BE-New Economic Policies - Srinivas Reddy

8/8/2019 BE-New Economic Policies - Srinivas Reddy

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What is

ECONOMIC POLICY

Economic policy refers to the actions

that Governments take in the

Economic field.


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The Indian Economy: An OverviewThe Indian Economy: An Overview

India is theIndia is the 44thth largestlargesteconomy in the world as measured byeconomy in the world as measured by

purchasing powerpurchasing power

Between 1980 and 2003, Indias economy grew at an averageBetween 1980 and 2003, Indias economy grew at an averagerate ofrate of5.7%5.7%

During the same period, Indias real income per head grew byDuring the same period, Indias real income per head grew by

125%125%

Dr. Manmohan Singh, Finance Minister in 1991 and architect ofDr. Manmohan Singh, Finance Minister in 1991 and architect of

IndiasIndias economic reformseconomic reforms, is the current Prime Minister, is the current Prime Minister


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India has a India has a consumerconsumer basebase of 1.2 billion people, andof 1.2 billion people, and

The youngest population of the world The youngest population of the world hencehence sustainable,sustainable, longlong

termterm growth is assuredgrowth is assured

Modern (organised) retail converging with the Modern (organised) retail converging with the consumptionconsumptionboomboom will open upwill open up manymany opportunitiesopportunitiesfor small and midfor small and mid--sizesize

consumer companiesconsumer companies

With upper income and rich classes growing rapidly and deprivedWith upper income and rich classes growing rapidly and deprived

classes actually falling, Indiasclasses actually falling, Indias incomeincome demographicsdemographics will actuallywill actuallybebe unrecognizableunrecognizable by the end of the decadeby the end of the decade


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Home ownership is on the rise with Home ownership is on the rise with 55 MillionMillion homes added everyhomes added every

year, approximatelyyear, approximately1.51.5 MillionMillion new homes added in urban areasnew homes added in urban areas

Mobile telephone subscriber base has grown from 0.3 Million in Mobile telephone subscriber base has grown from 0.3 Million in

1996 to over 55 Million currently; expected to grow to1996 to over 55 Million currently; expected to grow to 200 Million200 Million byby

20082008

13 Million credit card holders currently & growing at 13 Million credit card holders currently & growing at40%40%p.a.p.a.

Passenger car sales of USD 5 Billion in 2004, Passenger car sales of USD 5 Billion in 2004, more thanmore than twicetwice thethe

level of sales five years earlierlevel of sales five years earlier


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2013

7

36

70

1950s 1960s 1970s 1980s 1990s

The fastest rise in incomes.The fastest rise in incomes.

% rise in per capita income



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The biggest drop in inflationThe biggest drop in inflation

9.5

9.1

7.4

4

1970s 1980s 1990s 2000-4

% decrease in inflation


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Have prompted a spending boomHave prompted a spending boom

5.9

9.5

6.5

11.4

2000-01 2001-02 2002-03 2003-04

% growth in consumption expenditure


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as well as the highest level of savingsas well as the highest level of savings

13.8

19.321.9

26.6

1980-81 1990-91 2000-01 2003-04

Household savings as % of GDP


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The economy is riding highThe economy is riding high

4.4

8.5

6.9 7*

2002-03 2003-04 2004-05 2005-06

% annual growth in GDP


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India in 2050India in 2050

India will be the 3rd largest economy.

-

5,000

10,000

15,000

20,000

25,000

30,00035,000

40,000

45,000

50,000

Chin

aUS In

dia

Japan

Brazil

Russia UK

G

ermany

France

Italy

US2

003$billio

ns

..with the highest growth rate of BRICs

0

1

2

3

4

5

6

7

8

2005-10 2015-20 2025-30 2035-40 2045-505-YearPeriodAveragePerc

entPer

Annum

Brazil

China

India

Russia


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TYPES OF ECONOMIC POLICY

1. MONETARY POLICY

2. FISCAL POLICY

3. INDUSTRIAL POLICY

4. TRADE POLICY


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MONETARY POLICY

IT IS FORMULATED AND EXECUTED BYRESERVE BANK OF INDIA.

IT REFERS TO THAT POLICY BY WHICH

CENTERAL BANK OF COUNTRYCONTROLS:1. SUPPLY OF MONEY2. COST OF MONEY OR RATE OF

INTEREST WITH A VIEW TO

ACHIEVE PARTICULAROBJECTIVES.


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DEFINITION

ACCORDING TO D.C ROWAN THEMONETARY POLICY IS DEFINED AS

DISCRETIONARY ACT UNDERTAKEN BYTHE AUTHORITIES DESIGNED TOINFLUENCE :

THE SUPPLY OF MONEY

COST OF MONEY OR RATE OF INTERESTTHE AVAILABILITY OF MONEY

FOR ACHIEVING SPECIFIC OBJECTIVES.


