'Monetary Policy'

Definition: Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by the
government of a country to achieve macroeconomic objectives like inflation, consumption, growth
and liquidity.

Description: In India, monetary policy of the Reserve Bank of India is aimed at managing the
quantity of money in order to meet the requirements of different sectors of the economy and to
increase the pace of economic growth.

The RBI implements the monetary policy through open market operations, bank rate policy,
reserve system, credit control policy, moral persuasion and through many other instruments. Using
any of these instruments will lead to changes in the interest rate, or the money supply in the
economy. Monetary policy can be expansionary and contractionary in nature. Increasing money
supply and reducing interest rates indicate an expansionary policy. The reverse of this is a
contractionary monetary policy.

For instance, liquidity is important for an economy to spur growth. To maintain liquidity, the RBI is
dependent on the monetary policy. By purchasing bonds through open market operations, the RBI
introduces money in the system and reduces the interest rate.

RBI Monetary Policy / Credit policy 2018

Monetary policy is a policy formulated by the central bank, i.e., RBI (Reserve Bank of India) and
relates to the monetary matters of the country. The policy involves measures taken for regulating
the money supply, availability and cost of credit in the economy. The policy also oversees
distribution of credit among users as well as borrowing and lending rates of interest. In a
developing country like India, it is significant in the promotion of economic growth.

The various instruments of monetary policy include variations in bank rates, other interest rates,
selective credit controls, supply of currency, variations in reserve requirements and open market
operations.

Key Indicators

Indicators Current Rate

CRR- cash reserve ratio 4%

SLR-statutory liquidity ratio 19.5%

Repo rate 6.50%

Reverse repo rate 6.25%

Marginal Standing Facility rate 6.75%

Bank Rate 6.75%

Objectives of Monetary Policy

While the main objective of monetary policy is economic growth as well as price and exchange rate
stability, there are other aspects that it can help with as well.

Promotion of saving and investment: Since the monetary policy controls the rate of interest and
inflation within the country, it can impact the savings and investment of the people. A higher rate of
interest translates to a greater chance of investment and savings, thereby, maintaining a healthy
cash flow within the economy.

Controlling the imports and exports: By helping industries secure a loan at a reduced rate of
interest, monetary policy helps export-oriented units to substitute imports and increase exports.
This, in turn, helps improve the condition of the balance of payments.

Managing business cycles: The two main stages of a business cycle are boom and depression.
Monetary policy is the greatest tool using which boom and depression of business cycles can be
controlled by managing the credit to control the supply of money. The inflation in the market can be
controlled by reducing the supply of money. On the other hand, when the money supply increases,
the demand in the economy will also witness a rise.

Regulation of aggregate demand: Since monetary policy can control the demand in an economy, it
can be used by monetary authorities to maintain a balance between demand and supply of goods
and services. When credit is expanded and the rate of interest is reduced, it allows more people to
secure loans for the purchase of goods and services. This leads to the rise in demand. On the other
hand, when the authorities wish to reduce demand, they can reduce credit and raise the interest
rates.

Generation of employment: As monetary policy can reduce the interest rate, small and medium
enterprises (SMEs) can easily secure a loan for business expansion. This can lead to greater
employment opportunities.

Helping with the development of infrastructure: The monetary policy allows concessional
funding for the development of infrastructure within the country.

Allocating more credit for the priority segments: Under the monetary policy, additional funds
are allocated at lower rates of interest for the development of the priority sectors such as small-
scale industries, agriculture, underdeveloped sections of the society, etc.

Managing and developing the banking sector: The entire banking industry is managed by the
Reserve Bank of India (RBI). While RBI aims to make banking facilities available far and wide across
the nation, it also instructs other banks using the monetary policy to establish rural branches
wherever necessary for agricultural development. Additionally, the government has also set up
regional rural banks and cooperative banks to help farmers receive the financial aid they require in
no time.

Flexible Inflation Targeting Framework (FITF)

The Flexible Inflation Targeting Framework (FITF) was introduced in India post the amendment of
the Reserve Bank of India (RBI) Act, 1934 in 2016. In accordance with the RBI Act, the Government
of India sets the inflation target every 5 years after consultation with the RBI. While the inflation
target for the period between 5 August 2016 and 31 March 2021 has been determined to be 4% of
the Consumer Price Index (CPI), the Central Government has announced that the upper tolerance
limit for the same will be 6% and the lower tolerance limit can be 2% for the same.

In this framework, there are chances of not achieving the inflation target fixed for a particular
amount of time. This can happen when:

The average inflation is greater than the upper tolerance level of the inflation target as
predetermined by the Central Government for 3 quarters in a row.

The average inflation is less than the lower tolerance level of the target inflation fixed by the Central
Government beforehand for 3 consecutive quarters.

Monetary Policy Tools

To control inflation, the Reserve Bank of India needs to decrease the supply of money or increase
cost of fund in order to keep the demand of goods and services in control.

Quantitative tools –

The tools applied by the policy that impact money supply in the entire economy, including sectors
such as manufacturing, agriculture, automobile, housing, etc.

Reserve Ratio:

Banks are required to keep aside a set percentage of cash reserves or RBI approved assets. Reserve
ratio is of two types:

Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in cash with the RBI. The
bank can neither lend it to anyone nor can it earn any interest rate or profit on CRR.

Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion in liquid assets such
as gold or RBI approved securities such as government securities. Banks are allowed to earn
interest on these securities, however it is very low.

Open Market Operations (OMO):

In order to control money supply, RBI buys and sells government securities in the open market.
These operations conducted by the Central Bank in the open market are referred to as Open Market
Operations.

When RBI sells government securities, the liquidity is sucked from the market, and the exact
opposite happens when RBI buys securities. The latter is done to control inflation. The objective of
OMOs are to keep a check on temporary liquidity mismatches in the market, owing to foreign
capital flow.

Qualitative tools:
Unlike quantitative tools which have a direct effect on the entire economy’s money supply,
qualitative tools are selective tools that have an effect in the money supply of a specific sector of the
economy.

Margin requirements – RBI prescribes a certain margin against collateral, which in turn impacts
the borrowing habit of customers. When the margin requirements are raised by the RBI, customers
will be able to borrow less.

Moral suasion – By way of persuasion, RBI convinces banks to keep money in government
securities, rather than certain sectors.

Selective credit control – Controlling credit by not lending to selective industries or speculative
businesses.

Market Stabilisation Scheme (MSS) -

Policy Rates:

Bank rate – The interest rate at which RBI lends long term funds to banks is referred to as the bank
rate. However, presently RBI does not entirely control money supply via the bank rate. It uses
Liquidity Adjustment Facility (LAF) – repo rate as one of the significant tools to establish control
over money supply.

Bank rate is used to prescribe penalty to the bank if it does not maintain the prescribed SLR or CRR.

Liquidity Adjustment Facility (LAF) – RBI uses LAF as an instrument to adjust liquidity and money
supply. The following types of LAF are:

Repo rate: Repo rate is the rate at which banks borrow from RBI on a short-term basis against a
repurchase agreement. Under this policy, banks are required to provide government securities as
collateral and later buy them back after a pre-defined time.

Reverse Repo rate: It is the reverse of repo rate, i.e., this is the rate RBI pays to banks in order to
keep additional funds in RBI. It is linked to repo rate in the following way:

Reverse Repo Rate = Repo Rate – 1

Marginal Standing Facility (MSF) Rate: MSF Rate is the penal rate at which the Central Bank lends
money to banks, over the rate available under the rep policy. Banks availing MSF Rate can use a
maximum of 1% of SLR securities.

MSF Rate = Repo Rate + 1

Monetary Policy Transmission

Borrowers fail to fully benefit from RBI’s repo rate cut due to the following reasons:

Banks are not affected by RBI rate cuts as the Central Bank is not their primary money supplier.
Deposits already made are fixed at the rates when taken and cannot be reduced; the rate cuts will
only reflect in the new deposit rates.

PPF, Post Office accounts and other small saving instruments are available at high administered
interest rates and in case of reduction of bank deposit rates, customers have the choice to move to
those funds.

Banks do not prefer to lower their rates as high lending rates keeps their profit margins up.

India does not have a well-developed corporate bond market, therefore corporate customers have
little choice but to reach out to banks for borrowing.

Steps to improve monetary transmission:

Both the government and RBI has taken and plans to take some steps in order to accelerate the
transmission of monetary policy.

Government intends to bring down the interest rates on small saving accounts. If the small saving
rates are linked to the bank rate, this could serve as a permanent solution.

In order to improve monetary transmission, RBI wants banks to change the calculation
methodology of base rate to marginal cost of funds from average cost of funds.

Despite banks raising the lending rates immediately after RBI’s rate cuts, the Central Bank is unable
to control inflation due to the following reasons:

 Financial deficit in the higher government.

 Issues at the supply side, such as crude oil prices, issues in agri marketing, etc.
 Lack of financial inclusion as borrowers still depend on moneylenders, who are not under
RBI’s control.
 Non-monetised economy in certain rural areas.
 Dear Money Policy or Contractionary Monetary Policy:

Dear money policy is a policy when money become more expensive with the rise of interest rate.
Due to this, the supply of money also decreases in the economy, therefore it is also referred to as
the contractionary monetary policy.

This policy leads to a drop in business expansions owing to a high cost of credit, as well as a fall in
business expansion. This in turn affects employment as it brings down growth rates. Therefore,
interest rate cuts such as SLR and CRR are preferred by the government and the corporates.

Demand Pull Inflation:

This is a state when people have excess money to buy goods in the market. RBI practises easier
control on this as it can lead to a fall in money supply in the economy, which in turn would mean a
drop in prices.

Supply Side Inflation:

Inflation in the economy owing to constraints in the supply side of goods in the market. This cannot
be controlled by RBI as it does not control prices of commodities. The government plays an
important role in this case through fiscal policy.

