Every economy looks forward to growth and stability and many times a trade off between the two.

Economists generally think in terms of counteracting business cycle fluctuations using fiscal policy and
monetary policy. But this task becomes difficult with globalization and increasing interdependence of
economies on each other. Turmoil in a dependent economy sets pressures on other economies as well.
Today’s economies are more complex and policies do not just rest on simple adjustment in domestic interest
rates or government spending, but also cover a host of other policies; Foreign, EXIM, Industrial, Technology
and any other policy that helps in better governance, stability, growth and development.

Fiscal Policy
Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as
Keynesian economics, this theory basically states that governments can influence macroeconomic
productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn,
curbs inflation increases employment and maintains a healthy value of money.

Fiscal policy basically means by which a government adjusts its levels of spending in order to monitor
and influence a nation's economy. It is the sister strategy to monetary policy, with which a central bank
influences a nation's money supply. These two policies are used in various combinations in an effort to
direct a country's economic goals.
It refers to the union government's use of its annual budget to affect the level of economic activity,
resource allocation and income distribution. The budget strategy can also influence the achievement of
the government's objectives of internal and external balance and economic growth.
The two main instruments of fiscal policy are government spending and taxation. Changes in the
level and composition of taxation and government spending can impact on the following variables in the
economy:
Aggregate demand and the level of economic activity;
The pattern of resource allocation; and
The distribution of income.

KEY COMPONENTS OF FISCAL POLICY:

GOVERNMENT SPENDING: Government spending can be broken down into three main categories:

General government expenditure -Consists of the combined capital and current spending of
central government including debt interest payments to holders of government debt.
General government final consumption -Government expenditure on current goods and
services excluding transfer payments
Transfer payments –Transfers are transfers from taxpayers to benefit recipients through the
working of the social security system.

EXPENDITURES:-Government expenditure comprises expenditure on economic, social and general

services. The pattern in government expenditure since the Eighties has been mainly influenced by a change
in role of the government in the growth process, financing pattern of the deficits (debt and interest payments)
and the need for fiscal consolidation.

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 Main areas of expenditures:-
Interest payments:-The widening of fiscal deficit and consequent rise in debt stocks during last
two decades have resulted in mounting expenditure on interest payments.
Subsidies: -Expenditure on subsidies is a crucial element of government expenditure
particularly in the light of targeting poverty alleviation and the growing need to rationalize
expenses for fiscal consolidation. The total burden of subsidies on government finances should
take into account, in addition to the explicit subsidies, several implicit subsidies in the form of
lower user charges for economic and social services provided by the government.
Wages, Salaries and Pensions:-The rising bill in respect of wages, salaries and pensions is
considered to be an important element in the fiscal health of the government, particularly in the
recent years. These components partly represent the committed expenditure obligations of the
government.
Capital Outlays:-Capital outlays represent the expenditure undertaken by the government to
build its investments. These investments enhance the productive capacity of the economy
through provision of the infrastructure and capital goods. The actual impact of these investments
on the growth process is magnified by the “crowding-in” impact on private investment.
Defense:-The central government also undertakes revenue and capital expenditures for defense
purposes which act as a public good at the national level.

METHODS OF RAISING FUNDS:-

Governments spend money on a wide variety of things, from the military and police to services like education
and healthcare, as well as transfer payments such as welfare benefits.This expenditure can be funded in a
number of different ways:

Taxation
Seignorage, the benefit from printing money
Borrowing money

TAXATION:-

I. Income Tax: It is a tax levied on the financial income of persons, corporations, or other legal
entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation
can be progressive, proportional, or regressive. When the tax is levied on the income of companies,
it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax

2
 the total income of the individual (with some deductions permitted), while corporate income taxes
often tax net income (the difference between gross receipts, expenses, and additional write-offs).

II. Payroll Tax:- It generally refers to two kinds of taxes: Taxes which employers are required to
withhold from employees' pay, also known as withholding, Pay-As-You-Earn (PAYE) or Pay-As-You-
Go (PAYG) tax; or taxes directly related to employing a worker paid from the employer's own funds:
these may be either fixed charges or proportionally linked to an employee's pay.

III. Capital Gain Tax:-It is a tax charged on capital gains, the profit realized on the sale of an asset that
was purchased at a lower price. The most common capital gains are realized from the sale of
stocks, bonds, precious metals and property.

IV. Value Added Tax:- Value Added Tax (VAT), or Goods and Services Tax (GST), is tax on
exchanges. It is levied on the added value that results from each exchange. It differs from a sales
tax because a sales tax is levied on the total value of the exchange. For this reason, a VAT is
neutral with respect to the number of passages that there are between the producer and the final
consumer. A VAT is an indirect tax, in that the tax is collected from someone other than the person
who actually bears the cost of the tax (namely the seller rather than the consumer). To avoid double
taxation on final consumption, exports (which by definition, are consumed abroad) are usually not
subject to VAT and VAT charged under such circumstances is usually refundable.

V. Sales Tax:- A Sales Tax is a consumption tax charged at the point of purchase for certain goods
and services. The tax is usually set as a percentage by the government charging the tax. There is
usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the point
of sale (tax-exclusive).

VI. Stamp Duty:-Stamp duty is a form of tax that is levied on documents. Historically, a physical stamp
(a tax stamp) had to be attached to or impressed upon the document to denote that stamp duty had
been paid before the document became legally effective. More modern versions of the tax no longer
require a physical stamp.

SEIGNORAGE:- It is the net revenue derived from the issuing of currency. Seignorage derived from coins
arises from the difference between the face value of a coin and the cost of producing, distributing and
eventually retiring it from circulation. Seignorage is an important source of revenue for some national banks.
Seignorage derived from notes is the difference between the interest earned on the government's securities
portfolio, and the costs of producing and distributing bank notes.

FUNDING OF DEFICITS:- A fiscal deficit is often funded by issuing bonds, like Treasury bills or Consols.
These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too
great, a nation may default on its debts, usually to foreign debtors.

The three possible stances of fiscal policy are neutral, expansionary and contractionary:

A neutral stance of fiscal policy implies a balanced budget where G = T(Government spending =
Tax revenue). Government spending is fully funded by tax revenue and overall the budget
outcome has a neutral effect on the level of economic activity.

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 An expansionary stance of fiscal policy involves a net increase in government spending (G > T)
through rises in government spending or a fall in taxation revenue or a combination of the two.
This will lead to a larger budget deficit or a smaller budget surplus than the government
previously had, or a deficit if the government previously had a balanced budget. Expansionary
fiscal policy is usually associated with a budget deficit.

A contractionary fiscal policy (G < T) occurs when net government spending is reduced either
through higher taxation revenue or reduced government spending or a combination of the two.
This would lead to a lower budget deficit or a larger surplus than the government previously had,
or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is
usually associated with a surplus.

Objectives of Fiscal Policy

ECONOMIC GROWTH: Fiscal policy helps in achieving this objective by mobilizing resources for
development. These resources are then used for raising infrastructure facilities which give a boost to the
process of economic growth.

EQUITABLE DISTRIBUTION OF WEALTH: This is achieved by highly progressive direct taxes on

people in high income brackets and using these resources for the benefit of the common people. In the
policy of indirect taxes care is taken to ensure that basic necessities of life are not taxed while luxury
items are heavily taxed.

FULL EMPLOYMENT: This goal is achieved by accelerating the process of growth with employment.

EXCHANGE STABILITY: By regulating customs duties and if necessary by banning export and import
of items which lead to exchange instability fiscal policy helps in maintaining the value of currency in the
foreign exchange markets.

BALANCED REGIONAL DEVELOPMENT: Various fiscal measures are provided for balanced regional
development. These include a number of tax concessions including complete exemption of products
manufactured in the backward regions from excise duty etc.

India’s experience with fiscal rules

India is currently reviewing its fiscal rules framework with a view to inform the design of a successor
arrangement. After a decade of large and intractable fiscal deficits, India adopted a rules-based fiscal
framework, the Fiscal Responsibility and Budget Management Act (FRBMA), in 2003. The FRBMA’s

4
stated objective is to ensure inter-generational equity in fiscal management and the fiscal sustainability
necessary for long-term macro-economic stability. So far, India’s experience with fiscal rules has been
mixed. The FRBMA strengthened India’s fiscal policy framework. Every year the finance minister comes
out with the Union Budget which comprises the policies and programs for different sectors of the
economy. Following are the highlights of the fiscal policies for the year 2009-2010.

Highlights of Fiscal Policy 2009-10

IIFCL to refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over
the next fifteen to eighteen months. IIFCL and Banks are now in a position to support projects
involving total investment of Rs.1,00,000 crore.
Allocation to National Highways Authority of India (NHAI) for the National Highway Development
Programme (NHDP) increased by 23 per cent over B.E. 2008-09 in B.E. 2009-10 and allocation
for Railways increased
Allocation for housing and provision of basic amenities to urban poor enhanced to Rs.3,973
crore in B.E. 2009-10.
Target for agriculture credit flow set at Rs.3,25,000 crore for the year 2009-10.
Time given to the farmers having more than two hectares of land to pay 75 per cent of their
overdues under Debt Waiver and Debt Relief Scheme extended from 30th June, 2009 to 31st
December, 2009.
Allocation for Market Development Assistance Scheme enhanced to Rs.124 crore in B.E. 2009-
10.
Interest subvention of 2 per cent on pre-shipment credit for seven employment oriented export
sectors extended beyond the current deadline of September 30, 2009 to March 31, 2010.
While retaining at least 51 per cent Government equity in Public Sector Undertakings, people’s
participation in disinvestment programmes to be encouraged.
Public Sector Enterprises such as banks and insurance companies to remain in public sector
and will be given full support including capital infusion to grow and remain competitive
Scheduled commercial banks allowed to set up off-site ATMs without prior approval subject to
reporting
Allocation under NREGS increased by 144 per cent
National Food Security Act to be brought in to ensure entitlement of 25 kilo of rice or wheat per
month at Rs.3 per kilo to every family living below the poverty line in rural or urban areas.
All BPL families to be covered under Rashtriya Swasthya Bima Yojana (RSBY). Allocation under
RSBY increased by 40 per cent over previous allocation.
Unique Identification Authority of India (UIDAI) to set up online data base with identity and
biometric details of Indian residents and provide enrolment and verification services across
country. Provision of Rs.120 crore made for this in the Budget.
First set of unique identity number to be rolled out in 12 to 18 months.
Increase in Non-plan expenditure is mainly due to implementation of Sixth Central Pay
Commission recommendations, increased food subsidy and higher interest payment arising out
of larger fiscal deficit in 2008-09.
Structural changes in direct taxes to be pursued by releasing the new Direct Taxes Code within
the next 45 days and in indirect taxes by accelerating the process for the smooth introduction of
the Goods and Services Tax (GST) with effect from 1st April, 2010.

