public debt in an economy. If the government increases spending, it can lead to a higher level of borrowing and increase the public debt. On the other hand, if the government reduces spending, it can reduce borrowing and decrease the public debt.

7. Political stability: Fiscal policy can also have an impact on political stability, as it can affect the level of support that the government receives from the public. If fiscal policy is perceived as being fair and effective, it can help to increase support for the government. On the other hand, if fiscal policy is perceived as being unfair or ineffective, it can lead to public discontent and increase the risk of political instability.

Instruments of Fiscal Policy: Following are the main instruments of fiscal policy:

1. Public Expenditure: Expenditure means expenditure incurred by the government of a country. It generates sufficient influence on aggregate demand and development activities of a country. The expenditure can be of two types:

a. Expenditure incurred by the government to get goods and services. It directly influences aggregate demand.

b. Public expenditure incurred on pensions, scholarships, educational and medical facilities to people etc. This expenditure is known as Transfer Payment. It also raises aggregate demand.

2. Public revenue and taxation: A government needs income for the performance of a variety of functions and meeting its expenditure. Thus, the income of the government through all sources like taxes, borrowings, fees, and donations etc. is called public revenue or public income. In a modern welfare state, public revenue is of two types:

(a) Tax revenue and

(b) Non-tax revenue.

(a) Tax Revenue: A fund raised through the various taxes is referred to as tax revenue. Taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefits to the tax payer. Seligman defines a tax thus: “A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to specific benefits conferred.

Examples of Tax Revenue 

Ø  Income Tax (on income of the individual as well as joint Hindu families, Companies, AOP, BOI etc.) 

Ø  Custom Duty, import and export duty.

Ø  Goods and Services Tax

(b) Non Tax Revenue: The revenue obtained by the government from sources other than tax is called Non-Tax Revenue. The sources of non-tax revenue are: Fees, Fines or Penalties, Surplus from Public Enterprises, Special assessment of betterment levy, Grants and Gifts etc.

3. Public Debt: The third instrument of fiscal policy is public debt. Public debt refers to all types of borrowings by the govt. from among the institutions, organisations and the public. The government has to take the help of public debt if public expenditure exceeds public revenue. Public debt can be of:

a) Internal Debt: Internal debt comprises of all borrowings and market loans which were formerly called permanent or funded debt. In consists of all internal borrowings and market loans. It includes treasury bills issued by the govt. of India to the RBI, state govt., Commercial Banks and other parties.

b) External Debt: External debt includes loans taken by the govt. of India against the non – negotiable, non – interest hearing securities issued to international financial institutions like the IMF, IBRD, IDA, ADB, etc. Besides these the loans taken by the govt. of India from friendly countries are also included. External debt also includes loans taken from the IMF trust fund.

c) Other Outstanding Liabilities: This include all outstanding liabilities against the various small savings schemes, public provident fund and state provident fund contributions, income tax annuity deposit schemes, interest bearing reserve funds of the department of the Railways, Post and telegraphs, etc.

4. Deficit Financing: Deficit means an excess of public expenditure over public revenue. A public expenditure has to be incurred for economic development. This amount can be collected only through the public debt, taxation etc. So deficit financing has to be introduced. When there emerges a deficit due to excess of public expenditure over public revenue, this deficit is met with either by borrowing from the central bank or by issuing new notes. Deficit financing can be used to meet government expenditure. It increases aggregate demand.

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