“Economic Policy” By Mukesh Kumar Mishra Secretary General KRITYANAND UNESCO CLUB Jamshedpur
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Table of Contents
Economic Policy : Overview
Economic Policy of India
India Economic Policy to reforms
I. II. III. IV. V. VI. VII.
Fiscal Policy Social Policy Industrial Policy Trade Policy Foreign Direct Investment Agriculture Policy Infrastructure Policy
Summary and Conclusion
10 11 12 12 13 13 14
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“Economic Policy” Abstract
Economic integration and interdependence in the world today have reached an unprecedented level. As a result, the globalized economy cannot function for the benefit of all without international solidarity and cooperation. This was highlighted by the global financial and economic crisis that followed the collapse of big financial institution, and it has underlined the need for developing approaches to new forms of global collaboration for economic policy. India has reached a critical inflection point. Twenty years after the liberalization of the Indian economy, which unleashed an unparalleled period of sustained high growth, new challenges have emerged in the form of rising inflation, a falling growth rate, and delays in much needed reforms. After the same time we expected to overtake Japan as the world’s third largest economy by 2015 and surpass China by 2025 signal the potential to address present challenges and shape India’s next wave of economic growth.
It is very important that we set the reform agenda so that we can bring reforms forward rapidly and the declaration of GDP growth can be reversed. In this phase, our economy needs an imaginative policy thrust that encourages investments, both domestic and foreign sectors that have high potential to generate large-scale opportunities for growth and downstream livelihood. Food security, energy security, water security, new transport connectivity, and urban as well as rural renewal are some of the areas where we must evolve and implement strategic plans over the next two to three decades. India's future growth is heavily dependent on such basic infrastructure.
In the case of reform of governance, improved efficiency and effectiveness can be achieved by designing instruments better, or by changing the internal organization of government to provide more efficient incentives.
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1. Introduction The economy of India is the eleventh largest in the world by nominal GDP and the third largest by purchasing power parity (PPP). After the independence of India, our economy was inspired by the Soviet model of economic development, with a large public sector, high import duties combined with interventionist policies, later on India adopted free market principles and liberalized its economy to international trade under the guidance of
Shri Manmohan Singh and under the leadership of P.V.Narasimha Rao. Following
these strong economic reforms and a strong focus on developing national infrastructure such as the Golden Quadrilateral project by Shri Atal Bihari Vajpayee then Prime Minister the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people. Our economic performance in the post-reforms period has many positive features. India has had a great run of economic growth since the opening of the economy about 20 years ago, with accelerating growth increasing from about 5% growth rate in 2000 to 79% between 2004-11.Foreign direct investment has grown dramatically, and the effect of outsourcing of jobs has created a job boom in its urban centers, creating a boom in consumption of automobiles, mobile phones, durables like refrigerators and washing machines, as well as housing and construction. After 20 years of making mostly the right moves, the Indian economy and government is bumping against some deep structural and social limitations, inevitably, this has led to some questioning about the effectiveness of the reforms. We need urgently every sector reforms, which are the challenge before the governmentâ€”to spread itself thin over the entire economy and wait for the changes to take effect, money and energy to key zones. India needs to spend a trillion dollars on infrastructure over the next five years, also needs a long-term debt market to fund this, foreign institutional investors need more confidence in its economic outlook, and its fiscal deficit is rising. The need now is for a wider consensus on a second generation of reforms that ought to keep the economy on a 9% growth path. We also need for greater transparency in large projects: Absence of transparency is causing delays, misdirection of funds, and preventing private investors from taking an active role in the implementation of major infrastructure, energy and food production and security projects. Page | 4
2. Economic Policy: Overview One of America’s foremost economists, Paul Samuelson, defined “Economics” as “deciding what shall be produced, how, and for whom,” and the economic system provide society with means for deciding about the production and distribution of goods and services. Economists formulate economic principles which are useful in the establishment of policies designed to solve economic problems. Economic theory helps us to understand how the world works, but the formulation of economic policy requires a second step. We must have objectives. What do we want to change? Why? What is good and what is bad about the way the system is operating? How can make it better? Such questions force us to be specific about the grounds for judging one outcome superior to another. There are basically four criteria for judging Economic Policy: 1. Efficiency In economics, efficiency means allocative efficiency. An efficient economy is one that produces what people want at least possible cost. 2. Equity While efficiency has a fairly precise definition that can be applied with some degree of rigor, equity fairness lies in the eye of the beholder. Fairness implies a more equal distribution of income and wealth. 3. Growth Economic Growth is an increase in the total output of an economy. 4. Stability Economic stability refers to the condition in which output is steady or growing, with low inflation and full employment of resources.
