Economic reform in India since 1991.

Economic reforms refers to the changes introduced by the Government to bring an improvement in the economy of the country.
Economic reforms refers to the introduction of innovative policies such as eliminating the market barriers, encouraging economic participation from private sector, reducing the fiscal deficit, increasing exports and reducing imports, etc. for increasing the growth rate of the economy.
The Indian Government has introduced many Economic Reforms in India since 1991. During 1990-91, India had to face various economic problems. The massive deficiency in foreign trade balance was expanding further. Since 1987-88 till 1990-91 it was increasing in such a rapid scale that by the end of 1990-91 the amount of this deficit balance became 10,644 crores of rupees.
At the same time the foreign exchange stock was also decreasing. In 1990 and 1991 the government of India had to take huge amount of loan from the IMF as compensatory financial facility. Even by mortgaging 46 tons of gold it had taken short-term foreign loan from the Bank of England.
At the same time, India was also suffering from inflation, the rate of which was 12% by 1991. The reasons of that inflation were the increase in the procurement price of the agricultural products for distribution, the increase in the amount of monetized deficit in the budget, increase of import cost and decrease in the rate of currency exchange and Administered price like. Thus she was facing trade deficit as well as Fiscal Deficit.

There were a large number of events that accumulated simultaneously that led to economic crises of 1991. In 1991, major factors which led to the downfall of the Indian Economy were as follows:

• Collapse of Soviet Union
• The Gulf War
• Political Uncertainty
• External Macro Imbalance
• Grave External Payment Crises
• Iraq's annexation of Kuwait
• Problem with Public Finance

 We must remember that inflation was in double digits and our foreign exchange reserves had reached their lowest levels, the export market to Iraq and USSR had disappeared. In order to deal with the immediate crises, the following steps were taken:-

1. The government leased 20 tonnes of gold to the State bank of India, which in turn entered into the sale transaction with a re-purchase option in the international market. This transaction was worth 200 million $.
2. Gold was sent in four installments to the Bank of England. Total gold sent was 47 tonnes. A total amount of 405 million $ was raised from the Bank of England.
3. The government entered into a loan agreement with the World Bank and Asian Development Bank.
4. The Indian government devalued/ depreciated the rupee by nearly 18% on July 1 and July 3, 1991 in two instalments. The immediate impact of devaluation was to improve incentives to export and an increased disincentive towards imports.
5. A fiscal monetary policy was put in place to control inflation. Cash margins on imports were increased from 50% to 133% and further to 200% by April 1991. The Reserve Bank of India (RBI) imposed a surcharge of 25% on bank credit for imports. Import of capital goods was only allowed against foreign lines of credit. This was done to discourage to imports as imports became more expensive.

 To get relief from such economic problem the government of India had only two ways before it:

1. To take foreign debt and to create favorable conditions within the country for increasing the flow of foreign exchange and also to increase the volume of export.
2. The other was to establish fiscal discipline within the country and to make structural adjustment for the purpose.

Hence the government of India had to introduce a package of reforms which included:

1. To liberalize the industrial policy of the government and to invite foreign investment by privatization of industries and abolishing the license system as a part of that liberalization.
2. Automatic approval for Foreign Direct Investment (FDI) was introduced for many industrial sectors.
3. To make the import-export policy of the country more liberal and so that the export of Indian goods may become more easy and the necessary raw materials and instruments for both industrial development and production of exportable commodities may be imported and also to facilitate free trade by reducing the import duty.
4. To decrease the value of money in terms of dollar.
5. To take huge amount of foreign debt from the IMF and the world Bank for rejuvenating the economic condition of the country and to introduce the structural adjustment in the economic condition of the country as a pre-condition of that debt.
6. To reform the banking system and the tax structure of the country.
7. To establish market economy by withdrawing and restricting government interference on investment.
8. For several industries, the monopoly of public sector came to an end.
9. To encourage the private sector to make investment in large scale industries.

