MACRO ECONOMIC POLICIES IN INDIA 1. Industrial Policy 2. Monetary Policy 3. Fiscal policy Rajachellaiah committee 4. Trade policy 2004- 2006 5. Exim policy - 2002- 2007 INDUSTRIAL POLICY Industrial policy refers to governments policy towards industries their establishment, functioning, growth and management of. This indicates the respective areas of large, medium and small sector industries, foreign capital, labour tariff and other related aspects. When India became independent in 1947, the industrial base of the economy was very small and the industries were be set with many problems such as shortage of raw material, deficiency of capital, bad industrial relations etc., The investors were not sure about the industrial policy of the new national government and the industrial climate was wrought with uncertainties and suspicious. The Government thus called an Industrial Conference in December 1947 to improve matters and remove the uncertainties and suspicious in the minds of investors and entrepreneurs. The conference adopted a resolution for industrial peace and recommended a clear cut division of industries into the public sector and private sector. Industrial Policy Resolution of 1948 The First industrial policy resolution was issued by the government of India on April 6th 1948. Following were the main features of the Industrial Policy 1948. Acceptance of the importance of both private and public sector : The Industrial policy resolution accepted the importance of both public and private sectors in the economy of India. Consequently the resolution adopted a major two strategy are (i) Expansion of the state sector in areas where it was operating and in new lines of production (ii) Allowing the private sector to submit and expand albeit under proper direction and regulation. Division of the Industrial Sector : This resolution divided into 4 categories namely : Industries where State had a Monopoly arms and ammunition, atomic energy and rail transport. Mixed Sector Coal, iron and steel, air craft manufacturing, ship building, Manufacture of telephone, telegraph and wireless apparatus and mineral oils. The field of government control 18 industries of National importance were included in this category. Some of the industries included were automobiles, heavy chemicals, heavy machines, machine tools, fertilizers, electrical engineering, sugar, paper, cement, cotton and woolen textiles.

The field of private enterprise All other industries were left open to the private sector, However the state could take over any industry in this sector also if its progress was unsatisfactory. Role of small and cottage industries : The 1948 resolution accepted the importance of small and cottage industries in industrial development. These industries are particularly suited for the utilization of local resources and for creation of employment opportunities. The various problem of these industries should be solves by both central and state government together to facilitate the development. Other important features of the industrial policy The role of foreign capital in industrial development of the economy was recognized but the need of regulating and controlling it according to the needs of the domestic economy was deemed essential. This resolution called for harmonious relation between the management and labour The fair wage policy was enunciated Labour participation in management was stressed. Indian capitalists were satisfied with the industrial policy resolution of 1948. Since the role assigned to the public sector in that policy was on the whole, acceptable to them. However there were certain weaknesses and gaps in the 1948 policy and pt was subjected to a no. of criticisms. INDUSTRIAL POLICY RESOLUTION OF 1956 The 1948 policy remained in vogue for full eight years and determined the nature and pattern of industrial development in the country. This period was marked by some significant changes in the economy. The country had completed one five year plan in the period 1951 56. industries [Development and Regulation Act] was passed in 1951 and gave the government the necessary experience and expertise in regulating and controlling industries in the private sector. The ruling party had declared Socialist pattern of society as the goal for the country. Because of these factors, a new declaration of industrial policy seemed essential. This come in the form of Industrial Policy Resolution of 1956. The main objective of Industrial policy of 1956 To accelerate the rate of growth and to speed up industrialization. To develop heavy industries and machine making industries. To expand public sector To reduce disparities in income and wealth. To build up a large and growing co-operative sector. To prevent monopolies and concentration of income and wealth in the hands of a few.

Salient features of the Industrial Policy 1956 Division of the industrial sector :- As against four categories in 1948 resolution, the 1956 resolution divided industries into the following three categories. Monopoly of the state :- In the first category those industries were included whose future development would be the exclusive responsibility of the state. 17 industries were included here as schedule A. These industries can be grouped into the following five classes are (i) defence industries (ii) heavy industries (iii) minerals (iv) transport and communications and (v) power, of these four industries arms and communication, atomic energy, railways and air transport were to be the government monopolies, remaining 13 all new units were to be established by the state. Existing units in private were allowed to subsist and expand. Mixed sector of public and private enterprises :- 12 industries listed in schedule B were included. These were : all other minerals, road, sea transport, machine tools, ferro alloys and toolsteels, basic and intermediate product required by chemical industries such as manufacture of drugs, dyestuffs and plastics, antibiotics etc., Here state would establish new industries but would not deny the private sector if they wanted to establish. Industries left for private sector :- All the industries not listed in schedule A & B were included in this category. These were left open to private sector. The main role of state was to provide facilities. Mutual dependence of public & private sectors :- The public and public sectors were not to be exclusive and totally independent of one another . Assistance & control of private sector. Importance of small scale & cottage industries. Reduction of reg INDUSTRIAL POLICY RESOLUTION OF 1977 In March 1977 the congress party was thrown out and janta party assumed power at the centre. In december1977 the jantha Govt. announced a new industrial policy by the way statement in the parliament For the past 20yrs the govt. policy in the sphere of industry had been governed by IPR of 1956, the industrial policy despite some desirable elements had resulted in certain distortion viz unemployment has increased, rural urban disparities have widened and the rate of real investment has stagnated. The growth of industrial output has been no more than 3-4%pa on the average, the incidence of industrial sickness has become wide spread and some of the major industries have worst effected. The main elements of the new policy are 1) Development of small scale sector- the main thrust of the policy of the jantha party statement categorically mentioned the emphasis on industrial policy so far has been mainly on large industries neglecting cottage industries completely & relegating small industries to a minor role. The main thrust of the new industrial policy will be on effective promotion & small industries widely dispersed in rural areas & small towns. It is the policy of the govt. that whatever

