deployment of skilled manpower, entering in to joint ventures with leading foreign companies Rapid Industrialization is required to make India self-sufficient and self-reliable for fulfilling all her needs and requirements. The various Guiding Factors for Rapid Industrialization are Labour Productivity; Employment Generation and Resource Mobilization. The various Factors that hinder the process of Industrialization in a developing Economy are Economic Factors; Administrative Factors; International Factors and Socio -Demographic factors. The pattern of Industrial growth in India in the last six decades can be reviewed under seven sub heads namely period between 1965-66 ; Slow down phase-1970 ; Revival period in 1980s ; Recession during 1991-94 ; Revival followed by Recession in 1994-2002; Slowdown during 2008-13 and Short Revival during 2013-15 Small Scale industries are the industries wherein the production process is undertaken at a micro level and is often set up by private individuals, usually with the help and support of their family members and hiring local workers who understand the work. It uses simple machinery, tools and equipment. Large scale industry refers to undertakings which have a vast infrastructure, and employee base along with heavy power-driven machinery and huge capital investment. It embraces both manufacturing concerns and others that make use of both indigenous and imported technology to manufacture the products, so as to cater the domestic as well as international markets. Public sector includes all those activities and/or functions including the services which are performed, controlled or regulated or owned by the State Government, i.e., the public sector comprises of State enterprises. The general objectives of public sector are: to provide required investment and promotion of industrial activity ; to supply socio-economic developmental opportunities ; to nationalize those companies which are foreign dominated; to supply activities relating to import-substituting and export-promoting ; to make a balanced regional development ; to make opportunities for employment and to form a rational society etc,,. For Improving the Performance of Public Sector Enterprises it is suggested that all- out efforts should be made to make fuller utilisation of the capacity in different enterprises ; Managing of these undertakings should be entrusted to the trained and skilful personnel ; Price policy of the public sector undertakings should aim at improving the profitability of the public undertakings; Establishment of public 151 CU IDOL SELF LEARNING MATERIAL (SLM)
enterprises be based purely on economic and social welfare consideration rather than political pressures etc.. 7.9KEYWORDS GST :Goods Services Tax SSI -Small Scale Industries GDCF -Gross Domestic Capital Formation SIDBI :Small Industries Development Fund DIC : District Industries Centres District Industries Centres (DICs) 7.10LEARNING ACTIVITY Compile a list of key Small scale &Large-scale industries and collect statistical investment pattern in these sectors in the last five-year period. ________________________________________________________________________________________________________________________________ _______________ 7.11UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Industrialization & highlight the beneficial factors of Industrialization. 2. What are the positive effects of Industrialization towards the progress of a nation? 3. Write a note on small scale & large scale industries. 4. Describe the contribution from large scale industries? 5. Write a note on public sector undertakings; their growth, contribution and suggestions for improvement. Long Questions 152 1. Indicate two hindering factors in achieving rapid industrialization. 2. What is Slow down & Revival in industrial terms.? 3. What is Recession? CU IDOL SELF LEARNING MATERIAL (SLM)
4. Distinguish between Small scale &Large-scaleindustries. 5. What are the three yardsticks to be deployed in evaluating the performance Of Public sector undertakings. 6. Distinguish between Private & Public sector. Which is advantageous.? 7. What is meant by Sick Industries Act? B. Multiple Choice Questions 1. Industrialization is the process by which economy of a nation is shifted from ---------- based economy to industry driven economy. a. Fishing b. cottage c. Agriculture d. Tourism 2. Small scale industries contribute to development of ----------------. a. Local employment b. product availability c. Infrastructure improvement d. Capital equipment import. 3. The most critical problem faced by Small scale industries is--------- a. Capital b. Technology c. Marketing d. All of these 4.During the seventh five-year plan around Rs--------------crores was invested in Public Sector undertakings. a. 20000 crores b. 45000 crores 153 CU IDOL SELF LEARNING MATERIAL (SLM)
c. 50000 Crores. d. None of these 5. Performance of Public Sector undertakings is ------------- gradually. a. Declining. b. Improving. c. Stagnant d. None of these Answer 1 –C; 2-A; 3- C; 4-C; 5-D 7.12 REFERENCES References Book Mishra, S.K. & V.K. Puri; Problems of Indian Economy, Himalaya Publishing House. Dhingra, I.C.; Indian Economy, Sultan Chand, 2003 Aggarwal, A.N., Indian Economy, VishwaPrakashan, 2003. Datt, Ruddar; Sundhram, Indian Economy, Sultan Chand, 2003Textbook Indian Economy- Datt & Sundaram’s Indian Economy- I.C Dhingra Website *https://www.economicsdiscussion.net/economics-2/studying-the-structure-changes- in-indian-economy/2153 154 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 8: INDIAN PUBLIC FINANCE 155 Structure 8.0Learning Objectives 8.1 Introduction 8.2Public Finance Management 8.2.1 Importance of Public Finance 8.3Structure of Public Finance 8.3.1 Public Expenditure 8.3.2 Debts 8.3.3 Fiscal Policy 8.3.4 Financial Administration 8.3.5 Public Revenue 8.4 India’s Tax structure 8.4.1 Direct Tax 8.4.2 Indirect Tax: 8.5 GST 8.5.1 Meaning of GST 8.5.2 Nature of GST 8.5.3 Dual GST 8.5.4 Integrated GST 8.5.5 GST Applicability in India 8.5.6 Single Market; Single Tax 8.5.7 Subsumed Taxes 8.5.8 GST Implementation in India. 8.6 Summary 8.7 Keywords 8.8 Learning Activity 8.9Unit End Questions 8.10 References CU IDOL SELF LEARNING MATERIAL (SLM)
8.0 LEARNING OBJECTIVES After studying this unit, you should be able to: Explain the basic idea on Public Finance Management & its importance. Outline various types of Expenditures. Analyse and distinguish between Internal & External debts. Explain Fiscal Policy & its objectives. Analyse Financial Administration. Outline Public Revenue. Analyse Pattern of Tax structure in India. 8.1 INTRODUCTION Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones. As Dalton puts it, Public finance is “concerned with the income and expenditure of public authorities and with the adjustment of one to the other.” Accordingly, effects of taxation, Government expenditure, public borrowing and deficit financing on the economy constitutes the subject matter of public finance. The purview of public finance is considered to be threefold, consisting of governmental effects on: The efficient allocation of available resources; The distribution of income among citizens; and The stability of the economy. 8.2 PUBLIC FINANCE MANAGEMENT Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Thus the essential components of public financial management are: 156 CU IDOL SELF LEARNING MATERIAL (SLM)
Resource generation Resource allocation Resource utilization(expenditure management) 8.2.1. Importance of Public finance: It is evident that Public finance is very important for the growth and development of a country. It is obvious that the government of a country can push up the industrial and economic development of the country, provide more employment opportunities, encourage investments andsavings in the desired direction and increase social benefits through public expenditure. Therefore, it affects the overall economic and social system of the country. The major importanceof public finance is listed below as: 1. Steady state economic growth: Public finance is important to achieve sustainable high economic growth rate. The governmentuses the fiscal tools in order to bring increase in both aggregate demand and aggregate supply. Thetools are taxes, public debt, and public expenditure and so on. 2. Price stability: The government uses the public finance in order to overcome form inflation and deflation. During inflation it reduces the indirect taxes and genera expenditures but increases direct taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed. 3. Economic stability: The government uses the fiscal tools to stabilize the economy. During prosperity, the government imposes more tax and raises the internal public debt. The amount is used to repay foreign debt and invention. The internal expenditures are reduced. During recession, the case is just reversed. 4. Equitable distribution: The government uses the revenues and expenditures of itself in order to reduce inequality. If there is high disparity it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies,allowance, and other types of direct and indirect benefits to them. 5. Proper allocation of resources: The governmentfinance isimportant forproper utilization ofnatural, manmade and human resources. For it, on the production and sales of less desirable goods, the government imposes more taxes and provides subsidies or imposes taxes lightly on more desirable goods. 157 CU IDOL SELF LEARNING MATERIAL (SLM)
