LIBERALIZATION

Liberalization means removal of entry and growth restriction on the private sector.

• Liberalization involves deregulation and reduction of government controls and greater autonomy (freedom) of private investment, to make economy more competitive.
• Under this process, business is given free hand and is allowed to run on commercial lines.
• The purpose of liberalization was :
  # To unlock the economic potential of the country by encouraging private sector and multinational corporations to invest and expand; and
  # To introduce much more competition into the economy and creating incentives for increasing efficiency of operations.
•  The economic reforms taken by the government under liberalization include the following :

1. Industrial sector reforms
2. Financial sector reforms
3. Tax reforms
4. Foreign exchange reforms
5. Trade and investment policy reforms

INDUSTRIAL SECTOR REFORMS

Reduction in industrial licensing:

The new policy abolished industrial licensing for all the projects, expect for a short list of industries (like liquor, defense equipment, industrial explosives etc….)

• No licenses were needed

(i) to set up new units

(ii) expands or diversify the exciting line of manufacture.

• However, license is required for certain industries, related to security and strategic considerations.

Decrease in role of public sector:

One of the striking features was the substantive reduction in
the role of the public sector in the future industrial development of the country. The number of
industries reserved for the public sector, reduced from 17 to following 3 industries

(i)defense equipment

(ii) atomic energy generation

(iii) railway transport.

De-reservation under small-scale industries:Many goods produced by small scale industries
have now been de- reserved.

• The investment ceiling on plant and machinery for small undertakings enhanced to  rupees one crore.
• In many industries, the market was allowed to determine the prices through forces of the market (and not by directivity policy of the government).

Monopolies and restrictive trade practice (MRTP) Act:

with the introduction of liberalization and expansion schemes, the requirement of large companies, to seek prior approval for expansion , establishment of new undertakings, merger , amalgamations, etc.. Were eliminated.

FINANCIALLY SECTOR REFORMS

Financial sector includes financial institutes like commercial banks, investment hank, stock exchange operations and foreign exchange market . the financial sector in India is controlled by the central bank — Reserve bank of India (RBI) .

• Change in role of RBI:

The role of RBI was reduced from regulation of facilitator of financial sector . As a result, financial sector was allowed to take decisions on many matters, without consulting the RBI.

•  Origin of private banks:

The reforms policies led to the establishment of private sector banks , Indian as well as foreign . for example, Indian banks like ICICI and foreign banks like HSBC increased the competition and benefitted the consumers through lower interest rates and better services.

•  Increase in limit of foreign investment:

The limit of foreign investment in banks was raised to around 51% foreign institutional investors (FII) such as merchant bankers, mutual funds and pension funds were now allowed to invest in Indian financial markets.

• Ease in expansion process:

Bank were given freedom to set up new branches (after fulfillment of certain condition) without the approval of the RBI.

TAX REFORMS

Tax reforms refer to reforms in government’s taxation and public expenditure policies, which are collectively known as its ‘fiscal policy’.

Taxes are of two types:

• Direct taxes consist of taxes on incomes of individuals as well as profits of business enterprises for example , income tax (taxes on individual incomes) and corporate tax (taxes on profits of companies ) .

• Indirect taxes refer to those taxes which affect the income and property of persons through their consumption expenditure. indirect taxes are generally imposed on goods and services. For example, sales tax, VAT , custom duty, etc.

• Reduction in taxes :

Since 1991, there has been a continuous reduction in income and corporate tax as high tax retes were an important reason for tax evasion. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclose of income.

•  Reforms in indirect taxes:

Considerable reform have been made in indirect taxes to facilitate establishment of common national market for goods and services

• Simplification of process

In order to increase better compliance on the part of tax pair many procedures have been simplified.

