ECONOMIC REFORM IN INDIA – 2006 BUDGET
The reforms have boosted Marketing of Products manufactured in India. This is not only within the country but also out of the country. In this context we have briefly outlined some of the major policy decisions taken to globalize the Indian products by the Government of India during the last decade or so. The policy changes have resulted in growth of economy and a good impetus to Indian Industry.
The New Industrial Policy (NIP) is the first part of the liberalization measures. Under the NIP, industrial licensing has been greatly liberalized. In addition, substantive changes have been introduced in matters like foreign investment and technology import. Third, MRTP and FERA have been relaxed significantly. Lastly, the role of the public sector has been significantly curtailed.
All industries, except a few specified ones, have been de-licensed under the NIP and liberated from the clutches of control in a bid to eliminate the obstacles to industrial growth.
De-licensing of passenger car industry, white goods industry, bulk drugs industry, consumer electronics industry, etc became landmarks and several new players entered these industries. At present, only sectors like alcohol, cigarettes, industrial explosives, hazardous chemicals, defence and atomic energy need industrial licence. SSI de-reservation, however, has not made much progress. In the budget for 2001-02, de-reservation of 14 SSI items has, however, been announced.
The older industrial registration schemes, including de-licensed registration, exempted industries registration and DGTD registration, have all been abolished. Industry location, except in major cities, no longer needs government clearance. A new broad-banding facility was also introduced giving more flexibility of operations to industries. Powerful bureaucratic structures like DGTD and CCI&E have been abolished, giving more freedom to industry.
Encouragement to FDI
With a view to attracting foreign direct investment (FDI), the NIP introduced many changes in the Foreign Exchange Regulation Act (FERA), which had incorporated over the years a plethora of controls on companies whose foreign equity exceeded 40%.
Automatic clearance for foreign equity up to 51 percent
With the modifications, many of the inhibiting conditions governing foreign investment were removed. Automatic clearance for foreign equity up to 51% for new companies was allowed in 34 high priority industries. Subsequently, the government liberalized the provision further and stipulated that even existing companies can increase foreign equity up to 51%, even without any new project/expansion programs. With a view to obtaining better access to international markets, foreign equity up to 51% was allowed to trading companies as well. The government also declared that the country would allow 100% foreign equity in select industrial projects depending on their economies benefits. In the electronics sector, for example, the government introduced a new scheme, the Electronic Hardware Technology Park Scheme (EHTP) for attracting foreign direct investment, and in all units under the scheme, it allowed foreign equity up to 100%.
Automatic clearance for capital goods and technology import and royalty payments
Automatic clearance was also given for import of capital goods where foreign exchange availability was ensured through foreign equity. In addition, an automatic permission scheme was also introduced for import of foreign technology and for royalty payments in specified high priority industries. The government also withdrew restrictions on dividend repatriation by foreign investors.
Removal of restrictions on Functioning of Indian companies abroad
The government removed many of the restrictions on the functioning of Indian companies abroad. It liberalized direct investment by Indian Companies in other countries; and it recognized that the country must encourage Indian firms and businesses to grow into strong, India-based multinationals. To promote this trend, it was necessary to accord Indian firms greater flexibility for undertaking capital account transactions, especially for acquisitions of businesses abroad.
In 2001, the government relaxed external commercial borrowing (ECB) norms for corporates, lending institutions and the infrastructure sector. Corporate borrowers will now be able to raise external debt of 10-year and 20-year maturities without any end-use restrictions, provided the money is not pumped into the stock markets or the real estate. The cap on 10-year debt has been fixed at $100 million and for 20-year debt at $200 million.
FEMA replaces FERA
At the end of 1999, parliament passed the Foreign Exchange Management (FEMA) Bill. And, the Prevention of Money Laundering Bill, a companion piece of legislation, was to be passed in the next session but is still pending. The two legislations together will replace the draconian FERA.
The Monopolies and Restrictive Trade Practices Act (MRTP) has been growth restricting regulation. Under the NIP, sweeping changes have been made in MRTP regulations. The MRTP Act has been amended to altogether do away with the threshold assets limit which rendered a firm an MRTP company or a dominant undertaking. No MRTP clearance is now required for investment applications nor any approval is needed for establishing new undertakings, or for implementing expansions, mergers, amalgamations and takeovers. The existing restrictions on acquisition/transfer of shares have also been removed.
