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PROJECT TITLE
CASE ANALYSIS
SUBJECT
ECONOMICS-II
18LLB112
SEMESTER – III
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ACKNOWLEDGEMENT:
I would like to express my gratitude to PROF. Abhishekh Sinha who have given me the golden
opportunity to do this wonderful project of case analysis, which also helped me in doing a lot of
research and through which I came to know so many new things. I am thankful to him.
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CONTENTS
1. INTRODUCTION...............................................................................................................2
8. CONCLUSION..................................................................................................................30
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INTRODUCTION
India had rapid growth despite the Great Recession. It grew 6.7% in 2017, 7.1% in 2016 and 8%
in 2015. From 2008 through 2014, it grew between 5% and 11%. That phenomenal growth rate
has reduced poverty by 10% in the last decade.
On May 23, 2019, Prime Minister Nahrendra Modi won relection. He was initiallly elected on
May 16, 2014, ending 60 years of leadership by the party led by Mahatma Gandhi. Mr. Modi, a
successful businessman, promised to reduce bureaucracy and regulation, greenlight infrastructure
projects, and simplify the tax code.
Opponents say he has not fulfilled his campaign pledges. Although growth rates were greater
than 6% between 2014 and 2017, unemployment is still 8.5%. The government-owned banks had
bad debt that reduced their ability to lend. The rupee declined through 2016, allowing 3.6%
inflation. A goods and services tax was unpopular.
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WHAT TYPE OF ECONOMY IS INDIA?
India has a mixed economy. Half of India's workers rely on agriculture, the signature of
a traditional economy. One-third of its workers are employed by the services industry, which
contributes two-thirds of India's output. The productivity of this segment is made possible by
India's shift toward a market economy. Since the 1990s, India has deregulated several industries.
It's privatized many state-owned enterprises, and opened doors to foreign direct investment.
India's Strengths
India is an attractive country for outsourcing and a cheap source of imports. Its economy has
these five comparative advantages:
1. The cost of living is lower than in the United States. Its gross domestic product per
capita is $7,200, half that of China or Brazil. This is an advantage because Indian workers
don't need as much income since everything costs less.
3. English is one of India’s official languages. Many Indians speak it. This, combined with
the high level of education, attracts U.S. technology and call centers to India. For
example, an Indian call center employee only costs $12 per hour. That's almost half the
American counterpart of $20 an hour. According to the Technology Manufacturing
Corporation, more than 250,000 call center jobs, as a result, were outsourced to India and
the Philippines between 2001 and 2003.
4. India’s 1.3 billion people come from a wide range of economic and cultural backgrounds.
This diversity can be a strength or a challenge. Socioeconomic status is largely
determined by geography. India’s three main regions each have distinct class and
education divisions. Annually, 11 million people leave the rural areas to live in the cities.
Most of them are young and educated. They seek a higher quality of life.
5. The profitable Indian film industry is called "Bollywood." It's a portmanteau of Bombay,
now called Mumbai, and Hollywood. Bollywood makes twice the number of movies
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Hollywood makes. The most popular actor in the world is India's Shah Rukh Khan. In
2016, Bollywood contributed $4.5 billion to India's GDP. It generates less revenue than
Hollywood’s $51 billion only because its ticket prices are much lower. On the plus side,
Bollywood films cost less to make: $1.5 million on average versus $47.7 million in
Hollywood.
These comparative advantages mean great opportunities for American business. Foreign direct
investment in Indian companies could be very profitable. The Indian middle class is almost 250
million people, bigger than the U.S. middle class. It will continue to drive India's consumer
spending and economic growth.
In addition to FDI, India has seen more than 100 initial public offerings in the last 18
months. Private equity funding grew in 2012 and 2013, a trend that is expected to continue.
Energy, health care, industry, and materials have been the top four sectors.
While inbound mergers and acquisitions deals have declined in the last year, outbound deals
have increased substantially in the emerging markets in the Middle East, Asia, Africa and South
America. These deals are driven by depressed valuations due to the recent recession.
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CHALLENGES FACED BY INDIA IN THE CURRENT GLOBAL SITUATION
Prime Minister Modi is a Hindu nationalist leader. Many blame him for the violence against
Muslims while he was governor of India's Western region of Gujarat.