Foreign Exchange Reforms

The important reforms made in the foreign exchange market are:

• 1. Devaluation of Rupee – Devaluation refers to reduction in the value of domestic currency by the government. To overcome Balance of Payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange

2. Market Determination of Exchange Rate: The Government allowed rupee value to be free from its control. As a result, market forces of demand and supply determine the exchange value of the Indian rupee in terms of foreign currency

Trade and Investment Policy Reforms

Before 1991, a lot of restrictions (high tariffs and quotas) were imposed on imports to protect the domestic industries.

However, this protection reduced the efficiency and competitiveness of domestic industries and led to their slow growth.

So, the reforms in the trade and investment policy were initiated:

• To increase the international competitiveness of industrial production.
• To promote foreign investments and technology into the economy.
• To promote efficiency of local industries and adoption of modern technologies.

The important trade and investment policy reforms include

1. Removal of Quantitative restrictions on Imports and Exports: Under the New Economic Policy, quantitative restrictions on imports and exports were greatly reduced. For example, quantitative restrictions on imports of manufactured consumer goods and agricultural products were fully removed from April 2007

2. Removal of Export Duties: Export duties were removed to increase the competitive position of Indian goods in the international markets

3. Reduction in Import Duties :  Import duties were reduced to improve the position of domestic goods in the foreign market.

4. Relaxation in Import Licensing System : The Import licensing was abolished,except in case of hazardous and environmentally sensitive industries. This encouraged domestic industries to import raw materials at better prices, which raised their efficiency and made them more competitive”

PRIVATIZATION

Privatization means transfer of ownership, management and control of public sector enterprises to the entrepreneurs in the private sector.

Privatization implies greater role of the private sector in the economic activities of the country. Over the years, Indian Government has diluted its stake in several public enterprises, including IPCL, IBP, Maruti Udyog, etc.

Privatization can be done in two ways:

•  Transfer of ownership and management of public sector companies from the government to the Private Sector
• Privatization of the public sector undertakings (PSU) by selling off part of the equity of PSUs to the public.
• This process is known as disinvestment.

Disinvestment is of three type

• Complete disinvestment in this type of disinvestment complete public sector undertaking is sold to private sector.
• Majority disinvestment in this type of disinvestment a major portion of public sector undertaking is sold ie more than 50% shares of public sector undertaking are sold to private sector.
• Minority disinvestment in this type of disinvestment government sells less than 50% of stake two private sector.

The purpose of privatization was mainly to improve financial discipline and facilitate modernization. It was also believed that private capital and managerial capabilities will help in improving performance of the PSUS.

GLOBALIZATION

Globalization means integrating the national economy with the world economy through removal of barriers on international trade and capital movements

• Globalization is the outcome of the policies of liberalization and privatization

• Globalization is generally understood to mean integration of the economy of the country with the world economy

• However, it is a complex phenomenon. It is an outcome of the set of various policies that aim to transform the world towards greater interdependence and integration

Changes made by the Globalization of the Indian Economy

1. The New Economic Policy prepared a specified list of high technology and high investment priority industries, in which automatic permission will be available for foreign direct investment up to 51 per cent of foreign equity

2 In respect of foreign technology agreements, automatic permission is provided in high priority industry up to a sum of rupees 1 crore. No permission is now required for hiring foreign technicians or for testing indigenously developed technology abroad.

3. In order to make international adjustment of Indian currency, rupee was devalued in July 1991 by nearly 20 per cent. It stimulated exports, discouraged imports and raised the influx of foreign capital.

4 To integrate Indian economy with world, the Union Budget 1992-93 made Indian rupee partially convertible and then the rupee was made fully convertible in 1993-94 budget

5, A new five year export import Policy (1992 – 97) announced by the Go i,rir • establish the framework of globalisation of India’s foreign trade The policy removed all restrictions and controls on the external trade and allowed market forces to play a greater role in respect of exports and imports.

6. In order to bring the Indian economy within the ambit of global competition, the government has modified the customs duty to a considerable extent. Accordingly, the peak rate of customs duty has been reduced from 250 per cent to 10 per cent in 2007-2008 budget.