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Government actions designed to affect the performance of economy as a whole; we defined economics as the study of the performance of the national economy as well as the policies used to improve that performance. Some of the major issues of Economic Policy are; •
Economic Growth and Living Standards By standard of living we mean the degree to which people have access to goods and service that make their lives easier, healthier, safer, and more enjoyable.
Productivity Average labor productivity, or output per employed workers, is a crucial determinant of living standards.
Recessions and Expansions Economic experience period of slower growth (Recessions) and more rapid growth (Expansion), Macroeconomist examine the source of then fluctuations and the government policies that attempts to moderate them.
Unemployment The unemployment rate is the fraction of people who would like to be employed; Economists study the causes of unemployment, inducing the reasons why it sometimes differs markedly across countries.
Inflation The Inflation rate is the rate at which prices in general are increasing over time.
Economic Interdependence among Nations Modern economics are highly interdependent sometimes international flows of goods and services become a method of political and economic concern.
Understanding the effects of various policies and helping government officials develop better policies are important objectives of economists.
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Types of Economic Policy Economic policies as government policies that effect the performance of the economy as a whole, and opposed to the market for a particular good or service. There are three types of policy: •
Monetary Policy The term monetary policy refers to the determination of the nation’s money supply.
Fiscal Policy Fiscal Policy refers to decisions that determine the government’s budget, including the amount and composition of government expenditures and government revenues.
Structural Policy The term Structural Policy includes government policies aimed at changing the underlying structure, or institutions, of the nation’s economy. Structural policy refers to government actions to change the underlying structure or institution of the economy. Structural policy can range from minor tinkering to a major entire economic system. The analysis of a proposed policy can be positive or normative. A positive analysis addresses the policy’s likely economic consequences, but not whether those consequences are desirable. A normative analysis addresses the question of whether a proposed policy should be used.
Measuring Economic Policy or performance Variables that arise frequently in analyses of the state of the economy: •
The Gross Domestic Product or GDP The most frequently used measure of an economy’s output is called the gross domestic product, or GDP is intended to measure how much an economy Page | 7
produces in a given period, more precisely, Gross Domestic Product (GDP) is the market value of the final goods and services produced in a country during the period. GDP also can be expressed as the sum of four types of expenditures: consumption, investment, government purchases, and net exports. •
Rate of Unemployment The Unemployment rate is a sensitive indicator of conditions in the labor market. When the unemployment rate is low, jobs are secure and relatively easier to find, low unemployment is often associated with improving wages and working conditions as well, as employers compete to attract and retain workers.
Inflation The rate of Inflation is defined as the annual percentage rate of change in the price level, as measured. Inflation is a condition, when cost of services coupled with goods rise and the entire economy seems to go haywire.
3. Economic Policy of India
The Indian Constitution provides the overarching framework for the country’s fiscal policy. India has a federal form of government with taxing powers and spending responsibilities being divided between the central and the state governments according to the Constitution. There is also a third tier of government at the local level. Since the taxing abilities of the states are not necessarily commensurate with their spending responsibilities, some of the centre’s revenues need to be assigned to the state governments.
The central government is responsible for issues that usually concern the country as a whole like national defense, foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and banking. The state governments are responsible for other items including, law and order, agriculture, fisheries, water supply and irrigation, and public health.
