Economic Policy

Module 3
 New economic policy of India
• Economic policy refers to the actions that
governments take in the economic field. It covers the
systems for setting levels of taxation, government
budgets, the money supply and interest rates as well
as the labor market, national ownership, and many
other areas of government interventions into the
economy.
 New economic policy of India
• Industrial Policy - The stress of these policies is on the public sector
of India in 1948. This policy is handled by the development and
regulation act 1951. 1973’s FERA handles the foreign investment in
India. After the 1991’s economic crisis these governments took strong
steps in order to make the industries in India and also introduced the
industry more competitive.

• Trade Policy - The foreign trade policy of India focuses on enhancing

the share of India in universal trade from 2.1% to 3.5%. Most
importantly, the trade of this country India became $900 billion in the
financial year of 2020.
 New economic policy of India
• Monetary Policy - This policy in India majorly deals with the
monetary authority of this country and it includes the central bank.
It handles the allocation and also the supply of money, rate of
interest in order to present the high growth of the economy in
India.
• Fiscal Policy - This policy controls taxation and the decision of
expenditure from the perspective of the government of India. This
government takes strong steps to strengthen the control of the
expenditure of this country. Through the initiative of this
government, the contribution of the resources and the principles of
the market have been improved.
 New economic policy of India
• Indian Agricultural Policy - This policy mainly includes the
reformation of the land in India. The strategies regarding
agriculture and the use of innovative technology in agriculture are
also the concern of this policy. Most importantly, the policy of
prices of the goods, security and safety of the foods, and also the
public distribution system, service regarding non-firms are also an
integral part of this policy.

• National Agricultural Policy - Through this policy, the annual

development rate regarding agriculture has been increased.
Reformation of land includes reform of tenancy, advancement of
land-lease markets, and the rights of women regarding land. This
policy also aims to bring equal development regarding the
agriculture of the country of India.
 New economic policy of India

• Industrial Policies - Regarding these policies, the industrial policy resolution

was taken in 1948 to add democratic socialism to the structure of the economy

in India. The new policies regarding industries suggest the expansion of the

responsibilities of the states under India, decrease of the threats of

nationalization and all.

• International Trade Policy - This policy includes free trade in India. Free

trade suggests the smooth trade of a country. In the mid 19th century, the

government of India modified the trade international trade policies. The main

aim of these policies is to make the economy of the country India strong.
 New economic policy of India

• Exchange Rate Management Policy - This policy is also known

as the pegged exchange rate. This policy includes the flexibilities
in the exchange rate. There is the upper and lower limit of the
exchange rate. If the up and down rate is 1%, then the rate of
exchange is in a normal state. The main purpose of these policies
regarding exchange rate is to assure stability regarding foreign
trade and capital movement.

• EXIM Policy - EXIM policy suggests the export and import

policies in India. Through these policies, the guidelines have been
fixed regarding export and import. The government of this country
India introduced these policies for five years in the control of the
development and regulation act 1992 regarding foreign trade
 Pre-1991 economic scenario in India
• Indian economic policy after independence was influenced by the
colonial experience (which was seen by Indian leaders as exploitative in
nature) and by those leaders' exposure to Fabian socialism.

• Nehru, and other leaders of the independent India, sought an alternative

to the extreme variations of capitalism and socialism.

• In this system, India would be a socialist society with a strong public

sector but also with private property and democracy. As part of it, India
adopted a centralized planning approach.

• Policy tended towards protectionism, with a strong emphasis on import

substitution, industrialization under state monitoring, state intervention
at the micro level in all businesses especially in labour and financial
markets, a large public sector, business regulation
 Drawbacks of Pre-1991 economic policy
1. Licence raj: The “Licence Raj” or “Permit Raj” was the elaborate
system of licences, regulations and accompanying red tape that were
required to set up and run businesses in India between 1947 and
1990.