OUTSOURCING

Outsourcing refers to contracting out some of its activities to third party which. were earlier performed by the organisation. For example, many companies have started outsourcing security service to outside agencies on a contractual basis.

• Outsourcing is one of the important outcomes of the globalization process.
• It has intensified in recent times because of the growth of fast modes of communication, particularly the growth of Information Technology (IT).
• With the help of modern telecommunication links, the text, voice and visual data in respect of these services is digitized and transmitted in real time over continents and national boundaries.
• India has become a favorable destination of outsourcing for most of the MNC’s because of low wage rates and availability of skilled manpower.
• For example, Indian Business Process Outsourcing (BPO) companies are already gaining prominence and earning precious foreign exchange.

World Trade Organisation (WTO)

Origin of World Trade Organisation (WTO)

• Prior to WTO, General Agreement on Trade and Tariff (GATT) was established as global trade organisation, in 1948 with 23 countries.
• GATT was set up to administer all multilateral trade agreements by providing equal opportunities to all countries in the international market.
• WTO was founded in 1995 as the successor organisation to the GATT
• The WTO agreements cover trade in goods as well as services, to facilitate international trade.
• At present, there are 159 member countries of WTO and all the members are required to abide by laws and policies framed under WTO rules

Some Major Functions of WTO:

1. To facilitate international trade (both bilateral and multilateral trade) through removal of tariff as well as non-tariff barriers;

2. To establish a rule-based trading regime, in which nations cannot place arbitrary restrictions on trade.

3. To enlarge production and trade of services

4. To ensure optimum utilization of world resources

5. To protect the environment.

AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS)

Economic reforms created mixed reactions at different levels. Le us discuss some of the positive and negative aspects of economic reforms. Arguments in Favor of Economic Reforms The following are some of the important arguments advanced in favor of economic reforms:

1 Increase in rate of Economic Growth:

• The growth of GDP increased from 5.6% during 1980-91 to 6.1% during 1992-2001
• This shows that there has been an increase in the overall GDP growth in the reform period.
• During the reform period, the growth of agriculture and industrial sectors has declined, whereas the growth of service sector has gone up.
• This indicates that the growth is mainly driven by the growth in the service sector. Currently, the growth rate of GDP is estimated to be 8.2%

2. Inflow of Foreign Investment:

• The opening up of the economy has led to the rapid increase in foreign direct investment (FDI).
• The foreign investment (FDI and foreign institutional investment) increased from about US $ 100 million in 1990-91 to US $ 36 billion in 2016-17.

3. Rise in Foreign Exchange

• Reserves foreign exchange reserves reached the level of $ 25,186 million at the end of March 1995 as compared to only $ 3,962 million in 1989-90.
• At present, India is the 6th largest foreign exchange reserve holder in the world, with $ 321 billionin the year 2014-15.

4. Rise in Exports:

• During the reform period, India experienced considerable increase in exports of auto parts, engineering goods, IT software and textiles

5. Control on Inflation.

• Increase in production tax reforms and other reforms helped in controlling the inflation.
• The annual rate of inflation reduced from the peak level of 17% in 1991 to around 7.6% in 2012-13.

6. Increase in role of Private sector

• Abolition of licensing system and removal of restrictions on entry of the private sector, in areas earlier reserved for the public sector, have enlarged the area of operation of the private sector

Criticism of Economic Reforms

Critics have raised a series of criticism against the New Economic Reforms, especially in the areas of employment, agriculture, industry, infrastructure development and fiscal management.

1. Growing Unemployment

Though the GDP growth rate has increased in the reform period, but such growth failed to generate sufficient employment opportunities in the country

2. Neglect of Agriculture

The new economic policy has neglected the agricultural sector as compared to industry, trade and services sector.

(i) Reduction of public investment: Public investment in agriculture sector, especially in infrastructure, which includes irrigation, power, roads, market linkages and research and extension (which played a crucial role in the Green Revolution), has been reduced in the reform period.