5
 Exemption limit in personal income tax raised by Rs.15,000 for senior citizens; by Rs.10,000 for
women tax payers; and by Rs.10,000 other categories of individual taxpayers.
Surcharge on various direct taxes to be phased out; in the first instance, by eliminating the
surcharge of 10 percent on personal income-tax.
Fringe Benefit Tax on the value of certain fringe benefits provided by employers to their
employees to be abolished.
Commodity Transaction Tax (CTT) to be abolished.
Customs duty of 5% to be imposed on Set Top Box for television broadcasting.
Customs duty on LCD Panels for manufacture of LCD televisions to be reduced from 10% to 5%.

Fiscal policies Battling Recession

6
 GDP - real growth rate
10%
9%
8%
7%
6% GDP - real growth rate
5%
4%
3%
2%
1%
0%
2003 2004 2005 2006 2007 2008 2009

Thanks to the Fiscal packages, the Indian economy grew by a significant 7.9 per cent in the second quarter
of this fiscal, up from 6.1 per cent in the previous quarter, essentially due to a good showing by the industry
and the services sector .The growth compares favorably to 7.7 per cent recorded in the July-September
quarter in the previous year. Consequently, the economy rose by 7 per cent in the first half ending
September 30 of the current fiscal on the back of stimulus packages and revival of domestic demand, giving
hopes that final figures for the year could be much higher.

The government, the Reserve Bank and the Planning Commission had predicted a growth of about 6-7 per
cent, while global agencies and analysts forecast it to be even lower. The economic growth of close to 8
per cent in the second quarter is also remarkable in the context of just 0.9 per cent expansion in farm
production due to a weak monsoon and continued contraction in exports due to slackening demand
overseas .Fiscal policies also helped the manufacturing sector grew by 9.2 per cent in the July-September
period compared to 5.1 per cent in the corresponding period of last fiscal and mining and quarrying by 9.5
per cent versus 3.7 per cent recorded in FY09.Community, social and personal services expanded by
double digit at 12.7 per cent against 9 per cent. Despite being affected by international slowdown, trade,
hotels, transport and communication sector grew by 8.5 per cent, which is lower than 12.1 per cent a year
ago. Financing, insurance, real estate, and business services rose by 7.7 per cent against 6.4 per cent.
Electricity, gas and water supply was up 7.4 per cent compared to 3.8 per cent. Construction rose by 6.5
per cent, down over 9.6 per cent a year ago. It was after September, that growth declined to 5.8 per cent in
the subsequent two quarters last year. So, if the trend continues, the growth rate is expected to be much
higher in the second half of this fiscal. The size of the domestic economy stood at Rs 17.90 lakh crore (Rs
17.90 trillion) in the first half of FY10.

In its five budgets since 2004, the Congress party-led coalition has risen spending on health, education and
rural employment but the economy has suffered due to a lack of economic reforms. The World Bank had
projected Indian economy in higher growth trajectory in fact ahead of China. The government has to take
the necessary steps to revive the economy. This positive outlook will solve problems for the government as
more FIIS, FDIs and borrowing from World Financial Institutions will flow in the infrastructure, power and
construction sectors, which are the building blocks of the economy.
PRESENT SCENARIO OF GOVERNMENT SPENDING AND REVENUE

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We can expect that government can increase its expenditure although it will weigh heavily on the already
high fiscal deficit that shot over 6 per cent in 2008-09 from 2.7 per cent in 2007-08. In future, it is expecting
good revenues, better tax collection, increase foreign trade activities as global economy is also on the
revival track that will automatically take care of the fiscal deficit. Direct tax collection in May in the year 2009
has been increased by 16.8%. In fact the collections have shown a positive growth since February. This will
help the Government to keep the fiscal deficit under control, which could well cross 5% of the GDP against
the limit of 2.5 % fixed earlier. The unfreezing of foreign capital will create conditions where an
expansionary fiscal policy will not unduly constrain monetary authorities in the near term. Fiscal and
monetary authorities may, therefore, get more head room. Of course, in the medium term there is no
escape from a return to fiscal consolidation. There is much more optimism in regard to getting a higher GDP
growth in 2009-10.

The gross tax revenue collections during the first six months of 2009-10 were Rs 2,58,880 crore which was
lower than the last year’s revenue collection of Rs 2,80,141 over the same period, a decline by almost 7.6
percent. Both the income tax and corporation tax collections registered an increase of 7.2 percent and 7.7
percent respectively. The revenue collections from indirect taxes, however registered a decline. While the
collection from custom duty fell by about 33 percent, those from excise duty registered a decline by almost
23 percent. The total receipts of the central government over the period April-September 2009-10 amounted
to Rs 2,51,073 crore, while the total expenditure was Rs 4,48,848 crore. The resulting deficit amounted to
Rs 1,97,775 crore which was higher by Rs 95, 121 crore from the deficit during the same period of last year.
The following graphs elaborate on the same.

8
9
Monetary Policy: A generic definition
In the layman term, Monetary policy is the process a government, central bank, or monetary authority of a
country uses to control (i) the supply of money, (ii) rate of interest to attain a set of objectives oriented towards the
growth and stability of the economy. Monetary policy rests on the relationship between the rates of interest in an
economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses
a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange
rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there
is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority
has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals).

A monetary policy could be an expansionary policy which intends to increase the money supply, or
a contractionary policy, which decreases the total money supply. Expansionary policy is traditionally used to
combat unemployment in a recession by lowering interest rates. An example could be the present status of US
economy. An expansionary policy increases the size of the money supply, or decreases the interest rate. A
reduction in interest rate encourages private investment, increases capital investment and pushes aggregate
demand upwards. Changes in real interest rates affect the public's demand for goods and services mainly by
altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates.

The primary tool used by the Central bank would involve;

Purchase securities on the open market, known as Open Market Operations: This entails
managing the quantity of money in circulation through the buying and selling of various credit
instruments, foreign currencies or commodities. All of these purchases or sales result in more or
less base currency entering or leaving market circulation
Lower the discount rates
Lower Reserve Requirements

On the other hand, the effects of a contractionary monetary policy are precisely the opposite of an
expansionary monetary policy. A contractionary policy involves raising interest rates to combat inflation. This
would involve raising the interest rate and reducing money supply. When the central bank decreases the money
supply, it can do a combination of three things:

Sell securities on the open market,

Raise the Discount Rate
Raise Reserve Requirements

The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last
resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain
market players to achieve specified outcomes); (iv) "Open mouth operations" (talking monetary policy with the
market).

Therefore, monetary decisions today take into account a wider range of factors, such as:

10
 short term interest rates;
long term interest rates;
velocity of money through the economy;
exchange rates;
credit quality;
bonds and equities (corporate ownership and debt);
government versus private sector spending/savings;
international capital flows of money on large scales;
financial derivatives such as options, swaps, futures contracts, etc.

MONETARY POLICY: UNDERSTANDING IN REAL TERMS

We can all understand the role played by monetary policy and why is it used by the central bank of different
economies. However, it is essential to understand its implications in the real term.

Wages and prices will begin to rise at faster rates if monetary policy stimulates aggregate demand enough to
push labor and capital markets beyond their long-run capacities. In fact, a monetary policy that persistently
attempts to keep short-term real rates low will lead eventually to higher inflation and higher nominal interest rates,
with no permanent increases in the growth of output or decreases in unemployment.

Difference between Monetary and Fiscal policy; Can one work without the
other?
Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation.

IMPACT ON THE COMPOSITION OF OUTPUT

Monetary policy is seen as something of a blunt policy instrument – affecting all sectors of the economy although
in different ways and with a variable impact

Fiscal policy changes can be targeted to affect certain groups (e.g. increases in means-tested benefits for low
income households, reductions in the rate of corporation tax for small-medium sized enterprises, investment
allowances for businesses in certain regions)

Consider too the effects of using either monetary or fiscal policy to achieve a given increase in national income
because actual GDP lies below potential GDP (i.e. there is a negative output gap)

MONETARY POLICY EXPANSION

11
Lower interest rates will lead to an increase in both consumer and fixed capital spending both of which increases
current equilibrium national income. Since investment spending results in a larger capital stock, then incomes in
the future will also be higher through the impact on LRAS.

FISCAL POLICY EXPANSION

An expansion in fiscal policy (i.e. an increase in government spending) adds directly to AD but if financed by
higher government borrowing, this may result in higher interest rates and lower investment. The net result (by
adjusting the increase in G) is the same increase in current income. However, since investment spending is lower,
the capital stock is lower than it would have been, so that future incomes are lower.

DIFFERENCES IN THE EFFECTIVENESS OF MONETARY AND FISCAL POLICIES

When the economy is in a recession (when business and consumer confidence is very low and perhaps where
deflationary pressures are taking hold) monetary policy may be ineffective in increasing current national spending
and income. The problems experienced by the Japanese in trying to stimulate their economy through a zero-
interest rate policy might be mentioned here. In this case, fiscal policy might be more effective in stimulating
demand. Other economists disagree – they argue that short term changes in monetary policy do impact quite
quickly and strongly on consumer and business behaviour.

