TASK-3

Economic Reforms—The First Phase:

With the changes in the nature of markets and institutions, industrial organisation and
structures and social relations of production in various countries of the world, India has also
started to respond to all these changes, particularly to the increasing globalisation of
economic processes.
The first phase of economic reforms that had its origin in 1985 when Mr. Rajiv Gandhi took
over as the Prime Minister of the country. Just after that Mr. Gandhi declared the New
Economic Policy where he put much emphasis on improvement in productivity, absorption
of modern technology and fuller utilisation of capacity and finally on the greater role for the
private sector.
In order to provide greater scope to private sector, this new policy introduced various policy
changes regarding industrial licensing, technology up-gradation, elimination of controls and
restrictions, foreign capital, fiscal policy, rationalizing and simplifying the system of fiscal
and administrative regulation and export-import policy.
These policy changes were brought with the sole-intention to create a favourable climate
for getting a big boost in private sector investment which would, in turn usher in rapid
growth of the economy as well as pave the way for modernization of the economy.
In this connection, Prof. K.N. Raj rightly observed that, “There has been, however, a general
agreement that a very distinctive feature of these policy changes taken as a whole is the
greater scope for unfettered expansion they offer to the private sector, particularly in the
corporate segment of manufacturing industry and the opportunities opened up to multi-
national enterprise.”
Accordingly, the New Economic Policy stressed on removing unnecessary restrictions in
issuing licences, in denying Industrial Licences to MRTP companies and in making
adjustment of output to administered prices.
In this connection, the government introduced various measures in the following manner:
1. Cement:
Cement was totally decontrolled and a number of private sector units were issued
additional licensed capacities.
2. Sugar:
The share of free sale of sugar in open market was enlarged.
3. Asset limit:
The ceiling of the asset limit of big business houses was enhanced from Rs. 20 crores to Rs.
100 crores.
4. Broad-banding:
The scheme of “broad-banding” of licences was introduced to bring variety in the
production of two wheelers which was later extended to 25 other categories of industries
like, four-wheelers, chemicals, petro-chemicals, pharmaceuticals, typewriters-etc.
5. Drug:
94 drugs were completely delicensed and 27 industries were placed outside the purview Of
MRTP Act.