produced by small & cottage industries must only be so produced. The small sector was classified into 3 categories. a)cottage & household industries which provides self employment on a wide scale. b)tiny sector incorporating investment in industrial unit in machinery & equipment up to Rs.1lakh.. c)small scale industries comprising industrial units with an investment up to Rs.10lakhs & in case of ancillary industries with an investment fixed capital up to Rs.15lakhs. The purpose of the classification was specifically designed policy measures for each category. As against 180 items in the list of reservation operating earlier, the govt expanded it further to 807 items by march 1978 The govt setup in each dist an agency called DIC i.e., District industries centre to serve as the focal point of development for small scale & cottage industries. The govt revamped the khadi & village industries commission with a view to enlarge its area of operation.2) Area for large scale sector According to 1977 IP statement, the role of large

scale industries would be related to the program for meeting the basic minimum needs of the population through wider dispersal of small scale & village industries & to the strengthening of the agricultural sector. a) basic industries, essential for providing infrastructure as well as for development of small scale & village industries such as steel, non-ferrous metals, cement & oil refineries. b) Capital goods industries for meeting the machinery requirements of basic industries as well as small scale industries c) High tech industries which required large scale production were related to agricultural & small scale industries d) Other industries which were out side the list of reserved items3) Approach towards large business houses :- the growth of large houses has been

disproportionate to the size of their internally generated resourses has been largely based on borrowed funds from public financial institutions and banks. This process must be reversed. The funds of the public sector financial institutions would be largely available for the small sector.4) Expanding role for the public sector:- It would also be used effectively as a

stabilizing force for maintaining essential supplies for the consumer.5) Approach towards foreign collaboration:- The industrial policy stated In areas

where foreign technological know-how is not needed, existing collaborations will not be renewed Approach towards sick units:- The policy statement suggested a selective approach on the question of sick units. It mentioned : while the govt cannot ignore the necessity of protecting existing employment has also to be taken into account.

Evaluation of 1977 Industrial policy statement This policy was just the extension of the 1956 policy except a few changes like emphasis on SSI etc. The large scale has to rely on their own finance was the big blow to large scale industries. It did not contain any radical policies regarding foreign companies. The fall of Janatha party. It was mainly done to encourage small-scale & cottage industries as against the large-scale industries dominated y big industrial houses & multi-nationals. Among the measures listed for their promotion were: 1) Reservation or demarcation of spheres of production; 2) Non-expansion of the capacity of large-scale industry. 3) Imposition of a cess on large-scale industry. 4) The govt in this industrial policy expanded its list from 180 items 807 items. INDUSTRIAL POLICY DEVELOPMENT 1980 The decade of 1980s witnessed several steps to liberalized the IP as the following discussion clearly brings out: Exemption from licensing: The limit of exemption from licencing was continuously raised upwards. In March 1978 the limit was fixed at Rs 3 crore. During 1980s it was first raised to Rs 5 cr in 1983 & then to a whopping Rs 15 cr for projects located in non backward areas & Rs 50 cr for projects located in backward areas in 1988-89.

Relaxations to MRTP & FERA Companies: under the pretext of industrial production and promoting exports, various concessions were provided to companies failing under the MRTP act & FERA act. The most impt relaxation related to the raising of the limit for MRTP companies from Rs 20 cr to Rs 100 cr at one stroke in March 1985. On Dec 24th 1985, the govt permitted the unrestricted entry pf large industrial houses & companies governed by FERA into 21 high-technology items of manufacture. Delicensing: with a view to encouraging production, the government delicensed 28 broad categories of industries and 82 bulk drugs and their formulations. For these industries only registration with the seceretariat for industrial approvals was now required: no licence had to be obtained under the industries (development and regulation)act. Re-endorsement of capacity: With a view to improving capacity utilization in industries ,the government announced a scheme of capacity re-endorcement in april, 1982. during 1986, this scheme was liberalised to allow undertakeings which had achived 80 per cent capacity utilization (as against 94 per cent earlier ) to avail of the facility. The re-endorsed capacity was to be calculated by taking the highest production achived during any of the previous 5 years plus one third thereof.