2. Import substitution: Import substitution industrialization (ISI) is a

trade and economic policy which advocates replacing foreign
imports with domestic production. ISI is based on the premise that a
country should attempt to reduce its foreign dependency through
the local production of industrialized products and was intended to
promote self reliance. But this meant the monopoly of indian
industries and lack of incentive for them to improve the quality of
products which hampered consumer interests.
 The New Economic Policy?
The New Economic Policy (NEP) is a policy introduced in India in
1991 aimed at restoring macroeconomic stability. The NEP was
designed to address the crisis of stagflation, which was a result of the
simultaneous increase in prices for both food and manufactured
goods. The NEP consisted of several reforms, including the
liberalisation of the financial sector, the reduction of import duties,
and the removal of subsidies on food, fuel, and fertilisers.
• The NEP was successful in restoring macroeconomic stability and
encouraging economic growth. In 2001, the government
introduced the Multi-Year Programme (MAP) which aimed to
achieve even greater economic growth. The MAP was successful
in achieving growth rates of 10% to 12%.
 Goals of The New Economic Policy
The new economic policy was made in India through privatization,
liberalization and globalization. It refers to the relaxation of many
tariffs, opening the market for foreign players. It also refers to
lessening the burden of taxes for the economic growth of India. The
main motto was to boost the Indian economy through globalization.
• The New Economic Policy was built to reduce the rate of inflation
• To attain economic stabilization. To mould existing markets into a
market economy by withdrawing unnecessary restrictions.
• To allow the international flow of capital, technology, goods, human
resources, and services without any limitations.
Monetary Policy and Fiscal Policy
• Monetary policy and fiscal policy are two different tools that have an
impact on the economic activity of a country.

• Monetary policies are formed and managed by the central banks of a

country and such a policy is concerned with the management of
money supply and interest rates in an economy.

• Fiscal policy is related to the way a government is managing the

aspects of spending and taxation. It is the government’s way of
stabilizing the economy and helping in the growth of the economy.

• Governments can modify the fiscal policy by bringing in measures

and changes in tax rates to control the fiscal deficit of the economy
Monetary Policy - Meaning & Objectives
Reserve Bank of India states that,
• Monetary policy refers to the use of instruments under the
control of the central bank to regulate the availability, cost and
use of money and credit.

Objectives
• Maintaining price stability
• Ensuring adequate flow of credit to the productive Sectors of
the economy to support economic growth
• Rapid economic growth
• Balance of payment equilibrium
• Full employment
• Equal income distribution
 Monetary Policy - Methods
The RBI aims to achieve its objectives of economic growth and control of

inflation through various methods. These methods can be grouped as:

1. General/ quantitative methods These methods maintain and control

the total quantity or volume of credit or money supply in the economy.

– Open Market Operations - Open market operations indicate the buying/

selling of govt. securities in the open market to balance the money supply in

the economy

– Deployment of Credit - The RBI has taken various measures to deploy credit

in different sector of the economy. The certain %age of the bank credit has

been fixed for various sectors like agriculture, export etc

 Monetary Policy – instruments
– Direct Instruments

Cash reserve ratio (CRR) The money supply in the economy is

influenced by CRR. It is the ratio of a bank’s time and demand
liabilities to be kept in reserve with the RBI. The RBI is authorized
to vary the CRR between 3% and 15%.

Statutory liquidity ratio (SLR): Under SLR, banks have to invest

a certain percentage of its time and demand liabilities in govt.
approved securities. The reduction in SLR enhances the liquidity of
commercial banks.
 Monetary Policy – instruments
Indirect Instruments
– Liquidity Adjustment Facility (LAF): – Consists of daily infusion
or absorption of liquidity on a repurchase basis, through repo
(liquidity injection) and reverse repo (liquidity absorption) auction
operations, using government securities as collateral.

– Repo Rate: – Repo rate is the rate at which the RBI lends shot-term
money to the banks against securities. When the repo rate increases
borrowing from RBI becomes more expensive.

– Reverse Repo Rate: – The rate at which RBI borrows from

commercial banks
 Monetary Policy - Methods

2. SELECTIVE/ QUALITATIVE MEASURES

The RBI directs commercial banks to meet their social
obligations through selective/ qualitative measures. These
measures control the distribution and direction of credit to
various sectors of the economy.
– CEILING ON CREDIT
– MARGIN REQUIREMENTS
– DISCRIMINATORY RATES OF INTEREST
FACTORS AFFECTING MONETARY POLICY

– There exist a non-monetized sector

– Excess of non-banking financial institutions (NBFI)
– Existence of unorganized financial market
– Money not appearing in an economy
– Time lag affects success of monetary policy
– Monetary policy and fiscal policy lacks coordination
 INFLATION
Inflation is broadly understood as the general rise in the prices of
goods and services year on year, inflation is a more complex
phenomena associated with the money supply and currency values.