The main objectives of the new fiscal policy are, however, to establish economic structural adjustment at the first stage and then to establish market economy by removing all controls and restrictions on it. There are two phases in the structural adjustment phase:

1. The stabilization phase where all government expenditures are reduced and the banks are restricted on creating debt.
2. The second phase is the structural adjustment phase where the production of exportable good and the alternative of import goods are increased and at the same time reducing governmental interference in industry, the management skill and productive capacity of the industries are increased through privatization.

Thus, the new fiscal policy has introduced three significant things Deregulation, Privatization and Exit Policy. Excepting 15 important industries all other industries have been made free from license system. To encourage foreign investment its highest limit has been increased up to 51%. Thirty-eight (38) industries have been made open for foreign investment like the Metal industry, Food Processing industry, Hotel and tourism industry etc. Exit Policy has been introduced in the industries which are running at a loss with surplus staff and the sick industries are scheduled to be closed.
The Economic liberalization have helped India to grow at faster pace. India is now considered one of the major economy of Asia. The Foreign investments in India have increased over the years. Many multinational companies have set-up their offices in India. The per-capita GDP of India have increased, which is a sign of growth and development.
India has emerged as a leading exporter of services, software and information-technology products. Many companies such as Wipro, TCS, HCL Technologies, Tech Mahindra have worldwide fame.
Thus the new economic policy is taking India towards liberal economy or market economy. It has relieved India much of her hardship that she faced in 1990-91.

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ECONOMICS NOTES

 

Inflation

Definition: A rise in the general level of price in an economy. That is sustained over time. The opposite of Inflation in 'deflation'. Inflation, in general, is just a price rise.When the general level of prices is falling over a period of time it is called deflation.
The rate of inflation is measured on the basis of price indices which are of two kind WPI & CPI

WPI - Wholesale Price Index
CPI - Consumer price Index
Rate of inflation (Year x)

In the index, the total weight is taken as 100 at particular year of the past i.e. Base year (Year of reference) Inflation is measured 'point to point'. It means that the reference dates for the annual inflation are January to January of two consecutive years. This is similar for even weekly inflation.
Types of Inflation: Broadly there are 2 types of inflation.
(a) Demand - Pull Inflation:

A mismatch between demand & supply pulls up the price. Either demand increases over the same level of supply or the supply decreases the same level of demand. This is Keynesian idea.
(b) Cost - Push Inflation:-

An increase factor input costs (i.e. wage & raw materials) push up the prices. A price rise which is the result of the increase in the production cost is cost - push inflation.
A measure of check inflation:-
(1) Supply side: 

Govt may import.
Govt may increase production.
Govt may improve storage. Transportation, hoarding etc
(2) Cost side:

Govt may cut down production cost by giving tax breaks, cuts in duties etc. By adopting Better production process, technological Innovation etc. Increasing Income of people also helps in checking inflation.
(3) Other steps:

 Tighter monetary policies can be introduced by RBI, this might help in a short run. Increasing production with the help of best production practices is a long term solution. Other types of inflation:

In General there are 3 Broad Categories i.e.
(i) Low inflation:- 

 It is slow & predictable.
 Takes place in a longer period.
 The range of increase is usually in single digit.
 It is also called CREEPING INFLATION
(ii) Galloping Inflation:- 

It is very high inflation
Range of increase is usually in double digit or triple digit
It is also known as hopping inflation, jumping inflation & Running Runaway inflation.
(iii) Hyper-Inflation:-

This type of inflation is large and Accelerating.
(This might have annual rates in Millions or even Trillion.
(Range of increase is very large but increase takes place in a very short span of time. The price shoots up overnight.
Over variants of inflation:-
(i) Bottleneck inflation:-

This inflation takes place when supply falls drastically & the demand remains at the same level.
Such situation arises due to supply ride accidents, hazards or Mismanagement.
It is also known as 'structural Inflation'
It can be put Under 'demand-pull inflation
(ii) Core inflation:-

This nomenclature is based on the inclusion or Exclusion of the good & services while calculating inflation.
In India, it was 1st time used in the financial year 2001-02.
In India, it means inflation of Manufactured goods. 