In fact, industrial licensing liberalization and MRTP liberalization have been complementary. It is to make the licensing liberalization genuinely effective that the MRTP impediments have been removed.
Curtailment of Public Sector and Enlargement of Role of Private Sector
The new industrial policy curtailed public sectorâ€™s pre-eminent role in Industry and threw open the industrial arena to the private sector in almost full measure. Public sectorâ€™s exclusive domain now stands limited to eight core industries like arms and ammunition, atomic energy, railways, mining and coal. And with this, more than three-fourths of the total industrial activity of the country is now available to the private sector. Though reservation is retained for the public sector in eight industries, there is no bar against even these industries being opened up to the private sector.
Goodbye to Controls and Welcome to Competition
All earlier formulations on Industrial policy basically revolved around the Industrial Policy Resolution (IPR) of 1956. Control and regulation had been the crux of these policies. They had presumed that the government would be the major operator in Industries. In contrast to such earlier policies, the NIP said goodbye to controls and regulations. Similarly, it said goodbye to import substitution. In all the past formulations, protecting domestic industry from global competition, and import substitution â€“cum-preservation of foreign exchange was a major theme. Against this, liberal imports and exposing the domestic industry to global competition is the theme of the new policy. It envisages a more open, efficient and quality conscious industrial sector equipped to face global competition.
In short, through the NIP, the country cast away the extreme caution that had surrounded the industrial and foreign investment policy all these years. Moreover, for over 40 years â€˜a commanding role for the public sectorâ€™ had formed the cornerstone of Indiaâ€™s industrial policy. In contrast, the New Industrial Policy has voted for a substantive reduction in the role of the public sector in the industrial scene of the country.
Imports Liberalized and De-Canalized; Licenses abolished; Tariffs Lowered
Licensing hassles for imports have been reduced, except for a small non-permitted list of items. Imports have also been de-canalized for the most part; the canalization agencies will hence forth act as any other trading house.
There have also been steep reductions in the import tariffs on a number of items, including capital goods. Tariffs on all goods, except non-essential consumer goods, have been reduced to 15%, or lower. The government appreciated the fact that the tariffs in India were among the highest in the world and should be brought down in a gradual manner.
Achieving good growth in exports on a sustainable basis has been another major aim of the NIP. The policy offers several incentives for exports, including abolition of export duties, cheaper export credit and cuts in import duty. The government also enhanced the duty drawback in respect of a large number of items. Higher drawback facilitates the exporter to compete better in the international markets. The greater flow of bank finance to the export sector at concessional rate also enhanced the competitiveness of exports. Exports as a percentage of GDP have increased in the decade after liberalization.
The government also liberalized the Export Promotion Capital Goods Scheme (EPCGS). The new EPCGS provided for import of capital goods at a concessional duty of 5%, with a built-in export obligation. The government also liberalized the Export Oriented Units (EOU) scheme and the Export Processing Zone (EPZ) scheme and introduced special incentives for them. Subsequently, the government stipulated that Free Trade Zones (FTZ) would replace export-processing zones and FTZ are to be treated as outside the countryâ€™s customs territory. The scheme was introduced as a part of the Export & Import Policy, effective from 1 April 2000.Initially, Kandla, Santa Cruz (Mumbai), Kochi and Surat were converted from EPZs to FTZs.
Integrating Indiaâ€™s Economy with the Global Economy
The new trade policy had the larger aim of integrating Indiaâ€™s economy with the global economy. It involved the changeover from government regulated allocation of foreign exchange to market-driven allocation and government-regulated exchange rate to market-driven exchange rate. And, liberalization of imports and hefty cuts in imports tariffs gave a further push to the endeavor of integrating the Indian economy with the world economy.
All along, the viability and competitiveness of Indian products have been under strain, largely because of the high import tariffs on raw materials, capital goods and project imports. With the new initiatives, many of these hurdles were dismantled and the process of integration with the global economy facilitated.
The full float of the rupee on the trade account has been a signal to international investors as well as Indian companies about the governmentâ€™s determination to fully integrate the Indian economy with the World economy.
All the points above highlight the fact that Government policies play a major role in international marketing or foreign trade of Indian products. The benefits are multifold for Indian manufacturers and trade. Not only the production capacities, revenues go up but the quality and services also get improved to face international competition. Prices also indirectly will be under control for fear of cheaper imports from foreign competitors.