6. Balanced development: The government uses the revenues and expenditures in order to erase the gap between urban and rural andagricultural and industrial sectors. For it, the government allocates the budget for infrastructural development in rural areas and direct economic benefits to the rural people. 7. Promotion of export: The government promotes the export imposing less tax or exempting form the taxes or providing subsidies to the export oriented goods. It may supply the inputs at the subsidized prices. It imposes more taxes on imports and so on. 8. Infrastructural development: The government collects revenues and spends for the construction of infrastructures. It has to keep peace, justice and security too. It has to bring socio-economic reformation too. For all these things it uses the revenues and expenditures as fiscal tools. 8.3 STRUCTURE OF PUBLIC FINANCE Public Revenue Public Expenditure Public Debt Fiscal Policy Financial Administration Fig 8.1 158 CU IDOL SELF LEARNING MATERIAL (SLM)
8.3.1 Public Expenditure Government Spending refers to public expenditure on goods and services and is a major component of the GDP. Government spending policies like setting up budget targets, adjusting taxation, increasing public expenditure and public works are very effective tools in influencing economic growth. Revenue expenditure is a current or consumption expenditure incurred on civil administration (i.e., police, jails and judiciary), defence forces, public health and education.This revenue expenditure is of recurrent type which is incurred year after year. On the other hand, capital expenditure is incurred on building durable assets. It is a non- recurring type of expenditure. Expenditure incurred on building multipurpose river projects, highways, steel plants etc., and buying machinery and equipment is regarded as capital expenditure. *Developmental expenditure are those expenditures of Government which promote economic growth.Expenditure on irrigation projects, flood control measures, transport and communication, capital formation in agricultural and industrial sectors are described as developmental.Expenditure on education, research and health are generally regarded as developmental expenditure * On the other hand, expenditure on defence, civil administration (i.e., police, jails and judiciary), interest on public debt etc., are put into the category of Non-development expenditure. 8.3.2 Public Debts Public debt is the debt owed by a central government. Among the non-tax sources, the major source of government revenues is public debt. As per the current budgetary practices, there are three sets of liabilities, which constitute a central government public debt, vis. 1) Internal debt,(2) External debt, and(3) Other liabilities. Internal Debt:The internal debt is classified into:(a) Market loans,(b) other long and medium term borrowings, and(c) short-term borrowings all of which are shown under the receipts side of the central budget.They include special securities and T-bills issued to RBI, state governments, commercial banks and other financial institutions. External Debt:Represents loans received from foreign government and bodies. Both the internal and external debt is secured under a fund called as the Consolidated Fund of India. Other Liabilities:Includes other interest bearing obligations of the government such as: 159 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) Post office savings deposits under small saving schemes, loans raised through post office cash certificates, etc.(ii) provident funds,(iii) interest bearing reserve funds of departments like railways and telecommunications, etc. The obligations of ‘other liabilities’ are met by the Public Account, just as the internal and external debts are secured under the Consolidated Fund. ‘ Public Revenue: The income of the government through all sources calls public income or public revenue. In its wider sense, it includes all the incomes or receipts which a public authority may secure during any period. In its narrow sense, however, it includes only those sources of income of the public authority which are ordinarily known as “revenue resources.” The two main sources of public revenue from India Tax Revenue, and.Non-Tax Revenue. A] Tax Revenue:Taxes are the first and foremost sources of public revenue. It is compulsory payments to the government without expecting direct benefit or return by the taxpayer. Taxes collected by Government are used to provide common benefits to all mostly in the form of public welfare services. They do not guarantee any direct benefit for the person who pays the tax. It is not based on a direct quid pro quo principle. Examples : Union Excise Duties ; Customs ; GST Tax ; Income Tax ; Corporation Tax ; Wealth Tax ; Gift Tax ; Capital Gains Tax etc .. B] Non-Tax Revenue: The revenue obtained by the government from sources other than the tax is called Non-Tax Revenue. Public income received through the administration, commercial enterprises, gifts, and grants is the source of non-tax revenues of the government. Examples: Interest Receipts; Surplus Profits of the Reserve Bank of India (RBI);Currency; Coinage and Mint: Railways; Profits of Public Enterprises etc 8.3.3 Fiscal Policy Fiscal policy refers to the use of government spending and tax policies to influence economic conditions. Fiscal policy is largely based on ideas from John Maynard Keynes, who argued governments could stabilize the business cycle and regulate economic output. During a recession, the government may employ expansionary fiscal policy by lowering tax rates to increase aggregate demand and fuel economic growth. In the face of mounting inflation and other expansionary symptoms, a government may pursue contractionary fiscal policy. Union Budget is an extensive account of the Government’s finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. Union budget is an expression of the fiscal policy of the government. 160 CU IDOL SELF LEARNING MATERIAL (SLM)
The Finance Minister presents the Union Budget every year in the Parliament that contains the Government of India’s revenue and expenditure for one fiscal year, which runs from 1st April to 31st March. Objectives of Fiscal policy The objectives of fiscal policy can be identified as follows 1. To promote Economic growth 2. To promote Balanced regional Development 3. To reduce inequalities in the distribution of income and wealth. 4. To promote saving and investment in the economy 5. To promote full employment and price stability 6. To achieve equilibrium in BOP(balance of payments) To promote Economic growth a. The government can extend tax incentives and concessions b. The government can change tax rates to encourage or discourage the production of certain types of commodities. c. The government can incur expenditure on building up of infrastructure and other essential services like power,,communication,irrigation etc d. The government can set up its own production enterprise and make available large funds for investment in such enterprise e. The government can raise loans or print new currency; thisenables it to spend more in the economy than what it takes Output of the economy. To promote Balanced Regional Development It requires that the different regions and areas of the country should participate in the growth-promoting activity. More generally, it is observed that the rich and well -endowed regions transport attract more investment and resources. The backward regions tend to be ignored. it is important that the backward and the weaker regions should be promoted in a big way. For this purpose, following fiscal instruments can be made use of: *Tax incentives and concessions for investment in the backward areas. *Larger public expenditure on provision of infrastructure and other essential services in backward regions. *The government itself can set up and promote the production units in backward regions. 161 CU IDOL SELF LEARNING MATERIAL (SLM)
To reduce inequalities in the distribution of income and wealth. *Higher incomes and wealth should be taxed at higher rates *Persons with lower incomes should be exempted from tax. *Higher sales tax and excise duties should be imposed on those commodities which are normally consumed by richer sections of the society. *Subsidies should be extended on the goods which are consumed by the poorer sections. *More public expenditure should be incurred on social sector activities like primary education, primary health and medical facilities, supply of drinking water, sanitation. Such services should be made available to the weaker sections free of cost or at normal prices. To promote savings and investment in the economy *Tax concessions and rebates may be extended to household on their savings. *Luxury articles should be heavily taxed so that their demand is discouraged; income will flow into savings *Larger public expenditure on infrastructure will create favourable conditions for investment. *Larger public expenditure also creates favourable conditions to induce more private investment. To promote full employment and price stability. *Larger public expenditure induces more private consumption and investment expenditure, this generates more employment opportunities. *Government itself can launch employment generation schemes: public expenditure on these schemes will have a multiplier effect. *The central Government presents before the parliament each year,on the last working day of the month of February, a Financial Statement.This statement provides all details about the sources of receipts and expenditure relating to 3 years. The annual financial statement of the central government is related to 3 major funds: *The consolidated fund of India 162 CU IDOL SELF LEARNING MATERIAL (SLM)
