MACRO ECONOMIC POLICIES

IN INDIA

1. Industrial Policy
2. Monetary Policy
3. Fiscal policy – Rajachellaiah committee
4. Trade policy – 2004- 2006
5. Exim policy - 2002- 2007

INDUSTRIAL POLICY

Industrial policy refers to government’s policy towards industries – their

establishment, functioning, growth and management of. This indicates the respective
areas of large, medium and small sector industries, foreign capital, labour tariff and other
related aspects.

When India became independent in 1947, the industrial base of the economy was
very small and the industries were be set with many problems such as shortage of raw
material, deficiency of capital, bad industrial relations etc.,

The investors were not sure about the industrial policy of the new national
government and the industrial climate was wrought with uncertainties and suspicious.
The Government thus called an Industrial Conference in December 1947 to improve
matters and remove the uncertainties and suspicious in the minds of investors and
entrepreneurs. The conference adopted a resolution for industrial peace and
recommended a clear – cut division of industries into the public sector and private sector.

Industrial Policy Resolution of 1948

The First industrial policy resolution was issued by the government of India on
April 6th 1948. Following were the main features of the Industrial Policy 1948.

Acceptance of the importance of both private and public sector : The Industrial policy
resolution accepted the importance of both public and private sectors in the economy of
India. Consequently the resolution adopted a major two strategy are (i) Expansion of the
state sector in areas where it was operating and in new lines of production (ii) Allowing
the private sector to submit and expand albeit under proper direction and regulation.
Division of the Industrial Sector : This resolution divided into 4 categories namely :
Industries where State had a Monopoly – arms and ammunition, atomic energy and rail
transport.

Mixed Sector – Coal, iron and steel, air craft manufacturing, ship building, Manufacture
of telephone, telegraph and wireless apparatus and mineral oils.

The field of government control – 18 industries of National importance were included in

this category. Some of the industries included were – automobiles, heavy chemicals,
heavy machines, machine tools, fertilizers, electrical engineering, sugar, paper, cement,
cotton and woolen textiles.
The field of private enterprise – All other industries were left open to the private sector,
However the state could take over any industry in this sector also if its progress was
unsatisfactory.

Role of small and cottage industries : The 1948 resolution accepted the importance of
small and cottage industries in industrial development. These industries are particularly
suited for the utilization of local resources and for creation of employment opportunities.
The various problem of these industries should be solves by both central and state
government together to facilitate the development.

Other important features of the industrial policy –

The role of foreign capital in industrial development of the economy was recognized but
the need of regulating and controlling it according to the needs of the domestic economy
was deemed essential.
This resolution called for harmonious relation between the management and labour
The fair wage policy was enunciated
Labour participation in management was stressed.

Indian capitalists were satisfied with the industrial policy resolution of 1948. Since the
role assigned to the public sector in that policy was on the whole, acceptable to them.
However there were certain weaknesses and gaps in the 1948 policy and pt was subjected
to a no. of criticisms.



INDUSTRIAL POLICY RESOLUTION OF 1956

The 1948 policy remained in vogue for full eight years and determined the nature
and pattern of industrial development in the country. This period was marked by some
significant changes in the economy. The country had completed one five year plan in the
period 1951 – 56. industries [Development and Regulation Act] was passed in 1951 and
gave the government the necessary experience and expertise in regulating and controlling
industries in the private sector. The ruling party had declared ‘Socialist pattern of society’
as the goal for the country. Because of these factors, a new declaration of industrial
policy seemed essential. This come in the form of Industrial Policy Resolution of 1956.

The main objective of Industrial policy of 1956

To accelerate the rate of growth and to speed up industrialization.

To develop heavy industries and machine making industries.
To expand public sector
To reduce disparities in income and wealth.
To build up a large and growing co-operative sector.
To prevent monopolies and concentration of income and wealth in the hands of a few.
Salient features of the Industrial Policy 1956

Division of the industrial sector :- As against four categories in 1948 resolution, the 1956
resolution divided industries into the following three categories.

Monopoly of the state :- In the first category those industries were included whose future
development would be the exclusive responsibility of the state. 17 industries were
included here as schedule ‘A’. These industries can be grouped into the following five
classes are (i) defence industries (ii) heavy industries (iii) minerals (iv) transport and
communications and (v) power, of these four industries – arms and communication,
atomic energy, railways and air transport were to be the government monopolies,
remaining 13 all new units were to be established by the state. Existing units in private
were allowed to subsist and expand.

Mixed sector of public and private enterprises :- 12 industries listed in schedule ‘B’ were
included. These were : all other minerals, road, sea transport, machine tools, ferro alloys
and toolsteels, basic and intermediate product required by chemical industries such as
manufacture of drugs, dyestuffs and plastics, antibiotics etc., Here state would establish
new industries but would not deny the private sector if they wanted to establish.

Industries left for private sector :- All the industries not listed in schedule ‘A’ & ‘B’ were
included in this category. These were left open to private sector. The main role of state
was to provide facilities.

Mutual dependence of public & private sectors :- The public and public sectors were not
to be exclusive and totally independent of one another .