• Problems caused by Inflation

– High and persistent inflation imposes significant socio-economic
costs.
– High inflation distorts economic incentives by diverting resources
away from productive investment to speculative activities.
– Inflation reduces households saving as they try to maintain the real
value of their consumption.
– If domestic inflation remains persistently higher than those of the
trading partners, it affects external competitiveness through
appreciation of the real exchange rate. The Reserve Bank’s current
assessment suggests that the threshold level of inflation for India is in
the range of 4–6%.
 FISCAL POLICY
• Meaning
– Fiscal policy deals with the taxation and expenditure decisions
of the government. These include, tax policy, expenditure
policy, investment or disinvestment strategies and debt or
surplus management. - Kaushik Basu ( Former Chief
Economic Adviser )

• Objectives Of Fiscal Policy

– Increase in capital formation.
– Degree of Growth.
– To achieve desirable price level.
– To achieve desirable consumption level.
– To achieve desirable employment level.
– To achieve desirable income distribution.
 FISCAL POLICY
Fiscal Policy there are three possible positions

• A Neutral position applies when the budget outcome has neutral

effect on the level of economic activity where the govt. spending
is fully funded by the revenue collected from the tax.

• An Expansionary position is when there is a higher budget deficit

where the govt. spending is higher than the revenue collected
from the tax.

• An Contractionary position is when there is a lower budget deficit

where the govt. spending is lower than the revenue collected from
the tax.
 FISCAL POLICY
• The Two Main instruments of fiscal policy
– Revenue Budget -
• Direct Tax - Individual Income Tax & Corporate Tax.
• Wealth Tax @ 1%
• Tax deducted at source
• Indirect Tax - central excise – GST - customs duty - Educational
cess @ 3%

– Expenditure Budget
• The central government is responsible for issues like national
defense, foreign policy, railways, national highways, shipping,
airways, post and telegraphs, foreign trade and banking.
• The state governments are responsible for other items including,
law and order, agriculture, fisheries, water supply and irrigation,
and public health.
 Fiscal Deficit
• Fiscal Deficit = Total Expenditure (that is
Revenue Expenditure + Capital Expenditure) –
(Revenue Receipts + Recoveries of Loans +
Other Capital Receipts)
 Difference between
Monetary Policy and Fiscal Policy

Particulars Monetary Policy Fiscal Policy

Definition It is a financial tool that is It is a financial tool that is
used by the central banks in used by the central
regulating the flow of government in managing tax
money and the interest rates revenues and policies related
in an economy to expenditure for the benefit
of the economy

Managed By Central Bank of an economy MOF of an economy

Measures It measures the interest It measures the capital
rates applicable for lending expenditure and taxes of an
money in the economy economy
 Difference between
Monetary Policy and Fiscal Policy
Particulars Monetary Policy Fiscal Policy

Impact on Exchange rates improve when It has no impact on the

Exchange rates there is higher interest rates exchange rates

Targets Monetary policy targets Fiscal policy does not

inflation in an economy have any specific target
Impact Monetary policy has an Fiscal policy has an
impact on the borrowing in an impact on the budget
deficit
economy

Focus Area Stability of an economy Growth of an economy

Foreign Institutional
Investors
 Contents
• Foreign Investment
• Need Of Foreign Investment
• Types of Foreign Investment
• What IS FII
• How FII started in India
• Registration Process of FIIs
• Investment Conditions and Restrictions for FIIs
• Entities which can register as FII’s in India
• Salient Features of FIIs
• Why there is need of FII
• Impact of FIIs on Indian Markets
• Advantages of FII
• Disadvantages of FII
 Foreign Investment

• Foreign investment refers to the investments

made by the residents of a country in the
financial assets and production process of
another country.

• The foreign investment is necessary for all

developing nation as well as developed nation
but it may differ from country to country.
 Need Of Foreign Investment
• The developing economies are in a most need of these foreign
investments for boosting up the entire development of the nation
in productivity of the labour, machinery etc.

