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McGraw-Hill/IrwinStrategic Management, 10/e Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.
MACRO ECONOMICPOLICY
MODULE - 2
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MONETARY POLICY
LEARNING OBJECTIVES
Industrial Policies of the past-
1948,1956,,1977,1980,1991.
Monetary Policy
Objectives of Monetary Policy
Credit Control tools
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INDUSTRIAL POLICY
Meaning of Industrial policy:
Industrial policy refers to government's policy
towards industries- their establishment, functioning,
growth and management of this this indicates the
respective areas of large, medium and small sector
industries, foreign capital, labor tariff and otherrelated aspects.
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Industrial Policy
1947- India became independent. Industrial basesmall & beset with many problems:
Shortage of raw materials, deficiency of capital, bad industrial relations.
Investorsnot sure about the industrial policy of new national government &industrial climate wrought with uncertainties and suspicions.
1947 -Industrial conference in December 1947adopted a resolution for industrialpeace and recommended a clear-cut division of industries into Public & private
sector & thus removed the uncertainties & suspicions in the minds of investors &entrepreneurs.
Various industrial policies were passed from time to time to improve theindustrialization our country.
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INDUSTRIAL POLICY RESOULTION OF 1948
IPR 1948 was the first industrial policy issued by thegovernment.
Following were the features of Industrial Policy of
1948:
1. Acceptance of the importance of both Private & Public
sectors.
Two important strategies: i) Expansion of the state sector
in areas where it was operating and in new lines ofproduction.
ii) Allowing the private sector to submit and expand albeit
under proper direction and regulation.
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INDUSTRIAL POLICY RESOULTION OF 1948
2. Division of the industrial sector into four categories:
i) Industry where state had a monopoly : arms &
ammunition, atomic energy and rail transport.
ii) Mixed sector: six industries were specified:
Coal, iron & steel, aircraft manufacture, ship building,manufacture of telephone, telegraph & wireless appratus
& mineral oils.
In the national interest the state itself finds it necessary to
secure the cooperation of private enterprise.
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INDUSTRIAL POLICY RESOULTION OF 1948
iii) The field of Govt. control: 18 industries of national importance wereincluded in this category.
.
Industries were- automobiles, heavy chemicals, heavy machines,machine tools, fertilizers, electrical engineering, sugar, papercement, cotton and woolen textiles.
iv) The field of private sector: all other industries were left open to the
private sector.
However, the state could take over any industry in this sector if itsprogress was unsatifsctory.
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INDUSTRIAL POLICY RESOULTION OF 1948
Other imp. Features of the industrial policy 1948:
Small & cottage industries: IPR -1948 accepted the
importance of small & cottage industries in industrial development.
Best suited for the utilization of local resources and for creation of
employment opportunities.
Factories Act -1948: The rosolution enunciated a policy of just
labour conditions wherein workers would be given fair wages. Forpurposes of maintaining industrial peace, labour participation inmanagement.
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INDUSTRIAL POLICY -1991
The Congress Govt led by Mr. Narasimaha Rao announced the New IndustrialPolicy in July 1991.
The main aim of the new Industrial policy was :
To Introduce liberalization with a view to integrate the Indian economy with the
world economy.
To remove restriction on direct foreign investment as also to free the domestic
entrepreneur from the restrictions of MRTP Act.
To unshackle the Indian Industrial economy from the cobwebs of unnecessary
bureaucratic control.
The policy aimed to shed the load of the public enterprises which have shown a very
low rate of return or were incurring losses over the years.
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MONETARY POLICY
Monetary Policy refers to the measures adopted by the
Central Bank of a country to control the money supply to
achieve the objectives of general economic policy.
According to RP KENT, Monetary Policy is the
management of the expansion and contraction of the
volume of money in circulation for the explicit purpose ofattaining a specific objective such as all full employment
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OBJECTIVES OF MONETARY
POLICY
Price stability: when prices rise , the fixed group gets Adversely affected and when the prices fall, the producers and
businessman Get affected. It is argued that the price stability ensures
steady growth in Production and employment.