6. Textile:
Introduction of new Textile Policy, 1985 practically abolished the distinction between mill,
power loom and handloom sectors and also between natural and synthetic fibre for
licensing purposes.
7. Electronics:
Electronics industry was liberalised from MRTP Act restrictions. The entry of FERA
Companies in the areas was also liberalised.
8. Foreign Trade:
Export-Import Policy, 1985 was announced in order to pave the way for easier and quicker
access to imports, strengthening export production base and for facilitating technological
up-gradation.
9. LTFP:
Long Term Fiscal Policy, 1985 was announced for the implementation of the Seventh Plan in
a smooth manner.
Economic Reforms in India—the Second Phase:
The first phase of economic reforms failed to yield the expected result in most of the fronts.
More particularly, the deficit in the balance of trade account gradually increased and thus
the average deficit in balance of trade during the Sixth Plan which was to the extent of Rs.
5,935 crore, suddenly rose to the tune of Rs. 10,841 crore during the Seventh Plan.
Moreover, receipts on invisible account has also declined Thus the country has been
plunged into a serious balance of payments crisis. In order to save the situation, the
Government approached the World Bank and the International Monetary Fund (IMF) to
extend loan to the tune of about $7 billion. IMF finally decided to advance this loan but at
the same times insisted that the Government should put the economy again on right track.
Accordingly, Dr. Manmohan Singh, the then Finance Minister of India finally made a
commitment by his letter dated August 27, 1991 to the IMF Managing Director Michel
Camdessus that the Government of India set certain macro-economic targets and also
initiated certain policy measures in order to bring about structural readjustment of the
economy.
In order to restore both internal and external confidence, the Narasimha Rao Government
initiated a good number of stabilisation measures in 1991-92. These measures include—
tightening of monetary policy by raising interest rates, adjustment of the exchange rate of
rupee by 22 per cent, liberalisation and simplification of foreign trade policy, reduction of
fiscal deficit and introduction of other reforms in economic policy necessary to bring a new
element of dynamism to the process of economic growth of the country.
The memorandum submitted by the then Finance Minister observed that, “The thrust will
be to increase the efficiency and international competitiveness of industrial production, to
utilize foreign investment and technology to a much greater degree than in the past, to
improve the performance and rationalize the scope of the public sector and to reform and
modernize the financial sector so that it can more efficiently serve the needs of the
economy.”
Macro-Economic objectives:
The main macro-economic objectives of economic reforms (2nd phase) in India include:
(a) Attaining economic growth at the rate of 3 to 3.5 per cent in 1991-92 and at 4 per cent in
1992-93;
(b) Reducing the annual rate of inflation by 9 per cent in 1991-92 followed by 6 per cent in
1992-93;
(c) Relieving the critical balance of payments situation and rebuilding foreign exchange
reserves to $ 2.2 billion in 1991-92;
(d) Reducing current account deficit in the budget from 2.5 per cent of GDP in 1990-91 to
2.0 per cent by 1992-93.
Policy Measures of Second Phase of Economic Reforms:
The following are the major areas of the second phase of economic reforms in India:
1. Fiscal Policy Reforms:
The Government initiated various fiscal measures in order to reduce the fiscal deficit from
8.4 per cent of GDP in 1990-91 to 5.0 per cent in 1996-97 and to 3.7 per cent in 2006-2007.
In order to achieve this target, the Government introduced various controls over public
expenditure and took initiative to raise both its tax and non-tax revenue.
The other measures include imposition of fiscal discipline by both Central and State
Governments, reduction of subsidies, developing a more efficient expenditure system,
encouraging state governments to streamline the working State Enterprise, more
particularly State Electricity Boards and State Transport Corporations and withdrawal of
budgetary support to Central public sector enterprises and to improve their profitability and
efficiency.
2. Monetary Policy Reforms:
The Government pursued a restrictive monetary policy for reducing inflationary pressures
and also for improving balance of payment position.
3. Pricing Policy Reforms:
In order to reduce budgetary provision for subsidies and to promote a more flexible price
structure, the Government increased the administered prices of various commodities and
inputs (petroleum products and fertilizers) and gave greater freedom to public sector
enterprises to set price as per market forces.
4. External Policy Reforms:
The government introduced stabilisation and import compression measures in order to
reduce the current account deficit in balance of payments to 2.1 per cent of GDP in 1991-92
and then to 2 per cent of GDP in 1992-93.
5. Industrial Policy Reforms:
In order to make necessary reforms in its industrial policy, the Government introduced its
new industrial policy on July 24, 1991.
The various measures under industrial policy reforms include:
(a) Abolition of the scheme of industrial licensing for all industrial projects excepting 18
industries related to security, strategic or environmental concerns etc.;
(b) De-reservation of the area of public sector from 17 to 8 industries in order to open up
area of investment for the private sector;
(c) Elimination of the system of pre-entry scrutiny of investment decisions of the MRTP
companies and controlling only “unfair or restrictive business practices”;
(d) Liberalisation of location policy;
(e) Abolition of phased manufacturing programmes earlier enforced to increase the pace of
indigenisation and
(f) Removal of mandatory convertibility clause.
6. Foreign Investment Policy Reforms:
The new industrial policy, 1991 made provision for increased flow of foreign investment in
connection with technology transfer, marketing expertise and introduction of modern
managerial techniques. Accordingly, the new policy included 34 priority industries in
Annexure III to give automatic permission for foreign direct investment up to 51 per cent
foreign equity.
In respect of foreign technology agreements automatic permission will be provided in high
priority industry for royalty payments up to 5 per cent on domestic sales, 8 per cent on
export sales or a maximum payment of Rs. 1 crore. Moreover, in order to promote exports
of Indian commodities in international market, foreign trading companies were also allowed
to raise their foreign equity holdings up to 51 per cent for export activities.
7. Public Sector Policy Reforms:
Considering the huge amount of losses incurred by a good number of public sector
enterprises, the Government has taken various policy measures of making necessary
reforms of the public sector.

These policy measures include:

(a) Reservation of list of industries under public sector reduced to 8 as against 17 industries
reserved earlier;
(b) Review of those public investments be made in order to avoid those areas where social
considerations are not so paramount and where private sector investment would be more
efficient;
(c) Enterprises earning higher profit and judged appropriate, will be provided with much
higher degree of arrangement autonomy through the system of MOD;
(d) Progressive reduction of budgetary support of public enterprises;
(e) Inviting private sector participation to increase market discipline and also the
competitive capacity of these public sector enterprises through disinvestment of part of
equity of selected enterprises;
(f) Referring the chronically sick public enterprises to the 3oard for Industrial and Financial
Reconstruction (BIFR) for its rehabilitation, reconstruction or rationalisation.
In the mean time, the Government has taken decision to dereserve the area of industries
and thus reduced the number of industries reserved for public sector to 8 and also allow
private sector participation even in these 8 areas selectively. The Government also allowed
joint ventures with foreign companies.
The Government has also decided to disinvest 20 per cent of the equity of public enterprises
to selective private sector enterprises. Accordingly, in 1991-92 and in 1992-93, Rs. 3,038
crore and Rs. 1,866 crore respectively were raised through disinvestment of PSE shares.
In 1993-94, the Government realised Rs. 2,291 crore against the targeted amount of Rs.
3,500 crore and in 1994- 95, the Government plans to mobilise Rs. 4,000 crore through
disinvestment of PSUs shares but it realised Rs. 5,237 crore. A National Renewal Fund (NRF)
has also been created for training and redeployment of workers and also to provide
voluntary retirement compensation.
Game Plan for Public Sector Reform, 1994-95:
On February 8, 1994, the Government announced a “game plan” for the public sector
reform in 1994-95 which gave more emphasis on improving dynamic efficiency and quality
check of the performance and also to give more weight (50 per cent) for profit and profit
related criteria in the memorandum of understanding (MOU) to improve the financial
performance of the public sector.
Originally no weight was given to profit when MOU was introduced in 1988. It subsequently
raised to 35 per cent in 1993-94 and the weight has been substantially stepped up to 50 per
cent for 1994-95.
The Government has already evolved a six-year action plan to restructure public sector
undertakings and the idea is to have 100 per cent weight for profit at the end of six years to
make the public enterprises fully run on commercial lines.
8. Trade Policy Reform:
In the context of globalisation of the economy and also to promote international integration
of our country, phasing out of excessive and indiscriminate protection given to domestic
industry become necessary. This would develop a vibrant export sector and create a regime
of price based system.
The main objective is to eliminate progressively the system of licenses and quantitative
restrictions, particularly for capital goods and raw materials so that these items can be
placed easily on open general license (OGL). The new policy made provision for reduction of
the scope of public sector monopoly sharply for most export items and also a good number
of import items.
In this context, the Government has introduced Export-Import Policy, 1992-97 and 1997-
2002 for the coming five years and on 13th April 1998 the Government has further modified
this new Exim Policy (1997-2002) and also announced its annual Exim Policy, 2000-01 and
also in 2001-2002; Again on 31st March, 2002, the Government announced its new Exim
Policy, 2002-07 so as to achieve 1 per cent share in global exports by 2007.
9. Social Policy Reforms:
To meet the objective of poverty alleviation as a part of our adjustment process, the
government has allocated a higher amount of outlays on elementary education, rural
drinking water supply, assistance to small and marginal farmers, programmes for the
welfare of scheduled caste and scheduled tribe and other weaker sections of the society,
programme for women and children and also on infrastructure and employment generation
projects.
As a part of this programme, the 1995-96 Budget has introduced a National Social
Assistance Scheme in the form of housing assistance, old age pension, maternity benefit,
group insurance for schemes etc. for those living below the poverty line.
Latest economic reforms
Goods and Services Tax (GST
Goods and Services Tax (GST) is an indirect tax (or consumption tax) used in India on the
supply of goods and services. It is a comprehensive, multistage, destination-based tax:
comprehensive because it has subsumed almost all the indirect taxes except a few state
taxesGoods and services are divided into five different tax slabs for collection of tax - 0%,
5%, 12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity are
not taxed under GST and instead are taxed separately by the individual state governments,
as per the previous tax system. GST has simplified the taxation system of the country. As
GST is a single tax, calculating taxes at the multiple stages of the supply chain has become
easierAs per the Indian retail industry, the total tax component is around 30% of the
product cost. Due to the impact of GST, the taxes have gone down. So, the end consumer
has to pay lesser taxes. The reduced burden of taxes has enhanced the production and
growth of the retail and other industries.GST has reduced the customs duty on exporting
goods. The cost of production in the local markets has also decreased due to GST. All these
factors have increased the rate of exports in the country.

NITI Aayog 
The NITI Aayog  (National Institution for Transforming India) is a policy think tank of
the Government of India, established with the aim to achieve sustainable development
goals with cooperative federalism by fostering the involvement of State Governments of
India in the economic policy-making process using a bottom-up approach. Its initiatives
include "15-year road map", "7-year vision, strategy, and action plan", AMRUT, Digital
India, Atal Innovation Mission, Medical Education Reform, agriculture reforms (Model Land
Leasing Law, Reforms of the Agricultural Produce Marketing Committee Act, Agricultural
Marketing and Farmer Friendly Reforms Index for ranking states) etc. It was established in
2015, by the NDA government, to replace the Planning Commission which followed a top-
down model.