However, there may be factors which make fiscal policy ineffective aside from the usual crowding out
phenomena. One other reason suggests why fiscal policy may be more suited to fighting unemployment, while
monetary policy may be more effective in fighting inflation. The monetary policy remedy to economic decline is to
increase the amount of money in circulation, thereby cutting interest rates. But once interest rates reach zero, the
central bank can do no more. Some economists contend that the present status of USA post the financial crisis
could encounter such a situation, which economists call the "liquidity trap," just like Japan did during the late
1990s.With its economy stagnant and interest rates near zero, many economists argued that the Japanese
government had to resort to more aggressive fiscal policy, if necessary running up a sizable government deficit to
spur renewed spending and economic growth.

Fiscal policy is weak (ineffective) when investment is very sensitive to interest rates and when consumers pierce
the veil and attempt to offset the actions of the government (e.g. saving a tax cut, or increasing their saving when
higher government spending leads to expectations of higher taxes in the future)

Monetary policy is weak (ineffective) when consumers are willing to hold large quantities of money rather than
spend them even when interest rates are very low. This in economic terms is called the LIQUIDITY TRAP.

DIFFERENCES IN THE LAGS OF MONETARY AND FISCAL POLICIES

Monetary and fiscal policies differ in the speed with which each takes effect the time lags are variable. Because
capital investment requires planning for the future, it may take some time before decreases in interest rates are
translated into increased investment spending. Typically it takes six months – twelve months or more before the
effects of changes in monetary policy are felt.

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The impact of increased government spending is felt as soon as the spending takes place and cuts in direct and
indirect taxation feed through into the economy pretty quickly. However, considerable time may pass between the
decision to adopt a government spending programme and its implementation. In recent years, the government
has undershot on its planned spending, partly because of problems in attracting sufficient extra staff into key
public services such as transport, education and health.

MONETARY POLICY IN INDIA

INTRODUCTION

The Reserve Bank of India (RBI), central bank of India, was set up in 1935. Like all central banks in developing
countries, the Reserve Bank has been playing a developmental and a regulatory role. In its developmental role,
RBI focused attention on deepening and widening the financial system. It played a major part in building up
appropriate financial institutions to promote savings and investment. The Monetary Policy Department holds
monthly meetings with select major banks and financial institutions, which provide a consultative platform for
issues concerning monetary, credit, regulatory and supervisory policies of the Bank. In addition, a Technical
Advisory Committee on Money, Foreign Exchange and Government Securities Markets comprising academics
and financial market experts, including those from depositories and credit rating agencies, provides support to the
consultative process. The Committee meets once a quarter and discusses proposals on instruments and
institutional practices relating to financial markets.

An active role by the Reserve Bank of India in terms of regulating the growth in money and credit became
evident only after 1950s. During the 1950s the average annual increase in the wholesale price was only 1.8 per
cent. However, during the 1960s, the average annual increase was 6.2 per cent and in the 1970s, it was around
10.3 per cent. In the early years of planning, there was considerable discussion on the role of deficit financing in
fostering economic growth. Thus, deficit financing, which in the Indian context meant Reserve Bank credit to the
Government, was assigned a place in the financing of the plan, though its quantum was to be limited to the extent
it was non-inflationary. Monetary growth, particularly in the 1950s, was extremely moderate. However, as each
successive plan came under a resource crunch, there was an increasing dependence on market borrowing and
deficit financing. These became pronounced in the 1970s and thereafter. The single most important factor

13
influencing the conduct of monetary policy after 1970 had been the phenomenal increase in reserve money
contributed primarily by the Reserve Bank credit to the Government. In the wake of the economic crisis in 1991
triggered by a difficult balance of payments situation, the Government introduced far reaching changes in India’s
economic policy. Monetary policy was used effectively to overcome the balance of payments crisis and promptly
restore stability. An extremely tight monetary policy was put in place to reap the full benefits of the devaluation of
the rupee that was announced. However, it did not stop with that. Financial sector reforms became an integral
part of the new reform programme. Reform of the banking sector and capital market was intended to help and
accelerate the growth of the real sector. Banking sector reforms covered a wide gamut. The most important of the
reforms was the prescription of prudential norms including capital-adequacy ratio. In addition, certain key changes
were made with respect to monetary policy environment which gave to commercial banks greater autonomy in
relation to the management of their liabilities and assets. First and foremost, the administered structure of interest
rates was dismantled step by step. Banks in India today enjoy the complete freedom to prescribe the deposit
rates and interest rates on loans except in the case of very small loans and export credit. Second, the
Government began borrowing at market rates of interest. The auction system was introduced both in relation to
Treasury Bills and dated securities. Third, with the economic reforms emphasising a reduction in fiscal deficit, pre-
emptions in the form of cash reserve ratio and statutory liquidity ratio were steadily brought down. Fourth, while
the allocation of credit for the priority sector credit continued, the extent of cross subsidisation in terms of interest
rates was considerably brought down because of the reform of the interest rate structure.

To summarise, the system as it existed at the end of 1970s was characterised by the following features. The
Reserve Bank of India as the central monetary authority prescribed all the interest rates on deposits and lending.
The commercial banks were required to allocate a certain percentage of credit to what were designated as
‘priority sector’. Credit to parties above a stipulated amount required prior authorisation from the central bank.
After the nationalisation of major commercial banks in 1969, nearly 85 per cent of the total bank assets came
under public sector. Apart from small private banks, foreign banks were allowed to operate with limited branches.

The increase in the scale of borrowing by the Government resulted in (a) the steady rise in statutory liquidity ratio
requiring banks to invest higher and higher proportion of their deposits in Government securities which carried
less than ‘market rates’ and (b) the Reserve Bank of India becoming a residual subscriber to securities and
Treasury Bills leading to monetisation of the deficit. The Reserve Bank had, therefore, to address itself to the
difficult task of neutralising to the extent possible the expansionary impact of deficits. The increasing liquidity of
the banking sector resulting from rising levels of reserve money had to be continually mopped up. The instrument
of open market operations was not available for this task since the interest rates on Government securities were
well below ‘market rates’. The task of absorbing excess liquidity in the system had to be undertaken mainly
through increasing the cash reserve ratio. In fact, in mid 1991, the cash reserve requirement was 25 per cent on
incremental deposits. In addition, the statutory liquidity ratio was 38.5 per cent. Thus, nearly 63.5 per cent of
incremental deposits was pre-empted in one form or another.

In mid 90s the thrust of monetary policy was to reduce the annual inflation rate and provide credit support for
production. Money supply (M3) was reduced considerably, mainly because of a slow growth in bank deposits and
a decline in the growth of reserve money.

SLOW GROWTH

14
Another major factor in controlling this growth was the lower level of foreign exchange inflows. Slower monetary
growth was accompanied by lower bank credit to the commercial sector. These trends were compounded by a
decline in other sources of finance to industry, such as primary issues in the domestic stock market and GDR
issues in Euro markets. 

OTHER REASONS

Funds raised from capital markets declined and the amount raised through Euro issue loans also fell down nearly
70 percent over the same period. Continued high levels of government borrowing associated with a large and
over-budget fiscal deficit kept money markets tight throughout the period. This in turn put increasing pressure on
interest rates. 

MONETARY GROWTH

Despite falling inflation, real rates faced by industry remained high, and the prime lending rate of most of the
banks was 16.5 percent. Based on an inflation rate of 6 percent and projected GDP growth of 6.6 percent for
1996-97, monetary rowth had been targeted at 15.5-16 percent for 1996-97.

RBI MEASURES

The RBI reduced banks' cash reserve requirements by one percentage point, freed bank deposit interest rates of
over one year term and shortened the minimum term for deposits from 46 days to 30 days. It also withdrew a
refinancing facility for banks' investments in government securities. These steps were to add the equivalent of
USD 1.2 billion to the banking sector. Short-term call money market rates of interest and forward premiums on the
dollar have dropped sharply. 

RESPONSE

While financial and industry sources have welcomed the liquidity-easing measures, they remain worried at the
rigidity of high lending rates of interest and suspect that the Government will soon absorb this new bank liquidity
by increasing Government borrowing from the market.

GROWTH OF M3

Growth in broad money (M3) in 1997-98 registered an increase, higher than the RBI's growth target. The increase
was due to a substantial expansion of domestic credit to the government and the business sector, and an
increase in net foreign exchange assets. Bank credit to business increased, net RBI credit to the government
increased and strong foreign exchange inflows during the first half of 1997-98 coupled with sluggish credit
creation ensured that the money market was awash with liquidity. Banks investment in government securities
increased by 17.7 percent in 1997-98, and non-food credit to business increased by 14.2 percent. The broad

15
money supply over the period April-August of 2009-10 registered a growth of 5.9 percent relative to 5.2 percent
growth recorded over the same period of previous year.

MONETARY POLICY OPERATING PROCEDURE DURING 1996-2000

In terms of monetary policy framework, a multiple indicator approach was adopted from 1998 replacing monetary
targeting. As a result, several measures were initiated to develop indirect (market based) instruments for
transmitting policy signals. As yields on government securities became market related with the announcement of
curbing short-term volatility in the foreign exchange market. During this phase, however, RBI continued to use the
cash reserve ratio (CRR), in addition to outright OMO, for modulating market liquidity. As indicative monetary
targets continued to be an important guidepost for the conduct of monetary policy, the RBI effectively varied the
CRR to influence the level of bank reserves and control money supply.