Conclusion:

RBI has been following a neutral policy stance for some time now. This means that with inflation
being at an all time low of 4.0%, and the growth projections of the Indian economy being at a
constant 7.30%, the RBI will try not to destabilize the delicate balance, by either infusing or
removing too much funds from the markets.

To this end, the Central Bank has increased the repo rate and reverse repo rate on 1 August 2018 by
25 basis points taking them to 6.50% and 6.25%, respectively. It has also increased the Bank Rate
and MSF Rate to 6.75% each. This ensures that the government’s requirement for more liquidity for
industry growth is fulfilled, without the risk of increase in inflation being too high.

Fiscal Policy:

A policy set by the finance ministry that deals with matters related to government expenditure and
revenues, is referred to as the fiscal policy. Revenue matter include matters such as raising of loans,
tax policies, service charge, non-tax matters such as divestment, etc. While expenditure matters
include salaries, pensions, subsidies, funds used for creating capital assets like bridges, roads, etc.

Fiscal policy means the use of taxation and public expenditure by the government for stabilization
or growth of the economy. According to Culbarston, “By fiscal policy we refer to government actions
affecting its receipts and expenditures which ordinarily as measured by the government’s receipts,
its surplus or deficit.” The government may change undesirable variations in private consumption
and investment by compensatory variations of public expenditures and taxes.

Fiscal policy also feeds into economic trends and influences monetary policy. When the government
receives more than it spends, it has a surplus. If the government spends more than it receives it
runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign
sources, draw upon its foreign exchange reserves or print an equivalent amount of money. This
tends to influence other economic variables.

On a broad generalization, excessive printing of money leads to inflation. If the government

borrows too much from abroad it leads to a debt crisis. Excessive domestic borrowing by the
government may lead to higher real interest rates and the domestic private sector being unable to
access funds resulting in the “crowding out” of private investment. So it can be said that the fiscal
deficit can be like a double edge sword, which need to be tackled very carefully.

Main Objectives of Fiscal Policy in India

Before moving on the discussion on objectives of India’s Fiscal Policies, firstly know that the general
objective of Fiscal Policy.

General objectives of Fiscal Policy are given below:

 To maintain and achieve full employment.

  To stabilize the price level.
 To stabilize the growth rate of the economy.
 To maintain equilibrium in the Balance of Payments.
 To promote the economic development of underdeveloped countries.

Fiscal policy of India always has two objectives, namely improving the growth performance of the
economy and ensuring social justice to the people.

The fiscal policy is designed to achieve certain objectives as follows:-

1. Development by effective Mobilisation of Resources: The principal objective of fiscal policy is

to ensure rapid economic growth and development. This objective of economic growth and
development can be achieved by Mobilisation of Financial Resources. The central and state
governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilised by:-

a. Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of
direct taxes as well as indirect taxes because most important source of resource mobilisation in
India is taxation.

b. Public Savings: The resources can be mobilised through public savings by reducing government
expenditure and increasing surpluses of public sector enterprises.

c. Private Savings: Through effective fiscal measures such as tax benefits, the government can raise
resources from private sector and households. Resources can be mobilised through government
borrowings by ways of treasury bills, issuance of government bonds, etc., loans from domestic and
foreign parties and by deficit financing.

2. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or
social justice by reducing income inequalities among different sections of the society. The direct
taxes such as income tax are charged more on the rich people as compared to lower income groups.
Indirect taxes are also more in the case of semi-luxury and luxury items which are mostly
consumed by the upper middle class and the upper class. The government invests a significant
proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve
the conditions of poor people in society.

3. Price Stability and Control of Inflation: One of the main objectives of fiscal policy is to control
inflation and stabilize price. Therefore, the government always aims to control the inflation by
reducing fiscal deficits, introducing tax savings schemes, productive use of financial resources, etc.

4. Employment Generation: The government is making every possible effort to increase

employment in the country through effective fiscal measures. Investment in infrastructure has
resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI)
units encourage more investment and consequently generate more employment. Various rural
employment programmes have been undertaken by the Government of India to solve problems in
rural areas. Similarly, self employment scheme is taken to provide employment to technically
qualified persons in the urban areas.
5. Balanced Regional Development: there are various projects like building up dams on rivers,
electricity, schools, roads, industrial projects etc run by the government to mitigate the regional
imbalances in the country. This is done with the help of public expenditure.

6. Reducing the Deficit in the Balance of Payment: some time government gives export
incentives to the exporters to boost up the export from the country. In the same way import curbing
measures are also adopted to check import. Hence the combine impact of these measures is
improvement in the balance of payment of the country.

7. Increases National Income: it’s the strength of the fiscal policy that is brings out the desired
results in the economy. When the government want to increase the income of the country then it
increases the direct and indirect taxes rates in the country. There are some other measures like:
reduction in tax rate so that more peoples get motivated to deposit actual tax.

8. Development of Infrastructure: when the government of the concerned country spends money
on the projects like railways, schools, dams, electricity, roads etc to increase the welfare of the
citizens, it improves the infrastructure of the country. A improved infrastructure is the key to
further speed up the economic growth of the country.

9. Foreign Exchange Earnings: when the central government of the country gives incentives like,
exemption in custom duty, concession in excise duty while producing things in the domestic
markets, it motivates the foreign investors to increase the investment in the domestic country.

UNION BUDGET OF INDIA (2018-19)

GO BACK

Last updated: Feb, 2018

The Union Budget for 2018-19 has been announced by Mr Arun Jaitley, Union Minister for Finance,
Government of India, in Parliament on February 1, 2018. It focuses on uplifting the rural economy
and strengthening of the agriculture sector, healthcare for the economically less privileged,
infrastructure creation and improvement in the quality of education of the country.

Highlights of Union Budget 2018-19

Overview of the economy

 The GDP grew at 6.3 per cent in the second quarter of 2017-18 and is expected to grow at
7.2-7.5 per cent in the second half of 2017-18.
 Growth for 2018-19 is forecasted at 7.4 per cent by the International Monetary Fund (IMF).
 Exports are expected to grow at 15 per cent in 2017-18.
 Fiscal deficit target for 2018-19 is set at 3.3 per cent of the GDP.
 Fiscal deficit for 2017-18 is revised to Rs 5.95 lakh crore (US$ 93.54 billion) at 3.5 per cent
of the GDP.
FOREIGN TRADE POLICY OF INDIA

Introduction

The integration of the domestic economy through the twin channels of trade and capital flows has
accelerated in the past two decades which in turn led to the India’s GDP reaching Rs 167.73 trillion
(US$ 2.30 trillion) in 2017-18*. Simultaneously, the per capita income also nearly trebled during
these years. India’s trade and external sector had a significant impact on the GDP growth as well as
expansion in per capita income.

Total exports from India (Merchandise and Services) increased 20.7 per cent year-on-year during
April-August 2018 to US$ 221.83 billion, while total imports increased by 21.1 per cent year-on-
year to US$ 269.54 billion according to data from the Ministry of Commerce & Industry. Exports
from the country recorded their highest growth in 2017-18.

According to Mr Suresh Prabhu, Minister for Commerce and Industry, the Government of India is
keen to grow exports and provide more jobs for the young, talented, well-educated and even semi-
skilled and unskilled workforce of India.

Capital Inflows

India's foreign exchange reserves were US$ 400.49 billion in the week up to September 14, 2018,
according to data from the RBI.

External Sector

In August 2018, US upgraded India’s status as a trading partner on par with its North Atlantic
Treaty Organization (Nato) allies.

India’s external sector has a bright future as global trade is expected to grow at 4 per cent in 2018
from 2.4 per cent in 2016.

Bilateral trade between India and Ghana is rising exponentially and is expected to grow from US$ 3
billion to US$ 5 billion over the coming three years, stated Mr Aaron Mike Oquaye Junior, Ghana's
Ambassador to India.

India has revised its proposal on trade facilitation for services (TFS) at the World Trade
Organisation (WTO) and has issued a new draft, with the contents being more meaningful and
acceptable to other member countries.

The Union Cabinet, Government of India, has approved the proposed Memorandum of
Understanding (MoU) between Export-Import Bank of India (EXIM Bank) and Export-Import Bank
of Korea (KEXIM).

The Goods and Services Network (GSTN) has signed a memorandum of understanding (MoU) with
Mr Ajay K Bhalla, Director General of Foreign Trade (DGFT), to share realised foreign exchange and
import-export code data, process export transactions of taxpayers under goods and services tax
(GST) more efficiently, increase transparency and reduce human interface.

In March 2017, the Union Cabinet approved the signing of the customs convention on the
international transport of goods, Transports Internationaux Routiers (TIR) making India the 71st
signatory to the treaty, which will enable the movement of goods throughout these countries in
Asia and Europe and will allow the country to take full benefit of the International North South
Transportation Corridor (INSTC).

Mr Richard Verma, the United States Ambassador to India, has verified that India-US relations
across trade, defence and social ties will be among the top priorities of the newly elected US
President Mr Donald Trump's administration.

Foreign Trade Policy

In the Mid-Term Review of the Foreign Trade Policy (FTP) 2015-20 the Ministry of Commerce and
Industry has enhanced the scope of Merchandise Exports from India Scheme (MEIS) and Service
Exports from India Scheme (SEIS), increased MEIS incentive raised for ready-made garments and
made- ups by 2 per cent, raised SEIS incentive by 2 per cent and increased the validity of Duty
Credit Scrips from 18 months to 24 months.

In September 2018, Government of India increased the duty incentives for 28 milk items under the
Merchandise Export from India Scheme (MEIS).

All export and import-related activities are governed by the Foreign Trade Policy (FTP), which is
aimed at enhancing the country's exports and use trade expansion as an effective instrument of
economic growth and employment generation.

The Department of Commerce has announced increased support for export of various products and
included some additional items under the Merchandise Exports from India Scheme (MEIS) in order
to help exporters to overcome the challenges faced by them.