Assistance & control of private sector.

Importance of small scale & cottage industries.
Reduction of reg

INDUSTRIAL POLICY RESOLUTION OF 1977

In March 1977 the congress party was thrown out and janta party assumed power at the
centre. In december1977 the jantha Govt. announced a new industrial policy by the way
statement in the parliament
For the past 20yrs the govt. policy in the sphere of industry had been governed by IPR of
1956, the industrial policy despite some desirable elements had resulted in certain
distortion viz unemployment has increased, rural urban disparities have widened and the
rate of real investment has stagnated. The growth of industrial output has been no more
than 3-4%pa on the average, the incidence of industrial sickness has become wide spread
and some of the major industries have worst effected.

The main elements of the new policy are

1) Development of small scale sector- the main thrust of the policy of the jantha
party statement categorically mentioned “the emphasis on industrial policy so far
has been mainly on large industries neglecting cottage industries completely &
relegating small industries to a minor role……. The main thrust of the new
industrial policy will be on effective promotion & small industries widely
dispersed in rural areas & small towns. It is the policy of the govt. that whatever
 produced by small & cottage industries must only be so produced. The small
sector was classified into 3 categories.
a)cottage & household industries which provides self employment on a wide
scale.
b)tiny sector incorporating investment in industrial unit in machinery &
equipment up to Rs.1lakh..
c)small scale industries comprising industrial units with an investment up to
Rs.10lakhs & in case of ancillary industries with an investment fixed capital up to
Rs.15lakhs.

The purpose of the classification was specifically designed policy measures for
each category.
• As against 180 items in the list of reservation operating earlier, the govt
expanded it further to 807 items by march 1978
• The govt setup in each dist an agency called DIC i.e., District industries
centre to serve as the focal point of development for small scale & cottage
industries.
• The govt revamped the khadi & village industries commission with a view
to enlarge its area of operation.

2) Area for large scale sector – According to 1977 IP statement, the role of large
scale industries would be related to the program for meeting the basic minimum
needs of the population through wider dispersal of small scale & village industries
& to the strengthening of the agricultural sector.
a) basic industries, essential for providing infrastructure as well as
for development of small scale & village industries such as steel,
non-ferrous metals, cement & oil refineries.
b) Capital goods industries for meeting the machinery requirements
of basic industries as well as small scale industries
c) High tech industries which required large scale production were
related to agricultural & small scale industries
d) Other industries which were out side the list of reserved items

3) Approach towards large business houses :- the growth of large houses has been
disproportionate to the size of their internally generated resourses has been largely
based on borrowed funds from public financial institutions and banks. This
process must be reversed. The funds of the public sector financial institutions
would be largely available for the small sector.

4) Expanding role for the public sector:- It would also be used effectively as a
stabilizing force for maintaining essential supplies for the consumer.

5) Approach towards foreign collaboration:- The industrial policy stated – “In areas
where foreign technological know-how is not needed, existing collaborations will
not be renewed”

Approach towards sick units:- The policy statement suggested a selective approach on the
question of sick units. It mentioned : “ while the govt cannot ignore the necessity of
protecting existing employment has also to be taken into account.
 Evaluation of 1977 Industrial policy statement

This policy was just the extension of the 1956 policy except a few changes
like emphasis on SSI etc. The large scale has to rely on their own finance was the
big blow to large scale industries. It did not contain any radical policies regarding
foreign companies. The fall of Janatha party.

It was mainly done to encourage small-scale & cottage industries

as against the large-scale industries dominated y big industrial houses & multi-nationals.
Among the measures listed for their promotion were:
1) Reservation or demarcation of spheres of production;
2) Non-expansion of the capacity of large-scale industry.
3) Imposition of a cess on large-scale industry.
4) The govt in this industrial policy expanded its list from 180 items
807 items.

INDUSTRIAL POLICY DEVELOPMENT 1980

The decade of 1980s witnessed several steps to liberalized the IP as the following
discussion clearly brings out:
• Exemption from licensing: The limit of exemption from licencing was
continuously raised upwards. In March 1978 the limit was fixed at Rs 3 crore.
During 1980s it was first raised to Rs 5 cr in 1983 & then to a whopping Rs 15 cr
for projects located in non backward areas & Rs 50 cr for projects located in
backward areas in 1988-89.

• Relaxations to MRTP & FERA Companies: under the pretext of industrial

production and promoting exports, various concessions were provided to
companies failing under the MRTP act & FERA act. The most impt relaxation
related to the raising of the limit for MRTP companies from Rs 20 cr to Rs 100 cr
at one stroke in March 1985. On Dec 24th 1985, the govt permitted the
unrestricted entry pf large industrial houses & companies governed by FERA
into 21 high-technology items of manufacture.

• Delicensing: with a view to encouraging production, the government delicensed

28 broad categories of industries and 82 bulk drugs and their formulations. For
these industries only registration with the seceretariat for industrial approvals was
now required: no licence had to be obtained under the industries (development
and regulation)act.