Stability of Foreign Exchange: one of the traditional objectives ofmonetary policy. When countries were on the gold standard, the aim
of the monetary authorities was to regulate credit in such a way as to
minimize fluctuations in foreign receipts and payments and thereby
protect gold reserves. Full Employment: The monetary policy should aim at solving the
unemployment problem by expanding consumption and investment
expenditure.
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OBJECTIVES OF MONETARY
POLICY
High Rate of Economic Growth: the concept of economicgrowth implies qualitative and quantitative increase in the
volume of goods and services produced in the economy.
A large No. of branches of commercial banks have been set
up in the rural areas, and special institutions for providing
credit to industries have been started in the urban areas.
Equitable Distribution of Income: Credit policy can be
organized in such as way as to provide more credit to thepoor and needy, to help them purchase productive assets.
Such a policy will also help in tackling the problems of
unemployment and poverty.
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CREDIT CONTROL TOOLS
OPEN MARKET OPERATIONS: OMP refer to the buying and
selling of government and other securities by the Central Bank.
Whenever the Central Bank sells securities, it intends to contract the
quantity of money and credit by absorbing the purchasing power inthe hands of public.
At the same time it, it manages to reduce the cash reserves of the
commercial banks and thereby reduces their capacity to create credit.
Reverse is the same.
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CREDIT CONTROL TOOLS
VARIABLE STATUATORY RESERVE RATIO: Central Bank of a country enjoys the power to determine the statutory cash
reserve requirements of the commercial banks.
Under this policy, the central bank requires the commercial banks to maintain a
certain percentage of their demand and time deposits as reserves.
Ex: If the banking system has Rs. 6,000 crores in total reserves and legal reserve
required is 8%, then the banking system can support Rs 5,520 crores of demand
deposit.
Let us suppose that legal reserve requirement is raised to 9% . Banking system will
be able to support only Rs. 5,460 crores.
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CREDIT CONTROL TOOLS
SELECTIVE OR QUALITATIVE METHODS OF CREDIT CONTROL
They aim at curtailing the flow of credit into unproductive channels and
diverting them into productive channels. They operate by means of official
regulations issued and enforced by Central Bank.
Some of the important methods of Selective Credit control tools are:
Rationing of credit: Central Bank may issue direction to commercial banks to
restrict (ration) credit to certain sectors or sections of the population. This
method is useful in controlling inflationary pressures.
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CREDIT CONTROL TOOLS
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FISCAL POLICY
MODULE - 2
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Fiscal policy
Fiscal Policy refers to the policy of the Governmentregarding Public Revenue, Public Expenditure and Public
Debt.
It tells the methods adopted by the government to earn
revenue, to spend it and manage the deficit.
Modern Economists believe that the Fiscal Policy can be
used to change aggregate demand in a such an extent that
contributes to economic stabilization.
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OBJECTIVES OF FISCAL POLICY
1. Attaining Full Employment : Increase in Govt. Exp.pushes up aggregate and thru
multiplier effect, there woulde be multiple increase in national income
and employment.
2. Maintenance of Price Stability and Economic Stability: Fiscal policies of the
Govt. should be framed in such a manner as to counteract the cyclical
fluctuations.
Ex: Booms and Depression
During a depression, appropriate fiscal policy would be to increase publicexpenditure and decrease tax rates.
During Inflation : Appropriate policy would be to reduce public expenditure and
increase taxes, thereby reducing purchasing power in the hands of the people. This
will help in achieving price and economic stability.
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OBJECTIVES OF FISCAL POLICY
3. Increasing the Rate of Capital Formation: In a developing countries where the
level of income and employment are very low, the fiscl policy must aim at
increasing the rate of investment. This can be done by restricting consumption.
4. Minimizing inequalities in income and wealth : reduce disparities of income and
and wealth, the Govt. may design a tax structure which is progressive in nature.
Indirect Taxes should be heavy on luxury goods and light on necessary goods.