An extremely significant measure during this period was the reactivation of the Bank Rate in April 1997 by initially
linking it to all other rates, including the Reserve Bank's refinance rates.5 Changes in the Bank Rate tend to have
a dual impact on interest rates, viz., the direct signaling impact and the indirect liquidity effect. While a change in
the Bank Rate per se is reflective of a shift in the stance of policy and conveys a message about the central banks
assessment of monetary conditions, it also has a direct effect on the cost of liquidity available from the central
bank, which, in turn, has an impact on overall interest rates. However, as the quantum of refinance available is
restricted in the Indian context, the liquidity effect of changes in the Bank Rate is negligible. The introduction of
fixed rate reverse repo helped in creating an informal corridor in the money market with the reverse repo rate
(floor) and the Bank Rate (ceiling), which enabled the RBI to modulate the call rate within this corridor. As
commercial banks could draw refinance from the RBI at the Bank Rate and impart with liquidity at the reverse
repo rate, the Bank Rate being the ceiling was a natural corollary as it discouraged banks from indulging in
arbitrage activities of borrowing at the Bank Rate and investing in the less remunerative call money market.

MONETARY POLICY OPERATING PROCEDURE DURING 2000-2006

During this period, unprecedented capital inflows posed new challenges for monetary management, which
precipitated a change in the operating procedure of monetary policy. In this regard, the development of a full-
fledged Liquidity Adjustment Facility (LAF) from June, 2000 facilitated the modulation of liquidity conditions on a
daily basis. In this mechanism, while liquidity was absorbed at the reverse repo rate (floor), liquidity injection was
done at the repo rate (ceiling) by the RBI. The gradual emergence of the LAF corridor as the principal short-term
operating instrument has facilitated the steering of short-term interest rates within this corridor, thereby imparting

16
greater stability to financial markets. This corridor predominantly has characteristics of standing facilities, even
while they aid open market operations. As a result, RBI reduced its reliance on CRR for liquidity management
operations and substantially rationalized its refinance facilities. Changes in the Bank Rate, however, were
continued to be used for signaling the medium-term stance of policy. Monetary management since mid-2002 has
clearly focused on managing surplus liquidity, simultaneously operating through LAF and open market operations.
As a result, monthly average call rates, which were volatile during 1990-98, have stabilized subsequently after the
introduction of LAF. The benefits of efficient liquidity management operations were also apparent from the
relatively orderly movement of both the exchange rates and interest rates during this period.

MONETARY MEASURES RESPONSE TO GLOBAL FINANCIAL

CRISIS
The global financial crisis had questioned several fundamental assumptions and beliefs governing economic
resilience and financial stability followed by banking institutions across the world. What started off as turmoil in the
financial sector of the advanced economies had penetrated into the deepest and most widespread financial and
economic crisis of the last 60 years. The Indian banking system has had no direct exposure to the sub-prime
mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitized assets.
The contagion of the crisis has spread to India through three major channels – the financial channel, the real
channel, and importantly, as happens in all financial crises, the confidence channel.

First, as a consequence of the global liquidity squeeze, Indian banks and corporates found their overseas
financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. Also, in their
frantic search for substitute financing, corporates withdrew their investments from domestic money market mutual
funds putting redemption pressure on the mutual funds and down the line on non-banking financial companies
(NBFCs) where the MFs had invested a significant portion of their funds. This substitution of overseas financing
by domestic financing brought both money markets and credit markets under pressure. Second, the forex market
came under pressure because of reversal of capital flows as part of the global deleveraging process.
Simultaneously, corporates were converting the funds raised locally into foreign currency to meet their external
obligations. Both these factors put downward pressure on the rupee. Third, the Reserve Bank’s intervention in the
forex market to manage the volatility in the rupee further added to liquidity tightening. Rupee-US$ rate moved up
from 40.25 during 2007-08 to 45.92 during 2008-09 and 48.65 during April 01-July 21, 2009.

The policy responses in India since September 2008 have been designed largely to mitigate the adverse impact
of the global financial crisis on the Indian economy. The Reserve Bank has multiple instruments at its command
such as repo and reverse repo rates; cash reserve ratio (CRR), statutory liquidity ratio (SLR), open market
operations, including the market stabilization scheme (MSS) and the LAF, special market operations, and sector
specific liquidity facilities. The thrust of the various policy initiatives by the Reserve Bank has been on providing
ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining a market environment conducive for
the continued flow of credit to productive sectors. The key policy initiatives taken by the Reserve Bank since
September 2008 are set out below:

17
POLICY RATES

The policy repo rate under the liquidity adjustment facility (LAF) was reduced from 9 per cent to
4.75 per cent.
The policy reverse repo rate under the LAF was reduced by from 6 per cent to 3.25 per cent.

RUPEE LIQUIDITY

The cash reserve ratio (CRR) was reduced from 9 per cent of net demand and time liabilities
(NDTL) of banks to 5 per cent.
The statutory liquidity ratio (SLR) was reduced from 25 per cent of NDTL to 24 per cent.
The export credit refinance limit for commercial banks was enhanced to 50 per cent from 15 per
cent of outstanding export credit.
A special 14-day term repo facility was instituted for commercial banks up to 1.5 per cent of
NDTL.

FOREX LIQUIDITY

The Reserve Bank sold foreign exchange (US dollars) and made available a forex swap facility
to banks.
The interest rate ceilings on nonresident Indian (NRI) deposits were raised.
The all-in-cost ceiling for the external commercial borrowings (ECBs) was raised. The all-in-cost
ceiling for ECBs through the approval route has been dispensed with up to June 30, 2009.
The systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI)
were permitted to raise short-term foreign currency borrowings.

REGULATORY FORBEARANCE

The risk-weights and provisioning requirements were relaxed and restructuring of stressed
assets was initiated.

ECONOMIC RESPONSE TO POLICY INITIATIVES

Both the Government and the Reserve Bank responded to the challenge of minimizing the impact of crisis on
India in co-ordination and consultation. The Reserve Bank shifted its policy stance from monetary tightening in
response to the elevated inflationary pressures in the first half of 2008-09 to monetary easing in response to
easing inflationary pressures and moderation of growth engendered by the crisis. The Reserve Bank's policy
response was aimed at containing the contagion from the global financial crisis while maintaining comfortable
domestic and forex liquidity. Taking a cue from the Reserve Bank's monetary easing, most banks have reduced
their deposit and lending rates. Notwithstanding the Global Financial turmoil, the Indian banking sector continues
to be strong and robust. The Indian banking system was not affected by the global crisis and all financial
parameters have remained strong with capital adequacy ratio for the system at 13.65 per cent (tier I ratio at 8.95

18
per cent), return on assets over 1 per cent, non-performing loans around 2 per cent as of March 2009. Indian
banking has by-and-large been spared of global financial contagion due to the subprime turmoil for a variety of
reasons.

PRESENT MONETARY POLICY OF RBI

In this fiscal FY10, FDIs and FIIs in India are upbeat with foreign investment inflows reported at $27.5 billion
during April to August 2009, which could likely go beyond the $61.6 billion level of 2007-08. In the global arena
too, the second quarter results showed expansion in world output by 3% yoy, pick up in trade and financial
markets, coupled with improving investor confidence and risk appetite. In sync with the good performance, RBI’s
monetary policy had indicated recovery of the Indian economy from the global crisis and cautioned gradual
stiffening of monetary policy. This is because such high inflows and inadequate demand, could lead to financial
instability which could harm the current recovery process. This can be shown from the following graph which
shows the increase in liquidity in the economy.

19
So, managing the money flow now could prevent inflationary pressures in the future. This is primarily because the
WPI inflation which was negative earlier, has turned positive and the CPI inflation is on the high side.It has been
argued that even though the current inflationary pressures are driven by food prices, monetary policy can itself
strengthen expectations of higher inflation and thereby lead to generalised inflation. The RBI’s inflationary
expectations survey also confirms the need for early exit from expansionary policies.

Insofar as the details of exit are concerned, the RBI has voted in favour of reversing some of the unconventional
measures taken to release liquidity into the financial system. These include, for instance, the increased liquidity
facilities provided for mutual funds or for NBFCs. There is also a marginal revision of the SLR, which had earlier
been reduced from 25 per cent to 24 per cent. It is now raised to 25 per cent.

20
The near term policy challenges are clearly conditioned by the evolving growth-inflation outcome that supports
shifting of the balance of policy focus on managing the recovery and on containment of inflation. Given the
dominance of food price inflation in shaping the overall course of the inflation path, the policy challenge though is
to address the supply constraints. Since supply shocks take time to taper off, there is a risk that high inflation in
essential commodities could affect inflation expectations over time and give rise to generalized inflation. Effective
assessment of the inflation process, and using monetary policy actions at the right time would then be critical to
enhance the effectiveness of the policy. In India, besides the industrial and overall recovery in growth, the overall
business confidence has improved significantly. While capital inflows have resumed after the period of net
outflows in the second half of 2008-09, there is a perception that India may experience surges in capital inflows
again, because of easy global liquidity conditions and superior growth prospects of India in the global economy.
Once the recovery gains further strength and sustainability in India, return to the fiscal consolidation path would
be critical to contain the constraints to the high growth path. With revival in demand for credit from the private
sector, the significance of fiscal consolidation would become more apparent. While higher growth itself would
contribute to some consolidation from the revenue side, the quality of fiscal consolidation need to be guided by
rationalization of expenditure. The RBI has already started the first phase of ‘exit’ in its October 2009 policy
statement, though primarily in terms of signaling the stance rather than affecting the liquidity conditions or the
interest rate. The evolving growth-inflation conditions will dictate the future course of actions from the RBI.

Recent Developments regarding maintenance of gold reserves: Since 1991, central banks around the
world had collectively reduced their gold holdings by some 10 percent. However, it now appears that attitudes are
changing. Gold has been hitting new highs in recent weeks, with the US Dollar weakening under loose monetary
policy, reversing the gains it made in late 2008. Investors are betting that Asia's emerging economic powers will
buy more of the precious metal to diversify their foreign-exchange reserves against awakening US Dollar. India is
also on the same path. India, the world’s biggest gold consumer, bought 200 metric tons from the International
Monetary Fund for $6.7 billion as central banks show increased interest in diversifying their holdings to protect
against a slumping dollar. The transaction, carried out by RBI, equivalent to 8 percent of world annual mine
production, was the IMF’s first such sale in nine years and propels India to the ninth-biggest government owner
globally. India is also stressing on increasing mining activities of gold and increasing its internal reserves.