Broad banding of industries : the scheme of broad banding of industries was introduces on 1984. This implied the classification of under broad categories of two wheelers, four wheelers, tractors as well as machinery fpr fertilizers pharmaceuticals & paper & pupl etc into generic categories. This measures intended to enable the manufacturers to change their product mix rapidly to match changes in demand patterns with out incurring procedural delays & other cost associated with seeking ammendmends to their industrial licence broad banding was extended in stages to cover 45 industry groups. Minimum economic scales of operation: Another impt concept introduced in the field of industrial licencing was that minimum economic level of operation. This was introduced in 1986. the idea was to encourage of economics of scale by expansion of existing install capacities if undertakings to minimum economic levels of operations. Development of backward areas: For promoting the development of backward areas. The govt extended the scheme of delicencing in March 1986 to MRTP & FERA companies in respect of 20 industries for location in any centrally declared backward area & 23 non appendix 1 industries for location in category A backward districts. The conditions permitting MRTP & FERA companies to establish non appendix 1 industries in backward districts were also liberalised. Incentives for export production: various concessions were announce by government in its industrial policy and export-import policy from time to time topromote the expansion of exports. For exmpale, MRTP and FERA companies were permited (out side the appendix 1 industry) if the product is predominantly fro export. With a view to providing fillip to reduction in industries of high national priority and/or those meant exclusively for export, the government introduced section 22-A in the MRTP act where by it chould notify industries or services to which sections 21 & 22 of the act will not apply. In October 1982 all 100% export orinted industries set up in the free trade zones were exempted from sections 21 & 22 of the act. In addition, the government identified some industries which were specially important from export angle. These industries were aloud 5% automatic growth per annum, up to a limit of 25% in a plan period over and above a normal permissible limit for 25% excess production over the authorized capacity. Enhancement of investment limit for SSI limits and ancillary limits: as started earlier the july 1980 statement fixed the investment limit for small scale industries at Rs,20 lakh and for ancillary units at rs,25 lakh. in march 1985 these limits were enhanced to rs,35 lakh to 45 lakh respectively. For tiny units the investment limit stood at Rs,2 lakh. a government notification issued in april 1981 raised the investment limit for SSI from Rs,35 lakh to 60 lakh and for ancillary units from 40 lakh to 75 lakh. in February 1997 the investment limit for SSI and ancillary units was raised to Rs,3 cr.the investment for tiny units was raised from 5 lakh to 25 lakh. the investment limits for SSIs was reduced to Rs,1 cr in 1999.

New Industrial policy, 1991

Announced on July 24,1991. It deregulates the industrial economy in a substantial manner. The major objectives of this policy are: To build on the gains already made To correct the distortions or weaknesses that might have crept in To maintain a sustained growth in productivity and gainful employment To attain international competitiveness.

Main provisions of 1991 policy Abolition of industrial licensing: Industrial licensing policy on India has been governed by the industries (development & regulation)act 1951. The 18 industries for which licensing was kept necessary were as under; coal & lignite, petroleum & its distillation products, distillation & brewing of drinks, sugar, animal fats & oils, cigar etc but now licensing is compulsory for only 6 industries.

Public sectors role diluted: The 1956 IP had reserved 17 industries for public sector. The 1991 IP reduced this number to 8. In 1993, 2 industries deleted from the list. In 1998, again 2 industries deleted. On May 2001,the govt opened up arms & ammunition sector to the private sector. This now leaves only 3 industries reserved exclusively fpr the public sector. MRTP limit goes: under MRTP act all firms with assets above a certain size(Rs 100 cr since 1985) were classified as MRTP firms. Such firms were permitted to enter selected industries only and on a case by case approval basis. The new industries policy therefore scrapped the threshold limit of assets in respect of MRTP and dominant undertakings. The act has been accordingly amended. Free entry to foreign investment & technology: The new IP prepared a specified list of high technology & high investment priority industries where in permission was to be made available for direct investment upto 51 per cent foreign equity. The limit was subsequently raised from 51% to 74% & then to 100% for many of these industries. Other liberalization measures: a)abolition of phased manufacturing programmes for new projects b)removal of mandatary convertibility clause. INDUSTRIAL POLICY CHANGES

PRE 1991 POLICY: Industrial licensing was the rule Public sector monopoly/dominance in strategic, basic & heavy industries MRTP act restrictions on entry & growth of large companies Foreign investment allowed only in select industries, that too subject to, normally, a ceiling of 40% of total equity & prior permission Restrictive policy towards foreign technology Reservation of large number of products for small scale sector

CURRENT POLICY Licensing is an exception All but 2 industries are open to the private sector No such restrictions Foreign investment allowed in a large number of industries, including upto 100% of equity in many of them. Automatic route available subject to specified conditions Very liberal policy towards foreign technology Reservation list is being pruned Appraisal of 1991 policy Benefits: According to J C Sandesara, the new industrial policy seeks to Raise efficiency and accelerate industrial production in five different ways:

All the provisions are such as do away with the prior clearance of the govt. It attracts capital, technology and managerial expertise from abroad. Privatization may increased efficiency. The Memorandum of Understanding may improve the performance of public

sector. Strengthening of MRTP will curb anti-competitive behaviors of firm in monopoly. Oligopoly etc.

Criticism of 1991 policy

No evidence of positive impact on industrial growth Distortions in production structure Threat from foreign competition Dangers of business colonalisation Misplaced faith in foreign investment Personalistic relationship and practices continue to prevail.

Trade policy: New foreign trade policy 2004-09 The UPA (United Progressive Alliance) govt. at the center announced a new foreign trade policy 2004-09 on August 31,2004. Today there is a need for facilitatory trade policy rather than restrictive trade policy and hence govt. took the step & formed new policy to meet the need of globalisation. Objectives of FTP 2004-09 There are two major objectives namely:

years.