The Central Board of Excise and Customs (CBEC) has developed an 'integrated declaration' process
leading to the creation of a single window which will provide the importers and exporters a single
point interface for customs clearance of import and export goods.

As part of the FTP strategy of market expansion, India has signed a Comprehensive Economic
Partnership Agreement with South Korea which will provide enhanced market access to Indian
exports. These trade agreements are in line with India’s Look East Policy. To upgrade export sector
infrastructure, ‘Towns of Export Excellence’ and units located therein will be granted additional
focused support and incentives.

RBI has simplified the rules for credit to exporters, through which they can now get long-term
advance from banks for up to 10 years to service their contracts. This measure will help exporters
get into long-term contracts while aiding the overall export performance.

The Government of India is expected to announce an interest subsidy scheme for exporters in order
to boost exports and explore new markets.

Road Ahead

India is presently known as one of the most important players in the global economic landscape. Its
trade policies, government reforms and inherent economic strengths have attributed to its standing
as one of the most sought after destinations for foreign investments in the world. Also,
technological and infrastructural developments being carried out throughout the country augur
well for the trade and economic sector in the years to come.
Boosted by the forthcoming FTP, India's exports are expected reach US$ 750 billion by 2018-2019
according to Federation of India Export Organisation (FIEO). Also, with the Government of India
striking important deals with the governments of Japan, Australia and China, the external sector is
increasing its contribution to the economic development of the country and growth in the global
markets. Moreover, by implementing the FTP 2014-19, by 2020, India's share in world trade is
expected to double from the present level of three per cent.

*Provisional estimates at current prices

Exchange Rate Used: INR 1 = US$ 0.0154 as on March 28, 2018

India’s Free Trade Agreements – The ‘present’ and the ‘future’

Free Trade AgreementTrade is of great importance to most nations in the modern world. Trade
without barriers – free trade – is promoted by institutions like World Trade Organisation (WTO). In
this background, as an emerging super power, India’s Free Trade Agreements deserve special
attention.

What are Free Trade Agreements (FTA)?

A Free Trade Agreement is an agreement between countries to reduce or eliminate barriers to

trade.Trade barriers include tariff barriers like taxes and nontariff barriers like regulatory laws.

Trade barriers include tariff barriers like taxes and nontariff barriers like regulatory laws.

A Free Trade Agreement or FTA is an agreement between two or more countries where the
countries agree on certain obligations that affect trade in goods and services, and protections for
investors and intellectual property rights, among other topics.

India- ASEAN Free Trade Agreement

Recently, India and The Association of Southeast Asian Nations (ASEAN) completed 25 years of
cooperation and partnership.

With the initiation of economic reforms in India from 1991 onwards, the then government initiated
the ‘Look East Policy’ which was particularly focused on Southeast Asia and East Asia.

The successive governments rigorously implemented the policy. With the regime change in 2014,
there was an upgrade of the ‘Look East Policy’ to ‘Act East Policy’.

The India-ASEAN relationship and ties go way back in history. Culturally, Southeast Asia has
borrowed heavily from India and there were even Indian kings who went to Southeast Asian lands
and established new dynasties there.

With the end of the colonisation era, slowly the ties between India and ASEAN started to develop
yet again.

There was increasing contact between people and this led to a rise in exchanges and even
economically.
Look East Policy was a game-changer and after that, there has been no looking back and only
growth of relations in between two regions.

Economic Perspective

The Economic relation is a pillar on which the two region’s partnership rests. In this context, with
the enforcement of the ‘Look East Policy’ there were growing trade relations in goods and
investments. After the India-ASEAN free trade agreement was created in 2003, trade relations
boomed even further. In 2009, the Free Trade Agreement in Goods was signed and enacted in 2010.
The ASEAN-India Free Trade Area (AIFTA) has been completed with the entry into force of the
ASEAN-India Agreements on Trade in Service and Investments on 1 July 2015. With this, India will
stand to gain as it has always asked for an FTA which will be more comprehensive and included
services which has been India’s stronger sector.

The ASEAN nations and India together consist one of the largest economic regions with a total
population of about 1.8 billion. ASEAN is currently India’s fourth largest trading partner, accounting
for 10.2 percent of India’s total trade. India, on the other hand, is ASEAN’s 7th largest trading
partner. India’s service-oriented economy perfectly complements the manufacturing-based
economies of the ASEAN countries.The annual trade between India and ASEAN stood at
approximately US$ 76.53 billion in 2014-15. However, it dropped to US$ 65.04 billion in 2015-16
due to declining commodity prices against the backdrop of a sluggish global economy.

Investment flows are quite remarkable both ways, with ASEAN accounting for approximately 12.5
percent of investment flows into India since 2000. Singapore is the primary hub for both inward
and outward investments. Foreign direct investment (FDI) inflows into India from ASEAN between
April 2000 and May 2016 were about US$49.40 billion. FDI outflows from India to ASEAN
countries, from April 2007 to March 2015, according to data from the Department of Economic
Affairs (DEA), was about US$38.672 billion.

In order to enhance economic and strategic relations with the Southeast Asian countries, the Indian
government has put in place a Project Development Fund to set up manufacturing hubs in
Cambodia, Myanmar, Laos and Vietnam(CMLV) countries through separate Special Purpose
Vehicles (SPVs).

Challenges in India-ASEAN Free Trade Agreement

India-ASEAN

Despite the fact that the Trade Agreement with ASEAN has helped trade grow immensely with
India, still, the issue remains that the agreement has benefitted the ASEAN region more than India.
With the agreement in goods signed, the domestic markets have faced stiff competition because
they have to compete with the cheaper goods of the ASEAN region. For example, the rubber imports
from Malaysia, palm oil imports from Indonesia have made it a tough ordeal for the local
manufacturers of palm oil and rubber, especially the rubber plantations of Kerala who have
complained of the cheaper imports ever since the agreement was about to be signed.

The other drawback of the agreement is that the agreement in services hasn’t reaped many benefits
for India. According to ASEAN rules, until all the nations have not ratified the FTAs in their
Legislatures, the FTA will not be enforced. This has caused much trouble for India as Philippines
hasn’t ratified the FTA in services as there will be direct competition in between India and
Philippines in direct competition in services which would be a disadvantage for the latter.

Over the years, with the statistics and trade figures, it can be easily deciphered that the trade
imbalance in favour of ASEAN and India has an expanding trade deficit with the region which dearly
hurts its Current Account Deficit and thus, hurt India overall fiscally.

India and RCEP

Regional Comprehensive Economic Partnership, also known as RCEP is a mega trade-block which is
being negotiated in between the ten members of the ASEAN group and six other members namely
South Korea, Australia, China, Japan, New Zealand and India. It is a Free Trade Agreement (FTA)
which is being proposed amongst these nations which will include goods and services, investments,
intellectual property rights, economic and technical cooperation and dispute settlement.

If negotiated and enforced, it will be one of the largest trading blocs of the world. With a combined
Gross Domestic Product of almost $17 trillion and covering more than 40 percent of the world’s
trade. It also covers more than 3 billion people.

The bloc aims at tariff liberalization amongst the nations and so, there will be easier market access
amongst for all the nations amongst themselves.

Advantages for India

For India, which is not a part of the other major trade blocs of the world, such as Asia Pacific
Economic Cooperation (APEC), the Trans Pacific Partnership (TPP), this free trade agreement
would prove to be of advantage as earlier it was feared that with the presence of these trade blocs
and the negotiation of their FTAs, India might lose out its market share, especially in case of textiles,
pharmaceuticals and medicines etc. to other Southeast Asian nations like Vietnam.

Also, with India already having an FTA with ASEAN and Japan and South Korea, with the
negotiation of the RCEP, it will complement India’s pre-existing FTAs and will allow better access to
consumer markets in other nations.

With the FTA being negotiated even in services, it will add to the advantage for India where they
have a comparative advantage over other nations, especially in the context of Information
Technology related services, healthcare services and educational services.

Challenges for India

The agricultural sector of India, which faces issues like lack of investment, low productivity,
obsolete technology and fragmented landholdings will suffer even more as with the negotiation of
the RCEP agreement, now, the Indian market will be flooded with products from other nations
which are comparatively cheaper and have a more efficient agricultural sector. The already
negotiated FTA with ASEAN has hurt the interests of some particular communities such as rubber
plantations and palm oil production. Also, the allied sectors, such as the dairy sector in India, which
still is not at a mature stage, will also face stiff competition from countries like New Zealand who
have a very strong dairy sector and their economy thrives on the same.

Also, the industrial sector of India is still in a nascent stage. In the context of goods, India has
already given up on a three tier tariff reduction proposal which would offer different coverage for
ASEAN, Japan and South Korea and much lower level of tariff reduction coverage for Australia,
China and New Zealand.

With the agreement on the intellectual property rights to be negotiated, which is being pressurised
by Japan, this will lead to the issue that India may lose its status as the pharmaceutical hub of the
world. Agreeing to data exclusivity, extending patenting terms and unduly strong enforcement
measures will weaken the generic pharmaceutical sector and will come in direct conflict with
section 3(d) of the Indian Patents Act. This will make medicines expensive and inaccessible not just
for Indians but for the entire developing world. India has already resisted pressure in not
succumbing to dilute the provisions with the European Union and the FTA to be proposed with the
same. Thus, diluting the measures in this context might again open a Pandora’s box for India.

Also, in the case of the services sector, where India is assuming and pitching for gains, it remains to
be seen whether it will duly gain or not. India is pitching for Mode 3 and Mode 4 type gains. With
Mode 4 types of gains highly unlikely to be awarded, in the context of Mode 3, except in the case of
Information Technology and Information Technology Enabled Services, it remains to be seen
whether it will benefit India much or not.