FOREIGN TRADE POLICY

The Foreign trade policy of India is a set of guidelines and instructions established by the Directorate General of
Foreign trade (DGFT) in matters related to the import and export of India and is regulated by the Foreign Trade
Development and Regulation Act, 1992. DGFT is the main governing body I matters related to the EXIM policy.

21
The main objective of the Foreign Trade Act is to provide the development and regulation of foreign trade by
facilitating imports into and boosting exports from India. The Foreign Trade Act, 1992 replaced the earlier law
known as the imports and exports control act, 1947.

The Indian EXIM policy contains various policy related decisions taken by the government in the sphere of
foreign trade, i.e., with respect to imports and exports from the country, especially export promotion measures,
policies and procedures related thereto. Trade policy is prepared and announced by the Central government
(Ministry of commerce). India’s Export Import policy also known as the Foreign Trade Policy, aims at developing
export potential, improving export performance, encouraging foreign trade and creating favorable balance of
payments position.

OBJECTIVES OF THE FOREIGN TRADE POLICY OF INDIA

Trade drives economic growth and national development. The primary purpose is not mere earning of foreign
exchange, but the stimulus of greater economic activity. The Foreign Trade Policy Of India is based on two
major objectives, [a] To double the percentage share of global merchandise trade within the next five years; [b]
To act as an effective instrument of economic growth by giving a thrust to employment generation. Apart from
the above two, some general objectives of the foreign trade policy are as follows:
To establish the framework for globalization.
To promote the productivity competitiveness of Indian industry.
To encourage the attainment of high and internationally accepted standards of quality.
To boost export by facilitating access to raw material, intermediate components, consumables and
capital goods from the international market.
To promote internationally competitive import substitution and self reliance.

STRATEGY OF FOREIGN TRADE POLICY OF INDIA

Removing government controls and creating an atmosphere of trust and transparency to promote
entrepreneurship, industrialization and trades.
Simplification of commercial and legal procedures and bringing down transaction costs.
Simplification of levies and duties on inputs used in export products.
Facilitating development of India as a global hub for manufacturing, trading and services.
Generating additional employment opportunities, particularly in semi-urban and rural areas, and
developing a series of ‘Initiatives’ for each of these sectors.
Facilitating technological and infrastructural upgradation of all the sectors of the Indian economy,
especially through imports and thereby increasing value addition and productivity, while attaining
global standards of quality.
Neutralizing inverted duty structures and ensuring that India's domestic sectors are not
disadvantaged in the Free Trade Agreements / Regional Trade Agreements / Preferential Trade
Agreements that India enters into in order to enhance exports.
Upgradation of infrastructural network, both physical and virtual, related to the entire Foreign Trade
chain, to global standards.
Revitalizing the Board of Trade by redefining its role, giving it due recognition and inducting foreign
trade experts while drafting Trade Policy.

22
 Involving Indian Embassies as an important member of export strategy and linking all commercial
houses at international locations through an electronic platform for real time trade intelligence, inquiry
and information dissemination.

HISTORY OF EXIM POLICY OF INDIA

In the year 1962, the Government of India appointed a special Exim Policy committee to review the government
previous export import policies. The committee was later on approved by the government of India. Mr. V.P.
Singh, the then commerce Minister and announced the EXIM Policy on the 12 th Of April, 1985. Initially the EXIM
policy was introduced for the period of three years with the main objective to boost the export business in India.

In order to liberalise imports and boost exports, the Government Of India for the first time introduced the
Indian EXIM Policy on April 1, 1992. In order to bring stability and continuity, the Export Import policy was
made for the duration of 5 years. However, the Central Government reserves the right in public interest to
make ay amendments to the trade policy in exercise of the powers conferred by Section- 5 of the act. Such
amendment shall be made by mean of a notification published in the Gazette of India.

INDIA’S INTERNATIONAL TRADE

INDIA’S EXPORTS

23
INDIA’S MAJOR TRADING PARTNERINDIA’S TRADE BASKET

INDIA’S DIRECT INVESTMENT FLOWS

INDIA’S OVERSEAS INVESTMENTS

24
TRENDS IN INDIAN FOREIGN TRADE – 1970 - 2009

25
FOREIGN TRADE POLICY 2009-2014 –
AN INTRODUCTION
The year 2009 witnessed one of the most severe global recessions in the post-war period. Countries across
the world have been affected in varying degrees and all major economic indicators of industrial production,
trade, capital flows, unemployment, per capita investment and consumption have taken a hit. The WTO
estimates forecasted global trade as likely to decline by 9% in volume terms and the IMF estimates a
decline of over 11%.

The recessionary trend has huge social implications. The World Bank estimate suggested that 53 million
more people would fall into the poverty net this year. Though India has not been affected to the same extent
as other economies of the world, yet the country’s exports have suffered a decline in the last 10 months due
to a contraction in demand in the traditional markets of our exports.

Before defining the objectives of the new policy it would be useful to take stock of achievements and failures
in the foreign trade over the last 5 years. The foreign trade policy announced by the Government in 2004
had set two objectives, namely, (i) to double the country’s percentage share of global merchandize trade
within 5 years and (ii) use trade expansion as an effective instrument of economic growth and employment
generation.

26
The short term objective of the foreign trade policy of 2009 – 2014 is to prevent and reverse the declining
trend of exports and to provide additional support especially to those sectors which have been hit badly by
recession in the developed world. Also, policy objective of achieving an annual export growth of 15% with
an annual export target of US$ 200 billion by March 2011 has been set. In the remaining three years of this
Foreign Trade Policy i.e. upto 2014, the country should be able to come back on the high export growth
path of around 25% per annum. By 2014, the government expects to double India’s exports of goods and
services. The long term policy objective for the Government is to double India’s share in global trade by
2020.

To achieve the twin objectives of the Foreign trade Policy, of doubling India’s percentage share of global
trade by 2009 and to be an effective instrument of economic growth and development by giving a thrust to
job generation, an integrated approach is required. To this end, some issues need to be taken into account.

A foreign trade policy which aids export diversification and market diversification and helps in the expansion
of output scale and product differentiation, it should focus on strengthening the schemes for improving
performance EPZs/SEZs/EOUs, apart from focusing on export-oriented R&D and technological capacity-
building that have got inadequate attention. Given the increasing importance of exports of services, better
mechanisms are needed for an efficient Services Export Promotion Council. Implementation of the
Assistance to States for Development of Export Infrastructure (ASDEI) scheme would be crucial. It has
been noticed that trade finance through the Foreign trade Bank has been a success. This story needs to be
given special attention, along with the insurance and guarantee schemes of the ECGC. Without such
facilities at the ground level, scale economies are difficult to reap and product differentiation is tough to
come by.

These and other policy dimensions have the potential to increase India’s global trade presence and also
make foreign trade policy an instrument of economic development.

POLICY HIGHLIGHTS

Higher Support for Market and Product Diversification

26 new markets have been added under Focus Market Scheme (FMS).
Incentive available under FMS rose from 2.5 to 3 %
Incentive available under Focus product scheme (FPS) rose from 1.25% to 2%.
Widens scope for products to be included for benefits under FPS. Also, additional engineering
products, plastics and some electronic products get a look in.
Market linked focus product scheme (MLFPS) expanded by inclusion of products like
pharmaceuticals, textile fabrics, rubber products, glass products, auto components, motor cars,
bicycle and its parts etc. Benefits to these products will be provided if these are exported to 13
identified markets, Algeria, Egypt, Nigeria, South Africa,Tanzania, Brazil, Mexico, Ukraine, Vietnam,
Cambodia, Australia and New Zealand.
Common simplified application form introduced for taking benefits under FPS, FMS, MLFPS.
Higher allocation for market development Assistance (MDA) and Market Access initiative (MAI)
To aid technology upgradation of export sector, EPCG scheme at zero duty has been
introduced.Jaipur, Srinagar and Anantnag have been recognised as’ Towns of Export Excellence’ for
handicrafts; Kanpur,Dewas and Ambur for leather products; and Malihabad for horticultural products.
Export obligation on import of spares, moulds etc. under EPCG Scheme has been reduced by 50%.

27
 Focus Product Scheme benefit extended for export of ‘green products’ and some products from the
North East.

FLEXIBILITY PROVIDED TO EXPORTERS

Payment of customs duty for Export Obligation (EO) shortfall under Advance Authorisation / DFIA /
EPCG Authorisation has been allowed by way of debit of Duty Credit scrips. Earlier the payment
was allowed in cash only.
Time limit of 60 days for re-import of exported gems and jewellery items, for anticipation in
exhibitions has been extended to 90 days in case of USA.

SIMPLIFICATION OF PROCEDURES

Greater flexibility has been permitted to allow conversion of Shipping Bills from one Export
Promotion scheme to other scheme. Customs shall now permit this conversion within three months,
instead of the present limited period of only one month.
To reduce transaction costs, dispatch of imported goods directly from the Port to the site has been
allowed under Advance Authorisation scheme for deemed supplies. At present, the duty free
imported goods could be taken only to the manufacturing unit of the authorisation holder or its
supporting manufacturer.
Disposal of manufacturing wastes / scrap will now be allowed after payment of applicable excise
duty, even before fulfilment of export obligation under Advance Authorisation and EPCG Scheme.
The procedure for issue of Free Sale Certificate has been simplified and the validity of the Certificate
has been increased from 1 year to 2 years. This will solve the problems faced by the medical
devices industry.
Automobile industry, having their own R&D establishment, would be allowed free import of reference
fuels (petrol and diesel), upto a maximum of 5 KL per annum, which are not manufactured in India.
Acceding to the demand of trade & industry, the application and redemption forms under EPCG
scheme have been simplified.

POLICY ANALYSIS

The foreign trade 2009-2014 takes into consideration grim scenario of global trade in last 4 quarters
and takes initiatives to redress the situation. The policy aims at US $ 200 billions export by March
2011. The long term objective is to double the share of India in Global trade from the present level.