• The foreign investment or foreign capital helps to build up the

foreign exchange reserves needed to meet trade deficit or we can
say that foreign investment provides a channel through which
developing countries gain access to foreign capital which is
needed most for the development of the nations in the area of
industry, telecom, agriculture, IT etc.
 Types of Foreign Investment
• Foreign direct investment -

Foreign direct investment involves in direct production

activities and in a long and medium term nature.

• Foreign institutional investment -

As far as the FIIs concern it is the short term nature and short

term investments. FIIs invest in financial markets such as

money markets, stock markets and foreign exchange markets.

 What IS FII

• Foreign Institutional Investors means “an institution

established or incorporated outside India which proposes to
make investment India in securities.

• It denotes all those investors or investment companies that are

not located within the territory of the country in which they
are investing.
 How FII started in India

• India opened its stock market to foreign investors in

September 1992.

• Since 1993, received portfolio investment from foreigners in

the form of FII in equities.

• This has become one of the main channels of FII in India for
Foreigners.

• In order to trade in Indian equity market, foreign corporations

need to register with SEBI as FII.
 Registration Process of FIIs
A FII is required to obtain a certificate by SEBI for dealing in
securities. SEBI grants the certificate SEBI by taking into account
the following criteria:
1. The applicant's track record, professional competence, financial
soundness, experience, general reputation of fairness and integrity.

2. Whether the applicant is regulated by an appropriate foreign regulatory

authority.

3. Whether the applicant has been granted permission under the

provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973)
by the Reserve Bank of India for making investments in India as a
Foreign Institutional Investor
 Continued…
Whether the applicant is
a. an institution established or incorporated outside India as a pension
fund, mutual fund, investment trust, insurance company or reinsurance
company

b. an International or Multilateral Organization or an agency thereof or a

Foreign Governmental Agency or a Foreign Central Bank.

c. an asset management company, investment manager or advisor,

nominee company, bank or institutional portfolio manager, established
or incorporated outside India and proposing to make investments in
India on behalf of broad based funds and its proprietary funds in if any
or university fund, endowments, foundations or charitable trusts or
charitable societies.
 Investment Conditions and
Restrictions for FIIs:
A Foreign Institutional Investor may invest only in the following:-
a. Securities in the primary and secondary markets including shares,
debentures and warrants of companies, unlisted, listed or to be
listed on a recognized stock exchange in India.
b. units of schemes floated by domestic mutual funds including
Unit Trust of India, whether listed or not listed on a recognized
stock exchange.
c. Dated Government securities.
d. Derivatives traded on a recognized stock exchange.
e. Commercial paper.
f. Security receipts.
Entities which can register as FII’s in
India
Entities who propose to invest their proprietary funds or
on behalf of “broad based” funds (fund having more than
twenty investors with no single investor holding more
than 10 per cent of the shares or units of the fund) or of
foreign corporate and individuals and belong to any of
categories given below can be registered for Foreign
Institutional Investors (FII’s).
 Continued…
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance companies
• Endowment Funds
• University Funds
• Trustees
• Banks
• Charitable Trusts
• Power Of Attorney Holders
 Salient Features of FIIs:
1. FIIs would be welcomed to make investments under the new guidelines.
2. Investment in all securities traded on the primary and secondary markets
3. FIIs would be required to obtain an initial registration with SEBI to enter the
market nominee companies,
4. Since there are foreign exchange controls in force, FIIs shall also seek various
permissions under FERA from the RBI, both SEBI and RBI registration will
be under a single window approach.
5. FIIs seeking initial registration with SEBI shall be required to hold a
Registration from the securities commission or such other regulatory
organization for the stock market in their country of domicile/incorporation.
6. SEBI’s initial registration would be valid for 5 years.
 Why there is need of FII

• FII flows supplements and augmented

domestic savings and domestic investments
without increasing the foreign debt of our
country.
• Capital inflows to the equity market increase
stock prices, lower the cost of equity capital
and encourage the investment by Indian firms.
 What are Foreign Investors looking
For?
• Good Projects
• Demand Potential
• Revenue Potential
• Political Commitment
• Optimal Risk Allocation Framework
 Impact of FIIs on Indian Markets

• In the past years there has been more than $41

trillion worth of FII funds invested in India.
• The present downfall of the market too is
influenced as these FIIs are taking out some of
their invested money.
 Advantages of FII

• Enhanced flow of equity capital.