• Re-endorsement of capacity: With a view to improving capacity utilization in

industries ,the government announced a scheme of capacity re-endorcement in
april, 1982. during 1986, this scheme was liberalised to allow undertakeings
which had achived 80 per cent capacity utilization (as against 94 per cent
earlier ) to avail of the facility. The re-endorsed capacity was to be calculated by
taking the highest production achived during any of the previous 5 years plus one
third thereof.
• Broad banding of industries : the scheme of broad banding of industries was
introduces on 1984. This implied the classification of under broad categories of
two wheelers, four wheelers, tractors as well as machinery fpr fertilizers
pharmaceuticals & paper & pupl etc into generic categories. This measures
intended to enable the manufacturers to change their product mix rapidly to
match changes in demand patterns with out incurring procedural delays & other
cost associated with seeking ammendmends to their industrial licence broad
banding was extended in stages to cover 45 industry groups.

• Minimum economic scales of operation: Another impt concept introduced in the

field of industrial licencing was that minimum economic level of operation. This
was introduced in 1986. the idea was to encourage of economics of scale by
expansion of existing install capacities if undertakings to minimum economic
levels of operations.

• Development of backward areas: For promoting the development of backward

areas. The govt extended the scheme of delicencing in March 1986 to MRTP &
FERA companies in respect of 20 industries for location in any centrally
declared backward area & 23 non appendix 1 industries for location in category
“A “ backward districts. The conditions permitting MRTP & FERA companies to
establish non appendix 1 industries in backward districts were also liberalised.

• Incentives for export production: various concessions were announce by

government in its industrial policy and export-import policy from time to time
topromote the expansion of exports. For exmpale, MRTP and FERA companies
were permited (out side the appendix 1 industry) if the product is predominantly
fro export. With a view to providing fillip to reduction in industries of high
national priority and/or those meant exclusively for export, the government
introduced section 22-A in the MRTP act where by it chould notify industries or
services to which sections 21 & 22 of the act will not apply. In October 1982 all
100% export – orinted industries set up in the free trade zones were exempted
from sections 21 & 22 of the act. In addition, the government identified some
industries which were specially important from export angle. These industries
were aloud 5% automatic growth per annum, up to a limit of 25% in a plan
period over and above a normal permissible limit for 25% excess production over
the authorized capacity.

• Enhancement of investment limit for SSI limits and ancillary limits: as started
earlier the july 1980 statement fixed the investment limit for small scale
industries at Rs,20 lakh and for ancillary units at rs,25 lakh. in march 1985 these
limits were enhanced to rs,35 lakh to 45 lakh respectively. For tiny units the
investment limit stood at Rs,2 lakh. a government notification issued in april
1981 raised the investment limit for SSI from Rs,35 lakh to 60 lakh and for
ancillary units from 40 lakh to 75 lakh. in February 1997 the investment limit for
SSI and ancillary units was raised to Rs,3 cr.the investment for tiny units was
raised from 5 lakh to 25 lakh. the investment limits for SSIs was reduced to Rs,1
cr in 1999.
 New Industrial policy, 1991

 Announced on July 24,1991.

 It deregulates the industrial economy in a substantial manner.

 The major objectives of this policy are:

 To build on the gains already made
 To correct the distortions or weaknesses that might have crept in
 To maintain a sustained growth in productivity and gainful employment
 To attain international competitiveness.

Main provisions of 1991 policy

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

 Public sector’s role diluted: The 1956 IP had reserved 17 industries for public
sector. The 1991 IP reduced this number to 8. In 1993, 2 industries deleted from
the list. In 1998, again 2 industries deleted. On May 2001,the govt opened up
arms & ammunition sector to the private sector. This now leaves only 3 industries
reserved exclusively fpr the public sector.

 MRTP limit goes: under MRTP act all firms with assets above a certain size(Rs
100 cr since 1985) were classified as MRTP firms. Such firms were permitted to
enter selected industries only and on a case by case approval basis. The new
industries policy therefore scrapped the threshold limit of assets in respect of
MRTP and dominant undertakings. The act has been accordingly amended.

 Free entry to foreign investment & technology: The new IP prepared a specified
list of high technology & high investment priority industries where in permission
was to be made available for direct investment upto 51 per cent foreign equity.
The limit was subsequently raised from 51% to 74% & then to 100% for many of
these industries.

 Other liberalization measures:

a)abolition of phased manufacturing programmes for new projects
b)removal of mandatary convertibility clause.

INDUSTRIAL POLICY CHANGES

PRE 1991 POLICY:

 Industrial licensing was the rule
 Public sector monopoly/dominance in strategic, basic & heavy industries
 MRTP act restrictions on entry & growth of large companies
 Foreign investment allowed only in select industries, that too subject to, normally,
a ceiling of 40% of total equity & prior permission
 Restrictive policy towards foreign technology
 Reservation of large number of products for small scale sector
CURRENT POLICY
 Licensing is an exception
 All but 2 industries are open to the private sector
 No such restrictions
 Foreign investment allowed in a large number of industries, including upto 100%
of equity in many of them. Automatic route available subject to specified conditions
 Very liberal policy towards foreign technology
 Reservation list is being pruned

Appraisal of 1991 policy

Benefits:

According to J C Sandesara, the new industrial policy seeks to

Raise efficiency and accelerate industrial production in five
different ways:

 All the provisions are such as do away with the prior clearance of the govt.
 It attracts capital, technology and managerial expertise from abroad.
 Privatization may increased efficiency.
 The Memorandum of Understanding may improve the performance of public
sector.
 Strengthening of MRTP will curb anti-competitive behaviors of firm in
monopoly. Oligopoly etc.