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Liberalization, growth, inclusion and fiscal consolidation (1991-2011)
Following the balance of payments crisis of 1991, the government commenced on a path of economic liberalization whereby the economy was opened up to foreign investment and trade, the private sector was encouraged and the system of quotas and licences was dismantled. Fiscal policy was re-oriented to cohere with these changes. The Tax Reforms Committee recommended reducing the rates of all major taxes, minimizing exemptions and deductions, simplifying laws and procedures, improving tax administration and increasing computerization and information system modernization
4. India’s Economic Policy to Reforms
The G-20, which has became a leading forum for international economic cooperation, successfully coordinated an immediate policy response to the crisis, or “Great Recession” as it is now called. Coordinated monetary policy easing by leading central banks marked the first step, with most members of the G-20 launching large fiscal stimulus packages as well as emergency support the economic freefall and won policymakers an important first round in battling the crisis. The Indian government initiated a policy of economic reforms in the early 1990s by stabilization and structural adjustment programmes to attain in the macro-economic stability and higher rates of economic growth. This was a period which saw a major reorientation of economic policy, away from the earlier control oriented economic system with a dominant role for public opening of the economy to world trade and foreign investment.
The economic stability must necessarily begin with an assessment of the management of the macroeconomic policies and factors. Liberalization, globalization and privatization are the favored ideas of the international agencies for a sustained and accelerated economic growth. India needs policies to improve these sectors’ long-term competitiveness in order to sustain and enhance its current growth rate. The reform process of the last 20 years is far from complete.
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The characteristics of globalization as it is unfolding now are multifarious. It is influencing culture as much as the economics of nation states. India is passing through a stage where there is no consensus on the globalization. We need our Economic policy to reforms 2.0 by the given sector through which we can achieve 8 percent GDP growth, which is now required for our nationâ€™s Economic Policy,
Fiscal Policy The global financial and economic crisis has raised important macroeconomics policy issues concerning the appropriate fiscal response, and its size, composition and duration. After an initial wide consensus on the necessity of proactive macroeconomic policies to support demand, many policymakers have now shifted their focus from fiscal stimulus to fiscal tightening. The policy debate today is about what measures should be taken to achieve the widely agreed objectives of recovery from the crisis and an improvement in the fiscal accounts, as well as the sequencing of those measures. In this rapidly unfolding phase, our economy needs an imaginative policy thrust that encourages investments, both domestic and foreign in sectors that have high potential to generate large-scale opportunities for growth and downstream livelihood. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy. Fiscal policy also feeds into economic trends and influences monetary policy. When the government receives more than it spends, it has a surplus. If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money.
Fiscal policy includes two general tools for affecting total spending and eliminating output gaps: 1. Change in government purchases and; 2. Changes in taxes or transfer payments. The precise use of fiscal policy can support the economic stabilization. Appropriate and timely fiscal policy measures can Page | 10
promote growth by setting
efficient and effective use of scarcer sources and by
creating the right incentive signals. There are three basic qualifications for the use of Fiscal Policy; A. Fiscal Policy and the Supply side. The fiscal policy may affect potential output as well as planned aggregate expenditure. Fiscal policy affects both planned spending and potential output. B. Deficits A stabilization policy is the need to avoid large and persistent budget deficits. C. The Relative inflexibility of Fiscal Policy Fiscal Policy is not always flexible enough to be useful for stabilization. Government can change spending or taxes relatively quickly in order to eliminate output gaps. Financial markets are supposed to mobilize resource and allow their efficient allocation for productive investment. In addition, they are expected to facilitate transactions and reduce transaction costs, as well as reduce risk by providing insurance against low probability but high cost events. Therefore, those markets are often seen as instrumental in promoting economic growth and broad social development.