Finally, to conclude, the FTA will basically put a big challenge to the ‘Make in India’ programme
which the current government is aggressively promoting. For example, the granting of tariff free
access to the Chinese goods, which have already flooded the Indian markets and have decimated
the Indian goods and markets will further aggravate the situation and add to increase the budget
deficit with China.

South Asia Free Trade Agreement (SAFTA)

South Asian Association for Regional Cooperation or SAARC, as it is known, is a region comprising
of all the South-Asian nations or the subcontinent i.e. India, Pakistan, Sri Lanka, Bangladesh, Nepal,
Bhutan and the other two countries namely Afghanistan and Maldives. It was conceived to improve
the interrelationships between the nations and improving people to people contact as all the people
are united culturally but divided by the borders.

In this context, the concept of South-Asia Free Trade Agreement or SAFTA was conceived for the
first time in 1993 as a Preferential Trade Agreement ( an agreement amongst the nations to trade
selected goods without tariffs or with very low tariffs) and later, it was upgraded to a Free Trade
Agreement in 2004 and came into force in 2006. This was basically done to improve trade and
economic relations amongst the member nations of SAARC.

With the classification of nations as Least Developing Countries and Non-Least Developing
Countries, there was a creation of an equal platform for all the players in the region so that the Free
Trade Agreement would not lead to issues for the domestic markets.

However, despite more than ten years after the enactment of the FTA, the trade growth amongst
the member nations is meagre. This puts a question mark on the concept of creation of an FTA in
the region. Because of the geopolitical scenario of the subcontinent, there have always been
contentious issues amongst the neighbours. For example, India and Pakistan have always had their
differences and their relationship becomes the elephant in the room in case of any summit and
negotiations to be done. Also, the proximity of Pakistan to China has added to the troubles.
Other smaller nations have also played the China card again and again against India which has led
to a void in the confidence amongst the nations. The trade amongst the nations is so poor that it
comprises of only five percent of the total trade of the nations.

The clause of ‘sensitive list’ has also hurt trade prospects which each nation apprehensive of losing
out on its domestic industry as compared to the other nations and thus, have included quite a many
of the list of goods and services to be traded in the sensitive list. When included in the list, the
products become immune from tariff concession.

India-European Union Free Trade Agreement (Proposed)

India-European Union (EU) FTA, officially known as the Broad-Based Trade and Investment
Agreement is being negotiated for quite a while. However, in 2013, there was a breakdown in talks
in between the two sides and the talks have been stalled ever since. The European Union wants
India to reduce the import duties on alcohol and automobiles and India wants the EU to declare
India as a ‘data secure’ country.

Also, in 2016, India unilaterally terminated Bilateral Investment Treaties with many countries
across the world, with many of them being European nations. This has added to the increased
scepticism of the nations who have question marks over the future investments to be made in India.
The reason why the Bilateral treaties have been terminated is that India has put forward its own
condition of exhausting all the judicial and litigation measures available in the country first and
then only go for international litigation or arbitration. The 2016 Model Indian Bilateral Investment
Treaty requires the foreign investor to litigate at least for five years in the national courts before
approaching the international tribunal.

In contrast, the EU and Canada had put forward the idea of Investor State Dispute Mechanism at the
global level in which the foreign investors in a country can drag the government at the international
arbitration centres without exhausting the local litigation means and claim huge losses citing losses
they suffered due to various reasons, including policy changes. This has been summarily rejected by
India, Argentina as well as Japan. Japan has been opposing it on the grounds that international
arbitration will involve huge costs whereas India wants the foreign investors to exhaust the
national judicial remedies and then only go for international arbitration.

Future of the Free Trade Agreements and India’s stand on them

The unilateral termination of the BITs with so many nations should be reviewed, especially when
India is being projected as a bright spot in the global economy. The move comes as a regressive step
as it increases the confusion of the foreign investors who wish to invest in India. Also, the clause
which says at least five years of national litigation is necessary after which the international
tribunals can be approached looks like a step in the wrong direction. This goes against the
government’s slogan of ‘More Governance, Less Government’ and against the concept of ‘Ease of
Doing Business’ in the nation.

In regard with the FTAs, India should be very careful in the clauses of negotiation. Despite having a
strong services sector in a select few categories, ( IT, ITES, Healthcare and Education etc.) the
agricultural sector as well as the industrial sector, especially the Micro, Small and Medium Scale
Enterprises are still not as mature and strong as compared to the other countries with which India
is negotiating FTAs.
For the sake of gaining an advantage in the services sector and access to foreign markets in
services, which are also not completely accessible because of the nation’s reservations, India ends
up compromising on the primary and secondary sector which affects too many livelihoods and the
economy overall.

Thus, the negotiations at an international level should be done only after proper deliberation and
understanding of the situation.

Government Budgeting in India

A government Budget is basically as an annual statement of all the estimated receipts and estimated
expenditures of the government in a fiscal year from 1 April to 31 March. Though the word
“Budget” does not finds mention in the Constitution, but it is mandated in Article 112 that the Union
government shall present before the Parliament an “Annual financial Statement” of estimated
receipts and expenses of the Government.

The Objectives of Government Budget in India:

In a mixed economy like ours, the government plays a significant role along with the private sector.
The three major functions served by this presentation of estimates.

Allocation function: Public goods (national defense, roads, government administration, measures
of lower air pollution,etc.) can’t be provided by Market Mechanism(transaction between
individuals).

Distribution function: Government can alter income distribution by making transfer payments
and collecting taxes, therefore affecting personal disposable income of households. Thus, through
its tax and expenditure policy government tries to achieve a fair income distribution in society.

Stabilization function: Fluctuations in economy may lead to inflation and unemployment.

Government policy measures to stabilize domestic economy.

Primary Difference between Public and Private Goods:

 Benefit of public goods available to all, not limited to any particular consumer. Also one
individual can enjoy the benefits of public good without reducing its availability to others.
 For public goods, there is no way to exclude anyone from enjoying benefits of the good.
(They are non-excludable). Since non-paying users can’t be excluded, hence difficult to
collect fees for public good. Leads to “free-rider” problem. To combat this missing link
between consumer & producer government has to provide public good and make public
provisions.

Components of Government Budgeting in India

Constitution mandates presentation of a statement of estimated receipts and expenditures of

government in financial year from 1 April to 31 March before the Parliament, under Article
112.government budgeting in India - economics study material & notes

The Annual Financial Statement is the Budget is divided into Revenue and Capital.
Revenue Budget of Government of India:

The current receipts of government are included in the revenue budget. Estimated expenditure
from these.

Revenue Receipts: Non-reedemable, i.e., can’t be reclaimed from the government). The revenue
receipts are divided into Tax revenue and Non-tax revenue.

Tax Revenue: proceeds of taxes and duties levied by central government. It is divided into direct
taxes and Indirect taxes.

Direct Taxes: collected directly from firms(corporation tax) & individuals(income tax). Also
includes Paper taxes(wealth tax, gift tax and estate duty) because low revenue yield.

Indirect Taxes: Excise tax(duties on goods produced within country), customs duties(taxes on
imported goods & exported goods), Service tax(tax on services since 1994 to correct disparity in
taxation of goods & services).

 Income tax progressive to achieve redistribution objective, higher income more tax.
 Corporation tax proportional basis. Tax rate in proportion to profit.
 Excise duty necessities of life excluded or exempted/low rate, comfort moderate tax,
luxuries, tobacco and petroleum production heavy tax.

Non Tax Revenue: interest receipts on loans given by central government, dividends or profits in
investment of government, fees & other receipts for services rendered by government. Also, cash
grants-in-aid received from foreign countries and international organisations.

Revenue Expenditure:

Expense other than creation of physical or financial assets of central government, which means
expenditure for normal functioning of government departments(day to day working)

 interest payments on debt taken by government

 grants to state government and others(even for creation of assets).

Budget classifies expense into – Plan expenditure and Non Plan expenditure

Plan revenue expenditure: It is related to central plan(FYP) and central assistance to states and
UTs Plans.

Non Plan revenue expenditure: It covers general, economic & social services of government.

 Interest payments on market loans, external loans.

 defence services(can’t be reduced)
 Subsidies(important policy instrument for welfare)
 Salaries and pensions.

Capital Budget of Government of India:

Assets and liabilities of central government. Changes occurring capital is considered, shows capital
requirements of government and pattern of their financing.
Capital Receipts:

Receipts creating liabilities, and reducing financial assets. These are:

 Market Borrowings: Loans raised from public.

 Treasury Bills: Borrowings from RBI and other commercial banks and FIs through treasury
bills.
 Loans received from foreign government and international organisation.
 Recoveries of loans granted by central government.
 Small savings in PO savings account, National Saving Certificate, etc.
 Provident Fund
 PSU disinvestment (receipts from sale pf share in Public Sector Undertakings).

Capital Expenditure:

Expense which result in creation of physical or financial asset. Reduction in financial liabilities.
They are:

 Expenditure on Land acquisition, building machinery, equipment.

 Investment in shares
 Loans & advances by Central government to states and UTs, PSUs or others.
 Also classifies as Plan and non-Plan expenditures.

Plan Capital Expenditure: Related to central plan, central assistance to States and UTs.

Non Plan Capital Expenditure: Covers general, social and economic services by government.

Other documents under the FRBM Act

Along with Budget, there are three other Policy Statements mandated by FRBM Act(Financial
Responsibility & Budget Management).

Medium Term Fiscal Policy Statement:

 Sets 3 year rolling target for specific fiscal indicators.

 examines if revenue expense can be financed through revenue receipts on sustainable basis.
 how productivity capital receipts (including market borrowing) are being used.

Fiscal Policy Strategy Statement:

 sets priority of government in fiscal area

 examinig current policies
 justifying any deviation in important fiscal measures.