Criticism of 1991 policy

 No evidence of positive impact on industrial growth

 Distortions in production structure
 Threat from foreign competition
 Dangers of business colonalisation
 Misplaced faith in foreign investment
 Personalistic relationship and practices continue to prevail.

Trade policy: New foreign trade policy 2004-09

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

Objectives of FTP 2004-09

There are two major objectives namely:

 To double our percentage share of global merchandise trade within the next five
years.
 To act as an effective instrument of economic growth by giving a thrust to
employment generation.
Strategies to achieve its objectives:

 Unshackling of controls and creating an atmosphere of trust and transparency in

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

Main features of FTP 2004-09

1. Doubling share of global merchandise trade

2. Five thrust sectors: sectors with significant export prospect and with potential for
employment generation in semi-urban & rural areas are called as thrust sectors.
FTP announced specific strategies for this five sectors namely: Agriculture,
Handicrafts, Handlooms, Gems & Jewellery and Leather & Footwear. These sectors
were termed as ‘Special Focus Initiatives’.

Main features of FTP 2004-09

3. ‘Served from India’ to be built as a brand.
4. New categories of star houses.
5. Target plus Scheme.
6. Setting up of Free Trade and Warehousing Zones (FTWZs)
7. Sops/benefits for EOU
8. Reducing transaction costs and simplifying procedures.
9. Focus on infrastructure development
10. Other measures – Biotechnology parks will be set up, The board of trade will be
revamped, Financial support to exporters.

Critical evaluation of FTP

 Unrealistic export target-0.8 to 1.5 in 2009.

 Burden of tax incentives
 Danger of circular trading
 Risk of importing outdated machinery
 Policy fails to take a holistic view of trade issues.

Export-import policy(2002-07)
The govt. of India announced the new five year Export-import policy covering 10th five
year plan period of (2002-07) on march 31,2002.
The main initiatives were as follows:

 It had removed quantitative restrictions on all imports.

 The govt. decided to focus on the export of 106 items like electrical, electronic,
watches, footwear, jeweler etc. were identified in the medium term export strategy
released in Jan 2002.
 Many measures were announced to give major thrust to agri-exports – AEZ were
identified.

Export-import policy(2002-07)

4. Units set up in SEZs (Special economic zones) were granted a number of concessions
and exemptions- income tax benefit, permission to Indian banks to set up overseas
banking units(OBUs) in SEZs. These banks were exempted from RBI restrictions.
5. To ensure greater participation of states in export promotion. The center increased fund
allocation under the assistance to States for infrastructural Devt. For Exports scheme.
6. It places a special focus on the small-sector which generates almost 50% if India’s
esports.
7. The status holders, export houses, trading houses were granted special benefits.- 100%
Foreign Exchange in external accounts.
Export-import policy(2002-07)
8. This Exim policy shifted as many as 50 items to the OGL (open general License or
free list).
9.It permitted relocation of industrial plants from foreign countries into India with any
license to attract foreign capital.
10. Changes were made in the Export Promotion Capital goods scheme to help exporters.
11. It announced lower inspection levels and simplification of schemes to make our
exports more competitive.

MONETARY AND FISCAL POLICY

Definition:
“It is a policy employing the central bank’s control of the supply of money
as an instrument for achieving the objective of general economic policy.” Harry
G. Johnson

Meaning:
The regulation of the money supply and the control of the cost and
availability of credit by the central bank of the country through the use of
deliberate and discretionary action for achieving the objectives of economic
policy.

Objectives of Monetary policy

In a developing economy, the monetary policy has often got to be

ambivalent. The objectives of the monetary policy may be stated as follows:
 i. To assist in the mobilization of savings in the community and promote capital
formation;
ii. To promote the spread of monetization and monetary integration in the country;
iii. To provide the credit necessary for the fulfillment of the targets of production and
trade;
iv. To extend monetary support to the authorities in the central task of the allocation
of resources by assisting them in the maintenance of an appropriate structure of
relative prices; and
v. To maintain a general price stability and present inflationary tendencies from
getting out of hand.

The importance f the monetary and banking system in the generation of

savings and in their mobilization is obvious. While inflationary financing at the
initiative of the government is an accepted method of development, it benefits
directly only the public sector. The banking system of the country has, however, a
greater responsibility and freedom of operation in the field of financing
development plans for the private sector. The monetary and credit policies of the
central bank, therefore, will have to take account of the objectives of the monetary
policy.

