[CHAPTER-3]

[LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN

APPRAISAL]

INTRODUCTION
Since independence, India followed the mixed economic system, by combining the
advantages of the market economic system (capitalist economy) with those of the planned
economic system (socialist economy).

But in reality, the public sector dominated the control and regulation of our economy and
private sector was ignored.

There was a huge investment in the public sector and very low investment in the private
sector.

The dominance of public sector for about 4 decades led to establishment of various rules and
laws, which hampered the process of growth and development.

According to some scholars, the increasing role of public sector has helped Indian economy
to:

 Achieve growth in savings

 Develop a diversified industrial sector
 Achieve food security through sustained expansion of agricultural output

REASONS FOR ECONOMIC REFORMS

The economic condition of India in the year 1991 was very miserable. It was due to the
cumulative effect of number of reasons.

The needs for making major economic reforms in the country:

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 Poor performance of public sector:
In the 40 years period (1951-90), public sector was assigned an important role to work for the
economic development of India.
However, except for few public enterprises, the overall performance was very disappointing.
Considering the huge losses incurred by a good number of public sector enterprises, the
Government recognized the need for making necessary reforms.

Deficit in balance of payment (BOP):

Deficit in BOP arises when foreign payments for imports exceed foreign receipts from
exports.
Even after imposing heavy tariffs and fixing quotas, there was a sharp rise in imports.

On the other hand, there was slow growth of exports due to low quality and high prices of
Indian goods in the International market.

Inflationary pressures:
There was a consistent rise in the general price level in the economy due to increase in
money supply and shortage of essential goods.

Fall in foreign exchanging reserves:

In 1991, foreign exchange reserves fall to the lowest level and it led to the foreign exchange
crisis in the country.
Foreign exchange reserves declined to a level that was not adequate:
To finance imports for more than two weeks; and
To pay the interest that needs to be paid to International lenders.

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 Huge burden of debts:
The expenditure of the Government was much higher than revenue.

As a result, Government had to borrow money from banks, public and from the International
financial institutions.

Inefficient Management:
The origin of the financial crisis can be traced from the inefficient management of the Indian
economy.

The Government was not able to generate sufficient revenue from internal sources such as
taxation, running of public sector enterprises etc.

Government expenditure began to exceed its revenue by such large margins that it became
unsustainable.

At time, the foreign exchange borrowed from other countries and international financial
institutions was spent on meeting consumption needs.

Crisis of 1991 forced India for Financial help from IMF and World Bank
To manage the economic crisis of 1991, Indian Government approached the International
Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the
International Monetary Fund (IMF) and received dollar 7 billion as loan.

For availing the loan, these International agencies expected India to liberalise and open up the
economy by:

Removing restrictions on the private sector

Reducing the role of Government in many areas
Removing trade restrictions
India agreed to the conditions of World Bank and IMF and announced the New Economic
Policy.

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 THE NEW ECONOMIC POLICY
The New Economic Policy (NEP) was announced in July 1991. It consisted of wide range of
economic reforms.

The main aim of the policy was to create a more competitive environment in the economy
and remove the barriers to entry and growth of firms.

The New Economic Policy can be broadly classified into two kinds of measures:

Stabilisation measures: They refer to short-term measures which aim at:

Correcting weakness of the balance of payments by maintaining sufficient foreign

exchange reserves
 Controlling inflation by keeping the rising prices under control

Structural reform measures: They refer to long-term measures which aim at:

Improving the efficiency of the economy

Increasing international competitiveness by removing the rigidities in various segments of
the Indian economy.

MAIN POLICIES OF NEW ECONOMIC POLICY

The Government initiated a variety of policies which fall under three heads:

Liberalisation
Privatisation
Globalisation

Liberalisation, Privatisation and Globalisation or ‘LPG’ are the supporting pillars, on which the
structure of new economic policy of our government has been erected and implemented
since 1991.

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 LIBERALISATION

Prior to 1991, there were large numbers of Government restrictions in India in the areas of
licensing, import and export trade, dealings in foreign exchange, etc.

In July 1991, a package of economic reforms was announced, which marked the beginning of
process of ‘Liberalisation’ in India.
Liberalisation means removal of entry and growth restrictions on the private sector.
It 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 is allowed to run on commercial lines.

The purpose of Liberalisation was:

 To unlock the economic potential of the country by encouraging private sector multinational
corporation 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:

 Industrial sector reforms

 Financial sector reforms
 Tax reforms
 Foreign sector reforms
 Trade and investment policy reforms

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 INDUSTRIAL SECTOR REFORMS
In order to make necessary reforms in the industrial sector, the Government introduced its
new industrial policy on July 24, 1991.

