Here we detail about the ten major economic policies which

are followed in India and has played a major role in the growth
of Indian economy.
And , the policies are: (1) Industrial Policy, (2) Trade
Policy, (3) Monetary Policy, (4) Fiscal Policy,
(5) Indian Agricultural Policy, (6) National
Agricultural Policy, (7) Industrial
Policies, (8) International Trade Policy, (9) Exchange
Rate Management Policy, and (10) EXIM Policy.

Policy # 1. Industrial Policy:

The first Industrial Policy based on the mixed economy
principle was announced in 1948 which demarcated clearly the
areas of operation of the public and private sectors. This policy
was revised in 1956 which laid greater emphasis on the
expanding role of the public sector. This was in keeping with
the Mahalanobis strategy of industrialisation embodied in the
Second Five Year Plan (1956-1961).
Trade-related ISI strategy of industrialisation demanded
control and regulation of the industrial sector. The basic
instrument of control was given by the Industries
(Development and Regulation) Act, 1951, which provided the
legislative framework for licensing of industrial investment in
the country. The MRTP Act, 1970—another regulatory
mechanism—aimed at controlling the concentration of
economic power in the hands of a few big monopoly business
houses. The FERA, 1973, was designed to control foreign
investment in India. All these controls and regulations were
consistent with the broad ISI policy.
India reached the crossroads in 1991 when unprecedented
economic crises called for unprecedented changes in economic
policies. Making a sharp departure from the 1956 Industrial
Policy, the Government of India announced liberalised
Industrial Policy on July 24, 1991. Instead of state-sponsored
development, the new policy put emphasis on market-led
development.
Indeed, this new policy takes a bolder step towards the process
of deregulating the economy so that Indian industry becomes
more competitive—domestically and internationally. This
policy marks a great leap towards privatisation and
liberalisation. It envisages disinvestment of government equity.
The new policy has laid a red carpet for foreign direct
investment. It is in line with the current economic philosophy
of the government to liberalise the existing industrial and
commercial policies with the objective of increasing efficiency,
gaining competitive advantage and achieving modernisation of
the economy.

Policy # 2. Trade Policy:

What should be the appropriate trade policy or commercial
policy of a country? The issue was first raised by the classical
authors. However, they were the champions of free trade. The
two giant advocates of free trade—Adam Smith and David
Ricardo—about two hundred years ago argued that free flow of
goods and services, i.e., unrestricted trade, would be beneficial
As a result of free trade, each country specialises in production
in which it has a comparative advantage. This will enable each
country to reap gain from trade. After the Second World War
(1939-1945), commercial policy underwent a change when the
wave of protectionism swept all over the world. It was argued
at that time that though some trade is better than no trade,
there is no reason to suppose that free trade is the best.
Trade under Free Trade:
The trade theory (both the absolute advantage and
comparative advantage theory) assumes the existence of free
trade. Here we want to explain how do free trade influence
domestic production, consumption, and import. Such may be
explained with the aid of demand-supply mechanism.
In Fig. 6.4, the curves DD and SS are the demand and supply
curves of say, Indian consumers and producers, respectively.
These two curves intersect each other at point E. Thus the
pre-trade price prevailing in India is OP. However, as soon as
this particular commodity goes outside the country where
price is determined in the world market, it becomes lower than
the domestic price OP.

Let the world price be OP, (<OP). Now in the absence of tariff
and with the opening of trade, the price in India (OP) becomes
equal to the world price (OP,). But, why? Since trade is free, the
foreign country would then export in the Indian market where
price is higher than the global price. It is because of
competition between the countries price would then fall to OP,
in the Indian market.
Note that at this lower price, Indian producers would reduce
supply from PE to P1M1 while domestic demand would
increase by M1N1. The horizontal line represents the supply
curve for import. This is a perfectly elastic supply curve.
Anyway, with the opening of trade, the supply- demand gap to
the tune of M1N1 is to be met by imports from the foreign
country.
The essence of the argument is that the strength of Indian
demand for imports and supply of domestic good determine
this volume of trade. In other words, it is the demand and
supply that determines the volume of trade under free trade.
Free Trade: Arguments and Counterarguments:
International trade that takes place without barriers such as
tariff, quotas, and foreign exchange control is called free trade.
Thus, under free trade, goods and services flow between
countries freely. In other words, free trade implies the absence
of governmental intervention on international exchange
among different countries of the world.