Monetary
control

Mobilisation
Price
of savings
stabilit
y

Credit
regulation
Capital
formatio Agriculture
n

Monetary
integratio
n
Promote
investm Industry
ent

In general, adjustment programmes are designed to achieve a certain

growth target in some credit or monetary aggregate. In countries where financial
innovations or a shift to a narket orienrarion of the economy are taking place, the
target for a particular monetary aggregate may become inappropriate and
therefore may have to be revised.

Instruments of Monetary policy

The tools available to the Reserve Bank for the attainmet of its objectives
are listed as follows:
 1. The Bank Rate and control over the lending rates of banks;
2. Open market operations;
3. Variable reserve requirements;
4. Selective controls;
5. Moral suasion.

Deposit Open
rates market
operatio
Lendin
ns
g rates

Statutory
Ban liquidity
k ratio
rate Monetar
y policy
Cash
reserv
Credit e ratio
plannin
g
Selectiv
Moral e credit
Credit control
suasion
authorizatio
n

The programmes of economic development have introduced a strong and

continuous expansionary trend in bank credit in which two factors cause
variations. For a variety of reasons the use of the two traditional instruments of
central bank control, viz., the bank rate and open market operations has been
rather limited in India, Variable reserve requirements, too, have been used only
once. On the other hand, selective credit controls and moral suasion have been
used fairly widely during recent years.

1. Bank rate and the banks lending policy: although the bank rate was intended to be
used primarily as the rate for buying or rediscounting bills of exchange or other
eligible connercial ppaperm in the absence of a genuine market in India for such
credit instruments.

2. Open market operations: The term Open Market Operations refers to the
purchase or
sale by the central bank of any Securities in which it deals, such as the govt.
securities, bankers acceptance or foreign exchanges.It exerts direct influence on
the supply of money in circulation.When central bank offers securities for sale, it
intends to contract the quantity of money & credit.When central bank buys
securities in the market, it intends to expand the quantity of money &
credit.During last two decades RBI is undertaking “switch operations” involves
purchase of one loan against sale of another or vice versa.It is more effective as
the govt. security market is well developed in the country.
3. Variable reserve requirements(Cash reserve ratio) : Under RBI (Amendment) Act
1962, the RBI is empowered to determine CRR for the commercial banks in the
range of 3% to 15% for the aggregate demand and time liabilities.It is used for
control of inflation during 1970 & 1980.It was increased from10 to 15%.It was
reduced to 8% in 2000-2001and in Oct 2001 to 5.5% later on 4.5% from June
14,2003.In Sep 11, 2004 it was raised to 5%.

4. Statutory liquid ratio: The Banking Regulation (Amendment) Act 1962 provides
for maintaining a minimum SLR of 25% by the banks against their net demand
and time liabilities. Empowered to raised up to 40% if required to control
liquidity.In 1990 it was raised to 38.5% to reduced commercial banks ability to
create credit and thus eased inflationary pressure and to made large resources
available for the state.Based on the Narsimham Committee recommendation the
govt. reduced SLR in stages from 38.5% to 25% in October 10, 1997 to till date.

5. Selective credit controls:Are meant to regulate credit for specific purposes or

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

FISCAL POLICY

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

Objectives of fiscal policy:

Fiscal policy of India is having following major objectives

1. Improving the growth performance of the economy- It affects growth by
influencing the mobilization of resources for development and by improving the
efficiency of resource allocation
2. Ensuring Social justice to the people.
3. High rate of economic growth: In order to accomplish this objective the fiscal
policy is directed towards ,
• To mobilize resources for financing the development programs in the
public sector
• To promote development in private sector
• To bring an optimum utilization of resources
4. Economic stability: This policy use taxation as an instrument for dealing with
inflationary of deflationary situations. when there is inflation direct taxation can
be screwed up and increased use of commodity taxes by a wider coverage and
higher rates can help to restrain consumption demand. When deflation emerges,
 the remedy would be to increase public expenditure and finance it by deficit
budjecting till the economy recovers.
5. Equitable distribution: Attainment of a wider measure of equality in incomes,
wealth and opportunities must form an integral part of economc development and
social advance.

Taxes
A tax is refered as a direct tax if the impact and incidence of the tax is on
the same person. Income tax, welth tax and gift tax are examples of direct
taxes. A tax is regarded as indirect tax if the impact and incidence of the
tax is on different persons. Excise duty , sales tax and customs duty are the
three important indirect taxes.

Central excise duty:

The principle source of the revenue for the central govt, the central
excise represents a levy on goods manufactured in the country. The key
provisions in the central excise duty are as follows
• There are two types of excise duties a) Specific and b) Advalorem
A specific duty is related to the quantum of manufacture. An
advalorem duty is based on the value of goods
• The modified value added tax scheme (MODVAT) essentially enables
manufacturers of excisable goods to reduce the final burden of excise duty
by climing credit for the excise duty paid on raw materials, components,
consumables and packing materials,

Sales tax:
A major revenue for the state govts, it is an important indirect tax
Sales tax is leviable on sale of goods. Originally goods were regarded as
angable, movable property. It also includes works contracts, hire purchase
and lease transactions and supply of food stuffs in hotels and restaurants.