All the receipts and disbursements on account of the Government of India flow in and flow Out of this fund. This part of the annual financial statement is generally known as BUDGET. *The contingency fund of India This fund has been set up to meet any unforeseen contingencies. *The public account of India. There are some financial transactions which are conducted by the central government on behalf of the state governments. Examples are National small savings funs, State provident fund, railway funds, mines welfare fund. 8.3.4 Financial Administration *Prof. M.S Kendrick, “The financial administration refers to the financial measurement of govt. including the preparation of budget method of administering the various revenue resources the custody of the public fund, procedures in expending money, keeping the financial records and the like. These functions are important to the effective conduct of operation of public finance” *Prof. Dimock, “Financial administration consists of a series of steps whereby funds and made available certain official under procedures which will ensure their lawful and efficient use. The main ingredients are budgeting, accounting, auditing and purchase and supply.” Budget, Auditing and Accounting are the methods or means of Financial Administration. 8.3.5 Public Revenue Non-Tax Revenue Non-tax revenue are those receipts, which are received from sources other than taxes like fees, fines, penalties and income from public enterprise Tax Revenue Tax is a compulsory payment by the citizens to the government to meet the public expenditure. It is legally imposed by the government on the taxpayer and in no case, taxpayer can deny to pay taxes to the government. Some of the taxes are Income tax,GST,wealth tax. 8.4 INDIA’S TAX STRUCTURE The Indian tax structure has developed in response to many influences like social, political and economic. The properties of ideal tax structure are as follows: i. Tax policy should be easy to implement administratively with a low cost of collection of taxes. ii. The distribution of tax burden should be progressive 163 CU IDOL SELF LEARNING MATERIAL (SLM)
iii. The tax structure should improve efficiency of the market. iv. The tax structure should facilitate the use of fiscal policy for growth of the economy. Main aspects of India’s tax structure A. There is an increased importance of Tax revenues and the revenue collected by central and state governments over the last few decades through tax has increased manifold. B. Tax revenue has become an important contributor to National Income. Fig 8.2 Types of Tax Tax in India can be classified into Direct Tax and Indirect Tax. 8.4.1 Direct Tax A direct tax is that, which is borne by the person on whom it is levied. A direct tax burden cannot be shifted to other person. Direct as well as indirect money burden of the direct tax is on the person on whom the tax is imposed. Impact of the tax as well as incidence of the tax is on the same As a proportion of gross tax revenue, direct taxes have accounted for over a half of total tax revenue since 2007-08.Some of the Direct taxes are Personal Income tax ; Corporate tax; Estate duty ; Wealth tax ; Gift tax ; Interest tax. 164 CU IDOL SELF LEARNING MATERIAL (SLM)
Income Tax:This is the most common type of tax that an individual citizen pays to the government. The concept is pretty simple – a portion of your income is paid to the government every year and this money is used by the government to fund its growth and development activities across the country. In 2015-16, the total income tax collected by the government was more than Rs. 2.86 lakh crores, which accounted for approximately 39% of the total tax collected by the government from all available routes i.e. direct and indirect. Corporate Tax: It is the tax levied on income of both domestic and foreign companies and is levied under the Income Tax Act, 1961.Corporate Tax is imposed on “net income” of a company registered under Companies Act, 1956.Only the income earned in India is taxed under corporate tax. Corporate tax rate for domestic companies is 30% and foreign companies is 40%.A surcharge is also levied on companies depending on their earnings and revenues Estate Duty: The property in possession of a person which passes onto his successors upon his death can be termed as Estate of such deceased person. Estate duty is tax on such Estate being passed on or beneficiary receiving the Estate, depending on how law is framed. Normally, the liability of Estate duty is restricted to the value of Estate. Inheritance tax works on similar principle as Estate Duty and accordingly both the terms are often used interchangeably. However, in the USA these are two separate taxes, Estate duty is federal (centre) tax and inheritance tax is state specific tax applicable in certain states of US. Wealth tax: is a direct tax with the aim to reduce the inequalities of wealth. It is charged on the net wealth of super rich individuals, companies, and Hindu Undivided Families (HUFs). It was abolished and replaced with 2% additional surcharge levy. Gift Tax: Gifts received by a person are taxed for the recipient under “income from other sources”. Gift Tax is mentioned under Section 56(2) (x) of the Income Tax Act, 1961.Gifts amounting to less than ₹ 50,000 in a year are exempted from taxation. Gifts and money received in marriages are exempted from tax. Entire sum of money received in addition to ₹ 50,000 without consideration is taxed at 100%. Interest Tax: The tax levied on interests accrued as per the Interest Tax Act, 1974 is known as the interest tax. This act was applicable for all scheduled banks whereas co-operative societies were kept out of the ambit of this tax. The Act was discontinued regarding chargeable interest earned after March 31st, 2000. 8.4.2 Indirect Tax: *Indirect taxes are those taxes, which have their primary burden or impact on one person, but that person succeeds in shifting his burden on to another person. 165 CU IDOL SELF LEARNING MATERIAL (SLM)
*Consequently, the final or the real burden of the taxes or the incidence has to be borne by a third person. Some of the Indirect taxes in India areService tax;Custom duties; Central excise duties; VAT;GST etc, Service Tax: Introduced in India as part of the Finance Act, 1994, the service tax is best defined as an indirect tax payable to the government by a pre-determined group of service providers. These service providers subsequently pass this tax on to their customers. Some of the common examples of establishments that charge customers service tax include hotels, restaurants, mobile connection providers, etc. Customs Duty: Tax levied on import and export of goods is called customs duty. It is primarily aimed at controlling and regulating entry and exit of goods. Customs duty vary from product to product and from time to time in order to protect the domestic industry. Custom duty depends on various international agreements under WTO, FTA, etc. Central Excise Duty: It is a form of indirect tax levied under Central Excise Tariff Act, 1985.It is levied on goods manufactured in India for domestic consumption. The manufacturer pays the tax after production of goods when it is sent to the market. After the implementation of GST, the tax has been subsumed under Goods and Services Tax. Value Added Tax: This was one of the leading indirect taxes of the pre-GST era in India and this is pretty common all over the world. VAT is applied whenever there is a value-addition to the inputs/raw materials used in order to produce the final product for sale. If a certain product is bought and sold multiple times as raw material or semi-finished product till it is available as the final product, the VAT will be applicable in each downstream step provided there is a value-addition activity involved. 8.5.GST Considered to be the greatest tax reform that India has undergone since its independence, the Goods and Services Tax or GST is all set to be implemented from July 2017. This indirect tax is designed to provide uniformity to taxes levied on products and services across India. To that effect, the GST will replace all other taxes levied by the state and central governments. As per currently available data, goods and services will be taxed according to specific rates of 0%, 5%, 12%, 18% or 28%, while a few other goods/services have been classified as exempt. Goods Services Tax:GST:Goods and Service Tax (GST) has been introduced with an only motive to accelerate the economic growth. It is expected that GDP growth will increase by 2% after introduction of GST. 166 CU IDOL SELF LEARNING MATERIAL (SLM)
8.5.1: Meaning of Goods and Services Tax (GST) Goods and Service Tax (GST) is an upgraded version of Value Added Tax (VAT). GST is a consumption based tax and a comprehensive indirect tax which shall levy on the supply of goods and services. Presently, Indian indirect tax structure is very vast and complex. Under indirect tax ambit, we have Central Excise, Service Tax, Central Sales Tax, 31 VAT laws, Luxury tax, entry tax, etc. As we can see, there is a whole complex web of laws. GST is set to subsume all these taxes and will prevail as a single indirect tax levy in the whole country. This will facilitate wider tax base, more compliant business, less litigation and tax collection cost will also decrease. As per Article 366(12A); “Goods and Service tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. As per Wikipedia, GST stands for \"Goods and Services Tax\", and is proposed to be a comprehensive indirect tax levy on the manufacture, sale and consumption of goods as well as services at the national level. It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. GST is one indirect tax for the whole nation, which will make India one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages. 8.5.2: GST is a consumption based Tax If we can assume goods or services as a horse, GST is a horse rider. Wherever the horse moves, the rider moves along with. GST is called a consumption based tax because of it is payable to the state in which goods or services are actually consumed. There is a logical reason behind GST being a consumption based tax. Under the current scenario, a tax is payable in the state where goods are produced. E.g. if goods are sold from Gujarat to Rajasthan, then the tax shall be paid to the government of Gujarat. This is origin- based taxation. Under this principle, consuming state is not getting any tax revenue which is tax base erosion of that particular state. This problem is resolved under proposed GST regime. Since GST is a consumption based tax, tax revenue will be levied and collected by theconsuming state, and this helps the consuming state to protect their tax base 167 CU IDOL SELF LEARNING MATERIAL (SLM)