To double our percentage share of global merchandise trade within the next five

To act as an effective instrument of economic growth by giving a thrust to employment generation.

Strategies to achieve its objectives: Unshackling of controls and creating an atmosphere of trust and transparency in dealing with business Simplifying procedures and bringing down transaction cost. Facilitating devt. Of India as global hut for mfg, trading & services. Identifying & generating additional areas of employment in both rural & urban. Technological & infrastructural up gradation of all the sectors. To ensure that out RTA are beneficiary. Up gradation of our infrastructure on international standards. Revitalising the board of trade & redefining its role. Activating our embassies as key players in our export strategy.

Main features of FTP 2004-09 1. Doubling share of global merchandise trade 2. Five thrust sectors: sectors with significant export prospect and with potential for employment generation in semi-urban & rural areas are called as thrust sectors. FTP announced specific strategies for this five sectors namely: Agriculture, Handicrafts, Handlooms, Gems & Jewellery and Leather & Footwear. These sectors were termed as Special Focus Initiatives. Main features of FTP 2004-09 3. Served from India to be built as a brand. 4. New categories of star houses. 5. Target plus Scheme. 6. Setting up of Free Trade and Warehousing Zones (FTWZs) 7. Sops/benefits for EOU 8. Reducing transaction costs and simplifying procedures. 9. Focus on infrastructure development 10. Other measures Biotechnology parks will be set up, The board of trade will be revamped, Financial support to exporters. Critical evaluation of FTP

Unrealistic export target-0.8 to 1.5 in 2009. Burden of tax incentives Danger of circular trading Risk of importing outdated machinery Policy fails to take a holistic view of trade issues.

Export-import policy(2002-07)

The govt. of India announced the new five year Export-import policy covering 10th five year plan period of (2002-07) on march 31,2002. The main initiatives were as follows: It had removed quantitative restrictions on all imports. The govt. decided to focus on the export of 106 items like electrical, electronic, watches, footwear, jeweler etc. were identified in the medium term export strategy released in Jan 2002. Many measures were announced to give major thrust to agri-exports AEZ were identified.

Export-import policy(2002-07) 4. Units set up in SEZs (Special economic zones) were granted a number of concessions and exemptions- income tax benefit, permission to Indian banks to set up overseas banking units(OBUs) in SEZs. These banks were exempted from RBI restrictions. 5. To ensure greater participation of states in export promotion. The center increased fund allocation under the assistance to States for infrastructural Devt. For Exports scheme. 6. It places a special focus on the small-sector which generates almost 50% if Indias esports. 7. The status holders, export houses, trading houses were granted special benefits.- 100% Foreign Exchange in external accounts. Export-import policy(2002-07) 8. This Exim policy shifted as many as 50 items to the OGL (open general License or free list). 9.It permitted relocation of industrial plants from foreign countries into India with any license to attract foreign capital. 10. Changes were made in the Export Promotion Capital goods scheme to help exporters. 11. It announced lower inspection levels and simplification of schemes to make our exports more competitive. MONETARY AND FISCAL POLICY Definition: It is a policy employing the central banks control of the supply of money as an instrument for achieving the objective of general economic policy. Harry G. Johnson Meaning: The regulation of the money supply and the control of the cost and availability of credit by the central bank of the country through the use of deliberate and discretionary action for achieving the objectives of economic policy. Objectives of Monetary policy In a developing economy, the monetary policy has often got to be ambivalent. The objectives of the monetary policy may be stated as follows:

i. ii. iii. iv. v.

To assist in the mobilization of savings in the community and promote capital formation; To promote the spread of monetization and monetary integration in the country; To provide the credit necessary for the fulfillment of the targets of production and trade; To extend monetary support to the authorities in the central task of the allocation of resources by assisting them in the maintenance of an appropriate structure of relative prices; and To maintain a general price stability and present inflationary tendencies from getting out of hand. The importance f the monetary and banking system in the generation of savings and in their mobilization is obvious. While inflationary financing at the initiative of the government is an accepted method of development, it benefits directly only the public sector. The banking system of the country has, however, a greater responsibility and freedom of operation in the field of financing development plans for the private sector. The monetary and credit policies of the central bank, therefore, will have to take account of the objectives of the monetary policy.Monetary control Mobilisation of savings Price stabilit y Credit regulation Agriculture Monetary integratio n Promote investm ent Industry

Capital formatio n

In general, adjustment programmes are designed to achieve a certain growth target in some credit or monetary aggregate. In countries where financial innovations or a shift to a narket orienrarion of the economy are taking place, the target for a particular monetary aggregate may become inappropriate and therefore may have to be revised. Instruments of Monetary policy The tools available to the Reserve Bank for the attainmet of its objectives are listed as follows:

1. 2. 3. 4. 5.