The various measures under industrial policy reforms include:

Reduction in
industrial
licensing

Monopolies INDUSTRIAL Decrease

and restrictive SECTOR in role of
trade practices REFORMS public
(MRTP) act sector

De-reservation
under small-
scale
industries

Reduction in Industrial licensing:

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

No license are needed [To set up new units] or [Expand or diversify the existing 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, exclusively reserved for the public sector, reduced from 17 to
following 3 industries:

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  [Defence Equipment],
 [Atomic energy generation],
 [Railways Transport]

De-reservation under small-scale industries:

Many goods produced by small scale industries have been de-reserved.
The investment ceiling on plant and machinery for small undertakings enhanced to rupee
one crore.
In many industries, the market was allowed to determine the prices through forces of the
market (and not by directive policy of the Government)

Monopolies and Restrictive Trade Practices (MRTP) Act:

With the introduction of liberalization an expansion schemes, the requirement for large
companies, to seek prior approval for expansion, establishment of new undertakings,
merger, amalgamations, etc. were eliminated.

FINANCIAL SECTOR REFORMS

Financial sector includes financial institutions like commercial banks, investment banks,
stock exchange operations and foreign exchange market.

The financial sector in India is controlled by the Central Bank- Reserve Bank of India (RBI).

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 The reforms introduced under financial sector are:

Changing
in role of
RBI

Ease in FINANCIAL Origin of

Expansion SECTOR private
process REFORMS banks

Increase in
limit of
foreign
investment

Changing in role of RBI:

The role of RBI was reduced from regulator to 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, India as well as
foreign.

For example; Indian banks like ICICI and Foreign Banks like HSBC increased the competition
and benefited the consumers through lower interest rates and better services.

Increase in the limit of foreign investment:

The limit of foreign investment in banks was raised to around 74%. Foreign Institutional
Investors (FII) such as merchant bankers, mutual funds and pension funds were now allowed
to invest in India financial markets.

Though banks have been given permission to generate resources from India and abroad,
certain aspects have been retained with the RBI to safeguard the interests of the account-

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holders and the nation

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 Ease in expansion process:
Banks were given freedom to set up new branches (after fulfillment of certain conditions)
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 tax: 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: refers to those taxes which affect the income and property of persons through
their consumption expenditure.

They are generally imposed on goods and services.

For example; Goods and Services Tax (GST)
The major Tax reforms made are:

Reduction in taxes:

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

Reforms in indirect taxes:

Considerable reforms have been made in indirect taxes to facilitate establishment of
common national market for goods and commodities.
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 Simplification of process:

In order to encourage better compliance in the part of taxpayers, many procedures have been
simplified.

The Goods and Services Tax Act was passed in the parliament on 29th March, 2017 to simplify
and introduce a unified indirect tax system in India.
The Act came into effect on 1st July, 2017.
This is introduced expected to generate additional revenue for the Government, reduce tax
evasion and create ‘one nation, one tax one market’.

FOREIGN EXCHANGE REFORMS

The important reforms were made in the foreign exchange market are:

Devaluation of rupee:
It refers to reduction in the value of domestic currency by the Government.
To overcome Balance of Payments crisis, the rupee was devalued against foreign currency.
This led to an increase in the inflow of foreign exchange.

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

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.

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

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 2001.

Removal of export duties:

Export duties were removed to increase the competitive position of Indian goods in the
International markets.

Reduction in Import duties:

Import duties were reduced to improve the position of domestic goods in the foreign
market.

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 more competitive.

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

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 It 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.
Privatisation can be done in two ways:

Transfer of ownership and management of public sector companies from the Government to
the Private sector;
Privatisation of the public sector undertakings (PSUs) by selling off part of the equity of PSUs
to the public, this process is known as disinvestment.
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.

Maharatnas, Navratnas and Miniratnas

The government also made attempts to improve the efficiency of public sector undertakings by giving them
autonomy in taking managerial decisions.
 For instance, some PSUs have been granted special status as navratnas and miniratnas.
 In order to infuse professionalism and enable PSU's to compete more effectively in the liberalised global
environment, government started granting 'Navratnas' status to PSUs.
 They were given greater managerial and operational autonomy in taking various decisions, to run the
company efficiently and to increase their profits.
 The granting of navratna status resulted in better performance of these companies.
 Apart from this, other profit-making enterprises were granted greater operational, financial and
managerial autonomy and they were referred as 'Miniratnas. As on September, 2023, there are:
» 13 Maharatnas {like Indian Oil Corporation Limited, Steel Authority of India Ltd., etc.};
» 14 Navratnas {like Bharat Electronics Limited, Container Corporation of India Limited, etc.);
» 60 Miniratnas I CPSEs {i.e. Category I of Central Public Sector Enterprises (CPSEs)} (Like Airports
Authority of India, Antrix Corporation Limited, etc.}.
» 11 Miniratnas II CPSEs {Like Bharat Pumps & Compressors Limited, Engineering Projects (India)
Limited, etc.}.