Modi is up against India's bloated government bureaucracy. That makes the execution of any
fiscal or monetary policy difficult. In August 2015, he was blocked from passing a bill to acquire
land to promote infrastructure.
U.S. monetary policy has hurt India’s economy. When the Federal Reserve began its quantitative
easing program, the lower interest rates strengthened the value of the dollar. This caused the
value of India's rupee to fall. The resulting 9.6% inflation forced India's central bank to raise its
interest rates. This action slowed India's economic growth, resulting in mild stagflation in
2013. In the second quarter, it had 9.6% inflation and 0% GDP growth. Inflation was caused by a
declining rupee. Slow growth came from contractionary monetary policy to stem inflation. By
2017, inflation had slowed to 3.6%.
Investors backed off from India and other emerging markets when the U.S. Federal Reserve
began tapering its quantitative easing program. When the dollar rose 15% in 2014, it forced the
value of the rupee and other emerging market currencies down.
Climate change threatens India's attempts to improve its citizens' standard of living. More than
600 million Indians face acute water shortages. Bangalore and New Delhi are two of the 21 cities
that could deplete their groundwater in 2020. In July 2019, the city of Chennai ran out of
groundwater. Around 200,000 people die from contaminated water. By 2030, 40% of the
population will have no access to drinking water.
Most of India's rainwater falls during the four-month monsoon season. It isn't captured
efficiently. Climate change will increase flooding from these monsoons.
The Indus River depends on water from the Hindu Kush-Himalaya glaciers. If nothing is done to
reduce greenhouse gases, two-thirds of these glaciers will melt by 2100.
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Sea level rise threatens India's 4,660 miles of coastline. It threatens megalopolises like Mumbai,
Chennai, and Kolkata, which are home to 46 million people. Many of these cities are built on
landfill. In Mumbai, seawater spills onto the main oceanside promenade during high tide.
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FOREIGN RELATIONS AND ITS IMPACT ON ECONOMY
The United States is one of India’s biggest military allies, and China is one of its biggest
economic partners. In 2006, the United States agreed to defy the Nuclear Non-Proliferation
Treaty by allowing full civil nuclear cooperation with India. This is despite India’s violations of
the treaty. They exploded nuclear devices and did not put its program under the International
Atomic Energy Agency’s safeguards.
India wants to be treated like the official five nuclear powers: United States, Russia, Britain,
France and China. The United States wants India to cap its production of fissile material, which
consists of highly enriched uranium and plutonium. But India has refused. India plans to increase
its warheads from 50 to 300 by 2010.
This bending-the-rules for India looks bad to U.S. allies that agreed to refrain from building
nuclear capacity: South Korea, Taiwan, Brazil, Argentina, South Africa, Ukraine, Kazakhstan
and Japan. The agreement was part of an overall increase in the business relationship between
American companies and India. The United States and India should place greater importance on
military cooperation, including joint defense exercises and counterterrorism efforts.
Modi has promoted closer ties between China and India, two of the world’s largest and fastest
growing economies. Because of their tight economic partnership, the countries are often called
Chindia. China and India have complementary economies. India has raw materials while China
has manufacturing. India has high-tech while China has the businesses and consumers to use
them.
They also have long-standing trade disputes stemming from their common borders and China’s
friendliness with India’s enemy, Pakistan. There are few airline routes and many visa delays.
These disputes will not be solved by one friendly trade agreement. Both realize the potential
advantages of a partnership. A trade agreement is a good first step toward a “Chindia” of some
sort.
With one-third of the world’s people, Chindia could be a tremendous economic powerhouse in
the global economy. It could also be a threat to the balance of power in that region. It is in the
United States’ best interest to maintain its alliance with India. That will offset the growing power
of China in the region.
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RAGHURAM RAJAN THE GOVERNOR OF RESERVE BANK
Raghuram Govind Rajan was the Governor of the Reserve Bank India from September 5, 2013,
to September 4, 2016. He raised interest rates and deregulated India's currency, the rupee, by
easing banking regulations. He forced banks to write down bad loans. That freed up their capital
to invest in healthy new ventures.
Rajan is most noted for warning central bankers about the 2008 financial crisis. In 2005, pointed
out how structural flaws in the economy would lead to a financial crisis. He presented a paper
entitled "Has Financial Development Made the World Riskier?" at the annual Economic Policy
Symposium of central bankers.