Customs duty:
Customs duty is an important indirect tax levid by the central govt
on the import of goods into India or export of goods out of India the key
features are-
• The rates of customs duty applicable to various goods are specifed under
the customs tariff act 1975.
• Where duties are charged advalorem
• The central govt has been empovered under the act to notify the goods the
import or export of which is prohibited.

Revenue and expenditure of Union and State Governament

Revenue of the Union/ Central Government:

The revenues of the Govt. of India can be divided into two namely:
I. Tax-revenue
II. Non tax revenue.

I.Sources of Tax revenue:

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

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

3. Corporation Tax:
The income tax on the net profit of JSC is called corporation
tax. In 2006-2007 budget it counts for 20% revenue.

4. Customs:
includes both import & export duties, but the import duties
contribute nearly 90% of our total customs revenue. The major portion
is deriver from revenue duties and only a small portion from protective
duties. The proportion of customs in central revenue has been steadily
going down. In 2006-2007 budget it counts for 11%.

5. Tax on Capital gains:

It was first introduced in 1946, it contunied till march 1948 it is
revieved from april 1956 it is applicable to capital gains resulting from
the sale, exchange or transfer of capital assets. Capital gains arising
form the sale of agricultural land or of personal effects or house hold
goods are exempted form this tax. In 1970-71 it was extended to the
sale of agricultural land in urban areas with a population of not less
than 10000. These are not liable to super tax.

6. Tax on wealth:
introduced in 1957-58. It imposes two major taxes i.e wealth
and expenditure taxes. Wealth tax is imposed on the net wealth of
individuals and hindu undivided families. Wealth below Rs 15 lakhs is
exempted from the tax.

7. Service tax:
 introduced in 1994-95. A service tax on services on
telephones, non life insurance on stock brokers was introduced. This
tax is charged @ 12% on the amount of telephone bills.

8. Expenditure Tax:
On expenditure incurred in hotel rooms costing more than
Rs.400 per day. It has been extended to restaurants providing superior
air conditioning fecilities this tax is levid @ 20% rate. In 1998-99, this
tax is expected to yield revenue of Rs 300 crore.

9. Interest tax:
In 1974 It is first time in the world in India this tax was
introduced on banks income from interest on their lending. A 7% tax
on the gross interest income earned by the banks on their loans and
advances.

10. Gift Tax:

introduced in 1958 after the introduction of estate duty, there
was a marked tendency among the wealthy classes to make gifts of
their property and other assets to heirs. It was to check this tendency
and to avoid loss of estate duty. It is thus intended to act as a
complement to the estate duty.

II. Non tax revenue of central Govt.

1. Surplus profit of RBI

2. Currency & Coinage & Mint
3. Railways
4. Posts & Telegraphs
5. Profits of Public enterprises
6. Interest Receipts
7. Other Non tax revue sources:
Departmental receipts, Multipurpose River schemes etc.
In budget 2006-07 the total tax revenue is expected as 65% and next only 11%
from Non tax revenue and nest 24% from Borrowings and other liabilities.

1. Surplus profit of RBI:

All the profits of the RBI go to swell the revenues of the central
govt. In recent years the bank against treasury bills for financing the plans.
profits have been rising rapidly because of the large borrowings by the
govt from the central govt.

2. Currency, coinage and mint:

The govt also derives income from running the currency note
printing-presses. Besides, profits are made from the circulation of coins-
this profit being the difference between face value of the coin and their
manufacturing cost.

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

4. Posts and Telegraphs:

These are run for public convenience rather then for profits. Its
contribution is not so large.

5. Profits of public enterprises:

Under the five-year plans, a large number of big public enterprises
have been started and public investment running in hundreds of crores has
been made on most of such individual public enterprises owned by the govt.

6. Interest receipts:
The large non-tax sources of govt revenue receipts is the interest it
earns on the loans it has advanced to stste govt and others.

7. Other non-tax revenue sources:

It includes departmental receipts, i.e., the income of the various
ministries of the govt by way of fees and penalties.

Public expenditure

1. Defense – It constitutes nearly one fourth of the total revenue exp.Since

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

2. Administrative services – The expenditure on civil administrative services has

also gone up markedly since independence. The pay roll has continued to
swell. This is the necessary incidence of democracy. The creation of
embassies the insignia of an independent state – the upward pay revision,
frequent revisions of dearness allowances and the grant of interin relief to
employees, and the food subsidies are other important factors responsible for
the abnormal increase in our civil expenditure.

3. Social & devt. Expenditure : It is another broad group of items that

4. Assistance to states: since the recent years a very important expenditure has
been the grants and other financial assistance that the centre extends to the
states and union territories.In 2006-07 budget it is estimated as 6%.

5. Interest payments: India has been raising more and more loans both internal
and foreign, for the execution of its development plans. In 2006-07 budget it
is estimated as 21%.

6. Fiscal services: It largely mean the cost of collection of taxes and duties
constitute another major head of expenditure.
 7. Central subsidies: It emerged as one of the major items of govt revenue
expenditure. In 2006-07 budget it is estimated as 7%.