8.5.3:Dual GST As per the Model GST law and various recommendations, it is proposed to have dual GST model; Central GST and state GST. Both shall be applicable on goods and services within the state. Input Tax Credit (ITC) of CGST and SGST shall not be available against each other. CGST and SGST shall not be applicable in the case of interstate supply of goods or services. 8.5.4: Integrated GST Integrated GST or IGST shall be levied and collected only on the interstate supply of Goods and services. IGST shall also be applicable on import of goods or services in India. The IGST rate shall be equal to combined rate of CGST and SGST. Input Tax Credit (ITC) of IGST shall be available against CGST and SGST. 8.5.5: GST Applicability in India GST is applicable on the supply of all goods or services or both except taxes on the supply of the alcoholic liquor for human consumption. Alcoholic liquor for human consumption shall continue to be taxed under the current system. GST is currently not applicable on Alcoholic liquor for human consumption and Petroleum crude, high-speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel (GST council will decide until when these will be brought under GST ambit). GST shall also be applicable on tobacco, tobacco products. The further centre may also impose excise duty on tobacco and tobacco products. 8.5.6: Single Market Single law GST is one indirect tax for the whole nation, which will make India one unified common market. Under present structure, there are 31 different VAT laws in the country. Each has a separate registration process, return filing procedure, penalty provisions, etc. This creates difficulty for the business man in running the business smoothly. Under GST regime, there shall be uniformity across the country. GST will provide a big breakthrough in ease of doing business in India. 8.5.7: Taxes Subsumed under GST Presently, there are various indirect tax laws functioning differently still not able to achieve the desired satisfaction. So many taxes create non-compliance, tax evasion and also it is difficult for the government authorities to administer. GST is set to remove this multiplicity of taxes.Further, narrowing the impact of the multiplicity of taxes is not only desired but also imperative in the current economic scenario. 168 CU IDOL SELF LEARNING MATERIAL (SLM)
8.5.8: GST Implementation in India With Effect from July 1, 2017, India's new Indirect tax regime in the form of GST laws on the track of \"One Nation - One Tax\" came in to effect. In its pre-mature days, the compliance levels were very low due to confusion; lack of knowledge coupled with technical glitches, the said online platform crashed many times resulted in waiving of late fee. Non-availability of 'Edit' function made issues even worsen. Later a facility to view and reset values has been provided. As a positive note and by end of the December, 2018, the compliance rate increased gradually on account of various anti-evasion measures undertaken by the Central and State Governments. The E-way bill mechanism had been introduced pan-India w.e.f 1st April, 2018 and 3rd June 2018 for inter-State and intra-State movement of goods respectively. Initially, the E-way Bill mechanism also fared badly with system unable to take the bill generation load on pan-Indian base. The Central Government quickly deferred it for few months and return well prepared now it is successfully rolled out nationwide without any technical glitches. According to GSTN portal, total 29,53,19,969 e- Way Bills have been generated till October 25th, 2018. Like any other major disruption, the economy is slowly stabilized itself by end of December 2018. 169 CU IDOL SELF LEARNING MATERIAL (SLM)
Subsumed Central &STATE TAXES 170 CU IDOL SELF LEARNING MATERIAL (SLM)
8.6 SUMMARY Public finance is the study of the role of the government in the economy that assesses the government revenue and government expenditure of the public authorities and suggests measures to balance them.. Public Finance Management is an intensive activity towards Collection of sufficient resources from the economy and use these resources efficiently towards economic growth of the country. Public finance is very important for the growth and development of a country which affects the overall economic and social system of the country like Price & Economic Stability, Promotion of Export and Infrastructure development. Structure of Public Finance can be classified in to public Finance, Public debt, Public revenue, Fiscal policy & Administration. Fiscal policy refers to the use of government spending and tax policies to influence economic conditions in order to promote Economic growth, Balanced regional development, Employment and Price stability. The Indian tax structure has developed in response to many influences like social, political and economic. There is an increased importance of Tax revenues and the revenue collected by central and state governments over the last few decades through tax has increased manifold. 8.7 KEYWORDS BOP : Balance of Payments. GST: Goods and services Tax. VAT : Value Added Tax FISCAL POLICY : Usage of government spending and tax policies to influence economic conditions SUBSIDY : Relief in price of certain goods provided by the Government 8.8 LEARNING ACTIVITY 1. Prepare a comprehensive note on India’s Tax structure & give suggestions to bring down Tax burden to common citizen year after year. ________________________________________________________________________________________________________________________________ 171 CU IDOL SELF LEARNING MATERIAL (SLM)
_______________ 8.9UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Public Finance & enumerate its importance. 2. Describe the structure of Public Finance. 3. What is Fiscal Policy & what are its advantages? 4. What are the components of Public Revenue? 5. Describe the Tax Structure of India and your suggestions to streamline the same? Long Questions 1. What is meant by Price stability? 2. What is the key objective of Fiscal Policy? 3. What is non-TaxRevenue? 4. Differentiate between Direct & Indirect Tax. 5. What is VAT & what is GST? B. Multiple Choice Questions 1. Public finance is the study of the role of the government in the ------------. a. Foreign Trade b. Economy c. health sector d. Education. 2 Internal debt is that part of the total ------- that is owed to lenders within the Country. a. Revenue b. debt c. expenditure 172 CU IDOL SELF LEARNING MATERIAL (SLM)
d. loss. 3. Developmental expenditure are those expenditures of Government which promote economic growth. a. Agricultural b. Developmental , c. Defence d. Space Research. 4.Public Finance Management deals with Resource ---------- A. Allocation B. Generation C. Utilization D. All of these 5.Fiscal Policy is aiming to facilitate --------------- growth. A. Agricultural B. Educational C. Health related D. Economic Answer 1- b; 2b; 3 – b; 4 – d; 5 - d 8.10 REFERENCES References Book Mishra, S.K. & V.K. Puri; Problems of Indian Economy, Himalaya Publishing House. Dhingra, I.C.; Indian Economy, Sultan Chand, 2003 Aggarwal, A.N., Indian Economy, VishwaPrakashan, 2003. 173 CU IDOL SELF LEARNING MATERIAL (SLM)
Datt, Ruddar; Sundhram, Indian Economy, Sultan Chand, 2003Textbook Indian Economy- Datt & Sundaram’s Indian Economy- I.C Dhingra Website *https://www.economicsdiscussion.net/economics-2/studying-the-structure-changes- in-indian-economy/2153 174 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 9: INDIA’S FOREIGN TRADE Structure 9.0 Learning Objectives 9.1 Introduction 9.2 Features of International Trade 9.3 Composition of India’s foreign trade 9.3.1 Composition of India’s exports 9.3.2 Composition of India’s imports 9.4 Direction of India’s foreign Trade 9.4.1: The table below indicates the shift in Exports as percentage for a span of 10 years 9.4.2: Direction of India's Imports: 9.4.3: Foreign Policy of the Narendra Modi Government Era 9.5 Summary 9.6 Keywords 9.7 Learning Activity 9.8Unit End Questions 9.9 References 9.0 LEARNING OBJECTIVES After studying this unit you will be able to Describe the features of international trade Summarize the composition of India’s imports and exports Restate the direction of India’s foreign trade. 9.1 INTRODUCTION Foreign trade works as an “engine of growth’. “Trade” refers to buying and selling of goods and services. It is commonly understood to mean exchange of goods, merchandise among people. 175 CU IDOL SELF LEARNING MATERIAL (SLM)