Policy # 3. Monetary Policy:

Monetary policy or credit policy concerns itself with the cost
(i.e., the rate of interest) and the availability of credit to affect
the overall supply of money. The hallmark of the RBI’s
monetary policy in the 1950s was that of controlled monetary
expansion. To supplement the process of macro stabilisation
and structural adjustment programmes launched in mid-1991,
monetary policy has been redesigned. Market-oriented
reforms (such as interest rate liberalisation, entry of private
Indian and foreign banks, development of alternative system of
monetary controls, etc.), are being constantly made since
monetary policy measures are continuous.
The Three Instruments of Monetary Policy:
The monetary authority controls the money supply directly
and/or indirectly by altering either the monetary base or the
reserve-deposit ratio. To do this, the monetary authority has at
its disposal three main instruments of monetary policy:
open-market operations, reserve requirements and the
discount rate.
Open-market Operations are the purchases or sales of
government bonds by the Central Bank/monetary authority.
When it buys bonds from the public, the money it pays for
bonds increases the monetary base and thereby increases
money supply. When it sells bonds to the public, the money it
receives reduces the monetary base and thus decreases the
money supply. Open-market operations are the most-often
used policy instrument of the Central Bank.
Reserve Requirements are Central Bank regulations that
impose on banks a minimum reserve-deposit ratio. An
increase in reserve requirement raises the reserve-deposit ratio
and thus lowers the money multiplier and the money supply.
This is the least-frequently used instrument.
The discount rate is the interest rate that the Central Bank
(BOE) charges when it makes loans to banks. Banks borrow
from the Central Bank (CB) when they find themselves with
too few reserves to meet reserve requirements. The lower the
discount rate, the cheaper are borrowed reserves and the more
banks borrow at the CB’s discount window. Hence, a reduction
in the discount rate raises the monetary base and the money
supply.
Although these instruments give the CB substantial power to
influence the money supply, the CB cannot control money
supply perfectly. Bank discretion in conducting business can
cause the money supply to change in. ways the CB did not
anticipate.

Policy # 4. Fiscal Policy:

Another arm of economic policy is the fiscal policy which is
concerned with the policy of taxation, expenditure and
borrowing. Fiscal policy as evolved over time has resulted in a
tax structure with its great reliance on indirect taxation. As it
has failed to contain non-plan expenditures, reinvestible
surpluses could not be generated. The government then relied
on deficit financing and public borrowing.
All these widened fiscal deficit. However, the situation
worsened in the early 1990s when fiscal imbalances rose to an
unprecedented height. Necessary fiscal policy measures were
made, first in mid-1991. Since then fiscal policy has been
aiming at promoting a market-led development of the
economy. For instance, a continuous effort is being made even
today to simplify both the tax structure and tax laws.
In its new fiscal policy, the Government has taken initiative to
strengthen methods of expenditure control. Above all, the new
fiscal policy aims at improving allocation of resources in terms
of market principles. It aims at giving demand stimulus on the
one hand, and restraining supply on the other hand by
calibrating tax rates.
One finds a large degree of overlap between these various
economic policies and their impact upon the macroeconomic
variables. Economic policy measures announced by the
Government have been presented in a tabular form so as to
form a quick idea about macroeconomic management of the
country.

Policy # 5. Indian Agricultural Policy:

Immediately after independence, the country was faced with
two major problems: food crisis and shortage of industrial raw
materials. The major objectives of the First Plan in the field of
agriculture were to correct the imbalances caused by Partition
in the supply of food grains and commercial crops and improve
infrastructural facilities.
Agriculture, including irrigational power, was, therefore,
accorded the highest priority. However, Indian agriculture is
characterised by low productivity and backwardness. This
demanded agrarian reforms. In fact, there are two ways of
improving productivity in agriculture institutional and
technological.
At the time of launching of the First Five Year Plan (1951),
socialists believed that institutional factors were responsible
for low productivity. Another school of thought pointed to the
technological backwardness as the prime factor in holding
back agricultural production.
Ultimately, institutional measures dominated the
government’s agricultural policy up to mid-1960s. In the
mid-60s, technological measures were introduced. High
priority was accorded to technology as a major input. Focus
now shifted to broadening base of agricultural growth and
modernisation through infrastructure development: irrigation,
drainage, roads, markets and credit institutions, extension of
new technology, appropriate price and procurement policies,
etc.
However, in the 1990s, the Indian economy introduced
structural programmes and new economic policies. In
response to these changes, some important policy changes
were announced in the agricultural sector. The creation of the
World Trade Organisation (WTO) has brought a new era for
agricultural economies. It has created avenues to export farm
products. To exploit such global opportunities, National
Agricultural Policy was announced in 2000. The current policy
will be described in detail. Before that, we mention briefly the
important policy measures introduced in the agricultural
sector during 1951-1990.
During the first three Five Year Plans (1950- 65) the
institutional reforms and public investment packages were the
most dominant policies. Both Central and State governments
formulated and enacted various laws relating to land reforms.
(i) Land Reforms:
Land reforms not only contribute to higher productivity but
also brings social justice. It entails a redistribution of the rights
of ownership and/or use of land away from big cultivators or
jotedars and in favour of small cultivators with limited or no
landholdings.
The following land reform measures have been taken
in India after independence:
(a) abolition of the intermediary system,
(b) tenancy reforms comprising rent regulation, security of
tenure and conferment of ownership rights to tenants,
(c) ceiling on landholdings and redistribution of acquired
landholdings by the state among the landless workers and
small farmers.
The twin objectives of land reform policy were higher
agricultural growth rate and social justice so as to abolish
exploitation of the tenants.
During 1950-65, Indian agriculture had been shaped by public
investment in agriculture with the objective of achieving
self-sufficiency in foodgrains. Such public investment
concentrated in the construction of irrigation reservoirs,
distribution systems.
(ii) New Agricultural Strategy Encompassing New
Technology:
In spite of the land reform measures undertaken in the early
decades of planning, the country faced severe food crisis
resulting in huge import of foodgrains. Necessity was felt to
introduce technological measures to raise agricultural
production and productivity in the quickest possible time.
During mid-60s to 1990, Government strategy in agriculture
evolved around incentive policies for the adoption of modern
technology in agriculture coupled with public investment
policy.
In the mid- 1960s, the Government of India adopted a new
agrarian strategy which goes by different
names—seed-fertiliser-water technology, modern agricultural
technology, green revolution, etc. It refers to the breeding of
high-yielding varieties of wheat and rice and the introduction
of modern technologies so as to achieve a sustained
breakthrough in agricultural production.
Satisfactory results have been achieved. There has been a
considerable increase in production and productivity of major
foodcrops. No longer the country is import-dependent; rather,
she is now exporting some food crops. Virtual self-sufficiency
in foodgrains has been achieved. This achievement relating to
productivity of Indian agriculture is described as ‘forest or
land-saving agriculture’. Truly speaking without the green
revolution it would not have been possible to achieve the state
of self- sufficiency in agriculture.
(iii) Institutional Credit:
Indian farmers are too poor to make arrangements for self-
financing their agricultural operations. In view of this, they
rely greatly on non- institutional private sources of credit
which are exploitative in nature. In view of this, the
Government of India decided to provide institutional credit to
farmers to replace the widely prevalent usurious
money-lending.
Barring the creation of cooperative credit societies,
commercial banks were nationalised in 1969 with the object of
ensuring a smooth flow of credit to agriculturists. Regional
rural banks have also been set up to meet the credit needs. An
apex credit organisation, called National Bank for Agriculture
and Rural Development (NABARD), was set up in 1982. In
view of the creation of financial institutions, the monopoly
position of the village moneylender in the provisioning of
agricultural finance has been broken.
(iv) Agricultural Price Policy:
Price policy measures relating to the prices of foodgrains not
only aim at increasing production but also aim at acquiring
marketable surplus, building up buffer stock of foodgrains to
protect the interests of both farmers and consumers. There are
two distinct phases of India’s agricultural price policy—one
covering the period up to 1965 since independence and other
covering the period from 1965 till date. Every season,
minimum support prices, procurement prices, etc., are
announced in a bid to provide incentive to the farmers to
increase production as well as marketable surplus.
(v) Food security—Public Distribution System PDS:
In order to ensure adequate supplies of essential foodgrains
and consumer goods such as rice, wheat, edible oils, sugar,
kerosene, etc. to consumers, especially weaker sections of the
community at cheap and subsidised prices, an elaborate food
security system, popularly known as Public Distribution
System (PDS) has been built up. This is an essential element of
the government’s safety net for the poor. The PDS seeks to
control prices, reduce fluctuations in them and achieve an
equitable distribution of certain essential consumer goods. It is
also an important element of anti-poverty programmes of the
government. Thus, the PDS provides food subsidy.
(vi) Input Subsidies:
In addition to food subsidy given to consumers, input subsidies
are provided to farmers on a massive scale with the aim of
increasing both production and productivity. Subsidies are
mostly given to inputs like irrigation, power and fertilisers.
Provisioning of such inputs at prices below the market rate not
only enables improved use of inputs but also avoids food and
raw materials to go up. As a result of input subsidisation and
various cross-subsidies of an astronomical height, the state
exchequer has become dry. There has now been a strong
demand for cut in food subsidies and input subsidies as these
have already reached fiscally unattainable level.
(vii) Provisioning of Non-Farm Services:
We have already said about the policy developments in respect
of agricultural institutional credit. An important component of
agricultural policy is the provisioning of non-farm services like
marketing including credit. Agricultural development becomes
self-sustaining when additional output can be sold in the
market at a remunerative price. Policy measures relating to
agricultural marketing may be grouped into (a) setting up of
marketing organisation, (b) establishment of regulated
markets, (c) provision of storage and warehousing facilities,
and (d) crop insurance scheme.
(viii) Trade Policy:
Because of highly state interventionist and discriminating
treatment against agricultural trade before 1991, Indian
agriculture had little exposure to international trade. Trade
liberalisation since 1991, however, bypassed Indian agriculture.
But, towards the end of 1990s, trade liberalisation has been
faster in tune with the WTO agreements.
In recent years (since 2000), several policy measures have
been taken to promote exports of agricultural products. For
instance, quantitative restrictions on agricultural trade flow
have been dismantled; Export Oriented Units (EOU) in the
floriculture sector have been set up; import of capital goods,
plant and machinery for establishing food processing units
have been made more flexible and liberal, etc.