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OBJECTIVES

MAIN OBJECTIVE OF THIS POLICY

IS : TO ACHIEVE PRICE STABILITY,

FINANCIAL STABILITY

ADEQUATE STABILITY OF CREDITFOR GROWTH.


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FISCAL POLICY

IT IS RELATED TO INCOME AND EXPENDITURE OFGOVERNMENT.

IT REFERS TO BUDGETARY POLICY OF GOVERNMENT.

IT IS OF GREAT IMPORTANCE FOR BOTH DEVELOPEDAS WELL AS DEVELOPING COUNTRIES.

IT IS AN INSTRUMENT FOR PROMOTING ECONOMICGROWTH,EMPLOYMENT,

SOCIAL WELFARE ETC.

IT HAVE A GREAT BEARING ON ECONOMICEQUALITY AND ECONOMIC GROWTH OF THECOUNTRY.


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DEFINITION

ACCORDING TO ARTHUSSMITHIES,FISCAL POLICY IS A POLICY

UNDER WHICH THE GOVERNMENTUSES ITS EXPENDITURE AND REVENUEPROGRAMMES TO PRODUCE DESIRABLEEFFECT AND AVOID UNDESIRABLE

EFFECTS ON THE NATIONALINCOME,PRODUCTION ANDEMPLOYMENT.


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INDUSTRRIAL POLICY

IT MEANS THOSE PRINCIPLES ANDACTIVITIES WHICH ARE PERSUED ANDPERFORMED TO HELP INDUSTIALISE A

COUNTRY. IT INCLUDES RULES, REGULATION,

PRINCIPLES AND PROCEDURES TOREGULATE THE INDUSTRIALUNDERTAKING OF A COUNTRY IN THEDESIRED DIRECTION TO ACHIEVEBROADER OBJECTIVES LIKE:


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INDUSTRIAL DEVELOPMENT

ECONOMIC DEVELOPMENT

BALANCED REGIONAL

DEVELOPMENT

INCREASE IN EMPLOYMENT ETC


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DEFINITION

INDUSTRIAL POLICY IS ANINSTRUMENT WITH THE HELP OFWHICH THE STATE PARTICIPATES IN

THE GROWTH PROCESS.

IT INCLUDES POLICY REGARDING LABOURAND CAPITAL ,COTTAGE AND SMALL SCALE

INDUSTRIES, FOREIGN CAPITAL ANDPROTECTION ETC.IT IS FULLY CONTROLLED AND REGULATEDBY THE GOVERNMENT.


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TRADE POLICY

BASIC OBJECTIVE OF TRADE POLICY ISTO PROMOTE EXPORTS,REGULATEIMPORTS,IMPROVE TERMS OF

TRADE,ENHANCE EXPORTCOMPETITIVENESS AND CREATECONDITIONS OF EXPORT -LED GROWTH.

THIS POLICY IS OF UTMOST

IMPORTANCE TO EXPORTERS AS ITHAS A MAJOR IMPACT ONTRANACTION COSTS AND EFFICIENCYOF TRADE TRANSACTIONS


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Why NEP 1991??????

To overcome Reservation of

Industries To overcome Entry & Growth

Restrictions

To overcome Restriction on ForeignCapital & Tech.


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OBJECTIVES OF NEP

To pull thecountry out ofeconomic crisis Accelerating the

rate of growth


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Reasons for NEP

Fiscal deficit was 5.4% of GDP in 1981-82 which gone up to

8.4% in the year 1990-91

In 1991 amount of interest liabilities rose further to 36.4% of

total government expenditure

Country was moving towards debt trap

Fall in foreign exchange reverse

Rise in prices

Poor performance of public sectors under takings


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First gulf war caused spikes in oil prices which caused a major

balance-of-payment crisis for India

India asked for $1.8bn bailout loan from IMF, in return demanded

reforms

This NEP was inaugurated by former PM P.V.Narasimha rao under

the guidance of his FM Manmohan Singh


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NEP

Liberalization

Privatization

Globalization


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Several types of controls on Indianeconomy ( licensing, price control,

financial control)

This led to

corruption,

undue

delays &

inefficiency

NEP made a bid to reducerestrictions on economy

(based on market economy)


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It is the general process of involving the private sector in the ownership or operations

of a state owned enterprise

PRIVATIZATION

Outright sale of government enterprises Withdrawal of the government

ownership & management from mixedenterprises

The ownership of PSUs is being gradually sold off to privateentrepreneurs


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Gains

100% commitment &efficiency

Compitition,upgradation &

modernization

Diversification ofproduction

Promotesconsumerssovereignty


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LossesSelf interest

supersede

social interest

Weaker

section suffers


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Policy-

strategiespromoting

globalization

Increase inequity limitof foreign

investment

Partialconvertibility

Long termtrade policy

Reduction intariffs


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Economic activities has picked up & the growthrate of GDP has shown an

impressive increase

Stimulated industrial production

Significant increase in government revenues & subsequent decrease in fiscal

deficit

Greater flow of goods & services checked inflation rate

Flow of pvt foreign investments increased

India has been recognized as emerging super power

Monopoly markets has been converted into competitivemarket


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Agriculture is totally neglected