• Managing uncertainty and controlling risks.
• Improved Corporate Governance
• Improving Capital Markets
• Equity market development aids economic
development.
• Imparting stability to India’s Balance of Payments
• Reduced cost of equity capital
• Knowledge Flows
• Improvements to market efficiency:
 Disadvantages of FII

• Problems of Inflation
• Problems of small investor
• Adverse impact on exports
• Hot Money
• Volatility and capital outflows
• Price rigging
• Herding and positive feedback trading
• Possibility of taking over companies or backdoor control
• Management control
 WHAT IS FDI
• Foreign direct investment (FDI) is when a company takes controlling
ownership in a business entity in another country. With FDI, foreign
companies are directly involved with day-to-day operations in the other
country. This means they aren’t just bringing money with them, but also
knowledge, skills and technology.

• Generally, FDI takes place when an investor establishes foreign business

operations or acquires foreign business assets, including establishing
ownership or controlling interest in a foreign company.

• Where is FDI made?

• Foreign Direct Investments are commonly made in open economies that
have skilled workforce and growth prospect. FDIs not only bring money
with them but also skills, technology and knowledge.
 FDI in India
• FDI is an important monetary source for India's economic
development. Economic liberalization started in India in the wake of
the 1991 crisis and since then, FDI has steadily increased in the
country. India, today is a part of top 100-club on Ease of Doing
Business (EoDB) and globally ranks number 1 in the greenfield FDI.

• Routes through which India gets FDI

– Automatic route: The non-resident or Indian company does not
require prior nod of the RBI or government of India for FDI.
– Govt route: The government's approval is mandatory. The company
will have to file an application through Foreign Investment Facilitation
Portal, which facilitates single-window clearance. The application is
then forwarded to the respective ministry, which will approve/reject
the application in consultation with the Department for Promotion of
Industry and Internal Trade (DPIIT), Ministry of Commerce. DPIIT
will issue the Standard Operating Procedure (SOP) for processing of
applications under the existing FDI policy.
 FDI UPDATES
• India gets the highest annual FDI inflow of USD 83.57 billion in FY21-22

• India rapidly emerges as a preferred investment destination; FDI inflows

have increased 20-fold in last 20 years.

• FDI equity inflows in Manufacturing rise by 76% in FY 2021-22, FDI

inflows rise by 23% post-Covid

• Karnataka emerges as the top FDI equity inflow recipient state in India

• Top FDI equity inflows from Singapore (27%) followed by U.S.A (18%)

• Computer Software and Hardware becomes the top recipient sector of FDI
Equity inflow with a share of around 25%
FDI growth in India
 GOVERNMENT INITIATIVES
• The GoI increased FDI in the defense sector by increasing it to 74% through the
automatic route and 100% through the government route.
• The government has amended rules of the FEMA, allowing up to 20% FDI in
insurance company LIC through the automatic route.
• The government is considering easing scrutiny on certain FDIs from countries
that share a border with India.
• The implementation of measures such as PM Gati Shakti, single window
clearance and GIS-mapped land bank are expected to push FDI inflows in 2022.
• In September 2021, India and the UK agreed for an investment boost to
strengthen bilateral ties for an 'enhanced trade partnership'.
• In September 2021, the Union Cabinet announced that to boost the telecom
sector, it will allow 100% FDI via the automatic route, up from the previous
49%.
• In August 2021, the government amended the Foreign Exchange Management
(non-debt instruments) Rules, 2019, to allow the 74% increase in FDI limit in
the insurance sector.
 FDI prohibition
• There are a few industries where FDI is strictly prohibited under any route. These
industries are

– Atomic Energy Generation

– Any Gambling or Betting businesses

– Lotteries (online, private, government, etc)

– Investment in Chit Funds

– Nidhi Company

– Agricultural or Plantation Activities (although there are many exceptions like

horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc)

– Housing and Real Estate (except townships, commercial projects, etc)

– Trading in TDR’s

–
 Difference between FDI and FII
Foreign Direct Investment (FDI) Foreign Institutional Investor (FII)

The investment made by a company or Investments made by institutional

individual from one country into investors from foreign countries in the
Meaning
another to establish business financial markets of a different
operations or acquire assets. country.