Focus Market Scheme & Focus Product Scheme has been more attractive. 26 new markets have
been added to the scheme. Incentive in FMS has been increased to 3% from the present 2.5%. A
large number of products have been included in the Focus Product Scheme (FPS) and the incentive
has been increased to 2% from the present 25%. Market Linked Focus Product Scheme has been
expanded.
Zero duty EPCG (Export Promotional Capital Goods) scheme has been introduced.

28
 Additional duty credit of 1% has been introduced for status holder for specified sector. The credit can
be utilized for import of capital goods on actual user condition.
Duty credit scrip issued under VKGUY has been made transferable, subject to the condition that it
can be transferred to status holders only for import of cold chain equipments.
DEPB has been extended till 31.December.2010.
Duty drawback for gold jewellery export has been introduced. Import of diamonds allowed for
grading and certification.
Emphasis of export growth on employment generating sectors like textile, processed foods, leather,
gems & jewellery, tea, handloom etc.
Some benefits given to EOU (Export Oriented Units) Sector.
Minimum value addition of 15% prescribed in Advance authorization scheme.
Certain measures to provide flexibility to the exporter have been provided. Now debit in
DFIA/advance authorization/EPCG is allowed for payment of custom duty on shortfall of export
obligation. Restricted items shall be allowed under transferred DFIA as DFRC earlier. Transit loss
claim received from insurance companies is allowed export obligation.
Effort has been made to reduce the transaction cost.

CURRENT SCENARIO

The current account deficit for July–September 2009 was marginally higher from the year-ago period
despite a lower trade deficit due to the decline in net invisible receipts.
Invisible receipts declined by 15.1 per cent, against a growth of 33.1 per cent last year.
Major categories of services exports registered a decline during the quarter. Invisibles include
software services receipts and non-software services receipts such as business services,
construction and royalties, copyrights and licence fees.

OIL IMPORTS FALL

According to the Balance of Payments data released by the Reserve Bank of India on Thursday, the
trade deficit was lower at $32.2 billion for the second quarter of the fiscal 2009-10.
In the corresponding quarter last year it was $39.1 billion.
The lower trade deficit was on account of a larger fall in imports, especially oil imports, on account of
lower oil prices as compared to last year.
The current account deficit was at $12.62 billion, marginally higher than $12.57 in the same period
last year.

DECLINING TREND

The exports and imports continued the declining trend during Q2 of 2009-10.
Exports declined to $42.630 billion ($53.630 billion). Import payments declined to $74.55 billion
($92.75 billion).
Oil imports declined by 45.7 per cent and non-oil imports by 27.5 per cent.

29
 The decline in oil imports was due mainly to a significant decline in oil prices at $67.6 per barrel (in
July 2008 it was at a peak of $132.5 per barrel).
Oil imports accounted for about 28.7 per cent of total imports (35 per cent).
Net invisibles were lower at $19.6 billion ($26.5 billion), due mainly to a decline in services exports,
particularly non-software services receipts.
This saw a decline of $4.42 billion against a gain of $3.793 billion last year. Software services
exports grew by $10.20 billion ($11.18 billion).
Net capital flows into the country were higher at $23.6 billion ($7.09 billion), due mainly to net foreign
investment inflows.

HIGHER FDI

The net foreign direct investments flows were higher at $7.11 billion ($4.9 billion).
Portfolio investment recorded a net inflow of $9.67 billion (as against net outflows of $1.3 billion).

FII INFLOWS

This included inflows from foreign institutional investors of $7.03 billion (against outflows of $1.43
billion) and from ADRs/GDRs of $2.66 billion ($136 million). Inflows under NRI deposits were higher
at $1.04 billion ($259 million).

30
FOREIGN DIRECT INVESTMENT
Improving global sentiment and a growing conducive environment in India are increasingly facilitating foreign
investors’ role in the country currently. Several other factors being attributed to the revival in foreign direct
investments (FDI) in the country include liberal investment policies and reforms, innovative and technologically
advanced products being manufactured in India and low cost and effective solutions.

India has been ranked at the third place in global foreign direct investments this year, following the economic
meltdown, and will continue to remain among the top five attractive destinations for international investors during
the next two years, according to United Nations Conference on Trade and Development (UNCTAD) in a new
report on world investment prospects titled, ‘World Investment Prospects Survey 2009-2011’.

Foreign direct investment (FDI) inflow to India was US$ 3.5 billion in July, 56 per cent higher than US$ 2.25
billion in the same month a year ago, according to the Commerce and Industry Minister, Mr Anand Sharma. FDI
equity inflows amounting to US$ 10.532 billion were received during April-July 2009.

India's FDI inflows touched about US$ 7.016 billion in the April-June period this fiscal. The country has attracted
foreign direct investment (FDI) worth US$ 2.58 billion in June 2009, an eight per cent increase over the same
month last year as against the FDI inflow of US$ 2.39 billion in June 2008, according to the Department of
Industrial Policy and Promotion (DIPP). The FDI inflow in May 2009 was US$ 2.1 billion.

While the services sector comprising financial and non-financial services attracted US$ 1,855 million in April-
June period of the current fiscal, computer software and hardware sector garnered about US$ 239 million in the
said period.

POLICY INITIATIVES

To bolster higher overseas investment into cash-strapped micro and small enterprises (MSEs), the government
has liberalised the FDI norms for the sector replacing the current 24 per cent ceiling on foreign holding with the
sectoral caps. These industries will now be guided like other large enterprises as far as FDI is concerned.

INVESTMENT SCENARIO

The Cairn-ONGC consortium has US$ 2 billion-investment and plans to invest a further US$ 1.8
billion by 2011.

31
 German luxury car manufacturer, Audi, is eyeing higher sales this year than its earlier target of 1,500
units and as part of its US$ 42.83 million investment in India, the company will set up a new
assembly line at its Aurangabad plant to assemble the Q5 model from 2010.
Italian carmaker, Fiat, will source more than US$ 1 billion worth components for its global
businesses in 2010 from India.
Accor Hospitality has said it will invest US$ 130 million to come up with 50 hotels in India by 2012.
HealthHiway, an initiative by the Apollo Hospitals Group providing software solutions for the
healthcare sector, has received an investment of US$ 4 million from Silicon Valley-based venture
capital firm, Greylock Partners.
Japanese tyre manufacturer, Bridgestone, which has a plant at Pithampur, near Indore, will set up a
second facility near Pune at an investment of about US$ 420.72 million.
The German carmaker, Volkswagen, has decided to invest US$ 453.66 million more towards
expansion at its Chakan plant.
South Korean steel giant, Posco, plans to set up a galvanising plant at an investment of US$ 907.32
million in Raigad district of Maharashtra.
Clinton Climate Initiative (CCI), a programme of US-based William J Clinton Foundation, has signed
a memorandum of understanding (MoU) with the Gujarat government for setting up solar parks in
Gujarat and the proposed 3,000 mega watt (MW) solar power project will see an investment of over
US$ 10.28 billion.
PepsiCo is doubling its investment in its Indian beverage business for calendar 2009 to over US$
220 million to increase the capacity of the business.
Robert Bosch Engineering and Business Solutions Ltd (RBEI), the engineering and IT services
subsidiary of Bosch in India, said it would invest an initial US$ 34.89 million in a new centre in
Coimbatore, which would be developed in three phases.
Mexican cinema chain, Cinépolis, will invest around US$ 163.1 million in south India for setting up
multiplexes across the four states. The company has lined up US$ 346.57 million for its proposed
expansion plan in the country.

PRESENT SCENERIO

With the government planning more liberalisation measures across a broad range of sectors and continued
investor interest, the inflow of FDI into India is likely to further accelerate.

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33
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Industrial policy
In the post-World War II period India was probably the first non-communist developing country to have instituted a
full-fledged industrial policy. The purpose of the policy was to co-ordinate investment decisions both in the public
and the private sectors and to seize the ‘commanding heights’ of the economy by bringing certain strategic
industries and firms under public ownership. This classical state-directed industrialisation model held sway for
three decades, from 1950-1980. The model began to erode in the 1980s. Following a serious external liquidity
crisis in 1991 the model was fundamentally changed.
Following were some of the areas where this INDUSTRIAL POLICY RESOLUTION, 1948 emphasized on:-

The importance to the economy of securing a continuous increase in production.

Its equitable distribution.
State must play of progressively active role in the development of Industries and can to
undertake any type of industrial production. It laid down that besides arms and ammunition,
atomic energy and railway transport, which would be the monopoly of the Central Government,
the State would be exclusively responsible for the establishment of new industries with the help
of private players.
The rest of the industrial field was left open to private enterprise though it was made clear that
the State would also progressively participate in this field.

Then came in the INDUSTRIAL POLICY RESOLUTION, (30th April, 1956) which followed the same path as the
previous policy but added the following points

Improving living standards and working conditions for the mass of the people and to reduce
disparities in income and wealth.
To prevent private monopolies and concentration of economic power in different fields in the
hands of small numbers of individuals.
The State will progressively assume a predominant and direct responsibility for setting up new
industrial undertakings and for developing transport facilities.
Undertake State trading on an increasing scale. At the same time private sector will have the
opportunity to develop and expand.
The principle of cooperation should be applied whenever possible and a steadily increasing
proportion of the activities of the private sector developed along cooperative lines.
The adoption of the socialist pattern of society as the national objective.
Categorization of industries.
The Government of India would stress the role of cottage and village and small scale industries
in the development of the national economy.

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The Industrial Policy Resolution of 1956 still remained valid, but certain structural distortions had crept in the
system. This policy resolution was made in 2nd February 1973 to take care of these distortions.

It provided for a closer interaction between the agricultural and industrial sectors.
Accorded the highest priority to the generation and transmission of power.
The list of industries exclusively reserved for the small scale sector was expanded from 180
items to more than 500 items.
Within the small scale sector, a tiny sector was also defined with investment in machinery and
equipment upto Rs.1 lakh and situated in towns with a population of less than 50,000 according
to 1971 census figures, and in villages.
Special legislation to protect cottage and household industries was also proposed to be
introduced.
It was also decided that compulsory export obligations would no longer be insisted upon while
approving new industrial capacity.
In the areas of price control of agricultural and industrial products, the prices would be regulated
to ensure an adequate return to the investor.