Policy # 6. National Agricultural Policy:

In view of the problems associated with the agricultural sector
during the 1990s, the National Agricultural Policy was
announced on July 2000.
The Policy Document Aims to Attain Objectives:
i. An annual growth rate of over 4 p.c. in the agricultural
sector;
ii. Growth that is based on efficient use of resources and
conserves our soil, water and biodiversity;
iii. Growth with equity i.e., growth which is widespread across
regions and farmers;
iv. Growth that is demand-driven and caters to domestic
markets and maximises benefits from exports of agricultural
products;
v. Growth that is sustainable technologically, environmentally
and economically.
In order to attain these objectives, the NAP- 2000 envisages
measures in the following areas sustainable agriculture; food
and nutritional security; generation and transfer of technology;
incentives for agriculture; investment in agriculture,
institutional structures, and risk management.
In the section on sustainable development, specific measures
have been suggested.
The measures are:
(a) to contain biotic pressures on land and to control
indiscriminate diversion of agricultural lands for
non-agricultural purposes;
(b) to use unutilised wastelands for agriculture and
afforestation;
(c) to increase cropping intensity through multiple-cropping
and inter-cropping. Agro-forestry and social forestry will
receive a major thrust.
Special efforts will be made to increase production and
productivity of crops to meet the growing demand for food
generated by unabated population pressures and raw materials
required for agro-based industries. A major thrust will be put
on irrigation, horticulture, floriculture, animal husbandry,
fisheries, etc.
The government will emphasise on the generation and
dissemination of appropriate technologies in the field of
animal production as also health care priority will be given to
improve the processing, marketing and transport facilities.
Besides this, cooperatives and private sector will be
encouraged—more particularly in areas like agricultural
research, human resource development, post-harvest
management, marketing, etc.
Above all, the NAP-2000 does not ignore the importance of
institutional reforms.
Land reform measures now embrace:
(a) consolidation of small and fragmented holdings,
(b) redistribution of ceiling surplus lands,
(c) tenancy reforms,
(d) updating of land records,
(e) development of land-lease markets, and
(f) recognition of women’s rights in land.
This policy envisages National Agriculture Insurance Scheme
to provide a package of insurance policy to all farmers and all
crops so as to insulate them from natural disasters.

Policy # 7. Industrial Policies:

A. Industrial Policy Resolution of 1948:
In a mixed economy of our sort, the government should
declare its industrial policy clearly indicating what should be
the sphere of the State and of the private enterprise. A mixed
economy means coexistence of the two sectors public and
private. This the Government of India did by a policy
resolution on 30 April 1948 called the First Industrial Policy
Resolution or Industrial Policy Resolution of 1948, which
made it clear that India was going to have a mixed economy.
The Industrial Policy Resolution 1948, drawn in the
context of our objectives of Democratic Socialism
through mixed economic structure, divided the
industrial structure into four groups:
(i)Basic and strategic industries such as arms and ammunition,
atomic energy, railways, etc. shall be the exclusive monopoly of
the State.
(ii) The second group consisted of key industries like coal, iron
and steel, ship-building, manufacture of telegraph, telephone,
wireless apparatus, mineral oils, etc. In such cases the State
took over the exclusive responsibility of all future development
and the existing industries were allowed to function for ten
years after which the State shall review the situation and
explore the necessity of nationalisation.
(iii) In the third group, 18 industries including automobiles,
tractors, machine tools, etc. were allowed to be in the private
sector subject to government regulation and supervision.
(iv) All other industries were left open to the private sector.
However, the State may participate and or intervene if
circumstances so demand.
To ensure the supply of capital goods and modern technology,
the IPR, 1948 encouraged the free flow of foreign capital. The
government ensured that there shall be no discrimination
between Indian and foreign undertakings; facilities shall be
given for remittance of profit and due compensation shall be
paid in case a foreign undertaking is nationalised. The IPR also
emphasised the importance of small-scale and cottage
industries in the Indian economy.
The Industries (Development and Regulation) Act was passed
in 1951 to implement the Industrial Policy Resolution, 1948.
B. Industrial Policy Statement of 1956:
On 30 April 1956, the Government revised its first Industrial
Policy (i.e., the policy of 1948), and announced the Industrial
Policy of 1956.
The reasons for the revision were:
(i) introduction of the Constitution of India,
(ii) adoption of planned economy, and
(iii) declaration by the Parliament that India was going to have
a socialist pattern of society.
All these principles were incorporated in the revised industrial
policy as its most avowed objectives.
And the revised policy still provides the basic framework for
the government’s policy in regard to industries. The 1956
Policy emphasises, inter alia, the need to expand the public
sector, to build up a large and growing cooperative sector and
to encourage the separation of ownership and management in
private industries and, above all, prevent the rise of private
monopolies. “The IPR, 1956, has been known as the Economic
Constitution of India” or “The Bible of State Capitalism.”
The Resolution classified industries into three
categories having regard to the role which the State
would play in each of them:
(i) Schedule A consisting of 17 industries shall be the exclusive
responsibility of the State.
Out of these 17 industries, four industries—arms and
ammunition, atomic energy, railways, air transport— could be
Central Government monopolies; new units in the remaining
industries shall be developed by the state Governments.
(ii) Schedule B, consisting of 12 industries, shall be open to
both the private and public sectors; however, such industries
shall be progressively State-owned.
(iii) All the other industries not included in these two
Schedules constitute the third category which is left open to the
private sector. However, the State reserves the right to
undertake any type of industrial production.
The classification of industries into three categories did not
mean that they were being placed in watertight compartments.
In appropriate cases, the private sector might be allowed to
produce an item falling within Schedule A for meeting its own
requirements. Further, heavy industries in the public sector
might obtain their requirements from the private sector while
the private sector, in turn, would rely on the public sector for
many of its requirements.
The IPR, 1956, stressed the importance, of cottage and small
scale industries for expanding employment opportunities and
for wider decentralisation of economic power and activity. The
Resolution also called for all efforts to maintain industrial
peace; a fair share of the proceeds of production should be
given to the toiling mass in keeping with the avowed objectives
of democratic socialism. Regional disparities in
industrialisation should be reduced. The government’s attitude
to foreign capital would remain unchanged.
The features of the new policy that distinguish it from
the previous one are:
(i) Expansion of the role of the State:
This was in keeping with the Mahalanobis Strategy of
large-scale industrialisation embodied in the Second Five Year
Plan.
(ii) Reduced threat of nationalization:
The apprehensions of nationalisation contained in the
previous policy were reduced to the bare minimum.
(iii) More meaningful approach to our concept of a
‘mixed economy:
Various complementaries of the public and private sectors
were made clear.
Criticisms:
The 1956 IPR came in for sharp criticisms from the private
sector since this Resolution reduced the scope for the
expansion of the private sector significantly. Private sector
apprehended that the expansion of public sector meant
swallowing of the private sector. But this criticism is
unfounded. No doubt, public sector had been given an
adequate role to play, but, in a mixed economy, public sector
must assume the role of a senior partner in the acceleration of
economic development. In fact, the Resolution gave ample
scope for expansion of the private sector. Even in Schedule A,
private sector had been allowed to operate in appropriate cases,
though the development of industries mentioned in Schedule A
was the exclusive responsibility of the State.
C. Industrial Policy of 1991:
The long-awaited liberalised industrial policy was announced
by the Government of India on 24 July 1991. There are several
important departures in the latest policy. The New Industrial
Policy has scrapped the asset limit for MRTP companies and
abolished industrial licensing of all projects, except for 18 (now
5) specific groups. It has raised the limit for foreign equity
holdings, thereby demanding a greater participation of foreign
capital in the country’s industrial landscape.
The new policy has dismantled all needless, irksome
bureaucratic controls on industrial growth. The new policy has
re-defined the role of the public sector and has asked the
private sector to operate even in those areas which were
hitherto reserved for the public sector. Thus, the new policy
considers that no longer big and monopoly business houses
and foreign capital and multinational corporations (MNCs) are
“fearsome” and, in fact, they are benign to the country’s
industrial growth.
Anyway, the new policy has decided to take a series of
initiatives in respect of the policies relating to the
following areas:
(a) industrial licensing,
(b) MRTP Act,
(c) public sector policy,
(d) foreign investment, and
(e) foreign technology agreements.
The highlights of the new policy are:
(i) Industrial licensing will be abolished for all projects except
for a short list of industries. The exemption from licensing will
apply to all substantial expansion of existing units. The
existing and new industrial units will be provided with a broad
banding facility to enable them to produce any article so long
as no additional investment in plant and machinery is
involved.
However, the small-scale industries taking up manufacture of
those products reserved for small sector will not be subjected
to compulsory licensing procedures. As a result, all existing
registration schemes (like de-licensed registration, exempted
industries registration, DGTD registration) will be abolished.
Now, entrepreneurs are required to fill an information
memorandum on new projects and substantial expansion.
(ii) The policy provides for automatic clearance for import of
capital goods in cases where the foreign exchange availability is
ensured through foreign equity. As for the MRTP Act, the
policy states that the pre-entry scrutiny of investment
decisions by the so-called MRTP companies will no longer be
required.
(iii) The policy intends to scrap the asset limit of the MRTP
companies.
(iv) The policy envisages disinvestment of government equity
in public sector to mutual funds, financial institutions, general
public and workers. For the first time, sick public units will
come under the purview of the Board of Industrial and
Financial Reconstruction (BIFR) for their revival.
A social security mechanism to protect workers’ interests in
such affected public sectors has been proposed in this policy.
Pre-eminent place of public sector in two core areas
production of atomic energy, and rail transport will, however,
continue. Reservation for the public sector, as on 2008, is very
limited covering only manufacturing involving certain
substances relevant for atomic, energy and provision of railway
transport.
(v) In order to invite foreign investment in high priority
industries, requiring large investments and advanced
technology, it has been decided to provide approval for direct
foreign investment up to 51 p.c. foreign equity in such
industries.
(vi) In a departure from the present locational policy for
industries, the policy provides that in locations other than
cities of population of more than one million, there will be no
requirement for obtaining industrial approvals except for
industries subject to compulsory licensing.