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OBJECTIVES OF FISCAL POLICY
5. Reducing Unemployment and under employment :Fiscal policy of the govt. Can
tackle the problem of unemployment and under employment, with the help
of specific public expenditure programmes.
Ex; Building roads, bridges undertaking multipurpose river projects, can provide
employment to the urban unemployed population.
Building of schools, hospitals , irrigation canals etc., during off season can provide
employment to the rural under employed population.
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FOREIGN TRADE POLICY
Indian economy is foreign trade oriented.
Government of India has announced massive Trade
Policy in 1991 to open up the economy to foreigntrade and to integrate the Indian economy into the
global economy.
Indian economy has undergone changes both in its
composition and direction of Foreign trade.
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FOREIGN TRADE POLICY
Before the economic planning was started in India, mainexports were primary goods and imports consisted ofmanufactured goods.
But after planning , there has been a total change in itscomposition.
In recent years India started exporting various kinds ofmanufactured goods like engineering goods, ready madegarments, chemicals and allied products, software, leatherand leather products etc.,
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FOREIGN TRADE POLICY
2004-2006
KEY STRATEGIES :
1. Unshackling (set free) of controls
2. Creating an atmosphere of trust and transparency
Simplifying procedures and bringing down
transaction costs.
Identifying and nurturing different special focus
areas to facilitate development of India as a Global
hub for manufacturing, trading and services.
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Highlights of Foreign Trade Policy
2004-2006
STRATEGY: it is for the first time a comprehensive Foreign TradePolicy is being notified.
FTP takes an integrated view of the overall development of Indias
Foreign trade.
OBJECTIVES OF THE FOREIGN TRADE POLICY:
1. To double Indias Percentage share of global merchandise
trade by 2009.
2. To act as an effective instrument of economic growth by
giving a thrust to employment generation, especially in
semi-urban and rural areas.
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EXIM POLICY 2002-2007
EXIM policy of India is primarily a five year policy, Commerceministry announces appropriate amendments every year , keeping inmind the latest national and international developments. This is
usually done on 31st
march every year.
Exim policy is supposed to last for 5 years, the UPA Governmentannounced new five year Foreign Trade Policy: by changing thename EXIM POLICY.
The Exim Policy -2002-2007 places a special focus on the small scalesector which generates almost 50% of Indias exports.
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EXIM POLICY 2002-2007
Union Commerce and Industry Minister Mr. MurasoliMaran announced the EXIM policy for the 5 years period .
The main thrust of the policy is to push Indias exports
aggressively by undertakings several measures aimed ataugmenting exports of farm goods, small scale sector,textiles, gems and jewellery, electronic hardware etc.
Policy aims to reduce transaction cost to trade through anumber of measures to bring about proceduralsimplifications.
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EXIM POLICY 2002-2007
EXIM policy initiated a number of measures which would help employmentorientation.
External Sector is becoming increasingly important for the growth of the Indianeconomy.
The Main Initiatives announced in the Exim Policy 2002-2007.
The focus of trade policy reforms in India have been on liberalization, openness, andglobalization with a basic trust on export promotion activity.
Exim Policy 2002-02 had removed quantitative restrictions on all imports.
Imports of second hand or used vehicles, meat and poultry products and and textileand textile articles were allowed.
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FOREIGN TRADE POLICY
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FOREIGN TRADE POLICY
2004-2006
Special focus initiatives have been identified for the Agriculture, handlooms,handicraft, gems and jewellery and leather sectors.
1. New SchemeVishesh Krishi Upaj Yojana (spl. Agricultural produce scheme)
for promoting the export of fruits, vegetables, flowers, minor forest produce, and their
value added products has been introduced.
2. Funds shall be earmarked for the development of Agri Export Zones(AEZ)
3. Units in AEZ shall be exempted from bank guarantee under Export Promotion Capital
Goods scheme.
4. New towns of export excellence with a threshold (points of entry or beginning) limit of
Rs. 250 crore have been identified.