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 GLOBALISATION

It means integrating the National economy with the world economy through removal of
barriers on International trade and capital movements.
It 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.

It involves creation of networks and activities transcending economic, social and geographical
boundaries.
In short, globalisation aims to create a borderless world.

Changes made by the Globalisation of the Indian economy

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.

In respect of foreign technology agreements, automatic permission is provided in high

priority industry upto a sum of rupees 1 crore.

No permission is now required for hiring foreign technicians or for testing indigenously
developed technology abroad.

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.

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.

A new five year export- import policy (1992-97) was announced by the Government to
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 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.
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.

Positive and Negative Traits of Budget

The process of globalization through liberalisation and privatisation policies has produce
positive as well as negative results, both for India and other countries.

In Favour of Globalisation:

Globalisation resulted in:

 Greater access to global market
 Advanced technology
 Better further prospects for large industries of developing countries to become important
players in the International arena.

Against Globalisation:

Globalisation has been criticized by some scholars because according to them:

 Benefits of Globalisation accrue more to developed countries as they are able to expand
their markets in other countries.
 Globalisation compromises the welfare and identify of people belonging to poor countries.
 Market-driven globalization increases the economic disparities among nations and people.

OUTSOURCING

It refers to contracting out some of its activities to a third party which were earlier performed
by the organization.
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For example, many companies have started outsourcing security service to outside agencies on
a contractual basis.
It is one of the important outcomes of the globalisation 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.

Some of the services outsourced to India include:

 Voice-based business process (known as BPO or Call centres);
 Record keeping
 Accountancy
 Banking services
 Music recording
 Film editing
 Book transcription
 Clinical advice, etc.

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
organization, 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 organization to the GATT.

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The WTO agreements cover trade in good as well as services, to facilitate international trade.

At present, there are 164 member countries of WTO and all the members are required to
abide by laws and policies framed under WTO rules.
As an important member of WTO, India has been in the forefront of framing fair global rules,
regulations and advocating the interests of the developing world.

India has kept its commitments made to the WTO. India has taken reasonable steps to
liberalise trade by removing quantitative restrictions on imports and reducing tariff rates.

Some major functions of WTO:

 To facilitate International trade (both bilateral and multi-lateral trade) through removal of
tariff as well as non-tariff barriers
 To establish a rule-based trading regime, in which nations cannot place arbitrary restrictions
on trade;
 To enlarge production and trade of services
 To ensure optimum utilization of world resources
 To protect the environment

Should India be a member of WTO?

Some scholars are of the view that there is no use for a developing country like India to be
member of the WTO.

According to them:
 Major volume of International Trade occurs among the developed nations
 Developing countries are being cheated as they are forced to open up their markets for
developed countries and are not allowed access to markets of developed countries.
AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS)

Economic reforms created mixed reactions at different levels. Let us discuss some of the
positive and negative aspects of economic reforms.

Arguments in Favour of Economic Reforms

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 The following are some of the important arguments advanced in favor of economic reforms:

Increase in rate of economic growth:

The growth in GDP was 5.6% during 1980-91. During 2018-19, growth in GDP is estimated at
7.2% as compared to growth rate of 6.7% in 2017-18.

O During the reform period, the growth of agriculture has declined and industrial sector
reported fluctuations, whereas, growth of services sector has gone up.
This indicates that the growth is mainly driven by the growth in the service sector.

O During 2012-15, there has been a setback in the growth rates of different sectors.
Agriculture recorded a high growth rate during 2013-14, but witnessed the highest ever
growth rate of 9.8% in 2014-15.
The industrial sector witnessed a steep decline during 2012-13, but began to show a positive
growth thereafter.

Inflow of foreign investment:

The opening up of the economy has led to the rapid increase in foreign investment (FDI).
The foreign investment (FDI and foreign institutional investment) increased from about US
dollar 100 million in 1990-91 to US Dollar 30 billion in 2017-18.

With launch of ‘Make in India’ initiative in September 2014, Foreign Direct Investment (FDI)
Policy was further liberalised.
Due to this reason, FDI inflow in India increased by 48%

Rise in foreign exchange reserves:

There has been an increase in the foreign exchange reserves from about US Dollar 6 billion in
1990-91 to about US Dollar 413 billion in 2018-19, which increases to US Dollar 590.70
billion(as on 22nd September, 2023 as per RBI).
India is one of the largest foreign exchange reserve holders in this world.