The Bank Rate and control over the lending rates of banks; Open market operations; Variable reserve requirements; Selective controls; Moral suasion.Deposit rates Lendin g rates Open market operatio ns Statutory liquidity ratio Cash reserv e ratio Selectiv e credit control

Ban k rate

Monetar y policy

Credit plannin g Moral suasion Credit authorizatio n

The programmes of economic development have introduced a strong and continuous expansionary trend in bank credit in which two factors cause variations. For a variety of reasons the use of the two traditional instruments of central bank control, viz., the bank rate and open market operations has been rather limited in India, Variable reserve requirements, too, have been used only once. On the other hand, selective credit controls and moral suasion have been used fairly widely during recent years.1. Bank rate and the banks lending policy: although the bank rate was intended to be

used primarily as the rate for buying or rediscounting bills of exchange or other eligible connercial ppaperm in the absence of a genuine market in India for such credit instruments.2. Open market operations: The term Open Market Operations refers to the

purchase or sale by the central bank of any Securities in which it deals, such as the govt. securities, bankers acceptance or foreign exchanges.It exerts direct influence on the supply of money in circulation.When central bank offers securities for sale, it intends to contract the quantity of money & credit.When central bank buys securities in the market, it intends to expand the quantity of money & credit.During last two decades RBI is undertaking switch operations involves purchase of one loan against sale of another or vice versa.It is more effective as the govt. security market is well developed in the country.

3. Variable reserve requirements(Cash reserve ratio) : Under RBI (Amendment) Act

1962, the RBI is empowered to determine CRR for the commercial banks in the range of 3% to 15% for the aggregate demand and time liabilities.It is used for control of inflation during 1970 & 1980.It was increased from10 to 15%.It was reduced to 8% in 2000-2001and in Oct 2001 to 5.5% later on 4.5% from June 14,2003.In Sep 11, 2004 it was raised to 5%.4. Statutory liquid ratio: The Banking Regulation (Amendment) Act 1962 provides

for maintaining a minimum SLR of 25% by the banks against their net demand and time liabilities. Empowered to raised up to 40% if required to control liquidity.In 1990 it was raised to 38.5% to reduced commercial banks ability to create credit and thus eased inflationary pressure and to made large resources available for the state.Based on the Narsimham Committee recommendation the govt. reduced SLR in stages from 38.5% to 25% in October 10, 1997 to till date.5. Selective credit controls:Are meant to regulate credit for specific purposes or

specificbranches of economic activities. It helps to check the misuse of borrowing facilities, It can prevent speculative hoarding of essential commodities and undue rise in the price.Since 1956 the RBI relied mainly on three techniques of selective CC namely: The determination of margin requirements for loans against certain securities.Determination of maximum amount of advance Charging of discriminatory interest rates on certain types of advances.The Credit Authorization scheme of 1965was this kind.

FISCAL POLICY Meaning: Fiscal policy refers to the policy of the govt. as regards taxation, public borrowing and public expenditure with specific objectives in view. Objectives of fiscal policy:1.

2. 3.

4.

Fiscal policy of India is having following major objectives Improving the growth performance of the economy- It affects growth by influencing the mobilization of resources for development and by improving the efficiency of resource allocation Ensuring Social justice to the people. High rate of economic growth: In order to accomplish this objective the fiscal policy is directed towards , To mobilize resources for financing the development programs in the public sector To promote development in private sector To bring an optimum utilization of resources Economic stability: This policy use taxation as an instrument for dealing with inflationary of deflationary situations. when there is inflation direct taxation can be screwed up and increased use of commodity taxes by a wider coverage and higher rates can help to restrain consumption demand. When deflation emerges,

the remedy would be to increase public expenditure and finance it by deficit budjecting till the economy recovers. 5. Equitable distribution: Attainment of a wider measure of equality in incomes, wealth and opportunities must form an integral part of economc development and social advance. Taxes A tax is refered as a direct tax if the impact and incidence of the tax is on the same person. Income tax, welth tax and gift tax are examples of direct taxes. A tax is regarded as indirect tax if the impact and incidence of the tax is on different persons. Excise duty , sales tax and customs duty are the three important indirect taxes. Central excise duty: The principle source of the revenue for the central govt, the central excise represents a levy on goods manufactured in the country. The key provisions in the central excise duty are as follows There are two types of excise duties a) Specific and b) Advalorem A specific duty is related to the quantum of manufacture. An advalorem duty is based on the value of goods The modified value added tax scheme (MODVAT) essentially enables manufacturers of excisable goods to reduce the final burden of excise duty by climing credit for the excise duty paid on raw materials, components, consumables and packing materials, Sales tax: A major revenue for the state govts, it is an important indirect tax Sales tax is leviable on sale of goods. Originally goods were regarded as angable, movable property. It also includes works contracts, hire purchase and lease transactions and supply of food stuffs in hotels and restaurants. Customs duty: Customs duty is an important indirect tax levid by the central govt on the import of goods into India or export of goods out of India the key features areThe rates of customs duty applicable to various goods are specifed under the customs tariff act 1975. Where duties are charged advalorem The central govt has been empovered under the act to notify the goods the import or export of which is prohibited.