Demonetization
On 8 November 2016, the Government of India announced the demonetization of
all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the
issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetised banknotes.
[1]
 The Prime minister of India Narendra Modi claimed that the action would curtail the
shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity
and terrorism.[ The announcement of demonetisation was followed by prolonged cash
shortages in the weeks that followed, which created significant disruption throughout the
economy. According to a 2018 report from the Reserve Bank of India, approximately 99.3%
of the demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh
crore that had been demonetised, were deposited with the banking system. The banknotes
that were not deposited were only worth ₹10,720 crore (107.2 billion),  leading analysts to
state that the effort had failed to remove black money from the economy. The BSE
SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the announcement.
The move reduced the country's industrial production and its GDP growth rate..Global
analysts cut their forecasts of India's real GDP growth rate for the financial year 2016–17 by
0.5 to 3% due to demonetisation.

Black Money Bill

Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 is
an Act of the Parliament of India. It aims to curb black money, or undisclosed foreign assets
and income and imposes tax and penalty on such income. The Act has been passed by both
the Houses of the Parliament. The Act has received the assent of the President of India on
26 May 2015. It came into effect from 1 July 2015.
Corporate tax cut
By announcing a large corporate tax rate cut and a much lower rate for new manufacturing
companies, the government has clearly shown that it will leave no stone unturned to revive
the economy.
Easing of FDI norms
 The opening up of FDI in several sectors is especially timely as in this era of trade wars,
India can be a beneficiary. Foreign investment is a key source of economic growth as well as
non-debt finance for the country.
Announcements on single-brand retail
 The announcement on single-brand retail is very important as it gives major flexibility and
ease of operations for potential investors. 
Big bank mergers
The merger of PSBs is also an idea whose time had come as stronger banks increase
productivity, lessen asset quality pressure, boost liquidity and credit flow, improve overall
operating efficiency and corporate governance.

List of the macro economic factors that affect the economy of India

 Rate of employment,
 The phases of the business cycle,
 Rate of inflation,
  The money supply,
 The level of government debt,
 Balance of Payment deterioration
 Increasing NPA’
Gross domestic product (GDP)
Gross domestic product (GDP) is the total monetary or market value of all the finished goods
and services produced within a country's borders in a specific time period. As a broad
measure of overall domestic production, it functions as a comprehensive scorecard of a
given country’s economic health. India’s economy slowed down to 3.1 per cent in Q4 on the
back of the coronavirus pandemic superimposed on a prolonged slowdown. With the
release of Q4 GDP growth, the full year 2019-20 GDP growth stood at 4.2 per cent. The
government has also revised down the GDP growth in Q1, Q2, and Q3 to 5.2 per cent, 4.4
per cent, and 4.1 per cent respectively.
Services sector is the largest sector of India. Gross Value Added (GVA) at current prices for
Services sector is estimated at 92.26 lakh crore INR in 2018-19. Services sector accounts for
54.40% of total India's GVA of 169.61 lakh crore Indian rupees. With GVA of Rs. 50.43 lakh
crore, Industry sector contributes 29.73%. While, Agriculture and allied sector shares
15.87%.
At 2011-12 prices, composition of Agriculture & allied, Industry, and Services sector are
14.39%, 31.46%, and 54.15%, respectively.
Share of primary (comprising agriculture, forestry, fishing and mining & quarrying),
secondary (comprising manufacturing, electricity, gas, water supply & other utility services,
and construction) and tertiary (services) sectors have been estimated as 18.57 per cent,
27.03 per cent and 54.40 per cent.
According to CIA Fackbook sector wise Indian GDP composition in 2017 are as follows :
Agriculture (15.4%), Industry (23%) and Services (61.5%)

Methods of GDP calculation

There are two primary methods or formulas by which GDP can be determined:

1 Expenditure Approach

The most commonly used GDP formula, which is based on the money spent by various
groups that participate in the economy.

GDP = C + G + I + NX

C = consumption or all private consumer spending within a country’s economy, including,
durable goods (items with a lifespan greater than three years), non-durable goods (food &
clothing), and services.
G = total government expenditures, including salaries of government employees, road
construction/repair, public schools, and military expenditure.

I = sum of a country’s investments spent on capital equipment, inventories, and housing.

NX = net exports or a country’s total exports less total imports.

2 Income Approach

This GDP formula takes the total income generated by the goods and services produced.

GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

Total National Income – the sum of all wages, rent, interest, and profits.

Sales Taxes – consumer taxes imposed by the government on the sales of goods and
services.