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 Rise in exports:

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

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 of 17% in 1991 to around 5.48% in 2015-16.
For year 2023-24, RBI estimates indicate that inflation will be around 5.1%.

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.

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.

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

1. 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 Green Revolution), has been reduced in the reform
period.
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 2. Removal of subsidy: Removal of fertilizer subsidy increased the cost of production, which
adversely affected the small and marginal farmers.

3. Liberalisation and reduction in import duties: This sector has been experiencing a number
of policy changes such as:
Reduction in import duties on agricultural products
Removal of minimum support price
Lifting of quantitative restrictions on agricultural products
All these policies adversely affected the Indian farmers as they now have to face increased
international competition.

4. Shift towards cash corps: 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.

Low level of industrial growth:

Industrial Growth recorded a slowdown due to the following reasons:

1. 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 manufactures started
facing competition from imports.
For example, Cheaper Chinese goods pose a big threat to Indian manufactures.

2. Lack of infrastructure facilities: The infrastructure facilities, including power supply, have
remained inadequate due to lack of investment.
3. 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.

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 Ineffective disinvestment policy:

The Government has always fixed a target for disinvestment of Public Sector Enterprises
(PSEs).
For instance, in 1991-02, it was targeted to mobilise Rs 2,500 crore through disinvestment.
the government was able to mobilise Rs 3,040 crore more than the targeted. In 2017-18,
the target was Rs 1,00,000 crore, whereas the achievement was about Rs 1,00,057 crore
However, according to some scholars, the disinvestment policy of Government was not
successful because:
 The assets of PSEs were undervalued 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 PSEs and building social
infrastructure in the country.

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.

Spread of consumerism:

The new policy has been encouraging a dangerous level of consumerism by encouraging the
production of luxuries and items of superior consumption.
Unbalanced growth:

Growth has been concentrated only in some select areas in the services sector, such as
telecommunication, information technology, finance, entertainment, travel and hospitality
services, real estate and trade, rather than vital sectors, such as agriculture and industry,
which provide livelihood to millions of people in the country.

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 DEMONETISATION
On the 8th of November, 2016, the Government of India made an announcement with
profound implications for the Indian economy. It was decided to demonetise high value
currency notes of denomination of Rs 500 and Rs 1,000 with immediate effect, ceasing to
be legal tender, except for a few specified purposes. Demonetisation is the act of removing
a currency unit of its status as Legal Tender.
These notes accounted for almost 86% of the country's cash supply. As per the scheme,
people had to deposit the invalid currency in the banks and restrictions were also placed on
cash withdrawals. In other words, restrictions were placed on the convertibility of domestic
money and bank deposits. The aim of demonetisation 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.
On May 19, 2023, RBI announced to withdraw Rs 2,000 currency notes from circulation and
general public were encouraged to deposit or exchange the Rs 2000 bank notes.

FEATURES OF DEMONETISATION
1. Demonetisation is viewed as a 'Tax Administration Measure'. Cash holdings arising
from declared income was readily deposited in banks and exchanged for new notes.
However, people holding black money had to declare their unaccounted wealth and
pay taxes at a penalty rate.
2. Demonetisation is also interpreted as a shift on the part of government indicating that
Tax Evasion will no longer be tolerated or accepted.
3. Demonetisation also led to channelizing savings into the formal financial system.
Though, much of the cash 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.
4. Demonetisation also aims to create a less-cash or cash-lite economy, i.e., channeling
more savings through the formal financial system and improving tax compliance.
 However, digital transactions require internet connectivity as they need cell
phones for customers and Point-of-Sale (PoS) machines for merchants.
 On the contrary, these disadvantages are counterbalanced by an understanding
that it helps people into the formal economy, thereby increasing financial
saving and reducing tax evasion.

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 IMPACT OF DEMONETISATION
Money/Interest rates i. Decline in cash transactions
ii. Bank deposits increased
iii. Increase in financial savings
Private wealth Declined since some high demonetised notes were not returned
and real estate prices fell.
Public sector wealth No effect.
Digitization Digital transactions amongst new users and use of RuPay Cards
and Aadhar Enabled Payment System (AEPS) increased.
Demonetisation has increased the popularity of e-wallets.
Real estate Prices declined.
Tax collection Rise in income tax collection because of increased disclosure.