Social Policy Development cannot proceed without human resources capable of initiating and managing social economic activity. Social development has become an important part of many evaluations. A social policy looks at social structures, processes, and changes within a group or community. In particular social issues are intended to determine whether a project is likely to cause adverse social impacts. The gap in social development needed to be closed, not only to improve the welfare of the poor and increase their income earning capacity, but also to create the preconditions for rapid economic growth. For social sector development we need following social assessment. Identify key stakeholders and establish an appropriate framework for their participation; Page | 11
Ensure the social project objectives and incentives; Assess the social impact of investment projects; Develop ability at the appropriate level to enable participation; The social sector gaps between India and other countries will require additional expenditure, which in turn depends upon improvements in the fiscal position of both the central and state governments;
Industrial Policy In last few years, a number of economists have called for increased government in their involvement in the allocation of capital across manufacturing sector known as Industrial policy. Government would take a direct, active role in shaping the structure and composition of industries to promote growth. Government and private sector may take steps to hasten expansion of high productivity industries and speed the movement of resources out of low productivity industries and may also increase its expenditure on basic research and development to stimulate technology progress. Industrial liberalization by the central government needs to be accompanied by supporting action by state governments. Private investors require much permission from state governments to start industry, like connections to electricity and water supply and environmental clearances. State bureaucracy also affects the Industry policy for its delay of work so government must direct the State government for supporting industrial policy.
Trade Policy One set of policy options includes measure designed to control the flows of trade and finance directly. The fundamental problem with these policies is that they reduce the volume of world trade and distort its pattern away from that which is economically desirable. Tariffis, quotas, and like can be imposed only at the sacrifice of some portion of the economic gains or benefits attainable from a free flow of world trade based on comparative advantage. All trade policies should be Page | 12
open, non-discriminatory and rule bound. They should fall within the contours of the competition principles. All physical and fiscal controls on the movement of goods throughout the country should be abolished.
Foreign Direct Investment Foreign Direct Investment means ownership of foreign property in exchange for a financial return, such as interest and dividends. Liberalizing foreign direct investment was another important part of India’s reforms, driven by the belief that this would increase the total volume of investment in the economy, improve production technology, and increase access to world markets.
Agriculture Policy The Uruguay Round agreement is a significant first step towards liberalizing agriculture trade and making agriculture a less distorted sector, but India’s economic reforms are that they have been excessively focused on industrial and trade policy, neglecting agriculture which provides the livelihood of 60 percent of the population. As the majority of the labor force still works in agriculture, reform of this sector is essential for growth and to reduce income inequalities. Reform measures should enhance both production and marketability of the country’s agricultural production. Agriculture still shackled by an inefficient public procurement and distribution system and severe input market distortions. The traditional goals and techniques of agriculture policy must be reexamined and revised. Review of the experience with the new rules on market access, export subsidies and domestic support shows only modest effects. Substantial deregulation of the agricultural sector is necessary in order to increase India’s competitiveness in world markets. To achieve this, the government should:
Eliminate subsidies that have largely benefited interest groups rather than poor farmers, in order to align incentives and liberate resources from state budgets; Page | 13
Reallocate these freed-up resources toward urgent public interventions, such as building roads, irrigation channels, and refrigeration facilities. Eliminate artificial price supports for food goods to reduce corruption and distortionary farming incentives.