Rajan found that banks were holding onto derivatives to boost their own profit margins. He
warned that, if an unexpected "black swan" event occurred, banks' exposure to these derivatives
could cause a crisis similar to the Long-Term Capital Management hedge fund crisis, and for
similar reasons. Rajan pointed out, "The interbank market could freeze up, and one could well
have a full-blown financial crisis."
The audience scoffed at his warnings, and then-Harvard University President and
economist Lawrence Summers called Rajan a Luddite. But Rajan's prediction was exactly what
happened two years later.
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A BREIF ON THE FIVE YEAR PLANS
First Five Year Plan of India (1951-56)
On December 8, 1951, the Prime Minister Jawaharlal Nehru presented the first five-year plan to
the Parliament of India. This was based on the Harrod-Domar model. At that time, India was
facing three problems – the influx of refugees, a severe shortage of food, and also
mounting inflation.
India had to recover from the partition and the disequilibrium in the economy due to the Second
World War. The First Plan, therefore, had the objectives of rehabilitating refugees, agricultural
development, and self-sufficiency in food along with controlling inflation.
The focus of the Second Plan was rapid industrialization, especially the development of heavy
industries and capital goods, like iron, steel, chemicals, etc. and the machine building industries.
Professor Mahalanobis developed the plan.
The primary goal of the Third Plan was to establish India as a self-reliant and a self-generating
economy. However, the Second Plan had slowed the rate of growth of agricultural production in
the country which limited India’s economic development.
Therefore, the Third Plan included agricultural development as one of its objectives to achieve
balanced, regional development. Unfortunately, this period had many misfortunes which drained
the funds – Indo-China war in 1961-62, Indo-Pak war in 1965-66, and also a severe drought-led
famine in 1965-66. Therefore, this plan could not meet its objectives.
From 1966-69, three Annual Plans were devised. While the Fourth Plan was designed in 1966, it
was abandoned under the pressure of drought, currency devaluation, and
inflationary recession on the economy. Therefore, the government opted for an Annual Plan in
1966-67 and the subsequent two years. This is period is also called – Plan Holiday.
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Fourth Five Year Plan of India (1969-74)
There were two principal objectives of this plan – ‘Growth with Stability’ and ‘Progressive
Achievement of Self-Reliance’. It aimed at a 5.5 percent average growth rate of the national
income and also the provision of the national minimum for the weaker sections of the society
(called ‘Garibi Hatao’ or ‘Growth with Justice’). However, another Indo-Pak war in 1971-72
created a financial crunch for the plan.
This plan had two main objectives – the removal of property and attainment of self-reliance. This
was planned through the promotion of higher growth rates, better income distribution, and also a
significant increase in the domestic rate of saving.
It also focused on import substitution and export promotion. Further, it included a National
Program on Minimum Needs like housing, drinking water, primary education, etc.
Also called the Rolling Plan, it helped to achieve the targets of the previous years.
This plan focused on the socio-economic infrastructure in the rural areas. Further, it endeavored
to eliminate rural poverty and reduce regional disparities through the Integrated Rural
Development Program (IRDP – 1979).
The country enjoyed a reasonable rate of economic growth (5.4 percent) during the Sixth Plan.
The Seventh Plan focused on the rapid production of foodgrains along with an increase in the
creation of employment and overall productivity. The guiding principles were growth,
modernization, self-reliance, and social justice.
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The Eighth Plan was scheduled to be introduced in April 1990. However, there were many
changes in the Government at the Center, which led to the reconstitution of the Planning
Commission and the preparation of different versions of the approach to the Eighth Plan.
Finally, in 1992, the Eighth Plan was introduced (fourth version). At this time, the country was
going through a severe economic crisis and the Government initiated fiscal reforms to provide a
new dynamism to the economy.
The South East Asian Financial Crisis (1996-97) caused an overall slowdown in the economy of
India too. While the liberalization process was still criticized, India was out of the fiscal mess of
the early 1990s. The Plan targeted a high growth rate of 7 percent and also directed itself towards
time-bound social objectives.