International trade is that branch of economics which is concerned with the exchange of goods between one country and another. It is the movement of goods from one political boundary or territory to another. India faced uncertainty and difficulty in the foreign trade in the years immediately following independence. Partition after independence led to a shortage of jute, cotton, etc., Planning commission was introduced and this demanded an increased import of materials and machinery for the development. All these led to an adverse effect on foreign trade in India. Imports exceeded over exports. In spite of many export promotions and import control policies, the balance of trade (BOT) was not favourable. 9.2FEATURES OF INTERNATIONAL TRADE Immobility of factors of production Basically this reason was given by the classical economists on the assumption that labour was the only factor of production. Ricardo emphasized a separate theory of international trade on the ground that factors of production are immobile between nations and mobile within nations. Immigration laws and citizenship requirement often restrict the international mobility of labour. International capital flows are also prohibited by different governments. It is factor immobility which leads to comparative differences in the cost of production. Heterogenous market There is lack of homogeneity in the world market due to differences in language,preference,customs,weights and measures. The behaviour of the buyers too differs accordingly. For example-cars in India have right hand drive while in foreign countries have left hand driving. Different National Policies Laws and rules relating to taxation, labour standards, trade unions, education and factory legislation are more or less uniform in different regions of a country. On the contrary, there is vast difference in such laws in different countries. State Intervention Government interferes with the normal trade through its tariff policy, import quota, subsidies and similar controls. Such state intervention will cause different problems in international trade. Differences in socio-economic environment There is more or less uniformity in the socio-economic Government within countries but it differs between countries. Fredrick states that “domestic trade is among us, international trade is between us and them”. Degree of competition 176 CU IDOL SELF LEARNING MATERIAL (SLM)
Within the country, prices in both the products as well as in the factor markets are determined under competitive conditions. Every firm works at its optimum scale. But in international trade rather than optimum allocation of resources, the theory of dumping and protection are considered to be of great importance. 9.3 COMPOSITION OF INDIA’S FOREIGN TRADE 9.3.1 The composition of India's exports:- Composition of foreign Indian foreign trade means major commodity or sectors in which India is doing export and import. India is a very old participant in world trade. Indian foreign trade registered a number of structural changes during the planning period. The percentage of non- traditional goods in total export has increased i.e., export of chemical and engineering goods has shown a good rise. Some other items are gems and Jewellery. India is making export of few traditional goods like; tea, coffee, rice, pulses, spices, tobacco, jute, iron ore etc. Fig 9.1 composition of India's exports:- Fig 9.1 shows the main export categories of India. Thus, it can be broadly classified as 1. Agricultural and allied products; 2. Ores and minerals ;3. Manufactured Items and 4. Fuel and lubricants Since independence, composition of export trade of India has undergone a huge change. Prior to independence, India used to export agricultural products and raw materials, like jute, cotton, tea, oil seeds, leather, food grains, cashew nuts, and mineral products. It also exported manufactured goods. But now in its export kitty are included mostly manufactured items like, machines, ready-made garments, gems and Jewellery, tea, jute manufactures, Cashew Kernels, electronic goods, especially hardware’s and software’s which occupy prime place in exports. Share Commodity Composition of Exports: Given below a tabular column giving Commodity composition of Exports during the 177 CU IDOL SELF LEARNING MATERIAL (SLM)
Period 2010 to 2013. It is observed that except in case of Agriculture products & Crude Petroleum which shows satisfactory growth, all others maintain their positions with slight variations. Exports of Commodity Group: Commodity Group 2010-11 2011-12 2012-13 Agriculture and Allied 9.7% 12.4% 14% Ores and minerals 3.4% 2.8% 2.0% Gems and Jewellery 16% 14.7% 15.4% Drugs and pharmaceuticals 4.3% 4.4% 5.0% Manufactures of metals 3.4% 3.1% 3.6% Transport equipment 6.4% 6.9% 6.3% Electronic goods 3.3% 3.4% 3.0% Readymade garments 4.6% 4.5% 4.3% Handicrafts 0.1% 0.1% 0.1% Crude and petroleum (including coal) 16.8% 18.7% 18.9% Sources: Economic Survey; 2013-14 Now let us review the Export performance for a 10-year period commencing from 2003 to 2013 for important commodities: Major Export Items (USD Million Dollars) Description FY 2003 FY 2013 Agri &Allied products 6708 40612 Basmati rice 425 3561 Raw cotton 10 3639 178 CU IDOL SELF LEARNING MATERIAL (SLM)
Guar gum meal 101 3892 Marine products 1431 3459 Meat &Preparations 285 3288 Oil meals 307 2906 Spices 342 2813 Sugar 366 1575 Wheat 364 1926 Source: Ministry of Trade and Commerce, India Agricultural and Allied Products: The top items of agriculture exports include RiceCotton,Fish products, Fruits&vegetables. As far as agricultural exports are concerned, a significant increase in exports can be observed in almost all the products. The share of agriculture and allied products in the total exports of India have increased between 2003 to 2013 by roughly 6 times. Ores and Minerals The overall export performance of ores and minerals has shown good progress.From a 1995 MillionUSD it has gone up to 5554 Million USD; almost 2.78 times in a span of ten year period. A major share of ores and minerals exports comes from the export of iron ore. Major Export Items (USD Million Dollars) Products FY2003 FY2013 Ores &Minerals 1995 5554 Iron Ore 868 1599 Processed Minerals 550 2074 Source: Ministry of Trade and Commerce, India Manufactured Goods The share of manufactured items in the total export earnings of India has shown significant improvement. In the year 2013, the share of manufactured items in the total export earnings was about 62% which is highly encouraging. 179 CU IDOL SELF LEARNING MATERIAL (SLM)
Engineering Goods;Readymade garments, Gems &Jewellery and Chemicals contribute significantly in the Exports of Manufactured Goods. Major Export Items (USD Million Dollars) Products FY 2003 FY 2013 Manufactured Goods 40232 183583 Leather & Related Products 1848 4867 Chemicals & Related products 5279 29482 Drugs & Pharmaceuticals 2650 14584 Engineering Goods 8988 64854 Textiles 5925 14407 Readymade Garments 12503 57058 Gems & Jewellery 9027 43425 Source: Ministry of Trade and Commerce, India Petroleum & Crude Products Mineral Fuel and Lubricants Major Export Items (USD Million Dollars) Products FY 2003 FY2013 Petroleum & Crude Products 2576 60180 Other Commodities 1192 10286 Source: Ministry of Trade and Commerce, India There has been a tremendous improvement in the export of Petroleum & Crude products, mineral fuels and lubricants which can be inferred from the above tables. India is one of the largest exporters of refined oil due to the presence of refineries and country's location between crude oil producing nations in the Middle East and its consumers inthe rest of Asia. Refined Petroleum is the among the top two exports of India. Our country is the 10th largest exporter of refined petroleum in the world. India exports refined petroleum to the USA, UK, Australia as well as oil-producing countries like Iraq and UAE. 180 CU IDOL SELF LEARNING MATERIAL (SLM)
Although, nominally speaking, trade with Europe and America has risen over the 10 year period under consideration their share in overall exports has declined. Share of exports to Europe declined from 25.7% in FY03 to 19.6% in FY13, while that of America came down from 24.6% in FY03 to 17.8% in FY13. Coupled with increased trade integration with Asia, this shift of export direction away from America and Europe may be attributed to the moderation in economic activity in these countries, which has caused lower import demand from these countries (i.e. exports from India and others) to contract. 9.3.2 Composition of India's Imports In 1947-48 the main items of India's imports were machineries, oil, grains, cotton, cutlery, hardware implements, chemicals, etc. They constituted 70% of India's imports. After that due to the emphasis on industrialisation during the second 5-Year plan necessitated the imports of capital goods. As a growing country, India’s import demand has consistently been on the rise. Barring a marginal dip in the year of recession in FY10, when imports fell from USD 299.3 billion to USD 287.6 billion, imports to the country have always been on the rise. In the last decade, import growth has been high at 26.0%; from USD 61.4 billion in FY03 to USD 490.3 billion in FY13.s *Commodity imports of the country are classified as POL (petroleum, oil and lubricants) and non-POL items. Import of POL items has grown at 28.5% (CAGR, FY03-FY13), from USD 17.6 billion in FY03 to USD 169.0 billion in FY13. Non-POL items on the other hand, have grown by 24.8% over this period, to stand at USD 321.3 billion in FY13. The share of POL imports in overall imports has inched up from 28.7% in FY03 to 34.5% in FY13 (31.7% in FY12). The upward trend is significant though the share in FY13 is overstated to an extent by the fact that nonoil imports growth had declined. Limited availability of domestic petroleum resources and constraints on exploration licenses coupled with increasing requirements from a growing economy like India, this trend does not come as a surprise. There are increasing efforts at turning more reliant on domestic POL sources. Non-POL imports, accordingly accounted for 65.5% of overall imports by India in FY13. Exhibit 8: Composition of Imports (% share) Source: Ministry of Trade and Commerce, India Further composition break-up of non-POL it The share of other non-POL items has been large (40.6% in FY03 and 38.0% in FY13). This comprises major import items such as gold and silver, coal, pearls and semi-precious stones, metal ferrous ores and metal scraps and electronic goods. The other major segment is capital goods imports. The share of which has been rather stable at 13.1% in FY03 and 12.3% in FY13. 181 CU IDOL SELF LEARNING MATERIAL (SLM)