Policy # 8. International Trade Policy:

Whether external trade should be allowed to prosper
uninterruptedly or be regulated by various means is a matter of
great controversy. A country’s position on this issue is
commonly known as commercial policy or trade policy. A
country’s trade policy, thus, centres around free trade versus
protection.
The policy prescription of Ricardo’s comparative cost theory of
trade is free trade. By free trade we mean no restrictions on
trade. In other words, it refers to the absence of tariffs, quotas,
exchange restrictions, taxes and subsidies on production,
factor use and consumption.
On the other hand, by protection we mean restricted trade.
Free trade eliminates tariff while protective trade imposes
tariff or duty. If tariffs, duties and quotas are imposed to
restrict the inflow of imports then we have protected trade.
This means that government intervenes in trading activities.
Intervention in trade by the government is called protection.
In the middle decades of the 19th century, virtually all
governments of the world pursued free trade policy. However,
Great Britain was the champion of free trade policy at that time.
But this tide could not be maintained in the early years of the
20th century. Protectionist tide reached a peak in the
depression years of the 1930s.
Virtually free trade policy had been abandoned by all the
countries of the world. But, as restrictive trade policy failed to
deliver the right amount of goods, industrially advanced
nations after the Second World War switched over to free trade
policy under the auspices of the International Monetary Fund
(IMF).
As far as commercial policy was concerned, the entire world
became divided into two camps: developed world and
developing world. Throughout 1950s and 1960s, developed
countries gradually moved towards free trade policy and
currency convertibility. International institutions like the IMF,
GATT (General Agreement on Tariffs and Trade) advocated
free trade policy.
But developing countries did not oblige these institutions. The
prevailing view for the developing countries was of the United
Nations Conference on Trade and Development (UNCTAD)
which recommended import substituting industrialisation
strategy or inward- looking strategy in which goods are
produced mainly for the domestic market.
It is to be mentioned here that India followed the import
substituting industrialisation (ISI) strategy since the beginning
(1951) of the Five Year Plans. As a means of development,
substantial protection to domestic industries was granted in
India. This was the time when it was believed that
“government” or the “state” is better.
Protection or ISI strategy may be seen as one of the
manifestations of the government. Protectionist policy
received a big jolt in the developing countries in the 1980s
when these countries experienced poor economic performance.
It was said by the IMF and the World Bank at that time that
dramatic economic success could be achieved in developing
countries if these countries ‘open up’ or become ‘outward’,
instead of being ‘inward’.
Outward looking trade policy emphasises on export-oriented
pattern of industrialisation. The basic stimulus for this kind of
trade reform came from the experiences of the four
high-performing East Asian countries— Taiwan, South Korea,
Singapore and Hong Kong. This means industries are not to be
‘protected’ by state intervention but to be ‘promoted’ by market
mechanism.
India followed a restrictive or protective trade policy up to
June 1991 when liberal free trade environment was ushered in.
India now moved from ‘inward’ to ‘outward’ looking trade
policies. She then gradually removed various kinds of trade
restrictions.

Policy # 9. Exchange Rate Management Policy:

Although a nation’s BOP always balances in the accounting
sense, it need not balance in an economic sense. An unbalance
in the BOP account has the following implications.
In the case of a deficit:
(i) Foreign exchange or foreign currency reserves decline,
(ii) Volume of international debt and its servicing mount up,
and
(iii) The exchange rate experiences a downward pressure. It is,
therefore, necessary to correct these imbalances.
BOP adjustment measures are grouped into four:
(i) Protectionist measures by imposing customs duties and
other restrictions, quotas on imports, etc., aim at restricting
the flow of imports,
(ii) Demand management policies—these include
restrictionary monetary and fiscal policies to control aggregate
demand [C + I + G + (X – M)],
(iii) Supply-side policies—these policies aim at increasing the
nation’s output through greater productivity and other
efficiency measures, and, finally,
(iv) exchange rate management policies— these policies may
involve a fixed exchange rate, or a flexible exchange rate or a
managed exchange rate system.
As a method of connecting disequilibrium in a nation’s BOP
account, we attach importance here to exchange rate
management policy only.
Fixed and Flexible Exchange Rate Management:
An exchange rate is the price at which one currency is
converted into or exchanged for another currency. Exchange
rate connects the price system of two countries since this
(special) price shows he relationship between all domestic
prices and ill foreign prices. Any change in the exchange rate
between rupee and dollar will cause a change in the prices of all
American goods for Indians and the prices of all Indian goods
for the Americans. In the process, equilibrium in the BOP
accounts will be restored.
Every government has to make international decisions of what
type of exchange rate it wants to adopt. This means that
government will have to decide how its own currency should be
related to other currencies of the world. For instance, it may
choose to fix the value of its currency to other currencies of the
world so as to adjust its BOP difficulties, or it may choose to
allow its currency to move free against other currencies of the
world so as to adjust its BOP difficulties. This means that there
are two important exchange rate systems—the fixed (or pegged)
exchange rate, and the flexible (or fluctuating or floating)
exchange rate.
These two exchange rates have been tried and tested in the
past. Fixed exchange rate system had been tried by the IMF
during 1947-1971 when this system was abandoned. After 1971,
the world’s exchange rate became a flexible one or a floating
one. Truly speaking, the exchange rate that is being followed by
the IMF now is known as the ‘managed floating system’, or the
‘managed flexibility’.
(A) Fixed Exchange Rate:
A fixed exchange rate is an exchange rate that does not
fluctuate or that changes within a pre- determined rate at
infrequent intervals.