Macroeconomic Statement:

 Assesses economy prospects with respect to GDP growth rate

 fiscal balance of central government
 external balance(gender budgeting which highlights gender sensitivities of budgetary
allocations).
Financial Market : Money Market and Capital Market

Fund Raising By Business Units

Business units have to raise short-term as well as long-term funds to meet their working
and fixed capital requirements from time to time. From where would they get funds from?
Ans : From investors or lenders. Surplus money flows from the investors or lenders to the
businessmen for the purpose of production or sale of goods and services. So, we find two
different groups, one who invest money or lend money and the others, who borrow or use
the money.

Financial Market
Financial market is the market that facilitates transfer of funds between investors/ lenders
and borrowers/ users. Financial market may be defined as ‘a transmission mechanism
between investors (or lenders) and the borrowers (or users) through which transfer of
funds is facilitated’. It consists of individual investors, financial institutions and other
intermediaries who are linked by a formal trading rules and communication network for
trading the various financial assets and credit instruments. It deals in financial instruments
(like bills of exchange, shares, debentures, bonds, etc).

Main functions of financial market

(a) It provides facilities for interaction between the investors and the borrowers.
(b) It provides pricing information resulting from the interaction between buyers and
sellers in the market when they trade the financial assets.
(c) It provides security to dealings in financial assets.
(d) It ensures liquidity by providing a mechanism for an investor to sell the financial assets.
(e) It ensures low cost of transactions and information.

Classification of Financial Market

A financial market consists of two major segments:
(a) Money Market; and
(b) Capital Market.

While the money market deals in short-term credit, the capital market handles the medium
term and long-term credit.

Financial Market Classification

Money Market.
i. Call Money.
ii. Treasury Bill.
iii. Commercial Paper.
iv. Certificate of Deposit.
v. Trade bill.
Capital Market.
i. Securities Market
a. Primary Market : IPOs, Book Building, Private Placements.
 b. Secondary Market : Equity Market, Debt Market, Commodity Market, Futures
and Options Market. (Secondary Market can be basically divided into two –
spot market and forward market. Forward market has two divisions –
futures and options/derivatives. Again, there are two types of options – put
option and call option.)
ii. Non-Securities Market
a. Mutual Funds.
b. Fixed Deposits, Savings Deposits, Post Office savings.
c. Insurance.

Money Market

The money market is a market for short-term funds, which deals in financial assets whose
period of maturity is upto one year. It should be noted that money market does not deal in
cash or money as such but simply provides a market for credit instruments such as bills of
exchange, promissory notes, commercial paper, treasury bills, etc. These financial
instruments are close substitute of money. These instruments help the business units, other
organisations and the Government to borrow the funds to meet their short-term
requirement.

The Indian money market consists of Reserve Bank of India, Commercial banks, Co-
operative banks, and other specialised financial institutions.

The Reserve Bank of India is the leader of the money market in India. Some Non-Banking
Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in
the Indian money market.

Capital Market

Capital Market is an institutional arrangement for borrowing medium and long-term funds
and which provides facilities for marketing and trading of securities. So it constitutes all
long-term borrowings from banks and financial institutions, borrowings from foreign
markets and raising of capital by issue various securities such as shares, debentures, bonds,
etc. The securities market has two different segments namely primary and secondary
market.

Primary Market vs Secondary Market : The primary market consists of arrangements for
procurement of long-term funds by companies by fresh issue of shares and debentures. The
secondary market or stock exchange provides a ready market for existing long term
securities. Stock exchange is the secondary market, which provides a place for regular sale
and purchase of different types of securities like shares, debentures, bonds & government
securities. It is an organised market where all transactions are regulated by the rules and
laws of the concerned stock exchanges.

Secondary Markets or Stock Exchanges : The functions of a stock exchanges are to

provide ready and continuous market for securities, information about prices and sales,
safety to dealings and investment, helps mobilisation of savings and capital formation. It
acts as a barometer of economic and business conditions and helps in better allocation of
funds. Stock exchanges provide many benefits to companies, investors and the society as a
whole. But they also suffer from limitations like exclusive speculation and fluctuation in
prices due to rumours and unpredictable events. There are 21 stock exchanges in India
presently, including BSE, NSE and OTCEI. Stock Exchanges are regulated by the Securities
Contracts (Regulation) Act and by SEBI. SEBI has initiated a number of reforms in the
primary and secondary market to regulate the stock market. Documentary and procedural
requirements for listing and trading have been made stricter and foolproof to protect
investors’ interest.

The secondary market has further two components. First, the spot market where securities
are traded for immediate delivery and payment. The other is forward market where the
securities are traded for future delivery and payment. This forward market is further
divided into Futures and Options Market (Derivatives Markets). In futures Market the
securities are traded for conditional future delivery whereas in option market, two types of
options are traded. A put option gives right but not an obligation to the owner to sell a
security to the writer of the option at a predetermined price before a certain date, while a
call option gives right but not an obligation to the buyer to purchase a security from the
writer of the option at a particular price before a certain date.

Money Market and Capital Market : A comparison

Point of Distinction Money Market Capital Market

1. Time period / Term Deals in short-term funds. Long term funds.

Deals in securities like treasury Deals in securities like

bills, commercial paper, bills of shares, debentures,
exchange, certificate of deposits bonds and
2. Instrument Dealt In etc. government securities.

Stock brokers,
under writers,
mutual funds,
Commercial banks, individual investors,
3. Participants NBFS, chit funds etc. financial institutions

4. Regulatory body RBI SEBI

Role of banks in savings mobilisation

The rapid pace of transformation has created new demands as well as new opportunities
for business. For the banking sector, the changes have called for a more effective and
efficient provision of financial services in response to the new order. Among the changes
that have been witnessed include; emergency of a diverse SMEs sector and of course, the
emergence of a new crop of tobacco farmers all with a new appetite for different bank
products. When properly harnessed, these sub-sectors are the potential sources of savings
and growth in the economy.

Principally, the financial system, mostly the banks, aim to facilitate the effective use of
funds, be it from the new farmers or the diverse small to medium enterprises players as the
new dispensation shows. The financial system is expected to act as an intermediary for all
resources in the economy.

The sources of funds are provided by savings in both the private and public sectors as well
as by the net inflow of funds from abroad. They are collectively channelled through
intermediaries such as banks. This intermediation function involves mobilising resources
by providing the means for savers to hold monetary and financial assets and at the same
time allocating these resources for productive investment. Banks play a substantial role in
mobilising savings to promote investments and growth. This function of banks is very
significant with respect to the an economy, where in banks predominate the financial
markets.

The whole process of mobilizing savings by the banks hinges on financial stability. Stability
of the financial system is vital to promoting the mobilisation of savings and to facilitate the
penetration of the formal financial system into the low and middle-income sections of the
population. The savings mobilisation process by the banks is a necessary precondition for a
steady and balanced economic and social development too.

Once the financial system is not stable it becomes difficult to mobilise savings and the
economy agents will keep their savings somewhere including under mattresses. If savings
are stashed in or under a mattress, or otherwise not deposited into a financial intermediary
such as a bank, there is no chance for those savings to be recycled as investment by the
business sectors.

This means that saving may increase without increasing investment, possibly causing a
short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and
income, and thus a recession) rather than to economic growth.

Financial resource mobilisation problem is very linked with the savings problem. Financial
sector mobilisation requires an institutional arrangement which encourages and mobilises
savings on one hand, and which channels savings to mobilised into productive investment
on the other.
This whole process is underpinned by other factors such as the availability of liquidity in
the whole economy, level of capitalisation of the banks, range of products provided by the
banks and other factors.

Commercial Banks through their intermediation role between savers and investors affect
the volume as well as mobilisation of savings, by providing the market with the
diversification of instruments that will meet the precise liquidity needs of savers and at the
same time making financial resources available to the investors over a relatively long-
period in accord with their needs.

Some of the challenges currently faced country is synonymous with the rest of the
developing countries, can be general attributed to the intrinsic problem of inadequate
savings capacity of the populace. It is also argued that the problems of promotion and
mobilisation of savings are caused; by inadequacies in the structure of financial markets
and the density of financial intermediaries.

In our own case in Zimbabwe, the other challenge that deter the maximum mobilisation of
savings by the banks include the hangover effects of the changeover from Zimbabwe dollar
to the multi-currency system where all the savings were by the populace were totally lost.

It is encouraging that the Government is in the process of looking for a mechanism to repay
all those who were holding the Zimbabwe dollar accounts.

The country as a whole should understand that high levels of savings in an economy
increase the amount of national resources and decrease the need to resort to foreign
indebtedness in order to cover domestic investment and consumption demand.

Numerous countries with low internal savings rates must borrow from abroad, which
results in a debt service burden. This clearly underlines the importance of savings
mobilisation to sustain economic growth with national financial resources.

In the long term if saving falls below investment it reduces investment and detracts from
future growth. Future growth is made possible by foregoing present consumption to
increase investment. However, savings kept in a mattress amount to idle resources acting as
tax to the economy as they are not being put to productive use.

The above arguments clearly underline the importance of savings mobilisation to sustain
economic growth with domestic financial resources. Domestically, the ability of the various
economic agents to save is important to spur economic activity in the country.

Any resources coming from outside the country should complement the resources set aside
by the residents of the country. It is hence the responsibility of each and every citizen to
develop a culture of savings and placing these savings in financial institutions.
On the other hand, the Banks should play their fiduciary duty and protect the savings of the
citizens and provide reasonable returns in case the savings are placed in appropriate
income generating accounts.

Industrial Sickness: Meaning, Incidence, Nature and Factors Causing It

Meaning of Industrial Sickness:

The strength of the industrial sector, by and large, determines the soundness of the
economy.

A developing economy like India cannot afford the growing sickness in industries as it
results in a colossal wastage of physical, financial and human resources. In the presence of
the resource crunch, the industrial sickness becomes all the more an alarming problem.
Industrial sickness usually refers to a situation when an industrial firm performs poorly,
incurs losses for several years and often defaults in its debt repayment obligations.