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Some useful Economics Terms

Balanced budget: A budget is said to be a balanced budget when current income is same as current expenditure.

Balance of Trade: Refers to the relationship between the values of country's imports and its export, i.e., the visible balance. These items only form part of the balance of payments which are (a) invisible items and (b) movements of capital.

Budget Deficit: When the expenditure of the Govt. exceeds the revenue, the balance between the two is the budget deficit.

Call Money: Is a loan that is made for a very short period of a few days only or for a week. It sanctions with a low rate of interest. In case of stock exchange, the duration length of the call money may be for a fortnight.

Cash Reserve Ratio: Refers to the ratio which banks have to maintain with the RBI as certain percentage between their holdings of cash and their time liabilities.

Deflation: Decline in the general price level of goods and services leading to rise in the value (purchasing power). A method of statistical conversion of a series of data to compensate for the general rise in prices.

Devaluation: Official reduction in the foreign value of domestic currency. It is done to encourage the country's export and discourage imports.

Direct Tax: Tax that cannot be shifted. The burden of direct tax is borne by the person on whom it is initially fixed. Examples: Personal income tax, Social Security tax paid by employees.

Elasticity: The degree of responsiveness of quantity demanded or supplied to a change in price.

Excise Tax: Tax imposed on the manufacture, sale or the consumption of different commodities, such as taxes on textiles, fabric, cloth, liquor etc.

Fiscal policy: Government's expenditure and tax policy, an important means of moderating the upswings and downswings of the business cycle.

Foreign Exchange: Claims on a countries by another, held in the form of currency of that country. Foreign 'exchange system enables one currency to be exchanged for another thus facilitation trade between countries.

Foreign Exchange Rate: Prices of the domestic currency in terms of foreign currencies.

Indirect taxes: Taxes levied on goods purchased by the consumer (and exported by the producer) for which the tax payer's liabilities varies in proportion to the quantity of particular goods purchased or sold.

Inflation: A sustained and appreciable increase in the price level over a considerable period of time.

Laissez faire: The principle of non-intervention of government in economic affairs.

National Income (at factor cost): Total of all incomes earned or imputed to factors of manufacturing, used in economic literature to represent the output or income of an economy in a simple fashion.

Per Capita Income: Total GNP of a country divided by the total populace. Per capita income is often used as an economic indicator of the levels of living and development. If however, can be a biased index because it takes no account of income distribution.

Statutory Liquidity Ratio: The SLR is the ratio of cash in hands, exclusive of cash balance maintained by ranks to meet required CRR, but no excess reserves.

Tariff (ad valorem): A fixed percentage tax on the value of an imported product, tax levied at the point of entry into the importing country .

Tobin tax: Named after James Tobin, the Nobel prize winner for economics in 1981, a global tax on capital transfers, which could raise possibly $250 billion from financial markets worldwide. And this huge sum could be used to support the developing economies of the third world. The revenue from the Tobin tax can also be used to write off the third world countries debts.

Value Added Tax (VAT): This form of tax has been in operation in some countries. If brings a value added tax, a tax levied on the values that is added to goods and services turned out by the producers during stages of production and distribution.

Zero Based Budgeting: The practice of justifying the utility in cost benefit terms of each government expenditure on projects. The ZBB technique, involves a serious review of every scheme before a budgetary provision is made in its favour. This form of financial planning is with an objective to ensure that every rupee spent is result oriented. If ZBB is properly implemented it could help to reverse the trend of large deficits on the revenue account of the Union Government.

All about Indian Tax Structure and Five-Year Plan

Indian Tax Structure

Notes on Indian Tax Structure

When country or a state legislature enacts a new tax, the debate usually includes some opinions about who should pay for running the government or for the particular program being supported by the tax. A means by which government finance their expenditure by imposing charges on citizens and corporate entitles.