Under the food and related items segment, imports are concentrated in pulses and vegetable oil imports. The share of both food items and textile items remains small in the country’s overall import basket. Major Import Items (USD million) Description FY03 FY013 Petroleum crude & POL items 17.634 1,69,046 (Petroleum .Oil &Lubricants) Non POL items 43,759 3,21,283 Total Imports 61,394 4,90,329 Source: Ministry of Trade and Commerce, India Major Import Items -Non-POL items Break up (USD million) NON POL Items Break up FY03 FY013 Food &Related items 2692 15852 Pulses 565 2340 Fruits &Nuts 133 1097 Vegetable Oils 1814 11223 Textiles 970 4000 Manmade Filament 397 1051 Chemicals & Related products 4803 35373 Organic Chemicals 1885 14444 Fertilizer 358 7412 Capital Goods 8048 60453 Non Electrical Machinery 3565 27622 Project Goods 543 6553 Transport Equipment 1897 13703 182 CU IDOL SELF LEARNING MATERIAL (SLM)
Other Non POL items 24920 186237 Pulp & Waste Paper 343 1283 Synthetic & Reclaimed Rubber 162 1390 Gold 3844 53,655 Silver 443 1979 Coal ,Coke &Briquettes 1239 15427 Metal-Ferrous ores & Metal scrap 1038 14971 Artificial Resins, Plastic Materials 782 8618 Iron & Steel 882 9784 Electronic Goods 5598 31434 Non Ferrous Metals 666 5120 Pearls, Precious & Non precious 6061 22603 stones Other Commodities 2328 19369 Total Value of Non POL items 43759 3,21,283 In FY13 gold was the single most important distinct import product, followed by electronics, non-electrical machinery, pearls, coal etc, metals etc and chemicals. Gold has registered a very significant increase in total imports from 6.3% to 10.9%, which has made it a problem area for policy makers which has necessitated firm action this year. 9.4 INTRODUCTION TO DIRECTION OF INDIA’S FOREIGN TRADE By Direction of trade we mean the countries with which India keeps international trade relations. It also helps us to understand the diplomatic relations maintained by India with other countries in direction of trade. 183 CU IDOL SELF LEARNING MATERIAL (SLM)
For the purpose of direction of trade, the countries to which India exports are broadly divided into following six type of countries: Direction of Exports in FY13 (USD billion) Countries Exports (USD Billion) Asia 150.40 America 53.40 Europe 58.8 Africa 29.1 Oceania 2.7 Others 5.7 Source: Ministry of Trade and Commerce, India. 9.4.1: The table below indicates the shift in Exports as percentage for a span of 10 years Shift In Direction of Exports Countries FY2003 FY2013 Asia 42.2% 50.1% America 24.60% 17.8% Europe 25.7% 19.6% Africa 5.9% 9.7% Oceania 0.4% 0.9% Others 1.2% 1.9% When comparing the direction of exports in FY03 with that in FY13, one can notice the shift towards trade within the Asian zone rising.As of FY13, share of Asia, in India’s exports rose to more than half (50.1%), when compared with that in FY03 (42.2%). Recent trend in Exports from India FY 2020 & FY 2021 is given below: 184 CU IDOL SELF LEARNING MATERIAL (SLM)
India Exports Country wise Jan2021 Jan 2020 Currency United States INR Billion United Arab Emirates 362.50 359.92 INR Billion China INR Billion Hong Kong 114.32 123.29 INR Billion Germany INR Billion South Africa 113.92 119.55 INR Billion Nepal INR Billion Singapore 68.25 62.76 INR Billion Netherlands INR Billion France 61.36 55.89 INR Billion Belgium INR Billion Saudi Arabia 57.82 25.58 INR Billion Australia INR Billion Italy 55.83 58.86 INR Billion Japan INR Billion 49.64 58.61 42.90 37.60 41.17 40.72 40.07 33.23 39.11 48.82 36.54 25.82 36.51 31.47 34.61 35.22 185 CU IDOL SELF LEARNING MATERIAL (SLM)
India Exports Country wise Jan2021 Jan 2020 Currency Thailand INR Billion Malaysia 32.01 32.25 INR Billion Brazil INR Billion Indonesia 30.76 50.52 INR Billion Spain INR Billion 28.75 28.83 28.01 22.43 25.23 22.87 9.4.2: Direction of India's Imports: Direction of Imports A major part of India’s imports are sourced from Asia itself (57.7% of overall imports which are due to the POL bill. Imports from Asia stood at USD 283.0 billion in FY13, registering growth of 26.0% over FY03 (CAGR, FY03-13). In fact, there appears to be substantial difference in the value of imports from Asia and the next largest import partner of the country. After Asia, the next largest import sources are Europe (USD 91.7 billion), followed by America (USD 58.2 billion) Direction of Imports in FY13 (USD billion) Imports (USD Billion) Countries Asia 283 America 58.2 Europe 91.70 Africa 43.20 Oceania 12.9 Others 1.4 Source: Ministry of Trade and Commerce, India Shift In Direction of Imports 186 CU IDOL SELF LEARNING MATERIAL (SLM)
Countries FY2003 FY2013 Asia 27% 57.70% America 9.9% 11.9% Europe 26.3% 18.7% Africa 5.6% 8.8% Oceania 2.3% 2.6% Others 29% 0.3% Source: Ministry of Trade and Commerce, India *Since the last decade, there has been a distinct shift in the direction of trade. The share of OECD countries both in exports & imports is on the decline. Eastern Europe is no more a major partner in our trade. Its share has reached the lowest among the group. The Asian developing countries are becoming important trade partners. India Imports by Country Last Previous Currency China 488.60 481.61 INR Billion United Arab Emirates 245.56 236.11 INR Billion United States 215.12 182.82 INR Billion Switzerland 170.91 183.78 INR Billion Saudi Arabia 127.63 151.91 INR Billion Hong Kong 114.82 94.99 INR Billion Singapore 111.21 97.77 INR Billion Indonesia 107.53 95.84 INR Billion 187 CU IDOL SELF LEARNING MATERIAL (SLM)
India Imports by Country Last Previous Currency Iraq 106.05 142.17 INR Billion Malaysia 82.23 66.19 INR Billion Japan 75.46 89.78 INR Billion Australia 64.44 59.30 INR Billion South Africa 60.91 104.80 INR Billion United Kingdom 57.78 30.62 INR Billion Qatar 57.25 61.95 INR Billion Belgium 49.38 64.67 INR Billion Russia 41.37 44.85 INR Billion Thailand 39.76 37.48 INR Billion Nigeria 37.45 45.08 INR Billion Italy 31.05 32.60 INR Billion 9.4.3: Foreign Policy of the Narendra Modi Government Era The Modi government has been substantially credited for mooting a sustainable foreign policy that has surged forward towards developing relations between neighbouring countries, created better trade relations in international space and also brought modernisation to the fore of the defence ministry. 188 CU IDOL SELF LEARNING MATERIAL (SLM)
The ministry of external affairs, which was earlier headed by Smt. Sushma Swaraj has been exceptionally great in crafting out excellent foreign policy reforms and stabilising policies at the international level. She has been succeeded by Dr S. Jaishankar -External Affairs Minister from 2019 and is the key person in-charge of mooting India’s foreign policies under our Prime Minister Shri. Narendra Modi’s rule. Foreign Policies under the Asian doctrine Under Modi’s regime, a one-of-a-kind doctrine with regards to foreign policy is not too clearly visible. Nevertheless, the ambit covering strategic foreign policy decisions got a wider reach. Mr. Modi was keenly engaged in foreign visits, holding delegations and meetings with reputed foreign officials, negotiations and attracting investments for all matters in-line with national interest. Yet the government maintains its image to propagate its own foreign policy models when it comes to finding diplomatic relations with foreign countries. South Asian transactions in business and international trade have been provided very high priority by our PM. The reason for this is that it is very important to hold very key international relationships with our immediate neighbours at the first outset, under the ‘neighbourhood first’ policy. Hence out of national concerns and much diplomatic interests, SAARC countries were invited to the PM’s swearing in ceremony. Mutual exchange of vision for a better co-operation and transformational prosperity was talked about during visits to Bhutan and Nepal. Revival of old relations and showing up the good intentions to establish peace and harmony among neighbouring countries has always been top priority for our PM. In the international scene, we can find Pakistan to be isolated from world developments due its failure to curb terrorism back at its home turf. This has in turn disturbed the already escalating tensions between the two countries. So the question of a balanced foreign policy with Pakistan on sustainable grounds still appears questionable. There have been grounds where tensions hit on account of concerns not being addressed of government stake holders. The relation between the centre and the states has been in such a way that they rather dissuade from the foreign policies of the centre rather than joining hands with them. Indian nationals were brought back from Iraq, owing to non-settling issues and tensions in the west Asian part and the PM played a very significant role in this outreach. But on a larger segment, the Modi government has not been able to solidify its stance when it comes to upholding clarity about strategic resolutions with Israel and Palestine. The hard balancing act in an effort to prove non-submissive doctrines to either relations between Japan and China created interest in the history of foreign affairs. Act East Policy 189 CU IDOL SELF LEARNING MATERIAL (SLM)