The Reserve Bank of India has defined a sick unit as one “which has incurred a cash loss for
one year and is likely to continue incurring losses for the current year as well as in the
following year and the unit has an imbalance in its financial structure, such as, current ratio
is less than 1: 1 and there is worsening trend in debt-equity ratio.” The State Bank of India
has defined a sick unit as one “which fails to generate an internal surplus on a continuous
basis and depends for its survival upon frequent infusion of funds.”

However, prior to the enactment of Sick Industrial Companies Act (SICA) in 1985, there was
no agreement on the criteria to be used to describe an industrial unit as sick. According to
SICA, as amended in 1992, an industrial company can be declared as sick which has at the
end of any financial year accumulated losses equal to or exceeding its entire net worth. It
may be noted that Sick Industrial Companies Act (SICA) applies to registered companies
which have been in existence for at least 5 years.

In case of small scale industrial unit (SSI), it is regarded as a sick unit if it has:

(i) Incurred a cash loss in the previous accounting year and was likely to continue with
losses in the current accounting year and further its cumulative cash losses are equal to 50
per cent or more of its peak net worth during the last five years and

(ii) It has defaulted in meeting four consecutive installments of interest.

According to the Development Commissioner, a small scale industrial unit (SSI) becomes
sick if its:

(a) Capacity utilisation is less than 50 per cent of the highest achieved during the preceding
five years (incipient sickness)’,

(b) Net worth has been eroded by more than 50 per cent; and

(c) The unit has remained closed for a period more than six months.
On the basis of the above definitions of a sick industrial unit, it emerges that the symptoms
of the sickness of an industrial unit manifest themselves in the form of unbalanced financial
structure, erosion of more than 50 per cent of its net worth, absence of the generation of
internal surplus, under- utilisation of capacity and survival of the unit upon frequent
infusion of funds.

Incidence of Industrial Sickness:

A very disquieting feature of the industrial scenario is the mounting incidence of industrial
sickness. It is a matter of deep concern not only for shareholders and creditors of the sick
concerns but also to the society at large. There is sickness of industries both in the large-
scale sector (i. e., Non- SSI sector) and in the small-scale industries (SSI). Growing incidence
of sickness has been one of the pressing problems faced by the industrial sector in India.
Substantial amounts of banking funds are locked up in these sick industrial units.

There was a problem of increasing industrial sickness even before the new policy of
liberalisation and globalisation adopted in 1991. Thus the number of SSI sick units
increased from 58,551 in 1982, rose to 2.21 lakhs in March 1991 and to 2.52 lakhs in end-
March 2001. Table 38.1 gives the number of sick industrial units both in the small scale
industrial (SSI) sector and non-small scale industrial (non-SSI) and the outstanding bank
credit locked in them.

It will be seen from Table 38.1 that though the number of large and medium sick industrial
enterprises (i.e., non-SSI sick units) is much smaller than SSI sick units, the outstanding
bank credit locked in them is much greater than that in SSI sick units.

It may be noted that in the sick industrial companies, a lot of resources of banks are locked
up. The data reveal that as on March 31, 2001, 3,317 non-SSI sick industrial units accounted
for an outstanding bank credit of Rs.21, 270 crores. Industry-wise data show that five
industries, namely, textiles, engineering, electrical, chemicals and iron and steel accounted
for about 56 per cent of total outstanding bank credit.

There has been a phenomenal rise of industrial sickness over the last few years. It is
significant to note that sickness has been growing faster in the small-scale sector than in
large and medium- scale sectors. At the end of March 2001, there were 252,947 sick units.
Out of these, 249,630 were small-scale sick units against whom outstanding bank credit was
Rs. 4,506 crores.

Nature and Causes of Industrial Sickness:

Competition breeds efficiency but adversely affects weak industrial units and makes them
sick. The clear directional changes since 1982-83 towards liberalisation of industrial
licensing policies, foreign collaboration approvals, the concept of minimum-size plants are
welcome from consumers’ point of view. But the weaker units have to pay the price. The
inevitable cost of achieving competitive efficiency is that the weak must be allowed to fade.
But the country cannot allow this to happen.
The Sick Industrial Companies (Special Provisions) Act, 1985, was enacted to help and
revive the sick units. The substantive portions of the Act came into force from May 15, 1987.
The Act provided for setting up of a quasi-judicial body designated as the Board for
Industrial and Financial Reconstruction (BIFR) to deal effectively with the problem of sick
industrial companies. The Reserve Bank of India has issued guidelines to banks to
strengthen the monitoring system and to arrest industrial sickness at the incipient stage.

Nature of Sickness:
Sickness in industry can be classified into:

(a) Genuine sickness which is beyond the control of the promoters of the concern despite
the sincere efforts by them,

(b) Incipient sickness due to basic non-viability of the project, and

(c) Induced sickness which is due to the managerial incompetence and wrong policies
pursued deliberately for want of genuine stake.

This is a man-made sickness in which some unscrupulous promoters adopt fraudulent

practices to start a concern and to get away with the money obtained by fraud and deceit.

The FICCI study entitled ‘Industrial Sickness — Dimensions and Perspectives’ says that the
causes of sickness are both internal and external, often operating in combination. External
factors are government policies on pricing, duties, taxes, high interest rates, taxes on profit,
slackness in demand, sluggishness in export markets, high labour cost, inadequate
availability of inputs, lack of infrastructure and the like.

The internal factors which contribute to sickness are wrong planning in relation to
location, technology, capital cost, technological obsolescence, management deficiencies and
industrial unrest. We explain below these external and internal factors in some detail.

External Factors:
The following are some of the external factors causing industrial sickness in India:

(i) General Recessionary Trend:

Sometimes a general depression hits industrial units. This is reflected in lack of demand for
industrial products in general. An overall slowdown in economic activities affects the
performance of individual projects. Improper demand estimation for the products to project
lands the industrial units in difficulties.

(ii) High Prices of Inputs:

When the costs of manufacture are high and sales realisation low, the industrial unit cannot
stand in the market. This happens when the prices of inputs such as price of fuel such as
petroleum during energy crisis goes up whereas the competitive forces keep down the
prices of the products.

(iii) Non-Availability of Raw Materials:

When the supplies of raw materials are not available regularly or in good quality, the
industrial units are bound to be in trouble. This often occurs in case of supply of imported
raw materials.

(iv) Changes in Government Policies:

The industrial sickness is also caused by certain changes in policy designs of the
government. These frequent changes affect the long-term production, financial and
marketing planning of an industrial unit. Changes in Government policies regarding
imports, industrial licensing, taxation can make viable units sick. For example, liberal
import policy since 1991 has rendered many small-scale industrial units sick.

(v) Infrastructure Bottlenecks:

Often the infrastructure difficulty is responsible for industrial sickness. No industrial unit
can survive prolonged transport and power bottlenecks.

Internal Factors:
The following are the important internal factors which are often responsible for industrial
sickness:

(i) Project Appraisal Deficiencies:

The industrial unit becomes sick when the unit has been launched without a comprehensive
appraisal of economic, financial and technical viabilities of the project.

(ii) Industrial Unrest and Lack of Employee Motivation:

When there is labour discontent, no industrial unit can function smoothly and efficiently.
When labour lacks motivation no good results can be expected and this results in sickness
and non-viability of several industrial units.

(iii) Wrong Choice of Technology:

If the promoters use wrong technology, results are bound to be unsatisfactory. Many
industrial units, especially in the small-scale sector, do not seek professional guidance in
installing the correct machinery and plant. If the machinery and plant installed turn out to
be defective and unsuitable, they are bound to suffer losses and become sick and non-viable.

(iv) Marketing Problems:

The industrial unit becomes sick due to product obsolescence and market saturation. The
industrial unit becomes sick when its product-mix is not attuned to the consumers’ demand.

(v) Wrong Location:

If the location of an industrial unit happens to be defective either from the point of the
market or the supply of inputs, it is bound to experience insurmountable difficulties.

(vi) Lack of Finance:

Inadequate financial arrangements or in the absence of timely financial aid an industrial

unit is bound to come to grief. It will not be able to withstand operational losses.

(vii) Improper Capital Structure:

If capital structure proves to be unsound or unsuitable especially on account of delayed

construction or operation, it will result in cost overruns or unduly large borrowing and
create financial trouble for the unit concerned.

(viii) Management Deficiencies:

The biggest cause of industrial sickness is the managerial inefficiency. Lack of professional
management or experienced management and the existence of hereditary management is
an important cause of industrial sickness. Inefficient management results in inability to
perceive things in proper perspective devoid of routine considerations. Inefficient
management is also unable to build up good team and inspire confidence for an organised
collective effort and takes autocratic and high-handed decisions.

(ix) Voluntary Sickness:

There is some sickness which is voluntarily invited by the entrepreneurs for various
motives like getting government concession or aid from financial institutions. Thus
industrial sickness cannot be attributed to any single, or simple cause but may be the result
of a combination of number of allied causes.

An analysis of 637 large-scale units identified that deficiency in management was

responsible for 52 per cent cases of sickness. While labour troubles caused sickness only in
2 per cent of the industries, market recession and environmental factors came second with
23 per cent.

The other causes were technical factors and faulty initial planning (14 per cent) and
infrastructural factors such as power cuts and shortage of critical inputs (9 per cent). Of the
637 large units, 350 could be put back on the track. Of these, 221 units, with the outstanding
credit of Rs. 1,125.06 crores were put under the nursing programme.

Suggestions for Rehabilitation of Sick Units:

The rehabilitation of sick units or restoring them to normal health is a matter of great
urgency in view of the serious social, economic and political consequences of industrial
illness.

The following measures may be suggested:

(i) Cooperation between Term-Lending Institutions and Commercial Banks:

Since commercial banks provide working capital, they are in a position to know about the
working of industrial concern. But assistance from term-lending institutions is also
essential for rescue operations.