Economists distinguish between those who bear the burden of a tax and those on whom a tax is imposed. Taxes in India are imposed by the Central Government and the state governments. Some minor taxes are also imposed by the local authorities such as Municipality.

According to Indian Constitution, Article 246 distributes legislative powers including taxation, between the Parliament of India and the State Legislature. The Central Board of Revenue or Department of Revenue is the apex body charged with the administration of taxes. It is a part of Ministry of Finance which came into existence as a result of the Central Board of Revenue Act, 1924.

Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, and central excise and service tax.

State Government levies taxes - Value Added Tax (VAT), Stamp Duty, State Excise, Land Revenue and Profession Tax.

Local bodies are empowered to levy tax on Properties, Octroi and for utilizations like water supply, drainage etc.

In Indian taxation system, system is divided into two taxes - Direct Taxation andIndirect Taxation.

Direct Taxes -  

In Direct Taxes the burden directly falls on the taxpayer.

• Income Tax - According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate prescribed in the Financial Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.
• Wealth Tax - Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value. Chargeability to tax also depends upon the residential status of the assessee same as the residential status for the purpose of the Income Tax Act.

Indirect Taxes

• Service Tax- It is a tax levied on services provided in India, except the State of Jammu and Kashmir. The responsibility of collecting the tax lies with the Central Board of Excise and Customs. From 2012, service tax is imposed on all services, except those which are specifically exempted under law.
• Excise Duty -Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods have been defined as those defined as those, which have been specified in the Central Excise Tariff Act as being subjected to the duty of excise. There are three types of excise duties:
  1. Basic Excise Duty
  2. Additional Duty of Excise
  3. Special Excise Duty

• Custom Duty- Custom or import duties are levied by the Central Government of India on the goods imported in India. The rate at which customs duty is leviable on the goods depends on the classification of the goods determined under the customs traffic.
• Value Added Tax - VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of value addition.

Five-Year Plans

When India became an independent country, many questions had arisen in front of the country's leaders at that time. The British had left the Indian economy handicapped; leaders had the challenges to make country's economy  strong. A formal model of planning was adopted. The Planning commission was established on 15^th March 1950, with Former Prime Minister Jawaharlal Nehru as the Chairman. The Planning Commission used to directly report to the Prime Minister of India. The planning commission was replaced by  NITI Aayog (National Institute for Transforming India Aayog) which was established by Prime Minister Narendra Modi on 1^st January 2015.

Planning Commission was assigned the task of formulating plans for the most effective and balanced utilisation of resources and determining priorities. Since then the Planning Commission frames the centralized and integrated national economic programs at the interval of every five years, thereby known as the Five-Year Plans.

The First Five-Year Plan of India was presented by Pandit Jawaharlal Nehru in 1951.

First Plan (1951-56):

• It was based on Harrod-Domar Model.
• Focus on Agriculture, Price Stability, Power and Transport
• It was a successful plan primarily because of good harvests in the last two years of the plan.

Second Plan (1956-61):

• It also called Mahalanobis plannamed after the well known statistician.
• Focus on rapid industrialization
• Advocated huge imports through foreign loans.
• Shifted basic emphasis from agriculture to industry
• During this plan prices increased by 30%, against a decline of 13% during the First plan

Third Plan (1961-66):

• It stressed agriculture and improvement in the production of wheat, but the brief Sino-Indian war of 1962 exposed weaknesses in the economy and shifted the focus towards the defence industry and the Indian Army.
• Complete failure in reaching the targets due to unforeseen events-Chinese aggression (1962), Indo-Pak war (1964), severe drought 1965-66.