Revenue and expenditure of Union and State Governament Revenue of the Union/ Central Government: The revenues of the Govt. of India can be divided into two namely: I. Tax-revenue II. Non tax revenue. I.Sources of Tax revenue:

1. Union Excise Duties:

These are at present easily the leading source of revenue for central govt. These are levied on commodities produced within a country but Excluding those where state has the right to charge (viz., liquors and Narcotic drugs). The commodities which are very important from the point of view of the yield of union excise duties are : Sugar, Mill cloth, Tobacco, Motor spirit, Matches and Cement. Apart from raising revenue, the object in many cases is to reduce domestic consumption and increase exportable surplus in such commodities.2. Income tax:

It is at present another source of revenue of the union govt and yeldied 5% in 1989-90. In 2006-2007 budget it counts for 11% of total revenue. It is levid on the incomes of individuals, Hindu undivided families and unregistered firms. Being a progressive tax, the rate of this tax rises with the rise in the income. In calculating the income tax the slab system is followed i.e the whole income is not taxed at the same rate but in successive slabs i.e higher slices of income are taxed at rising rates.3. Corporation Tax:

The income tax on the net profit of JSC is called corporation tax. In 2006-2007 budget it counts for 20% revenue. 4. Customs: includes both import & export duties, but the import duties contribute nearly 90% of our total customs revenue. The major portion is deriver from revenue duties and only a small portion from protective duties. The proportion of customs in central revenue has been steadily going down. In 2006-2007 budget it counts for 11%. 5. Tax on Capital gains: It was first introduced in 1946, it contunied till march 1948 it is revieved from april 1956 it is applicable to capital gains resulting from the sale, exchange or transfer of capital assets. Capital gains arising form the sale of agricultural land or of personal effects or house hold goods are exempted form this tax. In 1970-71 it was extended to the sale of agricultural land in urban areas with a population of not less than 10000. These are not liable to super tax. 6. Tax on wealth: introduced in 1957-58. It imposes two major taxes i.e wealth and expenditure taxes. Wealth tax is imposed on the net wealth of individuals and hindu undivided families. Wealth below Rs 15 lakhs is exempted from the tax. 7. Service tax:

introduced in 1994-95. A service tax on services on telephones, non life insurance on stock brokers was introduced. This tax is charged @ 12% on the amount of telephone bills. 8. Expenditure Tax: On expenditure incurred in hotel rooms costing more than Rs.400 per day. It has been extended to restaurants providing superior air conditioning fecilities this tax is levid @ 20% rate. In 1998-99, this tax is expected to yield revenue of Rs 300 crore. 9. Interest tax: In 1974 It is first time in the world in India this tax was introduced on banks income from interest on their lending. A 7% tax on the gross interest income earned by the banks on their loans and advances. 10. Gift Tax: introduced in 1958 after the introduction of estate duty, there was a marked tendency among the wealthy classes to make gifts of their property and other assets to heirs. It was to check this tendency and to avoid loss of estate duty. It is thus intended to act as a complement to the estate duty. II. Non tax revenue of central Govt. 1. 2. 3. 4. 5. 6. 7. Surplus profit of RBI Currency & Coinage & Mint Railways Posts & Telegraphs Profits of Public enterprises Interest Receipts Other Non tax revue sources: Departmental receipts, Multipurpose River schemes etc. In budget 2006-07 the total tax revenue is expected as 65% and next only 11% from Non tax revenue and nest 24% from Borrowings and other liabilities.

1. Surplus profit of RBI: All the profits of the RBI go to swell the revenues of the central govt. In recent years the bank against treasury bills for financing the plans. profits have been rising rapidly because of the large borrowings by the govt from the central govt. 2. Currency, coinage and mint: The govt also derives income from running the currency note printing-presses. Besides, profits are made from the circulation of coinsthis profit being the difference between face value of the coin and their manufacturing cost. 3. Railways:

A part of net profits made by the railways goes to add to the receipts of the govt. The 1990-91 budget placed it at Rs.932xrores,4. Posts and Telegraphs:

These are run for public convenience rather then for profits. Its contribution is not so large. 5. Profits of public enterprises: Under the five-year plans, a large number of big public enterprises have been started and public investment running in hundreds of crores has been made on most of such individual public enterprises owned by the govt. 6. Interest receipts: The large non-tax sources of govt revenue receipts is the interest it earns on the loans it has advanced to stste govt and others. 7. Other non-tax revenue sources: It includes departmental receipts, i.e., the income of the various ministries of the govt by way of fees and penalties. Public expenditure1. Defense It constitutes nearly one fourth of the total revenue exp.Since

partition, it has gone up due to political uncertainty prevailing in the world abroad, trouble on our borders, and the unsettled conditions prevailing at home. In 2006-07 budget it is estimated as 13%2. Administrative services The expenditure on civil administrative services has

also gone up markedly since independence. The pay roll has continued to swell. This is the necessary incidence of democracy. The creation of embassies the insignia of an independent state the upward pay revision, frequent revisions of dearness allowances and the grant of interin relief to employees, and the food subsidies are other important factors responsible for the abnormal increase in our civil expenditure.3. Social & devt. Expenditure : It is another broad group of items that 4. Assistance to states: since the recent years a very important expenditure has

been the grants and other financial assistance that the centre extends to the states and union territories.In 2006-07 budget it is estimated as 6%.5. Interest payments: India has been raising more and more loans both internal

and foreign, for the execution of its development plans. In 2006-07 budget it is estimated as 21%.6. Fiscal services: It largely mean the cost of collection of taxes and duties

constitute another major head of expenditure.

7. Central subsidies: It emerged as one of the major items of govt revenue

expenditure. In 2006-07 budget it is estimated as 7%.