(ii)Removal of subsidy: Removal of fertilizer subsidy increased the cost of production, which adversely affected the small and marginal farmers.

(iii) Liberalisation and reduction in import duties: After the commencement of WTO, a number of policy changes were made:

(a) Reduction in import duties on agricultural products;

(b) Removal of minimum support price

(c) Lifting of quantitative restrictions on agricultural products.

All these policies adversely affected the Indian farmers as they now have to face increased international competition.

(iv) Shift towards cash crops: Due to Export-oriented policy strategies in agriculture, the production shifted from food grains to cash crops for the export market. It led to rise in the prices of food grains.

3. Low level of Industrial Growth:

Industrial growth recorded a slowdown due to the following reasons:

(i) Cheaper Imported Goods:

• Due to globalisation, there was a greater flow of goods and capital from developed countries and as a result, domestic industries were exposed to imported goods.
• Cheaper imports replaced the demand for domestic goods and domestic manufacturers started facing competition from imports. For example, cheaper Chinese goods pose a big threat to Indian manufacturers

(ii) Lack of infrastructure facilities: The infrastructure facilities, including power supply, have remained inadequate due to lack of investment.

(iii) Non-Tariff Barriers by Developed countries: All quota restrictions on exports of textiles and clothing have been removed from India. But some developed countries, like USA have not removed their quota restrictions on import of textiles from India.

4. Ineffective Disinvestment Policy:

• The government has always fixed a target for disinvestment of PSUs.
• For instance, in 1991-92, the target was rupees 2,500 crore, whereas, government was able to mobilize rupees 3,040 crore.
• However, according to some scholars, the disinvestment policy of government was not successful because:
• The assets of public sector undertakings (PSUS) were under-valued and sold to the private sector.
• Moreover, such proceeds from disinvestment were used to compensate shortage of government revenues rather than using it for the development of PSUs and building social infrastructure in the country

5. Ineffective Tax Policy:

• The tax reduction in the reform period was done to generate larger revenue and to curb tax evasion.
• But, it did not result in increase in tax revenue for the government.
• Tariff reduction decreased the scope for raising revenue through customs duties.
• Tax incentives provided to foreign investors to attract foreign investment further reduced the scope for raising tax revenues.

6. Spread of Consumerism

• The new policy has been encouraging a dangerous trend of consumerism by encouraging the production of luxuries and items of superior consumption.

DEMONETIZATION (8 November 2016)

• The Government of India, made an announcement on November 8, 2016 with profound implications for the Indian economy.
• The two largest denomination notes,’500 ‘1,000, were  ‘demonetised’ with immediate effect, ceasing to be legal tender except for a few specified purposes such as paying utility bills.
• This led to eighty six per cent of the money in circulation invalid.The people of India had to deposit the invalid currency in the banks which came along with the restrictions placed on cash withdrawals. In other words, restrictions were placed on the convertibility of domestic money and Bank deposits.

Meaning of Demonetization

• Demonetization is a process of stripping a currency unit of its status as alegal tender. In simple words, when the Government demonetized the 500 and 1000 rupees notes, they were no longer valid as legal currency.
• Usually, a new currency replaces the old currency unit/s.
• In India, this is not the first instance of demonetization. In 1946, the Reserve Bank of India had demonetized Rs. 1,000 and Rs. 10,000 currency notes which were then under circulation.
• In 1954, the Government introduced new currency notes of Rs. 1,000, Its. 5,000, and Rs. 10,000.
• Further, these notes were demonetized in 1978 when the Morarji Desai Government decided to curb illegal transactions and anti-social activities

Reasons to Government demonetize 500 and 1000 notes in 2016

The Government made many claims with respect to the objectives and outcomes of the demonetization scheme in 2016. These were:

1. It will plug financing to terrorists

2. It will help unearth black money

3. The unearthed black money will also expand the fiscal space of the government

4. It will help reduce interest rates in the banking system

5. It will help formalize India’s informal economy, reduce the extent of cash transactions, and help in the creation of a less-cash economy

The government offered several incentives to induce people to use digital transactions too.