Three Annual Plans (1966-69):

• Prevailing crisis in agriculture and serious food shortage necessitated the emphasis on agriculture during the Annual Plans
• During these plans a whole new agricultural strategy was implemented. It involving wide-spread distribution of high-yielding varieties of seeds, extensive use of fertilizers, exploitation of irrigation potential and soil conservation.
• During the Annual Plans, the economy absorbed the shocks generated during the Third Plan.

Fourth Plan (1969-74):

• Main emphasis was on growth rate of agriculture to enable other sectors to move forward
• First two years of the plan saw record production. The last three years did not measure up due to poor monsoon
• Influx of Bangladeshi refugees before and after 1971 Indo-Pak war was an important issue

Fifth Plan (1974-79):

• It proposed to achieve two main objectives: 'removal of poverty' (Garibi Hatao) and 'attainment of self reliance'
• Promotion of high rate of growth, better distribution of income and significant growth in the domestic rate of savings were seen as key instruments
• The plan was terminated in 1978 (instead of 1979) when Janta Party government rose to power

Rolling Plan (1978-80):

• Janta government put forward a plan for 1978- 1983. However, the government lasted for only 2 years. Congress government returned to power in 1980 and launched a different plan.

Sixth Plan (1980-85):

• Focus - Increase in national income, modernization of technology, ensuring continuous decrease in poverty and unemployment, population control through family planning etc

Seventh Plan (1985-90):

• Focus - rapid growth in food-grains production, increased employment opportunities and productivity within the framework of basic tenants of planning
• The plan was very successful, the economy recorded 6% growth rate against the targeted 5%

Eight Plan (1992-97):

• The eighth plan was postponed by two years because of political uncertainty at the centre
• Worsening Balance of Payment position and inflation during 1990-91 were the key issues during the launch of the plan
• The plan undertook drastic policy measures to combat the bad economic situation and to undertake an annual average growth of 5.6%
• Some of the main economic outcomes during eighth plan period were rapid economic growth, high growth of agriculture and allied sector, and manufacturing sector, growth in exports and imports, improvement in trade and current account deficit

Ninth Plan (1997-2002):

• It was developed in the context of four important dimensions: Quality of life, generation of productive employment, regional balance and self-reliance.

Tenth Plan (2002-2007):

• To achieve 8% GDP growth rate
• Reduction of poverty ratio by 5 percentage points by 2007
• Providing gainful high quality employment to the addition to the labour force over the tenth plan period
• Universal access to primary education by 2007
• Reduction in gender gaps in literacy and wage rates by atleast 50% by 2007 Reduction in decadal rate of population growth between 2001 and 2011 to 16.2%
• Increase in literacy rate to 72% within the plan period and to 80% by 2012
• Increase in forest and tree cover to 25% by 2007 and 33% by 2012.
• Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012.

Eleventh Plan (2007-2012):

• Accelerate GDP growth from 8% to 10%. Increase agricultural GDP growth rate to 4% per year
• Create 70 million new work opportunities and reduce educated unemployment to below 5%
• Raise real wage rate of unskilled workers by 20 %
• Lower gender gap in literacy to 10 percentage point. Increase the percentage of each cohort going to higher education from the present 10% to 15 %
• Reduce Total Fertility Rate to 2.1
• Raise the sex ratio for age group 0-6 to 935 by 2011-12 and to 950 by2016-2017
• Provide clean drinking water for all by2009
• Attain WHO standards of air quality in all major cities by 2011-12
• Increase energy efficiency by 20 percentage points by 2016-17

Previous Year Questions From Economics

Previous Year Questions From Economics which are very useful for upcoming SSC Exams.