Revenue of the State Government The three broad sources of revenue for the states are: 1. Tax Revenue 2. Non Tax revenue of state. 3. States share in revenues of and grants from the central Govt 1.Tax Revenue of state 1. 2. 3. 4. 5. Sales Tax State Excise Stamps & registration Land revenue Agricultural Income tax1. Sales Tax: In a single point system the tax is levid on one point on

the chain of dealers. But in a multi point system each dealer in the chain has to pay the tax. A double point system levies the tax on both at the entry and at the exit of an article in a sector of business. In a single point system the rate is low and exemptions are many. It is not uniform in all states. Its rate varies from 3% in certain states to 7-8% in others.2. State excise: This revenue is derived fron the nayfacture and sale

od intoxicatin, liquors, hemp, drugs, etc. It is collected in the form of duties on their manufacture and fees for sale of licences. The major portion of excise revenue is derived from country liquors.3. Stamps & registration: It is derived from the sale of judicial and

commercial stamps, the former affixed on plaints and petitions, & the latter on commercial transactions.4. Land revenue: LR as a tax is coning from time immemorial. But it

is full of anomalies. For non-agricultural incomes there is exemption but no such exemption for land revenue.5. Agricultural income tax: Under the existing system of land revenue

assessment the bigger land holders escape lightly. Accordingly, agricultural income-tax has been levied in several states. For the sake of administrative convenience, as also on consideration of equity, the states have prescribed a minimum exemption limit. These limits have been changed from time to time. In a few states agricultural income have subjected also to super-tax. The tax rates in all states are based on the slab system.

2.Non-Tax revenue of state 1. 2. 3. 4. 5. 6. 7. 8. Irrigation Charges Betterment Levy Forests State Lotteries Interest Receipts Receipts from Economic services Receipts from general services and social community services Dividends from Commercial undertakings1. Irrigation charges: The present system of irrigation changes has

developed differently in different states with the result that there is multiplicity both in the principals & in the rate of assessment. The most important levying water charges are : Volumetric, i.e., according to the quantity of water supplied Consolidated rates i.e., water charges are consolidated with land revenue. Differential rates correspondence to difference between the assessments on dry & wet lands. Occupiers rate i.e., charged on the area actually irrigated Agreement rate i.e., fixed by agreement for a period of years whether water is taken or not.

2. Betterment levy: In order to meet the minimum maintenance charge

and to avoid possible losses on irrigation works decided to introduce betterment levy, especially to enforce compulsory charge in project areas where adequate response is not forthcoming. The idea is to appropriate an element of unearned increment in the values of land due to the introduction of canal irrigation & which is not, in any way due to the efforts of the individual landowners. It is intended to provide additional resources to the govt.3. Forests: The bulk of the forest revenue is derived from the sale of

timber, fuel & other minor produce & from fees on grazing.4. State lotteries: State lotteries have emerged as an effective instrument

of resource mobilization by the states. They take advantage of a mans get rich quick desire & his gambling instinct. They are used to raise resources for development particularly in the fields of public health & education. Besides, they have provided employment to a large number of people as selling agents.5. Interest receipts: Every state govt lends large sums to local bodies like

municipal committees & zilla parishads for social purposes & development schemes. Loans are also given to businessman & business concerns for agriculture & for setting up industries, especially small-scale industries.

6. Receipts from economic services: The state govts run several

economic services in their respective areas such as forests, industries, dairy development power project, road & water transport & they receive revenue therefrom. 7. Receipts from general services & social & community services: The revenue in the form of fees, charges, fines & penalties forms state revenue.8. Dividends from commercial undertakings: State govts have late started

certain commercial undertakings. These yield an estimated of Rs.122 crores. 9. Share in central taxes Share in income-tax: The state share in income-tax collected by central govt has become the major source of revenue of state revenues. Share in union excises: States are the partners in central excises in tobacco, matches & vegetables.10. Grants from the central govt: These are of the following types-

Grants of jute-growing states in leiu of their share in export duty on jute. Grants under article 275 of the constitution given annually to some states. Special non-recurring grants for special purposes More important & substantial are the plan grants under section 282 Expenditure of the State Government

The state govts expenditure can be broadly classified into two(A)Development expenditure (B)Non-development expenditure 1. 2. 3. 4. 5. 6. The chief heads of state govt expenditure are as followsAdministrative services- Admn. Police Jail etc Social services & Community services Edn medical family welfare, calamities etc Economic services Agri, Forest irrigation etc. Fiscal services cost in tax collection Debt servicing and interest payments Grants to local bodies and panchayati Raj Institution. 1. Administrative-services: It swallow up a large part of revenue of central govt, especially police. It accounts for 1/9th of total expenditure. 2. Social services & community services: The principal expenditure of this head are education, medical & public health.