Further, the Plan focused on the seven Basic Minimum Services (BMS) with a view to achieving
complete population coverage in a time-bound manner. The BMS includes:
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Higher growth rates must translate into better quality of life for people
The title of the 11th Plan was ‘Towards Faster and more Inclusive Growth’. It envisaged a high
growth rate of around 9 percent implying a growth rate of around 7.5 percent in the per capita
GDP. It also ensured an overall improvement in the quality of life of people. The vision of the
11th Plan includes:
Easy access to essential services in health and education for the poor
Environmental sustainability
According to this plan, ‘It must be guided by a vision of India moving forward in a manner that
would ensure a broad-based improvement in the living standards of all the people through a
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growth process which is faster than in the past, more inclusive, and also more environmentally
sustainable.‘ The objectives of this Plan are as follows:
Focus on the agricultural sector and have an average growth of 4 percent during the Plan
period
For the growth of GDP, ensure that the commercial energy supplies grow at a rate of 6.5-
7 percent per year.
What are the objectives of the 12th Five Year Plan of India?
Ensuring that the commercial energy supplies grow at a rate of 6.5-7 percent per year
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Focusing on the development of the infrastructure sector
Our methodology involves examining market price support (MPS) for eleven crops, the
expenditures on input subsidies benefiting farmers (for fertilizer, electricity and irrigation), and
product-specific and total producer support estimates (PSEs) over the period 1985-2002. We
draw on the extensive price-comparison and subsidy-measurement data sets and analysis
developed earlier by Gulati and his co-authors, often using disaggregated analysis for
representative surplus and deficit states.
This allows us to explore how key cost adjustments impact the results. Overall, our results
indicate that support for agriculture in India has been counter-cyclical. Support for agriculture
has been rising when world prices are low (as in the mid 1980s and 1998-2002) and falling when
world prices are high (as in the early and mid 1990s).
Our results demonstrate the increased importance of budgetary payments for input subsidies in
agriculture in recent years. Yet, in the aggregate for both price support and budgetary
expenditures over the period 1985-2002 the counter-cyclical dimension of agricultural policy
dominates a clear trend of movement from disprotection towards protection.
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Using different variants of MPS and PSE measurment we have extended earlier analysis to
demonstrate the impact of key assumptions on the calculations. These assumptions we argue are
important to consider. For example, in the standard approach, the MPS for the covered
commodities is “scaled up” based on the share of the covered commodities in the total value of
production.
If the commodity coverage is less than complete, as is often the case, the scaling up procedure
leads to a total MPS of greater absolute value than the MPS for the covered commodities. This
can result in PSEs of different sign than the non-scaled up version but is inappropriate unless
market price support for the commodities not covered is similar to that of the covered
commodities.
Furthermore, we find that the standard procedure of computing the MPS through a comparison
of the domestic price to an adjusted reference price based on observed imports or exports can be
problematic. This happens when trade volumes are relatively small. In such a scenario a
reference price based on observed imports or exports can lead to misleading conclusions. To
address the reference price issue, we follow Byerlee and Morris (1993).
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Essentially the approach adopted is to compute the level of protection or disprotection based on a
counterfactual reference price chosen on economic criteria i.e. the adjusted reference price that
would exist in the country if the policy interventions were removed. The relevant price can either
be the autarky equilibrium price or the import or export adjusted reference price depending on
the relationship among these prices.
We apply this modified procedure for six crops (wheat, rice, corn, sorghum, sugar and
groundnuts). The choice of the crops is dictated by the fact that India has been near self-
sufficiency and there have been changes in the direction of trade over the period of analysis. The
magnitudes of estimated support for agriculture obtained in this paper are important for several
reasons.
The estimates confirm that high levels of subsidies were required for India to export wheat or
rice in recent years, a conclusion reached by several other studies. However, we report less
disprotection of Indian agriculture in the 1990s than in earlier studies. Partly this difference is
explained by the modified procedure for choice of a reference price. A large component of this
difference can be accounted for by whether or not the scaling up procedure is invoked. There are
also fertile areas for future research.
Government action to influence the ownership & structure of the industry and its
performance. It takes the form of paying subsidies or providing finance in other ways, or
of regulation.
1
https://www.toppr.com/guides/business-studies/business-environment/indian-industrial-policies/
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It includes procedures, principles (i.e., the philosophy of a given economy), policies,
rules and regulations, incentives and punishments, the tariff policy, the labour policy,
government’s attitude towards foreign capital, etc.
Objectives2
The main objectives of the Industrial Policy of the Government in India are:
to transform India into a major partner and player in the global arena.
Industrial Policy Resolution of 1948- It defined the broad contours of the policy delineating the
role of the State in industrial development both as an entrepreneur and authority.