(ii) Coordination between Various Government Agencies:

All government agencies, both regulatory and promotional, must join hands to restore sick
units to health.

(iii) Full cooperation from various suppliers,’ unsecured creditors and other
stakeholders, particularly from the employees, is also essential to take the concern out of
the difficulties in which it is involved.

(iv) Willing Cooperation and Clear Understanding with the Project Promoters:

Generally there is a lack of trust and confidence among the various interests concerned. It is
found that government agencies and dealing institutions are more worried about their
money and are anxious to recover them instead of curing of the health of the sick units.

(v) Checking Over-Valuation of Inventories:

The banks should verify on a regular basis the valuation of inventories both in terms of
quantity and price. This would prevent over-borrowing on the hypothecation of inventories.

(vi) Marketing:

There should be well organised and scientific marketing by the project promoters
otherwise launching of a project will be a leap in the dark. Good marketing arrangements
will prevent industrial sickness.

(vii) Recovery of Outstanding:

Every effort should be made to realize outstanding advances so that the concern is able to
gather funds to avoid sickness.

(viii) Modernisation of Machinery:

If the sick unit is to be restored to health, old and obsolete machinery and outdated
technology should be discarded at the earliest.
(ix) Improving Labour Relations:

Restrictive labour and unreasonable trade unions are great obstacles. Improving labour
relations will go a long way in curing industrial sickness.

(x) Efficient Management:

If necessary inefficient management should be replaced. The key to industrial health lies in
alert and efficient management. The management should show a calm approach, patience
and perseverance, courage and ability to steer in bad weather.

(xi) Performance Incentives:

It is necessary to offer performance incentives to the executives and the workers to induce
them to put in their best efforts. This will be quite helpful in curing industrial sickness.

(xii) Sympathetic Government Attitude:

During periods of industrial illness the government agencies should adopt a sympathetic
and understanding attitude so that the problem is not aggravated but moves towards a
solution instead.

(xiii) Austerity and Economy:

Austerity and disciplines should be enforced at all levels. Every effort should be made in
raising funds internally through the sale of excess assets, surplus machinery, etc. Uncalled
for tours, lavish entertainments, unnecessary personal expenses should be ruthlessly cut
down.

Conclusion:
In view of the large-scale industrial sickness it would be necessary to organize a task force
consisting of competent and experienced executives in various branches of business to go
into the case and monitor recovery. Rehabilitation of sick units is not an easy and simple
affair. An all-round effort is necessary to root out the disease, first necessary step is the
identification of sick units which can be made viable through renovation, expansion, and
diversification. Units beyond recovery should be wound up.

The second step is the reconstitution of management. Where the management is unwilling
or unable to play its proper role, the financial institutions and the government agencies
should intervene to fulfill their large social responsibility of ensuring efficient use of
national resources. Since industrial sickness is due both to external causes, e.g., general
recession, and internal causes like dishonest and inefficient management, the remedy must
also lie in both directions.

With a view to meeting the situation, the early warning system is strengthened. Viability
studies should be undertaken to identify the sick units including creeping sickness which
could be eventually restored to health with additional financial aid on liberal and easy
terms. To an extent increase in industrial sickness is inevitable result of the very process of
modernisation or technological development industry. It is natural that the units which
cannot keep pace with the ongoing technological change will become sick, they should be
allowed to wind up.

Exim Policy

Exim Policy, also known as the Foreign Trade Policy is announced every 5 years by Ministry
of Commerce and Industry, Government of India. It is updated every year on the 31st of
March and all the amendments and improvements in the scheme are effective from the 1st
of April. Exim policy deals in general provisions pertaining to exports and imports,
promotional measures, duty exemption schemes, export promotion schemes, special
economic zone programs and other details for different sectors. The Government
announces a supplement to this policy each year. The Government of India also releases the
Hand Book of Procedures detailing the procedures to be followed for each of the schemes
mentioned in the Exim Policy.

EXIM POLICY
 The foreign trade of India is guided by the Export-Import policy of the Government
of India.
 Regulated by The Foreign Trade Development and Regulation Act 1992.
 Exim policy contain various policy decisions with respect to import and exports
from the country.
 Exim Policy is prepared and announced by the central government.
 Exim Policy of India aims to developing export potential, improving export
performance, encouraging foreign trade and creating favorable balance of payment
position.

General Objectives of Exim Policy

 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 augment 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.

The Govt. of India, Ministry of Commerce and Industry announce Export Import Policy
every five years. The current policy covers the period 2002-2007. The Export Import Policy
(Foreign Trade Policy) is updated every year on the 31st of March and the modifications,
improvements and new schemes are effective w.e.f. 1st April of every year.

Context of new Foreign Trade Policy

Trade is not an end in itself, but a means to economic growth and national development.
The primary purpose is not the mere earning of foreign exchange, but the stimulation of
greater economic activity.

For India to become a major player in world trade, an all encompassing, comprehensive
view needs to be taken for the overall development of the country's foreign trade.

While increase in exports is of vital importance, we have also to facilitate those imports
which are required to stimulate our economy. Coherence and consistency among trade and
other economic policies is important for maximizing the contribution of such policies to
development. Thus, while incorporating the existing practice of enunciating an annual
Foreign Trade Policy, it is necessary to go much beyond and take an integrated approach to
the developmental requirements of India's foreign trade.

The Foreign Trade Policy is built around two major objectives. These are:

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

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

generation.

STRATEGY

For achieving these objectives, the following strategies need to be adopted:

Unshackling of controls and creating an atmosphere of trust and transparency to unleash

the innate entrepreneurship of our businessmen, industrialists and traders.

Simplifying procedures and bringing down transaction costs.

Neutralizing incidence of all levies and duties on inputs used in export products, based on
the fundamental principle that duties and levies should not be exported.

Facilitating development of India as a global hub for manufacturing, trading and services.

Identifying and nurturing special focus areas which would generate additional employment
opportunities, particularly in semi-urban and rural areas, and developing a series of
'Initiatives' for each of these.

Facilitating technological and infrastructure up gradation of all the sectors of the Indian
economy, especially through import of capital goods and equipment, thereby increasing
value addition and productivity, while attaining internationally accepted standards of
quality.

Activating our Embassies as key players in our export strategy and linking our Commercial
Wings abroad through an electronic platform for real time trade intelligence and enquiry
dissemination.

The new Policy envisages merchant exporters and manufacturer exporters, business and
industry as partners of Government in the achievement of its stated objectives and goals
The new Exim-Policy is essentially a roadmap for the development of India's foreign trade.
It contains the basic principles and points the direction in which we propose to go. By virtue
of its very dynamics, a trade policy cannot be fully comprehensive in all its details. It would
naturally require modification from time to time. We propose to do this through continuous
updating, based on the inevitable changing dynamics of international trade. It is in
partnership with business and industry that we propose to erect milestones on this
roadmap. With a view to doubling our percentage share of global trade within 5 years and
expanding employment opportunities, especially in semi urban and rural areas, certain
special focus initiatives have been identified for the agriculture, handlooms, handicraft,
gems & jewellery and leather sectors.

The thrust sectors indicated below shall be extended the following facilities:

AGRICULTURE

A new scheme called the Vishesh Krishi Upaj Yojana (Special Agricultural Produce Scheme)
for promoting the export of fruits, vegetables, flowers, minor forest produce, and their value
added products has been introduced .

Funds shall be earmarked under ASIDE for development of Agri Export Zones (AEZ)

Units in AEZ shall be exempt from Bank Guarantee under the EPCG Scheme.

Import of capital goods shall be permitted duty free under the EPCG Scheme

Units in AEZ shall be exempt from Bank Guarantee under the EPCG Scheme.

Capital goods imported under EPCG shall be permitted to be installed anywhere in the AEZ.

Import of restricted items, such as panels, shall be allowed underNew towns of export
excellence with a threshold limit of Rs 250 crore shall be notified the various export
promotion schemes.

Import of inputs such as pesticides shall be permitted under the Advance Licence for agro
exports.

HANDLOOMS

Specific funds would be earmarked under MAI/ MDA Scheme for promoting handloom
exports

Duty free import entitlement of specified trimmings and embellishments shall be 5% of FOB
value of exports during the previous financial year.

Duty free import entitlement of hand knotted carpet samples shall be 1% of FOB value of
exports during the previous financial year.

Duty free import of old pieces of hand knotted carpets on consignment basis for re-export
after repair shall be permitted.

New towns of export excellence with a threshold limit of Rs 250 crore shall be notified.
HANDICRAFTS

New Handicraft SEZs shall be established which would procure products from the cottage
sector and do the finishing for exports

Duty free import entitlement of trimmings and embellishments shall be 5% of the FOB value
of exports during the previous financial year. The entitlement is broad banded, and shall
extend also to merchant exporters tied up with supporting manufacturers

The Handicraft Export Promotion Council shall be authorized to import trimmings,

embellishments and consumables on behalf of those exporters for whom directly importing
may not be viableSpecific funds would be earmarked under MAI & MDA Schemes for
promoting Handicraft exports

CVD is exempted on duty free import of trimmings, embellishments and consumables.

GEMS AND JEWELLERY

Import of gold of 18 carat and above shall be allowed under the replenishment scheme

Duty free import entitlement of consumables for metals other than Gold, Platinum shall be
2% of FOB value of exports during the previous financial year.

Duty free import entitlement of commercial samples shall be Rs 100,000.

Duty free re-import entitlement for rejected jewellery shall be 2% of the FOB value of
exports

Cutting and polishing of gems and jewellery, shall be treated as manufacturing for the
purposes of exemption under Section 10A of the Income Tax Act

LEATHER AND FOOTWEAR

Duty free import entitlement of specified items shall be 5% of FOB value of exports during
the preceding financial year.