Depreciation – cost allocated to a tangible asset over its useful life.

Net Foreign Factor Income – the difference between the total income that a country’s
citizens and companies generate in foreign countries, versus the total income foreign
citizens and companies generate in that country.

Comparative analysis of GDP

2018 2019 2020

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
5.78 6.47 7.64 8.18 7.10 6.20 5.59 5.67 5.24 4.42 4.08 3.09

FY20 – Q4 V Q3
The GDP decreased from 4.1 to 3.1 in the q4 of FY 2019-20 of india.India's economy
expanded by 3.1 per cent in the January-March quarter and dragged the full year FY20 GDP
growth to 4.2 per cent, weakest since the financial crisis hit more than a decade back.The
lockdown imposed by the central govt in March Impacted the whole industries which
decreased production in the country. The services sector bore the brunt of lockdown as
tourism, aviation, hospitality industry came to a crashing halt, thereby affecting jobs in
those sector as well.
The MSME sector, which is a major contributor in the overall economic pie, suffered
severely as the curbs imposed to stop the spread of Covid-19 hit the industry hard. The
construction sector, that was already in doldrums, came to a screeching halt as the
nationwide curbs hit the economic activity hard. It contracted by 2.2 per cent in the fourth
quarter. Manufacturing contractedby1.4percent.

FY20 Q4 V FY 2019 Q4
The GDP decreased from 5.7 in Q4 (2019) to 3.1 in the q4 of FY 2019-20 of india.  India’s
economy slowed down to 3.1 per cent in Q4 on the back of the coronavirus pandemic
superimposed on a prolonged slowdown. , the growth rate of eight core industries for April
2020 fell by 38.1 per cent, compared to a fall of 9 per cent in March 2020. The output of
electricity fell by 22.8 per cent, while the output of cement fell by 86 per cent; steel by 84
per cent; fertiliser by 4.5; refinery by 24.2 per cent; crude oil by 6.4 per cent; and coal by
15.5 per cent in April 2020.

FY20 – Q3 V Q2
India's GDP growth slipped to a low of 4.1 per cent in October-December 2019, weighed by
a contraction in manufacturing sector output, PTI reported. Private consumption has
improved. Investment degrowth remains an area of concern in Q3.In Q2 ,All infrastructure
sectors contracted, barring refinery products and fertilizers. Contractions in the output of
coal (-17.6%) and electricity (-12.4%) were the steepest.In September, the core sector had
shrunk by 5.1%.

FY20 Q3 V FY19 Q3
Private consumption growth picked up during the third quarter, but private investment or
gross fixed capital formation fell over the previous quarter(2020). Nominal growth
(adjusting for inflation) is pegged at 7.7 per cent for Q3 and 7.5 per cent for FY20.
Manufacturing, which entered negative territory in Q2 contracted further in Q3, followed by
electricity, construction and trade and services.
FY20 Q2 V Q1
The GDP growth rate for the first quarter of 2019-20 settled at 5 per cent, a six-year low.
The slowdown in economic growth has taken away from India the tag of world's fastest
growing major economy to China. The GDP numbers were released along with the data for
the eight core infrastructure industries, which showed output delcining by 5.8 per cent in
October. As many as six of eight core industries saw a contraction in output in October. Coal
was the worst hit, declining steeply by 17.6 per cent.
FY20 Q1 V FY19 Q4
On comparing FY20 Q1 and FY19 Q4, we were able to see a change from 4.1 to 3.1. This was
the initial stages of the impact of global pandemic covid-19. Slowdown during the quarter
has been led by lacklustre growth in the manufacturing, financial services, construction and
lower consumption during the quarter. The private consumption in the economy has
indicated signs of slowdown compared with that in Q1 FY19. The private final consumption
expenditure grew at 18 quarter low by 3.1%, lower than the 7.3% growth in Q1 FY19 and
the 7.2% growth in the previous quarter.
FY20 Q1 V FY19 Q1
On analysing Q1 of both FY 20 and FY 19, the first quarter of the fiscal year 2019-20 has
been marked by disappointing and weak corporate earnings indicative of overall slowdown
in various industries and the economy. . In Q1 FY20, the net sales of the sample companies
grew at a lower 4.6% compared with the 13.5% in the comparable quarter last year. The net
sales of private banks have grown by 23% in Q1 FY20 higher than the 17.4% growth during
Q1 FY19. Public sector banks too witnessed growth in net sales by 8.1% compared with the
5.1% growth in Q1 FY19

Submitted by
Bijosh P Thomas
Junior Internship Trainnee