Strategic Industries (Public Sector): It included three industries in which Central Government
had monopoly. These included Arms and ammunition, Atomic energy and Rail transport.
Basic/Key Industries (Public-cum-Private Sector): 6 industries viz. coal, iron & steel, aircraft
manufacturing, ship-building, manufacture of telephone, telegraph & wireless apparatus, and
mineral oil were designated as “Key Industries” or “Basic Industries”.
2
Id.
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These industries were to be set-up by the Central Government.
These industries continue to remain under private sector however, the central government, in
consultation with the state government, had general control over them.
Other Industries (Private and Cooperative Sector): All other industries which were not included
in the above mentioned three categories were left open for the private sector.
Industrial Policy Statement of 1956 : Government revised its first Industrial Policy (i.e.the policy
of 1948) through the Industrial Policy of 1956.
The 1956 Policy emphasised the need to expand the public sector, to build up a large and
growing cooperative sector and to encourage the separation of ownership and management in
private industries and, above all, prevent the rise of private monopolies.
It provided the basic framework for the government’s policy in regard to industries till June
1991.
Schedule A consisting of 17 industries was the exclusive responsibility of the State. Out of these
17 industries, four industries, namely arms and ammunition, atomic energy, railways and air
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transport had Central Government monopolies; new units in the remaining industries were
developed by the State Governments.
Schedule B, consisting of 12 industries, was open to both the private and public sectors;
however, such industries were progressively State-owned.
Schedule C- All the other industries not included in these two Schedules constituted the third
category which was left open to the private sector. However, the State reserved the right to
undertake any type of industrial production.
The IPR 1956, stressed the importance of cottage and small scale industries for expanding
employment opportunities and for wider decentralisation of economic power and activity
The Resolution also called for efforts to maintain industrial peace; a fair share of the proceeds of
production was to be given to the toiling mass in keeping with the avowed objectives of
democratic socialism.
Criticism: The IPR 1956 came in for sharp criticism from the private sector since this
Resolution reduced the scope for the expansion of the private sector significantly.
Industrial Licenses
In order to open new industry or to expand production, obtaining a license from the government
was a prerequisite.
Opening new industries in economically backward areas was incentivised through easy licensing
and subsidization of critical inputs like electricity and water. This was done to counter regional
disparities that existed in the country.
Licenses to increase production were issued only if the government was convinced that the
economy required more of the goods.
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Industrial Policy Statement, 1977- In December 1977, the Janata Government announced its
New Industrial Policy through a statement in the Parliament.
The main thrust of this policy was the effective promotion of cottage and small industries widely
dispersed in rural areas and small towns.
In this policy the small sector was classified into three groups—cottage and household sector,
tiny sector and small scale industries.
The 1977 Industrial Policy prescribed different areas for large scale industrial sector- Basic
industries,Capital goods industries, High technology industries and Other industries outside the
list of reserved items for the small scale sector.
The 1977 Industrial Policy restricted the scope of large business houses so that no unit of the
same business group acquired a dominant and monopolistic position in the market.
It put emphasis on reducing the occurrence of labour unrest. The Government encouraged the
worker’s participation in management from shop floor level to board level.
Criticism: The industrial Policy 1977, was subjected to serious criticism as there was an absence
of effective measures to curb the dominant position of large scale units and the policy did not
envisage any socioeconomic transformation of the economy for curbing the role of big business
houses and multinationals.
The long-awaited liberalised industrial policy was announced by the Government of India in
1991 in the midst of severe economic instability in the country. The objective of the policy was
to raise efficiency and accelerate economic growth.
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Features of New Industrial Policy
De-reservation of Public sector: Sectors that were earlier exclusively reserved for public sector
were reduced. However, pre-eminent place of public sector in 5 core areas like arms and ammu-
nition, atomic energy, mineral oils, rail transport and mining was continued.
Presently, only two sectors- Atomic Energy and Railway operations- are reserved exclusively for
the public sector.
De-licensing: Abolition of Industrial Licensing for all projects except for a short list of indus-
tries.
There are only 4 industries at present related to security, strategic and environmental concerns,
where an industrial license is currently required-
Industrial explosives
Liberalisation of Foreign Investment: This was the first Industrial policy in which foreign
companies were allowed to have majority stake in India. In 47 high priority industries, upto 51%
FDI was allowed. For export trading houses, FDI up to 74% was allowed.