1. Inflation, in theory, occurs when money supply grows at a higher rate than GDP in real terms.
2. The existence of a large parallel economy, fluctuations in agricultural and industrial output and indirect taxation are the reasons for : Cost-push inflation.
3. Among the supply side measures to contain inflation is: to increase the supply of products or commodities.
4. Population experts refer to the possible 'demographic bonus' that may accrue to India around 2016 A.D. They are referring to the phenomenon of: A surge in the population in the productive age groups.
5. The significant change in the new FEMA which has replaced FERA is that the emphasis from imprisonment will be shifted to: Voluntary Compliance
6. 'Level playing field' argument industries requires: Domestic industry to be treated at par with MNCs.
7. One of the disadvantages of the Wholesale Price Index in India is that: It does not cover the service sector.
8. Check-off system refers to the verification of membership through : deduction of subscription from pay.
9. Direct taxation is a better form of taxation because: It allows for taxation according to means.
10. Lender of the last resort, periodic inspection of commercial banks, issue of bank notes of all denominations are the functions of : Reserve Bank of India
11. Multi Fibre Agreement deals with :Textiles
12. Under the Medium Term Fiscal Restructuring Programme, state governments have been permitted to borrow from international financial institutions like the World Bank and Asian Development Bank to : replace their high cost debt with low cost funds.
13. Open market operation of fiscal deficit was suggested by : Chakravarthy Committee.
14. According to chakravarthy Committee, one of the principal causes affecting price stability in India is: Violent fluctuation in agricultural production.
15. The concept of Total Fertility Rate(TFR) in population means the average number of children born to a woman during her lifetime.
16. The first bank managed by Indians was :Oudh Bank
17. The statement, "India has achieved national food security but has not ensured household food security" means: there is sufficient food stock but all households do not have access to it.
18. The permit for duty free trade issued by the East India Company at a price to private traders was called: Diwani
19. The demand for establishment of a department of agriculture in India was made by :Manchester Cotton Supply Association
20. The birth rate measures the number of births during a year per : 1000 of population
21. Structural unemployment arises due to :Inadequate productive capacity
22. "Disguised unemployment" refers to : more persons employed for a job which a few can accomplish.
23. The securities and Exchange Board of India (SEBI) has imposed a restriction on money flow in equity through "P-Notes". The full form of "P-Notes" is: Participatory Notes.
24. The money which government of India spends on the development of infrastructure in country comes from the following sources- Loan from World Bank/ ADB etc. Taxes collected from the people, Loan from the RBI etc.
25. "Investor Protection Fund" has been established by : Stock Exchange
26. The full form of FII is: Foreign Institutional Investor
27. The Union Government, on March 3, 2008, launched a conditional cash transfer scheme for the girl child. The conditions of this scheme include registration of birth of the girl, following a total immunisation schedule, school enrolment and delaying of marriage until the age of 18 years. The name of this scheme is :Dhan Laxmi
28. The National Association of Software and Service Companies (NASSCOM), the premier trade body represents: the IT and BPO industry
29. The largest consumer of natural gas in the world is : the USA
30. The country which leads in oil-consumption in the world is : the USA
31. The country which leads in Internet users in the world is : the USA
32. World's leading gold producer country is: South Africa
33. Entry for Normal Loss is recorded in :Trading Account
34. In product life cycle, the cost per unit is generally highest in the stage of :Introduction
35. Accounting acronym GAAP stands for :Generally Accepted Accounting Practices
36. Limited Liability is available in the kind of business organisation called: Company
37. Rank Account is called :Real Account
38. The form of accounting states that transactions are to be recorded in the period that they occur is:  Accrual basis of accounting
39. The most important ratio for the Sales Tax Department from the control point of view is :Gross Profit Ratio
40. The most important ratio for the Income Tax Department from the control point of view is: Net Profit Ratio
41. The abbreviaion for debit and credit come from the language : Latin, 'debere and credere'
42. A Public Limited Company tries to maximise: Wealth of Shareholders
43. Anticipated losses are recorded in the books of accounts as per: Matching of Cost and Revenue
44. Goodwill is recorded in the books of account only when : It is valued
45. Depreciation Account is called: Nominal Account
46. Monopoly is when there is single: Seller
47. We can get the current ratio by :dividing current assets by current liabilities
48. The major rubber producing state in India is: Kerala
49.