5. Specific funds earmarked under Market Acess Initiative Scheme for promotinghandloom and handicraft exports.
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FOREIGN TRADE POLICY
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FOREIGN TRADE POLICY
2004-2006
Special focus initiatives have been identified for the Agriculture, handlooms,handicraft, gems and jewellery and leather sectors.
6. New handicrafts SEZs shall be established which would procure products from
the cottage sector and do the finishing for exports.
7. The Handicraft Export promotion Council has been authorized to import
trimmings, embellishments(Beautify) and consumables on behalf of those
exporters for whom direct importing may not be viable.
8. Import of gold of 18 carat and above shall be allowed under the
replenishment(fill up again).
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EXIM POLICY 2002-2007
The five year 2002-2007 policy removed quantitative restrictions onexports except jute and onion which were retained for export throughthe state trading enterprises.
Government decided to focus on the export of 106 items includingengineering goods, electrical goods, electronic goods ,watch,footwear, chemicals, textiles, jewellery ect.,
Many measures were announced to give major thrust agri- exports.
Policy announced transport assistance for the export of fresh andprocessed fruits, vegetables, floriculture, poultry, dairy products
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EXIM POLICY 2002-2007
Salient features :
The Exim policy 2002 was described as pro-growth and positive
with certain concrete measures.
The most important initiatives of the policy were:
Removal of Quantitative Restrictions on Agricultural exports.
Setting up of 20 Agri-Export Zones in 12 states.
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EXIM POLICY 2002-2007
Salient features :
The policy also made the special Economic Zones (SEZs) more attractive by
extending income tax benefits to the units in SEZs.
Setting up SEZs units would be able to import capital goods and raw materials dutyfree.
SEZs units shall be deemed to be foreign territory for the purpose of trade
operations and tariffs. Goods going t the SEZ area would be treated as ddemed
exports.
Reduction in interest rate from 24 to 15 % in case of non-fullfillment of export
obligations by exporters under the various schemes. This measure is likely to tap
immense export potential.
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EVALUATION OF EXIM POLICY 2002-2007
Due to pressure of USA, which carried on acrusade against QRs by India, a casewas filed by USA in WTO gave its verdict against India in 1997.
Government of India filed an appeal, but the verdict went against India. India thus
forced to lift QRs.
Government of India is conscious of the fact that removal of QRs can open the
floodgates of foreign goods in the Indian market.
The removal of QRs on the import of second hand automobiles also posed a threat
to automobile manufacturers, but by imposing two conditions that only cars above
1000 c.c. capacity and automobiles, which are not more than 3 years old, can be
imported, the govt. claims to have protected the interests of the automobile industry.
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EVALUATION OF EXIM POLICY 2002-2007
Due to pressure of USA, which carried on a
crusade against QRs by India, a case was filed by USA in
WTO gave its verdict against India in 1997.
Government of India filed an appeal, but the verdict went
against India. India thus forced to lift QRs.
Government of India is conscious of the fact that removal of
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EVALUATION OF EXIM POLICY 2002-2007
The removal of QRs on the import of second hand automobiles also posed a threat
to automobile manufacturers, but by imposing two conditions that only cars above
1000 c.c. capacity and automobiles, which are not more than 3 years old, can be
imported, the govt. claims to have protected the interests of the automobile industry.
The critics felt that government has opened the doors of the Indian market for a
variety of goods used by Upper and Indian middle classes.
USA and other advanced countries had an eye on 250 million members of the
middle class who are prone to follow foreign styles.
There is a strong fear that by opening the floodgates of imports in all kinds of goods,
India may be faced with the prospect of closure of lakhs of small scale industries.
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EVALUATION OF EXIM POLICY 2002-2007
Critics, therefore allege that very dangerous situation is likely to emerge in the very
near future which may give a serious set back to Indian producers.
The nationalist government developed since 1947 policies to protect Indians from
the onslaught of Foreigners by imposing restrictions on the import of a very largenumber of items.
The slogan of Government was BE INDIAN, BUY INDIAN
The danger posed by the EXIM policy is expressed in the new paradigm shift BE
INDIAN, BUY FOREIGN
This will be negating the chief objective of the national struggle for independence.