Nature Long-term investment commitment. Typically short-term investment.

Establishment of business operations,

Earning financial returns and portfolio
Objective acquisition of assets, technology
diversification.
transfer, and market expansion.
Investments in physical assets, such Investments in securities like stocks,
Focus as factories, buildings, and bonds, derivatives, and other financial
infrastructure. instruments.

Often involves significant control Generally does not involve control

Control and ownership stakes in local or ownership in the companies
businesses. invested in.
 Difference between FDI and FII
Foreign Direct Investment (FDI) Foreign Institutional Investor (FII)

It may directly impact the host

It can influence market trends,
country’s economy, including job
Influence liquidity, and asset prices in the host
creation, technology transfer, and
country’s financial markets.
economic development.

A long-term commitment, with Short-term investments with the

Investment
investments spanning several years flexibility to enter or exit the market
Horizon
or even decades. relatively quickly.

Governed by financial market

Subject to regulations related to
regulations, including limits on foreign
Regulatory foreign ownership, investment
ownership, reporting requirements,
Framework approvals, and compliance with local
and compliance with investment
laws and regulations.
guidelines.

Exposure to risks associated with

operating in a foreign market, Susceptible to market risks, volatility,
Risks
including political, economic, and and potential capital outflows.
regulatory risks.
 Tax Structure in India
New Regime Slab Rates
Existing Regime Slab Rates for FY 22-23 (AY 21-22)
for FY 20-21 (AY 21-22)
Tax Slab
Resident Individuals Resident Individuals
Resident Individuals & Applicable for All
& HUF < 60 years of & HUF > 60 to < 80
HUF > 80 years Individuals & HUF
age & NRIs years

Rs 0.0 – Rs 2.5 lakh NIL NIL NIL NIL

Rs 2.5 – Rs 3.00 lakh NIL NIL

5% (tax rebate u/s 5% (tax rebate u/s 87a is
87a is available) 5% (tax rebate u/s available)
Rs 3.00- Rs 5.00 lakh NIL
87a is available)

Rs 5.00 – Rs 7.5 lakh 20% 20% 20% 10%

Rs 7.5 – Rs 10.00 lakh 20% 20% 20% 15%

Rs 10.00 – Rs 12.50
30% 30% 30% 20%
lakh

Rs 12.5 – Rs 15.00
30% 30% 30% 25%
lakh
> Rs 15 lakh 30% 30% 30% 30%
Pre GST Tax Structure
Pre GST Tax Structure
Post GST Tax Structure
Post GST Tax Structure
 Environmental Policy
• Environmental policy is the commitment of an organization to
the laws, regulations, and other policy mechanisms concerning
environmental issues. These issues generally include air and
water pollution, waste management, ecosystem management,
maintenance of biodiversity, the protection of natural
resources, wildlife, and endangered species
 Environmental Policy
• Policy Principles for Environmental Protection
– (A) The Polluter Pays Principle (PPP)
– (B) The User Pays Principle—(UPP)
– (C) The Precautionary Principle (PP)

• The international policy instruments are:

– International Carbon Tax,
– Tradable Quotas, and
– Tradable Pollution Permits:
 Objectives of
National Environment Policy (2006)
• Conservation of Critical Environmental Resources: To protect
and conserve critical environmental resources and invaluable
natural and man-made heritage which are essential for life-
supporting livelihoods and welfare of the society.

• Inter-generational Equity: To ensure judicious use of

environmental resources to meet the needs and aspirations of
present and future generations.

• Efficiency in Environmental Resources Use: To ensure efficient

use of environmental resources in the sense of reduction in their
use per unit of economic output and to minimize adverse
environmental impacts on society.
 Objectives of
National Environment Policy (2006)
• Enhancement of Resources: Appropriate technology and
traditional knowledge, managerial skills, and social capital will
be used for the conservation and enhancement of resources.

• Livelihood Security for the Poor: To ensure equitable access

to environmental resources for poor tribal communities,
which are most dependent on environmental resources for
their livelihood.

• Integration of Environmental Concerns for Socio-economic

Development; to integrate environmental concerns into
policies, plans, programs, and projects for socio-economic
development.
Thank You