Government or the central monetary authority intervenes in

the foreign exchange market so that exchange rates are kept
fixed at a stable rate. The rate at which the currency is fixed is
called par value. This par value is allowed to move in a narrow
range or ‘band’ of ± 1 per cent. If the sum of current and capital
account is negative, there occurs an excess supply of domestic
currency in the world markets. The government then
intervenes using official foreign exchange reserves to purchase
domestic currency.
Fixed or the pegged exchange rate can be explained graphically.
Let us suppose that India’s demand for US goods rises. This
increased demand for imports causes an increase in the supply
of domestic currency, rupee, in the exchange market to obtain
US dollars. Let DD1and SS1 be the demand and supply curves
of dollar in Fig. 6.9. These two curves intersect at point A and
the corresponding exchange rate is Rs. 40 = $1. Consequently,
the supply curve shifts to SS2 that cuts the demand curve
DD1 at point B.
This means a fall in the exchange rate. To prevent this
exchange rate from falling, the Reserve Bank of India will
demand more rupees in exchange for US dollars. This will
restrict the excess supply of rupee and there will be an upward
pressure in exchange rate. Demand curve will now shift to
DD2. The end result is the restoration of the old exchange rate
at point C.
Thus, it is clear that the maintenance of fixed exchange rate
system requires that foreign exchange reserves are sufficiently
available. Whenever a country experiences inadequate foreign
currency reserves it won’t be able to purchase domestic
currency in sufficient quantities. Under the circumstances, the
country will devalue its currency. Devaluation refers to an
official reduction in the value of one currency in terms of
another currency.
(B) Flexible Exchange Rate:
Under the flexible or floating exchange rate, the exchange rate
is allowed to vary to international foreign exchange market
influences. Thus, government does not intervene. Rather, it is
the market forces that determine the exchange rate.
In fact, automatic variations in exchange rates consequent
upon a change in market forces are the essence of freely
fluctuating exchange rates. A deficit in the BOP account means
an excess supply of the domestic currency in the world markets.
As price declines, imbalances are removed. In other words,
excess supply of domestic currency will automatically cause a
fall in the exchange rate and BOP balance will be restored.
Flexible exchange rate mechanism has been explained in Fig.
6.10 where DD1 and SS1 are the demand and supply curves.
When Indians buy US goods, there arises supply of dollar and
when US people buy Indian goods, there occurs demand for
rupee. Initial exchange rate—Rs. 40 = $1—is determined by the
intersection of DD1 and SS1 curves in both the Figs. 6.10(a) and
6.10(b).
An increase in demand for India’s exportable means an
increase in the demand for Indian rupee. Consequently,
demand curve shifts to DD2and the new exchange rate rises to
Rs. 50 = $1. At this new exchange rate, dollar appreciates while
rupee depreciates in value [Fig. 6.10(a)].
Fig. 6.10(b) shows that the initial exchange rate is Rs. 40 = $1.
Supply curve shifts to SS2 in response to an increase in
demand for the US goods. SS2 curve intersects the demand
curve DD1 at point B and exchange rate drops to Rs. 30 = $1.
This means that dollar depreciates while Indian rupee
appreciates.
(C) Managed Exchange Rate:
Under this heading, floating exchange rates are ‘managed’
partially. That is to say, exchange rates are determined in the
main by market forces, but the central bank intervenes to
stabilise fluctuations in exchange rates so as to bring ‘orderly’
conditions in the market, or to maintain the desired exchange
rate values.