Today, there are numerous sectors in the economy where government allows 100% FDI.
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MRTP Act was amended to remove the threshold limits of assets in respect of MRTP companies
and dominant undertakings. MRTP Act was replaced by the Competition Act 2002.3
The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the past. It attempted to
liberalise the economy by removing bureaucratic hurdles in industrial growth.
All this resulted in increased competition, that led to lower prices in many goods such as
electronics prices. This brought domestic as well as foreign investment in almost every sector
opened to private sector.
The policy was followed by special efforts to increase exports. Concepts like Export Oriented
Units, Export Processing Zones, Agri-Export Zones, Special Economic Zones and lately
National Investment and Manufacturing Zones emerged. All these have benefitted the export
sector of the country.
Distortions in industrial pattern owing to selective inflow of investments: In the current phase of
investment following liberalisation, while substantial investments have been flowing into a few
industries, there is concern over the slow pace of investments in many basic and strategic
industries such as engineering, power, machine tools, etc.
3
https://www.owlgen.com/question/what-is-monopolistic-and-restrictive-trade-practicesmrtp-act-1969
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Absence of incentives for raising efficiency: Focussing attention on internal liberalisation
without adequate emphasis on trade policy reforms resulted in ‘consumption-led growth’ rather
than ‘investment’ or ‘export-led growth’.
Vaguely defined industrial location policy: The New Industrial Policy, while emphasised the
detrimental effects of damage to the environment, failed to define a proper industrial location
policy, which could ensure a pollution free development of industrial climate.
Way Forward
India now has a much liberalised industrial policy regime focusing on increased foreign
investment and lesser regulations.
India ranked 77th on World Bank’s Doing Business Report 2018. Reforms related
to insolvency resolution (Bankruptcy and Insolvency Act, 2017) and the Goods and
Services Taxes (GST) are impressive and will result in long-term gains for the industrial
sector.
However, electricity shortages and high prices, credit constraints, high unit labour costs
due to labour regulations, political interference and other regulatory burdens continue to
remain challenges for firm growth of the industrial sector in India.
There is a need for a new Industrial Policy to boost the manufacturing sector in the
country. Government in December 2018 also felt the need to introduce a new Industrial
Policy that would be a road map for all business enterprises in the country.
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MONETARY POLICY OF INDIA:
Monetary Policy of India is formulated and executed by Reserve Bank of India to achieve
specific objectives. It refers to that policy by which central bank of the country controls(i) the
supply of money, and (ii) cost of money or the rate of interest, with a view to achieve particular
objectives.4
In the words of D.C. Rowan, “The monetary policy is defined as discretionary act undertaken by
the authorities designed to influence (a) the supply of money, (b) cost of money or rate of
interest, and (c) the availability of money for achieving specific objective.”
Thus, monetary policy of India refers to that policy which is concerned with the measures taken
to regulate the volume of credit created by the banks. The main objectives of monetary policy are
to achieve price stability, financial stability and adequate availability of credit for growth.
iv. It provides incentives to promote savings and to raise the savings-income ratio.
v. It ensures adequate availability of credit for growth and tries to achieve price stability.
4
https://cracku.in/blog/monetary-policy-of-india-pdf/
5
Puja Mondal,“Monetary Policy of India: Main Elements and Objectives”.
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Objectives of Monetary Policy:6
According to RBI Governor Dr. D. Subba Rao, “The objectives of monetary policy in India are
price stability and growth. These are pursued through ensuring credit availability with stability in
the external value of rupee and overall financial stability.”
The main aim of the monetary policy of the Reserve Bank was to control the money supply in
such a manner as to expand it to meet the needs of economic growth and at the same time
contract it to curb inflation. In other words monetary policy aimed at expanding and contracting
money supply according to the needs of the economy.
Another major objective of monetary policy in India is to maintain price stability in the country.
It implies Control over inflation. Price level, is affected by money supply. Monetary policy
regulates money supply to maintain price stability.
6
https://m.economictimes.com/wealth/borrow/what-is-monetary-policy/articleshow/67296236.cms
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By regulating the rate of interest and checking inflation, monetary policy promotes saving and
investment. Higher rates of interest promote saving and investment.
x. To Develop Infrastructure:
Monetary policy aims at developing infrastructure. It provides concessional funds for developing
infrastructure.