Concentration of growth processes in urban area

Consumerism has been increased

Cultural erosion


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Initiatives Taken in New Economic Policy

New Economic Policy (1991)

Industrial SectorReforms

Public Sector Policy

Industrial Licensing Policy

MRTP Act

External TradeReforms

Foreign Investment

Foreign Technology

Agreements


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Industrial Policy Changes

Pre-1991 Policy Current PolicyIndustrial Licensing was the new rule Licensing is an exception

Public sector monopoly/dominance in

strategic, basic and heavy industries

All but two industries are open to the private

sector

MRTP Act restriction on entry and growth of

large companies

No such restrictions

Foreign investment allowed only in select

industries that too subject to normally, a

ceiling of 40% of total equity and prior

permissions

Foreign investment allowed in a large number

of industries, including up to 100% or equity in

many of them. Automatic route available

subject to specified conditions.

Restrictive policy towards foreign technology Very liberal policy towards foreign technology

Reservation of large number of products for

small scale sector

Reservation list is being pruned.


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FDI in India

FDI is investment made by a foreign individual or company inproductive capacity of another country. It is the movement ofcapital across national frontiers in a manner that grants theinvestor control over the acquired asset.

India is considered a stable country for investing in by corporateoverseas.

India has displaced US as the second-most favored destinationfor (FDI) in the world after China according to an AT Kearney's

FDI

FDI is a tool for jump-starting economic growth through itsbolstering of domestic capital, productivity and employment.


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FDI in India

FDI has an impact on1. Country's trade balance

2. Increasing labor standards and skills

3. Transfer of new technology and innovative ideas

4. Improving infrastructure, skills and the general business climate.

US INVESTMENT IN INDIA

U.S. is one of the largest foreign direct investors in India.

The stock of actual FDI Inflow increased from U.S. $11.3 million in

1991 to US $4132.8 million as on August 2004 recording an increaseat a compound rate of 57.5 percent per annum.

The FDI inflows from the US constitute about 11 percent of the totalactual FDI inflows into India.


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FDI in India

FDI has an impact on

1. Country's trade balance

2. Increasing labor standards and skills

3. Transfer of new technology and innovative ideas

4. Improving infrastructure, skills and the general business climate.

US INVESTMENT IN INDIA

U.S. is one of the largest foreign direct investors in India.

The stock of actual FDI Inflow increased from U.S. $11.3 million in1991 to US $4132.8 million as on August 2004 recording an increaseat a compound rate of 57.5 percent per annum.

The FDI inflows from the US constitute about 11 percent of the totalactual FDI inflows into India.


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China vs. India FDI Attractiveness

India

China

6%

22%

29%

34%

35%36%

39%

40%

41%

41%

42%

45%46%

50%

57%

66%

70%

73%

73%78%

94%

78%

71%

66%

65%64%

61%

60%

59%

59%

58%

55%54%

50%

43%

34%

30%

27%

27%22%

Market Size

Market Growth Potential

Access to Export Markets

Government Incentives

Production/LaborCosts

Infrastructure

Financial/Economic Stability

EconomicReform

Political/Social Stability

Quality of Life

TaxRegime

Competitor Presence

ConsumerSophistication

Availability of M&A Targets

Regulatory Environment

Cultural Barriers

Transparency

ManagementTalent

Rule of Law

Highly Educated Workforce

Source: FDI Confidence Index. A.T. Kearney. October 2004.Volume 7


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BOOMING INDIAN ECONOMY

When I visited China in late 1980s


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When I visited China in 2005


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When I visited India in late 1980s


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When I visited India in the present day


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WHAT DO THE PREVIOUS FOUR IMAGES TELL US?

India in 1980

Ahead of China esp. in free

enterprise and per capita

earnings

China in 1980

Still strugglingwith Communist

Egalitarian past and lack of

enterprise

India in 2005

Full of vigour but political

system still trapped in

clanship management of the

Nation instead of takingcharge of enterprise

China in 2005

Government took charge of

enterprise in late 1980s,

transforming China into a

modern industrial nationwhich increased per capita

income by a factor of 5

How will Indias Industrial Growth

look in 2010?

How did China imbibe

Entrepreneurship into their

Management?


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GDP Growth 2000 to 2050

Source: Goldmann Sachs: The Path to 2050

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

[2003 bn US Dollars]

Germany

Brazil

JapanRussia


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CONCLUSION

India will reach 8% Growth Rate in next 5 years

Economy will grow to between 10 12% between 2010 2015

QUOTE: We can be a developed Nation by 2020 if we make this ourMission Statement Dr A P J Abdul Kalam, Indian President

Will India fulfil the Presidents Statement?


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BE-New Economic Policies - Srinivas Reddy

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