Policy # 10. EXIM Policy:

The Exim Policy (1997-2002):
The export-import policy for five years 1997- 2002
(co-terminus with the Ninth Plan) was announced on March 31,
1997.
Four important objectives of the policy are the
following:
1. The primary objective is to make India’s transitions to a
globally-oriented vibrant economy faster with a view to
deriving the maximum benefits from expanding global
opportunities.
2. The second objective is to promote faster economic growth
which can be sustained in the long run. This is possible by
providing access to essential raw materials, intermediate goods,
components and commodity and capital goods required for
increasing domestic production.
3. The third objective is to enhance the technological strength
and efficiency of Indian agriculture, industry and services with
a view to improving their competitiveness in the world market
as also for enabling Indian products to attain internationally
accepted standards of quality.
4. The fourth and final objective is to provide consumers with
quality products at acceptable prices.
The Exim Policy of 1997-2002 was revised on April 13, 1998
and March 31, 1999. In Nov. 1997 India agreed to remove tariff
restrictions on 2,714 items over a six-year period. The 1999 re-
view of the Exim policy recognised the importance of exports
of services. Moreover those who will be able to export more
than 50% of their products will get various facilities.
In short, the trade policy reforms initiated in 1991 have
drastically changed the foreign trade situation of the country.
It has resulted in the shift from inward-oriented to an
outward-oriented policy.
The Exim Policy (2002-07):
On March 31, 2002 the GOI announced a new five-year Exim
Policy- with a view to achieving 1% share of global exports.
Quantitative restrictions have been lifted and various
incentives offered to agricultural exports and special economic
zones to achieve the $ 80 billion annual exports target by
2007.
The policy seems to diversify markets with new export
programmes to African and CIS countries and offers benefits
to industrial clusters and exports of cottage and handicrafts
products, gems and jewellery and electronic hardware sectors,
among others.
With a view to achieving 1% share in global exports by 2007,
the Government announced lifting of export restrictions,
incentives to attract investments in special economic zones,
continuation and simplification of existing duty neutralisation
schemes, steps to reduce transaction cost and provided sops to
boost agriculture, hardware and gems exports.
In the Exim Policy commerce and industry minister Murasoli
Maran outlined a major policy thrust for the agriculture sector
including removal of packaging restrictions and lifting of
quantitative restrictions on all agricultural products except
onions and jute.
Though trading in some items would be permitted only though
state trading enterprises, the Government would decanalise
import of petroleum and petro goods as the administered price
mechanism for the sector was being dismantled from April 1,
2002.
As part of the agriculture sector package, Maran announced
transport assistance for export of fresh and processed fruits
vegetables, paltry, dairy and floriculture products, in addition
to wheat and rice products.
The boost electronic hardware exports units in electronic
hardware technology parks can freely sell goods covered under
the IT Agreement in the domestic market. The units would
need to have a positive net foreign exchange as percentage of
exports (NEEP) in five years instead of every year and would
not face other export obligations.
For gems and jewellery exports, Maran announced waiver of
customs duty on import of rough diamonds and abolished the
licencing regime on these imports. The Government also
provided sops for small scale and cottage industry units as also
the handicrafts sector with incentives to access market access
initiative (MAI) funds and export house status for units with
average export performance of Rs. 5 crores instead of Rs. 15
crores.
“India needs to release itself from feelings of export pessimism
and apathy and employ international trade as an engine of
growth”, Maran said a year after QRs on imports were lifted.
The minister continued his love for designated areas to
promote export excellence and announced sops for industrial
cluster-towns which would get funds under MAI for creation of
technological services, EPCG benefits and would also be
eligible to avail other export schemes with further relaxed
norms.
In his last two policies, Maran had announced the
establishments of SEZs and Agri Export zones (AEZs). Though
no new incentives were announced for AEZs, which now
number 20, for SEZs, the minister announced enhanced
income tax benefits, central sales tax exemption in case of sale
from domestic tariff area to SEZs and removal of restrictions
on external commercial borrowings.
He also announced establishment of overseas banking units in
SEZs which would be exempted from statutory liquidity ratio
and cash reserved ratio to help units and their developers ac-
cess funds at lower and international rates of interest.
Maran announced the continuation of export incentives
schemes including the duty entitlement and passbook (DEPB)
scheme, which would now have lower value caps, the advance
licence scheme and also provided a relief to export obligation
defaulters under the export promotion capital goods schemes.
Under the duty entitlement and passbook, which was expected
to be phased out from 2002- 03, the commerce and industry
minister also announced a major relaxation for exporters who
would now not be subjected to post-market value verifications.
Under the advance licence scheme, the minister announced the
withdrawal of annual advance licences, announced in 2001, as
the exporters were encountering problems.
The minister said the scope of MAI would be enlarged and
increased its allocation three-fold to Rs. 42 crores during
2002-03.
Sops were also offered to status holders including the flexibility
to retain 100% foreign exchange earnings under the Export
Earners Foreign Currency account and doubling of the normal
repatriation period from 180 days to 360 days.
As part of an attempt to usher in a regime with reduced
transaction costs, Maran announced a reduction in the
maximum fee limit on applications under various schemes,
same day licencing in all regional offices of DGFT, reduction in
physical examination by the customs department and
permission for direct negotiation of export document to help
exporters in reducing their bank charges.