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UNION BUDGET
BudgetGovernments annual estimate or plan of revenue andexpenditure.
Union budget is an important event which has great significance forthe entire nation and is normally introduced in the last week of
February every year.
The budget is prepared and present by finance minister before theparliament .
The finance bill has to be cleared to authorise expenditure.
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UNION BUDGET
Tax revenue comes broadly from three sources:
A) Taxes on income and expenditure
B) Taxes on property and capital or property transactionsand
C) Taxes on commodities and services.
Non tax revenue consists of:
1. Currency, coinage and mint
2. interest receipts and dividends
3. other tax revenue
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UNION BUDGET
The Budget of Government of India, for any year, gives a complete picture of theestimated receipts and expenditures of the Government for that year on the basis oftwo previous years.
Every Budget, for instance, gives three sets of figures :
A. actual figures for preceding year. B. budget and revised figures for the current year
C. Budget estimate for the following year
For instance, the budget estimate for the year2006-07 contains:
A) actuals or accounts for the year 2005-06
B) budget for the revised figures for the year 2006-07
C) budget estimates for 2007-08.
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UNION BUDGET
Revenue receipts include direct taxes likecorporation tax, income tax, wealth tax ,gift tax andso on.
Indirect taxes like customs duty,excise duty,sales taxetc.,
Non tax revenue like net income by public sectorundertakings are also accounted under Revenue
Receipts Capital receipts: Money include governments
market borrowings, provident fund, small savings
and the external assistance like loans grants etc.,
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BUDGET
Revenue Expenditureare those which neither addto the governments assets nor reduce the liabilities.
- Salaries of Government employees, purchase ofof stationery, maintenance of public utilities etc arepart of revenue expenditure.
Capital Expenditurerefers to items that involvesacquisition of assets.
Ex: investment in railways, roads, bridges, powerprojects and irrigation works.
When total expenditure exceeds the total receipts is
Budget deficit.
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UNION BUDGET
The excess of the total expenditure over the revenue receipts arefinanced by borrowings of the Government under Domestic Capital
Receipts and External Capital Receipts
The Market borrowings, small borrowings, provident funds etc., comeunder domestic capital receipts.
The loans and other assistance received from international agencies
come under external capital receipts.
Deficit in the revenue account implies that the Government is living
beyond its means and that its forced to borrow even to meet its current
expenditure.
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CHELLIAH COMMITTEE RECOMMENDATIONS
The Committee, set up in August 1991, submitted its Interim Report
in February 1992, and final report in two parts in August 1992 and
January 1993.
The recommendations made by the committee have been made with a
view to make the tax-system generate revenue in an efficient and
equitable manner.
For this the committee has suggested some major changes in direct
and indirect taxes.
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CHELLIAH COMMITTEE RECOMMENDATIONS
Direct taxes: In respect of direct taxes, the committee stressed the
importance of lower/moderate rates of taxation, a narrower spread
between the rate and the maximum marginal rate, and the fewest
special exemptions and deductions.
Income tax: In terms of personal income tax, it means lower tax rates,
fewer slabs, a higher exemption limit, and reductions in the savings
linked tax exemptions.
It has also been recommended that agricultural income in excess of
Rs. 25,000 accruing to the non-agriculturists be taxed by aggregating
it with non-agricultural income.
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CHELLIAH COMMITTEE RECOMMENDATIONS
Corporate tax:Committees recommendations are reduction in thecorporate rate: reduction in the differential between the rates on
domestic and Foreign companies .
INDIRECT TAX: As for the reform of indirect taxes is concerned, thecommittee made the following important recommendations: customs
tariffs on finished goods should be higher than on basic raw materials
and those on components and machinery should be in between:
agricultural imports should be subject to some import duty.
MODVAT: ultimately, of course the full fledged VAT (as a
replacement of various indirect taxes) is to be introduced.
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NEW INDUSTRIAL POLICY
RESOLUTION OF 1991
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In line with liberalization measures announced during the1980s, the then congress government announced a new
industrial policy on July 24,1991.