Possible Benefits of Demonetization

The aim of demonetization was to curb corruption, counterfeiting the use of high denomination notes for illegal activities; and especially the accumulation of ‘black money’ generated by income that has not been declared to the tax authorities.

•Increased Savings – When currency is demonetized, people tend to deposit their cash with a bank and store less physical currency at home. This helps them save more.

• Lower lending rates With currency demonetization, money moves from people to banks and financial institutions. Therefore, there is a better circulation of money. Further, banks and financial institutions have a lower cost of funds which translates into lower lending rates.

• Better economy – Since demonetization induces people to deposit their cash with the banks, there is a higher circulation of money in the economy The government receives more taxes and can undertake more development projects. Eventually, this leads to a better-perlbrming economy.

• Curbing anti-social activities – Usually, anti-social elements like smugglers or terrorists use cash as a mode of transaction. When the government decided to demonetize 500 and 1000 rupees notes, they were the highest denomination notes in circulation. By demonetizing them, the government forced these anti-social units to find ways to get rid of the old notes. This allowed the government an opportunity to get a better control over the unaccounted money in the economy and curb anti-social activities.

• Reducing counterfeit currency notes During demonetization, people deposit all old notes with banks who check if the notes are genuine or counterfeit before accepting them. Therefore, this allows the government to weed out counterfeit notes circulating in the market.

Features

• Demonetization is viewed as a tax administration measure.
• Cash holdings arising from declared income was readily deposited in banks and exchanged for new notes.
• But those with black money had to declare their unaccounted wealth and pay taxes at a penalty rate.
• . Demonetization is also interpreted as a shift on the part of the government indicating that tax evasion will no longer be tolerated or accepted
•  Demonstration also led to tax administration channelizing savings into the formal financial system.
• Though, much of the cash that has been deposited in the banking system is bound to be withdrawn but some of the new deposits schemes offered by the banks will continue to provide base loans, at lower interest rates.
•  Another feature of demonetization is to create a less-cash or cash-lite economy, i.e., channeling more savings through the formal financial system and improving tax compliance.

Though there are arguments against this as digital transactions require use of cell phones for customers and Point-of

Sale (PoS) machines for merchants, which will only work if there is internet connectivity.

On the contrary, these disadvantages are Counterbalanced by an understanding that it helps people into the formal Digitization has broadly impact three sections of society: The poor, who are largely outside the digital economy; the less largely outside the digital economy; the less affluent, who are becoming part of the digital economy who have been covered under Jan Dhan Accounts and Rupay cards, and the affluent, who are fully conversant with digital transactions

GOODS AND SERVICE TAX (01. July 2017)

• Introduction of Goods and Services Tax (GST) will indeed be an important perfection and the next logical step towards a widespread indirect tax reforms in India.
• As per, First Discussion Paper released by the Empowered Committee of the State Finance Ministers on 10.11.2009, it has been made clear that there would be a “Dual GST” in India, i.e. taxation power lies with both by the Centre and the State to levy the taxes on the Goods and Services.
• Constitutional Amendment: While the Centre is empowered to tax services and goods upto the production stage, the States have the power to tax sale of goods.
• The States do not have the powers to levy a tax on supply of services while the Centre does not have power to levy tax on the sale of goods.
• Thus, the Constitution does not vest express power either in the Central or
  State Government to levy a tax on the supply of goods and Services’.
• Moreover, theConstitution also does not empower the States to impose tax on imports.
• Therefore, it is essential to have Constitutional Amendments for empowering the Center to levy tax on sale ofgoods and States for levy of service tax and tax on imports and other consequential issue

What is GST?