GOODS AND SERVICE TAX (GST)

GST or "Goods and Services Tax" is a comprehensive Indirect Tax which has replaced many
Indirect Taxes in India. The Goods and Services Tax Act was passed in the Parliament on 29th
March, 2017. The Act came into effect on 1st July, 2017. It is a comprehensive, multi-stage,
destination-based tax that is levied on every value addition. GST has been identified as one of
the most important tax reforms post-independence.
The Government of India implemented GST following the credo of 'One Nation and One Tax'
and wanting a unified market in order to ensure the smooth flow of goods and services across
the country.

Types of Taxes under GST

(i) Central Goods and Services Tax (CGST): It is the GST levied on the Intra-State' supply
of goods or services by the Centre.
(ii) State Goods and Services Tax (SGST): It is the GST levied on the 'Intra-State' supply of
goods or services by the State (including Union Territories with legislature).
(iii) Integrated Goods and Services Tax (IGST): It is the GST levied on the 'Inter-State'
supply of goods or services and is collected by the Centre. IGST is equivalent to the sum
total of CGST and SGST.

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 Input Tax Credit under GST
Input Tax Credit means reducing the taxes paid on inputs from taxes to be paid on
output. When any supply of services or goods are supplied to a taxable person, the
GST charged is known as Input Tax. The supplier at each stage is permitted to avail
credit of GST paid on the purchase of goods and / or services and can set off this
credit against the GST payable on the supply of goods and services to be made by him.
Thus, the final consumer bears the GST charged by the last supplier in the supply
chain, with set-off benefits at all the previous stages. Hence, the tax will be levied only
on the value added, which results in avoiding double taxation.
For example, if tax payable by a manufacturer on the output, i.e. final product is Rs
450 and he has already paid tax of Rs 300 on input, i.e. purchases, then he can claim
'Input Credit' of Rs 300 and he needs to deposit only Rs 150 in taxes.

Inputs (A, B and C)

GST paid on purchase of A

input A = Rs 70
GST paid on purchase of B OUTPUT GST on Output = Rs 450
input B = Rs 130
GST paid on purchase of C
input C = Rs 100

GST to be paid by manufacturer = GST on output – GST on inputs = Rs 450 – (79+130+100) = 150

Key Features of GST

1. Applicability of GST: The territorial spread of GST is the whole country.
2. Applicable on Supply of Goods and Services: GST is applicable on the 'supply' of goods or
services as against the earlier concept of tax on the manufacture or sale of goods or on the
provision of services.
3. Consumption Based Tax: It is based on the principle of destination-based consumption
tax against the earlier principle of origin-based taxation.
4. ⁠
GST on Imports: Import of goods and services is treated as inter-State supplies and
would be subject to IGST in addition to the applicable customs duties.
5. GST Rates: CGST, SGST and IGST are levied at rates mutually agreed upon by the Centre
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 and the States under the aegis of the GST Council. There are four tax slabs namely 5%, 12%,
18% and 28% for all goods or services. Exports and supplies to SEZ are zero-rated.
6. Payment of GST: There are various modes of payment of tax available to the taxpayer,
including Internet banking, debit/credit card and National Electronic Funds Transfer
(NEFT)/Real Time Gross Settlement (RTGS).

REVISION MANTRA
REASONS FOR ECONOMIC REFORMS

1. POOR PERFORMANCE OF PUBLIC SECTOR- Except for few public enterprises, the overall
performance was very disappointing. Considering the huge losses by a good number of
public sector enterprises.
2. DEFICIT IN BOP- Even after imposing heavy tariffs and fixing quotes, there was a sharp
rise in imports.
3. INFLATIONARY PRESSURES- There was a consistent rise in the general price level in the
economy due to increase in money supply and shortage of essential goods.

4. FALL IN FOREIGN EXCHANGE RESERVES- Foreign exchange fell to the lowest level and it
led to the foreign exchange crises in the country.
5. HUGE BURDEN OF DEBTS- Govt. had to borrow money from banks, public and from
international financial institutions as there was heavy expenditure by govt.
6. INEFFICIENT MANAGEMENT- Govt. was not able to generate sufficient revenue from
internal sources such as taxation, running of public sector enterprises, etc. while the
expenditure was higher to maintain them.

THE NEW ECONOMIC POLICY

1. STABLISATION MEASURES- Refers to short-term measures which aim to (i) Correcting

weakness of BOP (ii) Controlling inflation
2. STRUCTURAL REFORM MEASURES- Refers to long-term measures which aim to (i)
Improving the efficiency of the economy (ii) Increasing international competitiveness

MAIN ECONOMIC REFORMS

1. LIBERALISATION- Refers to removal of entry and growth restrictions on the public sector
2. PRIVATISATION- Refers to transfer of ownership, management and control of public

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