Revenue of the State Government

The three broad sources of revenue for the states are:

1. Tax Revenue
2. Non Tax revenue of state.
3. States share in revenues of and grants from the central Govt

1.Tax Revenue of state

1. Sales Tax
2. State Excise
3. Stamps & registration
4. Land revenue
5. Agricultural Income tax

1. Sales Tax: In a single point system the tax is levid on one point on
the chain of dealers. But in a multi point system each dealer in the
chain has to pay the tax. A double point system levies the tax on
both at the entry and at the exit of an article in a sector of business.
In a single point system the rate is low and exemptions are many.
It is not uniform in all states. Its rate varies from 3% in certain
states to 7-8% in others.

2. State excise: This revenue is derived fron the nayfacture and sale
od intoxicatin, liquors, hemp, drugs, etc. It is collected in the form
of duties on their manufacture and fees for sale of licences. The
major portion of excise revenue is derived from country liquors.

3. Stamps & registration: It is derived from the sale of judicial and

commercial stamps, the former affixed on plaints and petitions, &
the latter on commercial transactions.

4. Land revenue: LR as a tax is coning from time immemorial. But it

is full of anomalies. For non-agricultural incomes there is
exemption but no such exemption for land revenue.

5. Agricultural income tax: Under the existing system of land revenue

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

1. Irrigation Charges
2. Betterment Levy
3. Forests
4. State Lotteries
5. Interest Receipts
6. Receipts from Economic services
7. Receipts from general services and social community services
8. Dividends from Commercial undertakings

1. Irrigation charges: The present system of irrigation changes has

developed differently in different states with the result that there is
multiplicity both in the principals & in the rate of assessment. The
most important levying water charges are :

• Volumetric, i.e., according to the quantity of water supplied

• Consolidated rates i.e., water charges are consolidated with
land revenue.
• Differential rates correspondence to difference between the
assessments on dry & wet lands.
• Occupier’s rate i.e., charged on the area actually irrigated
• Agreement rate i.e., fixed by agreement for a period of years
whether water is taken or not.

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

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

3. Forests: The bulk of the forest revenue is derived from the sale of
timber, fuel & other minor produce & from fees on grazing.

4. State lotteries: State lotteries have emerged as an effective instrument

of resource mobilization by the states. They take advantage of a man’s
get rich quick desire & his gambling instinct. They are used to raise
resources for development particularly in the fields of public health &
education. Besides, they have provided employment to a large number
of people as selling agents.

5. Interest receipts: Every state govt lends large sums to local bodies like
municipal committees & zilla parishads for social purposes &
development schemes. Loans are also given to businessman &
business concerns for agriculture & for setting up industries, especially
small-scale industries.
6. Receipts from economic services: The state govts run several
economic services in their respective areas such as forests, industries,
dairy development power project, road & water transport & they
receive revenue therefrom.
7. Receipts from general services & social & community services: The
revenue in the form of fees, charges, fines & penalties forms state
revenue.

8. Dividends from commercial undertakings: State govts have late started

certain commercial undertakings. These yield an estimated of Rs.122
crores.

9. Share in central taxes

• Share in income-tax: The state share in income-tax collected by
central govt has become the major source of revenue of state
revenues.
• Share in union excises: States are the partners in central excises
in tobacco, matches & vegetables.

10. Grants from the central govt: These are of the following types-
• Grants of jute-growing states in leiu of their share in export
duty on jute.
• Grants under article 275 of the constitution given annually to
some states.
• Special non-recurring grants for special purposes
• More important & substantial are the plan grants under section
282

Expenditure of the State Government

The state govt’s expenditure can be broadly classified into two-

(A)Development expenditure
(B)Non-development expenditure

The chief heads of state govt expenditure are as follows-

1. Administrative services- Admn. Police Jail etc
2. Social services & Community services – Edn medical family welfare,
calamities etc
3. Economic services – Agri, Forest irrigation etc.
4. Fiscal services – cost in tax collection
5. Debt servicing and interest payments
6. Grants to local bodies and panchayati Raj Institution.

1. Administrative-services: It swallow up a large part of revenue of

central govt, especially police. It accounts for 1/9th of total
expenditure.

2. Social services & community services: The principal expenditure of

this head are education, medical & public health.
 3. Economic services: These are very important for economic
development. It includes agricultural & allied services.

4. Fiscal services: It includes the cost of collection of tax & duties.

5. Debt servicing & interest payments: It includes interest on debt &

appropriation for reduction of debt. The big rise in this item is due to
the development loans obtained by state govt from the central govt.

6.Grants to local bodies & panchayat raj institution: State govt has to
make large grants to local bodies like municipal committees &
panchayat raj institutions like panchayat samities, zila parishads for
development & other services.

The chelliah committee on tax reforms

The reforms in Indian tax system became imperative in the wake of structural adjustment
programmes and swift economic liberalization measures initiated in the union budget for
1991-92. Accordingly in august 1991, the govt of India constituted a tax reforms
committee headed by Dr. Raja J. Chellih with the following terms of reference :
To examine the structure of direct and indirect taxes;
To make recommendations, inter-alia, for making the tax system more elastic and broad
based; and
To suggest measures required for simplifying the existing laws and regulations to
facilitate better enforcement and compliance.