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RBI regulates the banking system of the economy. RBI has expanded banking to all parts of the
country. Through monetary policy, RBI issues directives to different banks for setting up rural
branches for promoting agricultural credit. Besides it, government has also set up cooperative
banks and regional rural banks. All this has expanded banking in all parts of the country.
Monetary policy can contribute to the achievement of economic growth in two ways: 1.
Management of Aggregate Demand, 2. Encouragement to Saving and Investment
Till recently however, a majority of economists considered monetary policy as a short-run policy
primarily aimed at full employment and mitigating cyclical fluctuations and not concerned with
economic growth as such. Recently, however, it has been realised by many that it is not enough
to achieve full employment but that the economy should develop at an ever-growing pace if
people have to be provided with a high standard of living.
Monetary policy can contribute to the achievement of economic growth in two ways:
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1. Management of Aggregate Demand:
The monetary authority should keep the aggregate monetary demand in balance with the
aggregate supply of goods and services. For this a flexible monetary policy is called for. A
restrictive money policy will have to be applied when there is excess demand in the economy
threatening to raise prices and create conditions of unsustainable boom. An expansionist credit
policy is to be followed when there is a deficiency of aggregate demand and supply is in excess
causing a fall in prices, production, employment and income.
It is sometimes argued that a tight or restrictive money policy impedes while an expansionist or
easy money policy promotes economic growth. But as a matter of fact, neither view is true, since
the truth lies somewhere midway. A tight money policy is not conducive to growth when it is
applied at a wrong time, say when there is a deficient demand.
In a situation of the deficient demand and unemployed resources, an easy money policy is most
suitable, but if it is carried far beyond the stage of full employment, it will generate an
inflationary impact, and to control a speculative boom in such a situation, a tight money policy
will be appropriate.
Thus, the important thing is that they should be applied at the appropriate time; otherwise, they
do more harm than good to economic growth. Therefore, a flexible monetary policy has been
advocated to achieve economic growth with price stability. Briefly, thus, the monetary policy can
assist in promoting economic growth by maintaining reasonable price stability and optimum use
of economic resources in an economy.
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2. Encouragement to Saving and Investment:
The monetary authority can help economic development by creating a favourable environment
for saving and investment which greatly influence economic growth. For this, the monetary
policy’s aim of price stabilisation is very important. Reasonable price stability encourages both
saving and investment. As saving is the main source of capital formation, when saving increases
under favourable circumstances, capital formation can also be accelerated which in turn
accelerates economic growth.
In short, a monetary policy is necessarily concerned with all the major objectives of economic
policy, namely, exchange stability, price and economic stability, full employment, and economic
growth. These objectives are, to some extent, in conflict with one another.
However, few people are willing to admit that any one of these objectives is undesirable and
should be abandoned. Also, there is no common denominator of stability in terms of ends
towards which a monetary policy can be directed. Thus, monetary authorities are always
confronted with the problem of priorities. They have to resolve the conflicts between various
objectives by assigning different degrees of importance to the different objectives in different
economic situations.
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CONCLUSION
The policies highlight the transformation of the economy from agriculture to services, from
shortages to surpluses, from basic survival to global goals. If we consider these policies a mirror
reflecting the mind and the will of the nation, they allow those interested in India’s policies as
well as the policymaking process a glimpse into objectives and outcomes, across the seven
decades of policy-design, construction and execution. The book examines the laws and the rules,
the constrictions and the freedoms that India’s entrepreneurs, savers, investors and consumers
have negotiated from 1947 to 2017 and which have made India a $2.5 trillion economic
powerhouse, soon to be the world’s fifth largest.
Two, the economic laws enacted by Parliament. Three, the 12 Five Year Plans drafted by the
Planning Commission. Four, the 86 Union Budgets (these include 15 Interim Budgets and one
white paper). Five, reports of various Law Commissions. Six, reports of various Standing
Committees of Parliament. Seven, sector-specific government committees created for specific
policy interventions.
Eight, government resolutions on various issues and institutions. Nine, Supreme Court and high
court judgements that have questioned, interpreted and overseen the evolution of laws and
policies.
All these have informed the policies and embedded varying perspectives such as legal, political,
administrative and economic into them. From financial to fiscal, land to disinvestment, institutes
of technology to development finance institutions, these policies have defined India’s journey so
far.
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