As part of the initiative to strengthen ties with ASEAN countries and improve conditions in the eastern part of our country, the Modi government moved several military and economic revival segments in the form of Act East policy. This can be called a better version or an outreach step that had better focus on strategic handling with ASEAN countries, the initiative being first taken up in the year 1993 under the leadership of then PM Shri P V Narasimha Rao, under the Congress government rule. It was termed the ‘Look East Policy’ then. The development of Act East policy was mooted on a larger turf mainly to put into a larger perspective, the technological growth and economic developments of our country as against the judgement of China as the next powerful country in Asia. Development of a dedicated SAARC Satellite Indian Space Research Organisation (ISRO) launched the SAARC satellite or the GSAT-9 in May 2017. The main idea behind launching this satellite comes under the strategies in place for the neighbourhood first policy. Like minded interests and requirements, pertaining to the needs and developmental placards of the SAARC countries are focused as part of this satellite development program. Collaborations between Afghanistan, Maldives, Bhutan, Bangladesh, Nepal and Sri Lanka were supervised by the Modi government to loop them together to use the satellite for an array of uses, primarily multi-dimensional in nature. It’s also sad to know that Pakistan rejected the idea of being a part of this and hence does not derive any benefit from the satellite. Indian Ocean outreach If we look at the world map, we can find three very important nations that are strategically located with respect to India’s geographical position, the Seychelles, Mauritius and Sri Lanka. Prime Minister Narendra Modi visited all three nations as part of the Indian Ocean outreach program. The program aimed at providing military and security aid to these countries. The growing popularity of China in these nations has facilitated it to focus on infrastructure projects and thereby promoting a better hold of its name. To counter these factors and foster better relations with them, India focused on the defence part aiming to provide patrolling equipment’s, special navigation radars etc. At the bottom-line, these strategic talks were based on bilateral agreements that called for the wholehearted participation of nations in the future progress and development of nations towards a better tomorrow. Noteworthy Developments 190 CU IDOL SELF LEARNING MATERIAL (SLM)
Project Mausam aims to revive India’s glory in the past when maritime routes were very famous both economically and culturally. This has now been taken over by China’s domination in the region, yet India seeks to facilitate talks between nations and has engaged better cultural and business models to strengthen old ties. Fast track diplomacy that has been adopted by the Modi government works at solving diplomatic concerns in a fast track approach owing to the pace the world is moving in, accompanied by complex insights and suggestive influences on a global level. The Modi government gave a strong push to the state governments and called for greater participation in talks of trade, commerce and investment businesses. He proposed states to involve in direct transactions between foreign investors, which is also termed as ‘Para diplomacy’. Apart from these policies, the Link West policy and friendly relations with Israel over the Friendly- Israel policy have gained much momentum in the international scene. An Unprecedented Pandemic and India’s Response In the midst of the unprecedented ongoing pandemic, when even the best of the minds have not been able to come up with a reliable vaccine and when most of the developed western world has failed, a country like India with its truly continental size and a booming population of 1.3 billion has emerged as an outlier with all its fragility. No wonder it is an enigma for the rest of the world to see the resolve of the “Only Island of Hope” in such difficult times. As far as the global leadership is concerned, India has attached a truly humane approach to it and shown its willingness to take up the leadership role in the Post COVID world. At a time when most of the countries have turned inward, India has come up with innovative and collaborative ideas like SAAARC video conferencing, thereby giving a ray of hope to otherwise defunct SAARC. India has also advocated a collaborative approach at the G20 leadership summit held through videoconferencing. It has given a truly humane approach by allowing to export HCQ, Azithromycin etc., whilst also ensuring that its domestic demands are fulfilled and sufficient stocks are available to cope up with any future eventualities. It is very clear, therefore, that the Post COVID world will be fundamentally different from what we have known and globalization will surely take a backseat, even if it is for a temporary period. Hence, the question that begs to be asked is whether we can continue with the Post WW2 order in future. Questions will also be raised on the functioning, autonomy as well as transparency of organisations like WHO, UNSC etc. Questions related to the “permanent” position of US would also be raised as it has increasingly shown an inability to respond proactively. Chinese aggressiveness and apathy along with its role in future global order would also be raised. Certainly, many countries, including its erstwhile partners would also be increasingly wary about its intentions going forward. Whatever, be the case, it’s 191 CU IDOL SELF LEARNING MATERIAL (SLM)
also extremely essential to note that no future alternative would succeed without Chinese having a role to play. The real challenge, therefore, will be to balance out the Chinese aggressiveness and its ability to behave in a responsive manner. To Sum Up: It is difficult for any government to stand in a long queue and wait for international problems to be solved at the behest when there are so many burning issues back home. So Modi government in another perspective chose to turn its head prominently towards development of the changing India image. In this regard, the developing rift and wall building attitude between USSR and US had to be left at the backdoor without direct participation. These policies were much more heightened by negotiations at WTO where Indian representatives showed up with a pro-farmer stance. Objectives seen as farmer friendly were negotiated, bringing back subsidies on loans to the front desk and more action called in to strengthen these policies at the international level. Military modernisation received uplift with Modi proposing to put arms together for developing modern military machinery and equipment’s between India and US. History was re-created when Modi proposed a 49% stake of FDI (Foreign direct investment) for reviving technological pacts meant to modernise and upgrade machinery and artillery in defence sectors. Conclusion on Direction of India's Foreign Trade Significant changes have taken place in the direction of India's foreign trade since 1991, and more particularly during the last two-three years. What's most significant is the emergence of China, Singapore, Hong Kong, South Korea & Malaysia as important trading partners of India from the Asian region, Switzerland from OECD countries, and UAE & Indonesia (which left OPEC in 2008) from OPEC countries. However, India should cultivate more trade relations with Africa, South America and Middle-East Asian Countries as these rich countries would offer huge markets for India's export. 9.5 SUMMARY “Trade” refers to buying and selling of goods and services. It is commonly understood to mean exchange of goods, merchandise among people. International trade is that branch of economics which is concerned with the exchange of goods between one country and another. It is the movement of goods from one political boundary or territory to another. Agriculture & allied products, ores & minerals, manufactured items and fuel & lubricants are the main exports of India. 192 CU IDOL SELF LEARNING MATERIAL (SLM)
Petroleum products, capital goods, pearls & precious stones, iron & steel are the major imports goods of India. By Direction of trade we mean the countries with which India keeps international trade relations. It also helps us to understand the diplomatic relations maintained by India with other countries in direction of trade For the purpose of direction of trade, the countries to which India exports and imports are broadly divided into 5 groups-OECD, OPEC, Eastern Europe, Developing countries and others. 9.6 KEYWORDS BOT : Balance of Trade OECD: Organisation for Economic Co-operation & Development OPEC: Organisation of Petroleum Exporting Countries. Trade : Refers to buying and selling of goods and services Direction of Trade : The countries with which India keeps international trade relations 9.7 LEARNING ACTIVITY 1. Prepare a comprehensive note on status of Imports starting from Independence time till date & give your viewpoints regarding curtailing imports in future. ________________________________________________________________________________________________________________________________ _______________ 9.8UNIT END QUESTIONS 193 A. Descriptive Questions Short Questions 1. Explain in detail the composition of India’s Exports and Imports. 2. What do you mean by Direction of Trade? 3. What are the features of International trade.? 4. Prepare a brief note on Import pattern of India between 2000 to 2020. 5. Make a small note on country wise Export pattern of India. Long Questions 1. What is meant by Heterogeneous Markets? CU IDOL SELF LEARNING MATERIAL (SLM)
2. What are capital goods? 3. What is OPEC? 4. Name five important countries with whom India carry out majority of Exports. Trade. 5. What are the key imported materials in the last five years. B. Multiple Choice Questions 1. Types of goods and services we export and import is called: A. composition of trade B. balance of trade C. direction of trade D. None of these 2.The countries to which a country exports its goods and services and the Countries from which it imports is called: A. composition of trade B. direction of trade C. balance of trade D. None of these 3.Which of the following is India’s highest exporting category? A. Gems & Jewellery B. Agri-products C. Readymade garments D. Coffee 4.Which of the following countries is the largest trading partner of India? 194 A. US B. UK CU IDOL SELF LEARNING MATERIAL (SLM)