Recommendations :

The chelliah committee submitted its interim report in February 1992 to the govt
of India to enable the Finance minister to draw heavily upon it in framing the budgetary
proposals for 1992-93 budget. The committee submitted its final report in two parts, part
I in August 1992 and part II in January 1993. The finance minister implemented some of
the recommendations in 1993-94 budget.
The committee has made for reaching recommendations for reforms in all the
three major sources of central revenue, income tax, excise and customs. These
recommendations may be summed up as under:

Personal income tax reforms

The challiah committee has recommended the policy of moderating tax rates and
widening the tax base combined with fewer deductions and exemptions and effective
enforcement to encourage voluntary tax compliance thereby reducing tax evasion.
The committee has recommended an income tax regime with a narrower spread been
entry rate of income tax and maximum marginal rate along with lower rates of taxation. It
has, therefore, recommended that incomes falling in the slabs Rs 2,00,000 should be
taxed at 27.5% and the maximum marginal rate of income tax of 40% inclusive of
surcharge should be applicable to incomes above Rs 2,00,000.
The committee has recommended the withdrawal of exemptions of various saving-linked
tax exemptions schemes such as Equity-linked saving schemes and national saving
scheme (NSS) admissible for deductions under section 80 CCB of income groups.
This committee has recommended that the income of a minor child from gifted assets
should be clubbed with that of the parent to plug the loophole of cross gifting used to
evade the clubbing under the existing tax law.
The committee has recommended that double taxation in the sense of taxing the income
of a partnership firm and also taxing the partners on their share in the income of the firm
should be avoided.
The committee has suggested a presumptive tax scheme in respect of small shop owners
and traders. This scheme should be introduced on a optional basis stipulating that the
shopkeepers may pay a tax in lumpsum in case their turnover falls between Rs 3 and 5
lakh. This suggestion aims at attracting new payers.
The committee has suggested the taxing of leave travel allowance and receipts on
retirement.
The committee has recommended that the agricultural income in excess of Rs 25000
accruing to the non-agriculturists it with non agricultural income.

Capital gains tax reforms :

The chelliah committee has recommended the system of indexation to estimate capital
gains should be computed by allowing the cost of the asset to be adjusted for general
inflation before deducting from the sale proceeds of the assets. The adjustment factor
should be notified each year by the govt. Thus, the committee has favored tax on capital
gains from the sale of an asset net of its price increase owing to general inflation over the
period of time which it has been held.

Wealth tax reforms:

The challiah committee has suggested that, in order to encourage the tax payers to invest
in productive assets such as shares, securities, bonds, bank deposits etc.. and also to
promote investment through mutual funds, these financial assets should be exempted
from wealth tax.
The committee suggested that the wealth tax should be levied on individuals, Hindu
undivided families and all companies only in respect of non-productive assets such as
residential houses including farm houses and urban land, jewellery bullion motor cars,
planes, boats and yachts which are not used for commercial purposes.
The committee has further suggested that wealth tax should be at the rate of one percent ,
with a basic exemption of Rs 15 lakh.
The committee recommends the abolition of present wealth tax and its replacement in
effect, by a set of annual taxes on urban land, residents and few other forms of wealth.

Gift tax reforms:

The chelliah committee emphasized the need for an upward revision of the exemption
limit for purposes of gift tax. The committee has suggested that the gift limit should be
risied from 20,000 to 30,000.

corporate tax reforms:

the chelliah committee has recommended that the corporate tax rate for domestic
companies should be lowered to 45% in 1993-94 form the present level of 51.75% by
abolition of surcharge. It should be lowered further to 40% in 1994-95.
The committee has suggested that the tax rates for foreign companies should be lowered.
It has recommended that the difference between the rates on domestic and foreign
companies should be around 7.5% points. In no case the differential should exceed to 10
% points.
The committee has also suggested that the double taxation of foreign companies in
respect of fees for technical services should be avoided.
The committee has favored for retention of the central rate of depreciation on plant and
machinery at 25%.
The committee has recommended the abolition of tax on interest.
The committee recommends that for the time being the system of independent taxation of
company and individual incomes should continue. However, it favours a move in the
future to some form of partial integration of the two txes.

Customs duty reforms:

The chelliah committee has recommended reduction in the general level of tariffs. It has
recommended a drastic reduction in customs tariff rates to 15-20 % by 1997-98.
The committee has favored a stable import duty rate to avoid pressures for exemptions
and concessions which ultimately prove counter-productive.
The committee has also made recommendations for speedy systems to determine anti-
dumping duties which will acquire greater importance with the reduction in the custom
duty rates.
The committee has ruled out a single import duty regime and favored for a very limited
number of rates subjected at least to a minimum tariff. It has, therefore, recommended a
minimum 5% customs on all goods which now enjoy total exemptions.
The committee has suggested that customs tariff on finished goods should be higher than
on basic raw materials and those components and machinery should in between.