Architects behind industrial policy of 1991 were the then
prime minister PV Narasimha Rao and finance minister
Manmohan Sing.
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OBJECTIVES
The major objectives of the policy was to build onthe gains which was already made and correct the
weakness that had crept in.
Maintenance of a sustained growth in productivity
and gainful employment and international
competitiveness.
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In pursuit of these objectives, the governmentannounced a series of initiatives like
Industrial Licensing Foreign Investment
Foreign Technology agreements
Public Sector Policy MRTP Act
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ABOLITION OF INDUSTRIAL LICENSING
Industrial licensing policy in India is governed by the
Industrial development and Regulation Act of 1951.
Industrial licensing policy which was being resented by
entrepreneurs as it led to unnecessary governmental
interference, which delayed in investment decisions and
bureaucratic red tapism, corruption etc.,
And also Industrial licensing policy failed to achieve the
objective laid down by the government.
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Thus bearing all the above factors and also to liberalize the
economy, the industrial policy of 1991 abolished industrial
licensing for all but 18 industries.
The industries under licensing policy act were coal and lignite;
distillation and brewing of alcoholic drinks; sugar; animal fats
and oil; cigars and cigarettes; asbestos and asbestos basedproducts; plywood and other wood based products; raw hides,
skins and leather; tanned or dressed fur skins; motor cars;
paper and newsprint; electronics aerospace and defense
equipments; industrial explosive; hazardous chemicals; drugs
and pharmaceuticals; entertainment electronics; and white
goods domestic refrigerators, washing machines etc.).
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With the passage of time most of these industries have also
been delicenced except for alcohol, cigarettes, hazardous
chemicals, electronic aerospace and defense equipment,
drugs and pharmaceuticals and industrial explosives.
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DILUTION OF PUBLIC SECTOR INDUSTRIES
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DILUTION OF PUBLIC SECTOR INDUSTRIES
As many as 17 public sector industries was reduced to 8, they were
Arms and ammunition
Atomic energy
Coal and lignite
Mining of iron ore, manganese, chrome, gypsum, sulphur, gold, diamond,copper, lead, zinc, tin, molybdenum, and wolfram.
Minerals specified in the scheduled in the atomic energy.
Rail transport
Till date many have been deleted from reserved list only a total of 3industries are reserved for the public sector.
Public sector enterprises were reviewed and sick units was referred to theBoard for Industrial and Financial Reconstruction for rehabilitation andreconstruction.
The government also announced to offer a part of government shareholdingin the public sector enterprises to mutual funds.
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RELAXATION OF MRTP ACT
Under this act all the firm with assets worth rupees 100crore(since 1985) were classified as MRTP firms.
Such firms were permitted to enter selected industries only ona case by case approval basis.
The government realizing the effect of this restrictions on thepath of growth and diversification of this firms has scrappedthe threshold limit of assets.
After many such amendments the MRTP Act gives moreemphasis to the prevention and control of monopolistic,restrictive and unfair trade practices, so that consumers aresafeguarded from such practices.
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FREE ENTRY TO FOREIGN INVESTMENT AND
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FREE ENTRY TO FOREIGN INVESTMENT AND
TECHNOLOGY
The new industrial policy has prepared a specified list of hightechnology and high investment priority industries wherein automaticpermission was made available for foreign direct investment up to51% foreign equity.
The various industries with automatic approval are metallurgicalindustries, entertainment , electronics, food processing, and theservice sectors having export potential.
There is a total ban on FDI in handful of sectors like arms andammunitions, atomic energy, railway transport, coal and lignite,mining of iron, manganese, chrome, gypsum, sulphur, gold,diamonds, cooper and zinc.
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OTHER LIBERALIZATION MEASURES
Liberalization for obtaining approval from the centre, forestablishing of industries of non polluting nature in cities
with a population of more than 1 million.
Abolition of phased manufacturing programmes for new
projects.
Removal of mandatory convertibility clause imposed byfinancial institutions.