Then, came INDUSTRIAL POLICY in DECEMBER 23, 1977 which highlighted on producing inputs needed by a
large number of smaller units and making adequate marketing arrangements.

The Government would promote the development of a system of linkages between nucleus large
plants and the satellite ancillaries.
To boost the development of small scale industries, the investment limit in the case of tiny units
was enhanced to Rs.2 lakh,of small scale units to Rs.20 lakh and of ancillaries to Rs.25 lakh.
A scheme for building buffer stocks of essential raw materials for the Small Scale Industries was
introduced.
Industrial processes and technologies aimed at optimum utilisation of energy or alternative
sources of energy would be given special assistance, including finance on concessional terms.

INDUSTRIAL POLICY MEASURES IN THE YEAR 1980:-

Policy measures initiated in the first three decades since Independence facilitated the
establishment of basic industries and building up of a broad based infrastructure in the country.
The Seventh Five Year Plan (1985-1900), recognized the need for consolidation of these
strengths and initiating policy measures to prepare the Indian industry to respond effectively to
emerging challenges.
A number of measures were initiated towards technological and managerial modernization to
improve productivity, quality and to reduce cost of production.
The public sector was freed from a number of constraints and was provided with greater
autonomy.
There was some progress in the process of deregulation during the 1980s.

India in 1991:-
The year 1991 was an epoch making year for our country.

36
The most pressing problem then was the BALANCE OF PAYMENTS position.
There was foreign exchange in the kitty equivalent to only 3 weeks of exports.
With India’s credit rating down-graded, foreign banks showed reluctance to lend money to India.
The govt. was forced to transfer gold to vaults abroad as security for the loans. In 1979, India’s
forex reserves were $7 bn. By 1989, it had slipped to $ 4 bn.
Similarly the country’s foreign debt, which was $18 bn, had a four fold increase to $72 bn.
Dollars. Our oil import bill also jumped up due to Iraq’s invasion into Kuwait.
The fall of two successive Indian Governments at the centre within a span of 2 years also
contributed to the crisis.
Further more the inflation reached a peak of 16.7% in August 1991. Facing this situation called
for some bold and courageous steps.
Thus a fresh and new approach in the form of INDUSTRIAL POLICY,1991 was introduced to the
management of the Indian economy with steps taken to correct various distortions.

INDUSTRIAL POLICY 1991

Government is pledged to launching a reinvigorated struggle for social and economic justice, to
end poverty and unemployment and to build a modern, democratic, socialist, prosperous and
forward-looking India which is possible only if India grows as part of the world economy and not
in isolation.
Greater emphasis placed on building up our ability to pay for imports through our own foreign
exchange earnings.
Government is also committed to development and utilisation of indigenous capabilities in
technology and manufacturing as well as its upgradation to world standards.
Government will continue to pursue a sound policy framework encompassing encouragement of
entrepreneurship, development of indigenous technology through investment in research and
development, bringing in new technology, dismantling of the regulatory system, development of
the capital markets and increasing competitiveness for the benefit of the common man.
The spread of industrialization to backward areas of the country will be actively promoted.
Foreign investment and technology collaboration will be welcomed to obtain higher technology,
to increase exports and to expand the production base.
Government will endeavor to abolish the monopoly of any sector or in any field of manufacture,
except on strategic or military considerations and open all manufacturing activity to competition.
The Government will ensure that the public sector plays its rightful role in the evolving
socioeconomic scenario of the country.
Government will fully protect the interests of labour, enhance their welfare and equip them in all
respects to deal with the inevitability of technological change.
Labour will be made an equal partner in progress and prosperity.
Workers’ participation in management will be promoted and workers cooperatives will be
encouraged to participate in packages designed to turn around sick companies.
The major objectives of the new industrial policy package will be to build on the gains already
made, correct the distortions or weaknesses that may have crept in, maintain a sustained growth
in productivity and gainful employment and attain international competitiveness.
Need to preserve the environment and ensure the efficient use of available resources.

37
 Government’s policy will be continuity with change.

The thrust of the New Industrial Policy was on 8 major areas concerning:
Fiscal
Trade
Industrial
Balance of Payments (BOP)
Financial
Agricultural
Poverty alleviation
Human Resource Policies.

INDUSTRIAL POLICY AND IT

The growth of a modern, highly export-orientated IT industry is the arena of one of the main
controversies concerning the effectiveness of Indian industrial policy.
It is argued in some quarters that the outstanding achievements of the IT industry, to be outlined
below, are due to its ‘benign neglect’ by the government.
As the industry was a relatively late-comer on the scene in India, it is thought to have been
spared the bureaucratic inefficiencies of heavy government intervention of the Nehru-
Mahalanobis period of 1950-1980.
Further, it is argued that the industry has been successful precisely because its evolution in the
1990s and 2000s has coincided with the overall liberalization of the Indian economy as a result
of reforms ushered in by Dr Manmohan Singh in 1991.
There is, however, a large body of analysis and evidence that suggests that this characterization
of benign neglect by the government is grossly inaccurate and misleading.

The Industrial Policy 1991 is evaluated by analyzing the failures and achievements. The main failures and
achievements of the Industrial Policy 1991 are as follows:

Failures
No clear evidence of positive impact on growth: The NIP 1991 liberalized the Indian industry
with the main objective to accelerate industrial growth in the country. However, there is no clear
evidence of positive impact of the policy on industrial growth. Although, Indian industry shown good
growth from 1993 to 1996. However there was sharp decline in industrial growth since 1996. Also,
there were wide fluctuations in growth of the various sub-sector of the industry.
Problem of unemployment: The unemployment is on the increase due to restructuring of the
large industries. For instance, there has been negative growth in unemployment in the public sector
as well as in the organized private sector since 2001. The employment in public sector has dropped
from 192 lakhs in 1992 to 186 lakhs in 2003.
Problems for domestic firms: The liberalized entry of foreign MNC in the Indian market can have
serious consequence on the domestic industry. The domestic firms may find it difficult to compete
with high tech and highly professional foreign MNCs. However, liberalized has create an opportunity
for Indian firms to upgrade and compete globally with or without support of foreign collaborations. It

38
 is the survival of fittest, the basic low of nature.
Problem of Delicensing: The NIP 1991 recommended the automatic expansion of production
capacity without government approval in all industries. This has resulted in heavy expansion of
capacity in the 1990s in all sector of the industry. The expansion in capacities has resulted in
recession (1991-93) as supply far exceeded demand.
Problem of foreign technology: Critics point out that the foreign technology may not suit to Indian
conditions. Again there is a possibility of overdependence on foreign technology.
Problems of Dereservation of public sector: The NIP, 1991 advocated dereserved industries of
public sector. This has resulted in expansion of capacities in the private sector, which in turn had
resulted in recession in the industrial sector between 1991 and 1993.

Achievements
Recovery of industrial growth: The Indian industry, which was under sever crisis in 1991-92. Has
been revived to a certain extent, in spite of global recession during 1990s. In 1991-92, the industrial
growth was miserably low of about 0.6%. the industrial growth reached a high of 13% in 1995-96.
However, it came down in subsequent years, due to recession in the world economy and
consequently in the Indian economy. The industrial growth rate in 2004-05 was 8.4%.
Foreign investment: The NIP 1991 liberalized foreign direct investment. Automatic approval of
foreign direct investment (FDI) was allowed up to 51% of equity and even up to 100% in certain
cases. FDI gives opportunity for technological upgrading, gaining access to global managerial skills
and practices, to make optimum use of resources, and to attain international competitive through
higher efficiency.
Foreign technology: The NIP 1991 has liberalized foreign technology agreements. Automatic
permission is being granted for the import of foreign technology with a lump sum payment of up to 2
million US dollars. This enables the import of foreign technology. The import of foreign technology
has helped to improve the import of the international competiveness of Indian firms. Again, the
domestic consumers are at an advantage due to improved quality of goods and services, and that
too at reduced prices.
Benefits of Delicensing: The NIP 1991 abolished licensing, except for 18 industries, which
subsequently brought down to 6 industries. Due to delicensing, Indian industarlist were freed from
licensing formalities and as such they could concentrate on production activity more effectively.
Benefits of Dereservation: The NIP 1991 dereserved public sector. At present, there are only
three units reserved for public sector units which include railways, atomic energy and specified
minerals. The Dereservation has enabled the private sector to enter in those areas which were
earlier reserved exclusively for public sector. The dereservation has enabled the private firms to
compete effectively, which in turns improved the industrial efficiency and productivity.