3. Economic services: These are very important for economic development. It includes agricultural & allied services. 4. Fiscal services: It includes the cost of collection of tax & duties. 5. Debt servicing & interest payments: It includes interest on debt & appropriation for reduction of debt. The big rise in this item is due to the development loans obtained by state govt from the central govt. 6.Grants to local bodies & panchayat raj institution: State govt has to make large grants to local bodies like municipal committees & panchayat raj institutions like panchayat samities, zila parishads for development & other services. The chelliah committee on tax reforms The reforms in Indian tax system became imperative in the wake of structural adjustment programmes and swift economic liberalization measures initiated in the union budget for 1991-92. Accordingly in august 1991, the govt of India constituted a tax reforms committee headed by Dr. Raja J. Chellih with the following terms of reference : To examine the structure of direct and indirect taxes; To make recommendations, inter-alia, for making the tax system more elastic and broad based; and To suggest measures required for simplifying the existing laws and regulations to facilitate better enforcement and compliance. Recommendations : The chelliah committee submitted its interim report in February 1992 to the govt of India to enable the Finance minister to draw heavily upon it in framing the budgetary proposals for 1992-93 budget. The committee submitted its final report in two parts, part I in August 1992 and part II in January 1993. The finance minister implemented some of the recommendations in 1993-94 budget. The committee has made for reaching recommendations for reforms in all the three major sources of central revenue, income tax, excise and customs. These recommendations may be summed up as under: Personal income tax reforms The challiah committee has recommended the policy of moderating tax rates and widening the tax base combined with fewer deductions and exemptions and effective enforcement to encourage voluntary tax compliance thereby reducing tax evasion. The committee has recommended an income tax regime with a narrower spread been entry rate of income tax and maximum marginal rate along with lower rates of taxation. It has, therefore, recommended that incomes falling in the slabs Rs 2,00,000 should be taxed at 27.5% and the maximum marginal rate of income tax of 40% inclusive of surcharge should be applicable to incomes above Rs 2,00,000.

The committee has recommended the withdrawal of exemptions of various saving-linked tax exemptions schemes such as Equity-linked saving schemes and national saving scheme (NSS) admissible for deductions under section 80 CCB of income groups. This committee has recommended that the income of a minor child from gifted assets should be clubbed with that of the parent to plug the loophole of cross gifting used to evade the clubbing under the existing tax law. The committee has recommended that double taxation in the sense of taxing the income of a partnership firm and also taxing the partners on their share in the income of the firm should be avoided. The committee has suggested a presumptive tax scheme in respect of small shop owners and traders. This scheme should be introduced on a optional basis stipulating that the shopkeepers may pay a tax in lumpsum in case their turnover falls between Rs 3 and 5 lakh. This suggestion aims at attracting new payers. The committee has suggested the taxing of leave travel allowance and receipts on retirement. The committee has recommended that the agricultural income in excess of Rs 25000 accruing to the non-agriculturists it with non agricultural income. Capital gains tax reforms : The chelliah committee has recommended the system of indexation to estimate capital gains should be computed by allowing the cost of the asset to be adjusted for general inflation before deducting from the sale proceeds of the assets. The adjustment factor should be notified each year by the govt. Thus, the committee has favored tax on capital gains from the sale of an asset net of its price increase owing to general inflation over the period of time which it has been held. Wealth tax reforms: The challiah committee has suggested that, in order to encourage the tax payers to invest in productive assets such as shares, securities, bonds, bank deposits etc.. and also to promote investment through mutual funds, these financial assets should be exempted from wealth tax. The committee suggested that the wealth tax should be levied on individuals, Hindu undivided families and all companies only in respect of non-productive assets such as residential houses including farm houses and urban land, jewellery bullion motor cars, planes, boats and yachts which are not used for commercial purposes. The committee has further suggested that wealth tax should be at the rate of one percent , with a basic exemption of Rs 15 lakh. The committee recommends the abolition of present wealth tax and its replacement in effect, by a set of annual taxes on urban land, residents and few other forms of wealth. Gift tax reforms: The chelliah committee emphasized the need for an upward revision of the exemption limit for purposes of gift tax. The committee has suggested that the gift limit should be risied from 20,000 to 30,000. corporate tax reforms:

the chelliah committee has recommended that the corporate tax rate for domestic companies should be lowered to 45% in 1993-94 form the present level of 51.75% by abolition of surcharge. It should be lowered further to 40% in 1994-95. The committee has suggested that the tax rates for foreign companies should be lowered. It has recommended that the difference between the rates on domestic and foreign companies should be around 7.5% points. In no case the differential should exceed to 10 % points. The committee has also suggested that the double taxation of foreign companies in respect of fees for technical services should be avoided. The committee has favored for retention of the central rate of depreciation on plant and machinery at 25%. The committee has recommended the abolition of tax on interest. The committee recommends that for the time being the system of independent taxation of company and individual incomes should continue. However, it favours a move in the future to some form of partial integration of the two txes. Customs duty reforms: The chelliah committee has recommended reduction in the general level of tariffs. It has recommended a drastic reduction in customs tariff rates to 15-20 % by 1997-98. The committee has favored a stable import duty rate to avoid pressures for exemptions and concessions which ultimately prove counter-productive. The committee has also made recommendations for speedy systems to determine antidumping duties which will acquire greater importance with the reduction in the custom duty rates. The committee has ruled out a single import duty regime and favored for a very limited number of rates subjected at least to a minimum tariff. It has, therefore, recommended a minimum 5% customs on all goods which now enjoy total exemptions. The committee has suggested that customs tariff on finished goods should be higher than on basic raw materials and those components and machinery should in between.

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