‘G’-Goods

‘S-Services

T-Tax

Goods and Service Tax (GST) is a comprehensive tax levy on manufacture, sale and

consumption of goods and service at a national level under which no distinction is made

between goods and services for levying of tax. It will mostly substitute all indirect taxes levied

on goods and services by the Central and State governments in India. GST is a tax on goods and

services under which every person is liable to pay tax on his output and is entitled to get inputtax credit (ITC) on the tax paid on its inputs(therefore a tax on value addition only) and ultimately the final Consumer shall bear the tax”.

Types of GST

There are three kinds of taxes under the GST:-SGST, CGST, and IGST1. SGST- State Goods and Service Tax is the part of tax diverted to the state government which is credited to revenue department of state government.

This is generally equivalent to CGST. This compensates the loss of existing VAT or Sales Tax revenue to state government. In the easi of local sales, 50% quantum of tax amount under GST is diverted to GST tax.

2. CGST:-Central Goods and Service Tax is the share of GST tax diverted to revenue department of central government and is also equivalent to SGST.

This share of tax compensates the loss of existing excise duty and service tax to the central government. In the case of local sales, balanc 50% quantum of GSTI transferred to CGST.

3.IGST:-Integrated Goods and Services Tax is levied when inter-state sales and purchase is make. One part of this tax transferred to central government and another to state governmeni to whom goods and services belong. The IGST is charged only in case of inter-state sales or when transactions between two states involved.

OBJECTIVES OF GST:

• One of the main objective of Goods & Service Tax (GST) would be to eliminate the double taxation i.s. cascading effect of taxes on production and distribution cost of goods and services.
• The exclusion of cascading effect i.n. tax on tax till the level of final consumers will significantly iwprove the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. introduction of a GST to replace the existing multiple tax structure of Centre and State taxes is not only desirable but imperative.
• Integration of various taxes into a GST system would make it possible to give full credit for inputs taxes Iallected. GST, being a destination-based consumption tax based on VAT principle.

Worldwide GST:

France was the first Country to introduce GST in 1954. Worldwide, Almost 150 countries have

introduced GST in one or the other form since now. Most of the countries have a unified GST

system. Brazil and Canada follow a dual system.

Tax Rates under GST in India

• GST rates are divided into five categories which are 0% , 5%, 12%, 18%, 28%. All the basic need requirement goods are pleased in 0% category like food grains, bread, salt, books etc.
• Goods like paneer, packed food, tea coffee etc are placed under 5% category.
• Mobiles, sweets, medicine, are under 12%. Al types of services are under 18% category.
• All other remaining luxury items are placed under the last head of 28%.
• Petrol, gas, crude oil, diesel etc, are still out from the criteria of GST.

Impact of GST

• In the case of indirect taxes, the burden was on end customer or consumer.
• But due to the implementation of one tax in the whole country the overall cost of production of all goods will be reduced but on the other hand in case services, it will increase after the implantation of GST but CST gets abolished which ultimately reduces the cost of goods. Currently, we pay 30 35% tax on a commodity.
• In the case of sonic goods, direct and indirect taxes imposed by government raise its cost’ upto 30%. After the implementation of GST, it will reduce.
• The GST also reduces the cascading effect of tax which helps in making the trade simple and reduces the tax Burden of Entrepreneurs

Conclusion of GST

• Implementation of GST is one of the best decision taken by the Indian government.
• For the same reason, July 1, 2017 was celebrated as Financial Independence day in India when all the Members of Parliament attended the function in Parliament House.
• The transition to the GST regime which is accepted by 159 countries would not be easy. Confusions and complexities were expected and will happen.
• India, at some point, had to comply with such regime, Though the structure might not be a perfect one but once in place, such a tax structure will make India a better economy favorable for foreign investment. Until now India was a union of 29 small tax economies and 7 union territories with different levies unique to each state.
• It is a much accepted and appreciated regime because it does away with multiple tax rates by Centre and States.
• And if you are doing any kind of business then you should register for GST as it is not only going to help Indian government but will help you also to track your business weekly as in GST you have to make your business activity statement each work.