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INFORMATION TECHNOLOGY POLICY
In India Information Technology is still the fastest growing segment both in terms of production and exports.
With complete de-licensing of the electronics industry with the exception of aerospace and defense
electronics, and along with the liberalization in foreign investment and export-import policies of the entire
economy, this sector is not only attracting significant attention as a enormous market but also as a potential
production base by international companies.
The year of 2008 was a year of transformation for the Indian IT – BPO sector as it began to re-engineer
challenges posed by macro-economic environment, with the worldwide spending aggregate estimated to
reach nearly USD 1.6 trillion, a growth of 5.6 per cent over the previous year. In recent times, the IT-BPO
industry has become a growth engine for the economy. The sector contributes significantly to increase
nation's GDP, generate urban employment and exports. During the year 2008, the sector maintained its
double digit growth rate and was a net employer. The recent growth has been fueled by increasing
diversification in the geographic base and industry verticals, and adaptation in the service offerings
portfolio. The Indian IT-BPO industry has displayed resilience and tenacity in countering the unpredictable
conditions and reiterating the viability of India’s fundamental value proposition. Consequently, India has
retained its leadership position in the global sourcing market.
As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY98 to an estimated
5.8 per cent in FY09. Net value-added by this sector, to the economy, is estimated at 3.5-4.1 per cent for
FY09.
The Indian IT-BPO sector has built a strong reputation for its high standards of service quality and
information security - which has been acknowledged globally and has helped enhance buyer confidence.
The industry continues its drive to set global benchmarks in quality and information security through a
combination of provider and industry-level initiatives and at strengthening the overall frameworks, creating
greater awareness and facilitating wider adoption of standards and best practices. The Data Security

40
Council of India (DSCI) was launched in 2007 to institutionalize efforts to further enhance the information
security environment in India.
High offshore component of delivery and superior execution in multi-location delivery continue to be key
differentiators. Broad-based industry structure; IT led by large Indian firms, BPO by a mix of Indian and
MNC third-party providers and captives, reflects the depth of the supply-base. While the larger players
continue to lead growth, gradually increasing their share in the industry aggregate; several high-performing
Small and Medium Enterprises (SMEs) also stand out.
With a large pool of skilled manpower - chartered accountants, doctors, MBAs, lawyers, research analysts -
India would be able to add value to the global KPO business and its high-end processes like valuation
research, investment research, patent filing, legal and insurance claims processing, online teaching, media
content supply, among others. Skilled manpower and multi lingual capabilities combined with the
advantages of lower costs can help the country to emerge as a frontrunner in KPO, globally. Increasing
adoption of technology in the domestic industries is already beginning to reflect in their enhanced
performance and competitiveness.

IT-BPO SECTOR
Indian IT-BPO grew by 12 per cent in FY2009 to reach USD 71.7 billion in aggregate revenue. Software
and services exports (includes exports of IT services, BPO, Engineering Services and R&D and Software
products) reached USD 47 billion, contributing nearly 66 per cent to the overall IT-BPO revenue aggregate.
IT-BPO exports (including hardware exports) reached USD 47.3 billion in FY2009 as against USD 40.9
billion in FY2008, a growth of 16 per cent.
While the US (60 per cent) and the UK (19 per cent) remained the largest IT-BPO export markets in
FY2008, the industry footprint is steadily expanding to other geographies - with exports to Continental
Europe in particular growing at a CAGR of more than 51 per cent over FY2004-2008.
The industry’s vertical market exposure is well diversified across several mature and emerging sectors.
Banking, Financial Services and Insurance (BFSI) remained the largest vertical market for Indian IT-BPO
exports, followed by Hi-tech/Telecom which together accounted for 61 per cent of the Indian IT-BPO
exports in FY2008.
EXPORTS
IT-BPO Sector-IT-BPO Sector contributing 66 per cent to the overall revenue aggregate, exports remained
the mainstay of the Indian IT-BPO growth story.
IT services- IT services (excluding BPO, product development and engineering services), contributed 57
per cent to total exports to reach USD 26.9 billion.
BPO services-BPO services exports, up 18 per cent, was the fastest growing segment across software
and services exports driven by scale as well as scope. BPO service
Software and services exports-Software and services exports, accounting for over 99 per cent of the total
exports, reached USD 47 billion and directly employed over 1.7 million professionals in FY2009.
Software product development and engineering services-Complementing the strong growth in IT
services and BPO exports was the continued growth across Software product development and
engineering services, which also reflected India's increasing role in global technology IP creation. Export
revenues from these relatively high-value-added services such as engineering and R&D, offshore product
development and made-in-India software products grew at 15 per cent, and clocked USD 7.3 billion in
FY2009.
Broad-based growth across all the segments of IT services, BPO, Software products and engineering
services, is reinforcing India's leadership as the key sourcing location for a wide range of technology related
services with increasing traction in RIM & Application management and widening service portfolios.

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HISTORY
With the objective to help India emerge as an Information technology super power, a task force on IT was
set up in May 1998. This task force submitted 3 reports:
Information Technology Action Plan I (Software)
Information Technology Action Plan II (Hardware)
Information Technology Action Plan III(Long Term National IT Policy)
The 108 Recommendations of the IT Action Plan Part-I emphasize the Policy Framework
required for creating an ambience for the accelerated flow of investment into the IT sector, with
specific orientation towards the Software Industry.
The Information Technology Action Plan Part-II furnishes 84 Policy instruments for the
Development, Manufacture and Export of IT Hardware.
The Task Force advocated that the software industry and the hardware industry are two sides of
the gold coin representing India emerging as a global IT super power.
The success of one, whether it is export of software of $ 50 billion by the year 2008 or IT
penetration drive for realizing IT for all by 2008, depends on the concomitant success of the
other.

Following are the steps taken towards the IT Action Plan 3:-
Migration of mathematical talents into mathematically oriented software development, through
adequate number of scholarships as well as promotional retraining programs, is also being
encouraged now.
To create confidence among the recipient organizations in the developed countries for Indian
software export, the existing copyright law, which is one of the toughest in the world, will be
implemented in practice by suitably enforcing the existing laws. (IT Action Plan Part III)
With India having the largest pool of English speaking IT manpower in the world, the GoI will now
encourage furtherance of this strategic advantage for increasing software export.

Apart from the above steps the following areas were also taken care of by the policy as a part of the Action
Plan 3
FACILITATING INFRASTRUCTURE AND TECHNOLOGY

o Bandwidth requirements

 Interconnectivity between networks of different service providers

 Drastic Reduction in tariffs to encourage more value addition.
 Steep volume discounts to help companies take more bandwidth and provide better customer
service.
 This business alone was projected to bring in an additional $ 30 billion in foreign exchange by 2008.
 IT enabled services cos be permitted to directly negotiate capacity requirements with fibre optic
companies.
 Web based call centers

o Legal Framework for IT:-

 Industry code of practice.

 E-commerce code for personal information protection.

42
  Parents advisory group for protecting children interests.

o Infrastructure and State:-

 Many state governments are also taking initiative in developing suitable fiscal incentives,
infrastructure facilities, coupled with adequate pool of skilled manpower.
 The state of Andhra Pradesh was one of the first to announce a special policy for IT Enabled
Services industries.

o IT for the Masses:-

 Like many other countries, the internet in India is presently used by limited segments of the
population. Sixty eight cities and towns in India constitute 92% of the total internet users (NASSCOM
survey).
 The Indian government’s target of IT for all by 2008, set in its action plan is in accordance with the
Information Society Index.
 One way of increasing internet penetration in multi lingual India is through the development of
softwares in regional Indian languages which had already been implemented by the Andhra Pradesh
government on a trial basis.

o Creating Internal Demand

 Besides setting high targets for exports, the IT Action plan also focuses on creating policy ambiance
for expanding the domestic market for IT.

Also the department of Information technology in India has set various policies guidelines which are
stated below:-

Policy Guidelines/Document to Establish State Wide Area Network (SWAN)

Policy Guidelines for State Data Centre (SDC) 
Policy for .IN Internet Domain Registration
.IN Internet Domain Name-Policy Framework and Implementation
Guidelines for Capacity Building and Institutional Framework for e-governance under NeGP .
Guidelines for submission of proposals for seeking DIT support for organizing Conferences,
Seminars, Workshops, Symposiums etc. in select areas of Electronics, Information and
Communication Technology (ICT)
Guidelines for preparing a project proposal
Guidelines for Implementation of the Common Services Centres(CSC) Scheme in States

BPO policies:-
The GoI has recently released first set of terms and conditions for BPO operators in India. The new policy
initiatives are broad based and are aimed at liberalizing BPO operations in India. The salient features of the
announcement made through a press note issued by the Department of Telecommunications are:
BPOs are being permitted on non exclusive basis against the requests received from IT service
providers. These BPOs can be international or domestic BPOs.

43
 However, no interconnectivity of the international and domestic BPOs is permitted. But
interconnection of two domestic BPOs of the same company is permissible, subject to prior
written approval from DoT.
International BPOs will be permitted on IPLCs (International Public Leased Circuit) only and will
cater to calls from foreign end PSTN (Public Switched Telephone Network). However, no PSTN
connectivity will be permitted at Indian end. On Indian end, even linking to any private or public
network is not permitted for the IPLC, even if it is of the same organization
The domestic call canter can have PSTN connectivity at one end or both ends or at the
multipoint in a more complex configuration, with only incoming and with outgoing disabled at all
places wherever PSTN termination is provided.

No other interconnectivity, except permitted as above, with any public or private network, shall be
permitted to the BPO set up.

Conclusion
All discussions about the economy right now centre around if and when the government should exit from its
stimulus. While the major levers of monetary policy such as a hike in Cash Reserve Ratio, policy rate hike (repo
and reverse repo), or action on capital flows are untouched for now, the RBI has already started exiting the
monetary stimulus of last year in a small way. It has also changed its monetary stance from accommodative to
neutral. There are some influential policymakers who argue that any monetary tightening could halt the nascent
recovery of the Indian economy. It is nobody's case that there should be a cold turkey approach to withdrawing
the monetary stimulus. While the government has made it clear that it would not put through fiscal exit
measures, it should pay attention to certain structural issues.

The Foreign trade Policy should aim to double India’s percentage share of global trade and be an effective
instrument of economic growth and development by giving a thrust to job generation, an integrated approach is
required 

To bolster higher overseas investment into cash-strapped micro and small enterprises (MSEs), the government
should further liberalise the FDI norms for the sector replacing the current 24 per cent ceiling on foreign holding
with the sectoral caps.

The major objectives of the new industrial policy package, 1991 was to build on the gains already made, correct
the distortions or weaknesses that may have crept in in the previous industrial policies, maintain a sustained
growth in productivity and gainful employment and attain international competitiveness.

The Indian IT-BPO sector has built a strong reputation for its high standards of service quality and information
security - which has been acknowledged globally and has helped enhance buyer confidence. The industry
continues its drive to set global benchmarks in quality and information security through a combination of provider

44
and industry-level initiatives and at strengthening the overall frameworks, creating greater awareness and
facilitating wider adoption of standards and best practices.

45