C. UAE D. China 5. The key important materials that are exported are A. Manufactured goods. B. Agricultural products. C. Ores &Minerals. D. All of these. Answer 1- b; 2 – c; 3-b; 4 – d ;5 - d 9.9 REFERENCES References Book Mishra, S.K. & V.K. Puri; Problems of Indian Economy, Himalaya Publishing House. Dhingra, I.C.; Indian Economy, Sultan Chand, 2003 Aggarwal, A.N., Indian Economy, VishwaPrakashan, 2003. Datt, Ruddar; Sundhram, Indian Economy, Sultan Chand, 2003Textbook Indian Economy- Datt & Sundaram’s Indian Economy- I.C Dhingra Website *https://www.economicsdiscussion.net/economics-2/studying-the-structure-changes- in-indian-economy/2153 195 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT – 10: INDIA’S BALANCE OF PAYMENTS 196 Structure 10.0 Learning Objectives 10.1 Introduction to BOP (Balance of Payments) 10.2Features of BOP 10.3 Types of BOP 10.3.1: Current Account 10.3.2: Capital Account 10.3.3: Financial Account 10.4 Importance of BOP 10.5 Problems in BOP 10.5.1: Disequilibrium: 10.5.2. Types of Disequilibrium 10.6 Correction of disequilibrium 10.6.1: Automatic Correction 10.6.2: Deliberate Measures 10.6.3: Trade Policy Measures – 10.6.4: Monetary Measures 10.6.5: Monetary& Fiscal Policy 10.6.6: Devaluation (Expenditure Switching Policy): 10.6.7: Exchange Rate Control: 10.7Miscellaneous Measures 10.7.1: Balance of Trade: 10.8 Devaluation 10.9Summary 10.10 Keywords 10.11 Learning Activity 10.12Unit End Questions 10.13References CU IDOL SELF LEARNING MATERIAL (SLM)
10.0 LEARNING OBJECTIVES After studying this unit you will be able to Define BOP and list the types of BOP Discuss the problems in BOP. Summarize the importance of BOP. 10.1 INTRODUCTION BOP (Balance of Payments) BOP refers to Balance of Payments. It is a systematic record of all economic, monetary transactions between the ‘residents’ of a country and the rest of the world in a given period. According to kindle Berger, “BOP is a summary of international receipts and payments and indicates the real monetary position of the country concerned”. “BOP presents a classified record of all receipts on account of goods exported,services rendered and capital received by ‘residents’ and payments made by them on accountofgoods imported and services received from the capital transferred to ‘non-residents’ or ‘foreigners’-Reserve Bank Of India. 10.2 FEATURES OF BOP It is a statement that reflects the funds going in and Out of a country. It includes values of both Visible and Invisible items of Imports and exports. It relates to a period of time, generally a year. It is a double entry system which contains the following: All receipts for goods exported. All services rendered Capital received by residents (individuals, businesses,Government agencies) of the nation. Payments made by residents for goods imported and services received in addition to capital transferred to non-residents and foreigners. The BOP of a country may be expressed through the following relation. BOP=R-P (R=Total receipts and P=Total payments.) If R>P=BOP surplus R<P=Deficit in International Payments 197 CU IDOL SELF LEARNING MATERIAL (SLM)
R=P=Equilibrium in International payments 10.3 TYPES OF BOP The Balance of payments in India is classified into the following: Balance of Payments is made up of 3 components. 10.3.1: Current Account This account tracks inflows & outflows of goods & Services from one country to another country This includes recording receipts generated from Tourism, transportation,engineering stocks, business services and royalties from patent and copyrights. Current account also monitors payments for manufactured goods & raw materials. The current account of the Balance of payments of India includes 3 items: i) Visible trade relating to imports and exports; ii) Invisible items viz, receipts and payments for such services as shipping, banking, insurance travel, etc. iii) Unilateral transfers such as donations. The BOP on current account shows whether India has a favourable balance or deficit balance of payments in any given year. 10.3.2: Capital Account As the name suggests this account records all capital transactions made between two countries.These include sale and purchase of fixed assets by migrants, the flow of taxes as well as sale & purchase of assets like property and land Capital account helps to manage the surplus or deficit created in the current account.Investments,loans and borrowings and foreign exchange reserves are the three major elements of a capital account. Capital account includes Foreign investment like FDI, FII, NR deposits, commercial borrowings, IMF, rupee-debt service. It also records the flow of taxes, acquisition and sale of fixed assets by immigrants moving to a different country. Balance of payments on capital taken together with the current account will balance the balance of payments account of a country. 10.3.3: Financial Account Deals with investments in real estates, business ventures, Foreign Direct Investments (FDI).The Finance Account tracks financial inflow and outflow from the country’s economy. The necessity of Financial flows has grown speedily in the past few years from being a relatively insignificant consideration to a major component of Balance of Payments. The three major categories included in the Financial account are Foreign Direct Investment, Portfolio Investment (PI) and official Reserve transactions (ORT) 198 CU IDOL SELF LEARNING MATERIAL (SLM)
10.4 IMPORTANCE OF BOP 1. A balance of payment is an essential document in the finance department or transaction as it gives the status of a country and its economy. 2.It examines the transaction of all the export and import of goods and services for a given period 3.It helps the government to analyse the potential of a particular industry export growth and formulate policy to support that growth. 10.5 PROBLEMS IN BOP A deficit and a surplus in the BOP are considered as Disequilibrium. Both need corrective measure. The balance of payments on capital account shows the implications of current transactions for the country’s international financial position. The term adverse balance of payments only refers to balance of payments being favourable on the current account. when it is not balanced, it is balanced through the capital account. When there is deficit in the current account of BOP, the country meets its deficit through: Drawing on the past accumulated balances of the country. Exporting gold Raising loans in foreign countries for a short or long period. The BOP will be considered to be in deficit, if the autonomous payments exceed the autonomous receipts. In case of disequilibrium, the deficit can be balanced with induced inflows. In case of surplus, there will be induced Output flows. BOP will be said to be in disequilibrium where the demand and supply of foreign exchange are not in balance. Disequilibrium in BOP is caused by Economic, political and sociological factors. 10.5.1: Disequilibrium: Disequilibrium is a situation where internal and/or external forces prevent market equilibrium from being reached or cause the market to fall out of balance. This can be a short-term by -product of a change in variable factors or a result of long-term structural imbalances. *Disequilibrium is also used to describe a deficit or surplus in a country’s balance of payments. *Disequilibrium is when external forces cause a disruption in a market's supply and demand equilibrium. In response, the market enters a state during which supply and demand are mismatched. 199 CU IDOL SELF LEARNING MATERIAL (SLM)
*Disequilibrium is caused due to several reasons, from government intervention to labour market inefficiencies and unilateral action by a supplier or distributor. *Disequilibrium is generally resolved by the market entering into a new state of equilibrium. 10.5.2:Types of Disequilibrium 1. Cyclical Disequilibrium. 2. Secular Disequilibrium. 3. Structural Disequilibrium. 4. Temporary Disequilibrium. 5. Fundamental Disequilibrium. Cyclical Disequilibrium Cyclical Disequilibrium in the BOP arises due to the influences of cyclical fluctuations and occurs because the business cycle/Trade cycle follow different paths and patterns in different countries. 1. There are no identical timing and periodicity of occurrence of cycles in different nations. 2. No identical stabilization programs and measures are adopted by different states. 3. Income Elasticities of demand for imports in different nations are not identical. Price Elasticities of demand for imports differ in different nations. Deficit and surplus alternatively take place during the depression and prosperity phase of a cycle. The balance of payments equilibrium is automatically set forth over the Cyclical disequilibrium occurs either because the patterns of business cycles in different countries follow different paths or because income elasticities of demand for imports in different countries are different. We may illustrate this by some diagrams for two countries. In fig. 1, national money income is stable in country II and fluctuates cyclically in country I. The income elasticity of demand for imports may or may not be the same. In the diagram Y represents national income and M/Y represents average propensity to import. In the diagram, national income is stable in country II and fluctuates cyclically in country I. Import is a function of income. The income elasticity of demand for imports in country II is not involved, since income is stable. Country I is witnessing ups and downs in its national income and imports. In this situation is imports (and II’s exports) will decline during depression and rise in prosperity. Country II’s imports (and I’s exports) will continue steadily. The result is that country I will have an export surplus during depression and import surplus during prosperity. Let us take two points in the income path of Country I. In Figure 1, A and B provide two contrasting points. At the point A, MMI is country’s import; corresponding to 200 CU IDOL SELF LEARNING MATERIAL (SLM)
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