The duty free entitlement for the import of trimmings, embellishments and footwear
components for footwear (leather as well as synthetic), gloves, travel bags and handbags
shall be 3% of FOB value of exports of the previous financial year. The entitlement shall also
cover packing material, such as printed and non printed shoeboxes, small cartons made of
wood, tin or plastic materials for packing footwear

Machinery and equipment for Effluent Treatment Plants shall be exempt from basic
customs duty.

Re-export of unsuitable imported materials such as raw hides & skins and wet blue leathers
is permittedCVD is exempted on lining and interlining material notified at S.No 168 of
Customs Notification No 21/2002 dated 01.03.2002

CVD is exempted on raw, tanned and dressed fur skins falling under Chapter 43 of ITC(HS).
EXPORT PROMOTION SCEHEMES

 Target plus scheme to accelerate growth of exports.

 Vishesh krishi upaj yojna for agro-exports.
 Served from India scheme
 Additional flexibility under EPCG

Import of fuel under DFRC entitlement allowed to be transferred to marketing agencies

authorized by Min of Petroleum and Natural Gas.

The DEFB scheme will be continued.

EOUs shall be exempted from Service Tax in proportion to their exported goods and
services.

A scheme to establish Free Trade and Warehousing Zone is introduced to create trade-
related infrastructure to facilitate import and export with freedom to carry out trade
transactions in free currency.

In order to showcase India's industrial and trade prowess to its best advantage and leverage
existing facilities to enhance the quantity of space and service the govt plans to transform
Pragati Maidan into a world-class complex with visitor friendliness ingress and egress
system.

A Note on Special Economic Zones (SEZ)

SEZ are growth engines that can boost manufacturing, augment exports and generate
employment. The private sector has been actively associated with the development of SEZs.
The SEZs require special fiscal and regulatory regime in order to impart a hassle free
operational regime encompassing the state of the art infrastructure and support services.
The proposed legislation on SEZs to be enacted in the near future would cover the concepts
of the developer and co- developer , incorporate the provision of virtual SEZs, have fiscal
concessions under the Income Tax and Customs Act, provide for Offshore Banking Units
(OBUs) etc.

Out of the 24 new Special Economic Zones (SEZs) approved for establishment (as on
31/3/2004), 3 SEZs at Salt Lake (Manikanchan), Indore and Jaipur have become operational
and another two Zones are now ready for operation. The new SEZs are being set up largely
by the State Governments or their agencies or by the private sector in association with the
State Governments or by the private sector on their own. Periodic meetings are held by the
Department of Commerce with the State Governments/promoters of the SEZs to expedite
the projects. Eight SEZs at Kandla and Surat (Gujarat), Santa Cruz (Maharashtra), Cochin
(Kerala), Chennai (Tamil Nadu), Vishakapatnam (Andhra Pradesh), Falta (West Bengal) and
NOIDA (UP) converted from Export Processing Zones (EPZs) are operational.

Manufacturing Sector in INDIA

Introduction
Manufacturing has emerged as one of the high growth sectors in India. Prime Minister of
India, Mr Narendra Modi, had launched the ‘Make in India’ program to place India on the
world map as a manufacturing hub and give global recognition to the Indian economy. India
is expected to become the fifth largest manufacturing country in the world by the end of
year 2020*.

Market Size

The Gross Value Added (GVA) at basic current prices from the manufacturing sector in India
grew at a CAGR of 4.34 per cent during FY12 and FY18 as per the second advance estimates
of annual national income published by the Government of India. In April-June quarter of
2018-19, manufacturing sector’s GVA at basic price increased 13.5 per cent year-on-year.
Under the Make in India initiative, the Government of India aims to increase the share of the
manufacturing sector to the gross domestic product (GDP) to 25 per cent by 2022, from 16
per cent, and to create 100 million new jobs by 2022. Business conditions in the Indian
manufacturing sector continue to remain positive.

Investments

With the help of Make in India drive, India is on the path of becoming the hub for hi-tech
manufacturing as global giants such as GE, Siemens, HTC, Toshiba, and Boeing have either
set up or are in process of setting up manufacturing plants in India, attracted by India's
market of more than a billion consumers and increasing purchasing power.

As per Labour Bureau’s Quarterly Report on Employment Scenario, manufacturing sector

added an estimated 89,000 jobs in the second quarter of 2017-18.

Cumulative Foreign Direct Investment (FDI) in India’s manufacturing sector reached US$
76.82 billion during April 2000-June 2018.

India has become one of the most attractive destinations for investments in the
manufacturing sector. Some of the major investments and developments in this sector in the
recent past are:

India’s manufacturing PMI was recorded at 52.20 in September 2018. The rise in
manufacturing output in July led to a 14 month expansion streak.

In July 2018, Samsung inaugurated the world’s biggest mobile phone factory in Uttar
Pradesh. The factory will double the company’s mobile phone production capacity to 120
million units by 2020.

As of May 2018, The Chatterjee Group (TCG) is planning to set up a Continuous

Polymerisation (CP) unit and a spinning unit, which will act as forward integrated units for
its petrochemicals subsidiary MCPI.

As of April 2018, Rallis India, a subsidiary of Tata Chemicals, is planning to undertake

backward integration as its inputs have become costlier and the move will help the
company to ease pressure on its profit margins.

'For its Commercial Vehicles, Ashok Leyland is utilising machine learning algorithms and its
newly created telematics unit to improve the performance of the vehicle, driver and so on.
Government Initiatives

The Government of India has taken several initiatives to promote a healthy environment for
the growth of manufacturing sector in the country. Some of the notable initiatives and
developments are:

In September 2018, the Government of India exempted 35 machine parts from basic custom
duty in order to boost mobile handset production in the country.

Government of India is in the process of coming up with a new industrial policy which
envisions development of a globally competitive Indian industry. As of August 2018, the
policy has been sent to the Union Cabinet for approval.

In Union Budget 2018-19, the Government of India reduced the income tax rate to 25 per
cent for all companies having a turnover of up to Rs 250 crore (US$ 38.75 million).

Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Government of India
increased export incentives available to labour intensive MSME sectors by 2 per cent.

The Government of India has launched a phased manufacturing programme (PMP) aimed at
adding more smartphone components under the Make in India initiative thereby giving a
push to the domestic manufacturing of mobile handsets.

The Government of India is in talks with stakeholders to further ease foreign direct
investment (FDI) in defence under the automatic route to 51 per cent from the current 49
per cent, in order to give a boost to the Make in India initiative and to generate employment.

The Ministry of Defence, Government of India, approved the “Strategic Partnership” model
which will enable private companies to tie up with foreign players for manufacturing
submarines, fighter jets, helicopters and armoured vehicles.

The Union Cabinet has approved the Modified Special Incentive Package Scheme (M-SIPS) in
which, proposals will be accepted till December 2018 or up to an incentive commitment
limit of Rs 10,000 crore (US$ 1.5 billion).

Road Ahead

India is an attractive hub for foreign investments in the manufacturing sector. Several
mobile phone, luxury and automobile brands, among others, have set up or are looking to
establish their manufacturing bases in the country.

The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025 and
India is expected to rank amongst the top three growth economies and manufacturing
destination of the world by the year 2020. The implementation of the Goods and Services
Tax (GST) will make India a common market with a GDP of US$ 2.5 trillion along with a
population of 1.32 billion people, which will be a big draw for investors.

With impetus on developing industrial corridors and smart cities, the government aims to
ensure holistic development of the nation. The corridors would further assist in integrating,
monitoring and developing a conducive environment for the industrial development and
will promote advance practices in manufacturing.
Service sector in India

Introduction

The services sector is not only the dominant sector in India’s GDP, but has also attracted
significant foreign investment flows, contributed significantly to exports as well as provided
large-scale employment. India’s services sector covers a wide variety of activities such as
trade, hotel and restaurants, transport, storage and communication, financing, insurance,
real estate, business services, community, social and personal services, and services
associated with construction.

Market Size

The services sector is the key driver of India’s economic growth. The sector has contributed
55.65 per cent of India’s Gross Value Added at current price in Q1 2018-19 and employed
28.6 per cent of the total population. Net service exports stood at US$ 18.7 billion in Q1
2018-19 (P).

Nikkei India Services Purchasing Managers' Index (PMI) stood at 51.5 in August 2018.
During the same month, business sentiments of service providers were recorded to be at
their strongest levels since January 2015.

Investments

Some of the developments and major investments by companies in the services sector in the
recent past are as follows:

Leisure and business travel and tourism spending are expected to increase to Rs 14,127.1
billion (US$ 216.9 billion) and Rs 806.4 billion (US$ 12.4 billion) in 2018, respectively.

India’s earnings from medical tourism could exceed US$ 9 billion by 2020.

Indian healthcare companies are entering into merger and acquisitions with domestic and
foreign companies to drive growth and gain new markets.

Government Initiatives

The Government of India recognises the importance of promoting growth in services

sectors and provides several incentives in wide variety of sectors such as health care,
tourism, education, engineering, communications, transportation, information technology,
banking, finance, management, among others.

Prime Minister Narendra Modi has stated that India's priority will be to work towards trade
facilitation agreement (TFA) for services, which is expected to help in the smooth
movement of professionals.

The Government of India has adopted a few initiatives in the recent past. Some of these are
as follows:
Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Central Government
increased incentives provided under Services Exports from India Scheme (SEIS) by two per
cent.

Government of India is working to remove many trade barriers to services and tabled a
draft legal text on Trade Facilitation in Services to the WTO in 2017.

Road Ahead

Services sector growth is governed by both domestic and global factors. The Indian facilities
management market is expected to grow at 17 per cent CAGR between 2015 and 2020 and
surpass the US$19 billion mark supported by booming real estate, retail, and hospitality
sectors.

The implementation of the Goods and Services Tax (GST) has created a common national
market and reduced the overall tax burden on goods. It is expected to reduce costs in the
long run on account of availability of GST input credit, which will result in the reduction in
prices of services.

Exchange Rate Used: INR 1 = US$ 0.015 as on March 30, 2018