Infrastructure Policy As the UNDP Human Development Report 2010 The Physical infrastructure in India is as Road Density is 1001 km of road per sq. km of land area, Rail lines are 63,327 km, Air transportation is 1,234 million tonnes per km, Population without electricity are 34.2 % of population and on Human Development Index (HDI) is 119. One form of capital is infrastructure, also called public capital, refers to the roads, bridges,
telecommunications, air transport, and efficient ports and so on that collectively contribute to the public good. Infrastructure has the potential for increasing productivity and growth. Good highways and bridges reduce transportation costs and make it easier to transport goods. Indiaâ€™s road network is extensive, but most of it is low quality and this is a major constraint for interior locations. The major arterial routes have low capacity and also suffer from poor maintenance and misuse of natural resource. So some promising initiatives are needed in road networks. Food security, energy security, water security, new transport connectivity, and urban as well as rural renewal are some of the areas where we must evolve and implement ambitious, strategic plans over the next two to three decades. India's future
Growth-friendly Economic policies, of which a proactive incomes policy is a key element, can also help to contain inflation, since investment and productivity growth create the capacities needed to meet the desired steady expansion of domestic demand. An income policy based on clear rules for determining wage income in a growing economy can greatly facilitate policymakersâ€™ task, and support capital formation and sustainable development. Page | 14
In this rapidly unfolding phase, our economy needs an imaginative policy thrust that encourages investments, both domestic and foreign sectors that have high potential to generate large-scale opportunities for growth and downstream livelihood. Our entrepreneurs, when fully empowered, can undoubtedly spread prosperity across the country and secure India's dominant position in the world economy by winning new markets for our products and services. Many Indian business houses have already demonstrated their ability to compete and succeed on the world stage. It is the internal need for Reforms 2.0 that carries an air of urgency. It is self-evident in the stark social and geographical imbalances that have marred India's growth story. Over the years, the social and geographic divide in India has widened, and so has the urban-rural divide.
Reforms 2.0 should among other things, open the retail and insurance market to foreign investors, easy labor laws and simplify the tax system and Government Policies that reduce government control over the economy .Reforms 1.0 of course were the policy changes that came in 1991 and years that followed, which included the dismantling of industrial licensing.
The overarching purpose of the 1991 reforms was to free the private sector from impeding government controls and shoring up the fiscal system. This has instilled muscle-building competition and unleashed entrepreneurial energies all around. Now, experts say the four prime focus areas for reforms are agricultural, urban and human resource development, and the management of public services. We need greater investment and employment growth along with higher productivity, and these need a significant capacity expansion and more easily and widely available public services beyond the realm of the private sector. The first generation of reforms boosted the private sector. The next series of reforms should focus on the public sector to deliver public goods and services. Inclusive growth will need the monster of poverty tamed and employment opportunities for the expanding young labor force.
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It is equally true that a large part of India is still stuck in the Third World. Neither the political and governing establishment nor the business community can remain indifferent to this reality, which is morally indefensible and politically unsustainable. We can therefore no longer postpone the agenda of resetting India's growth plans with equity.
The challenge of poverty eradication is the flip side of the challenge of creating sustainable livelihoods. Government and political establishments should efficiently direct India's finite fiscal resources to the creation of productive assets, and enriching our enviable human resources with better education and healthcare. The business community should explore ways to build new, synergistic partnerships with the organized and informal sectors of the economy, which have the potential to generate opportunities for employment, self employment and entrepreneurship. For instance, rejuvenating Indian agriculture
technologies is one area that presents a big opportunity for decentralized growth and livelihood creation. The liberalization also needs to be extended in agriculture sector, where numerous restrictions remain in place. Reforms aimed at encouraging private investment in Agriculture sector. The health of a nation is reflected by the health of its citizens. Reforms 2.0 have to dramatically address this, failing which, no other reforms or measures will help. Healthcare needs to be accessible, affordable and appropriate for most Indians. New technological and delivery models are emerging but the proliferation needs to happen at a rapid pace and the penetration far and deep into the country's fabric. Best economic policy is to limit government to creating the conditions which permit individuals to pursue their own goals and live at peace with their neighbors. Government's obligation is simply to protect life and property and to allow people to enjoy the freedom and opportunity to cooperate and trade with one another. Government must maintain reasonable budget balances and debt levels to keep the confidence of taxpayers and creditors. Without fiscal creditors will refuse to continue lending. To reduce deficits, governments must raise revenues or reduce spending. Economic expansion can boost revenues through higher tax receipts, but if expansion is
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too slow, governments must resort to the unpopular alternatives of increasing tax rates and cutting spending as in the UK and US. The Indian economy with growth going down it appears that the government would focus on tax reforms and better targeting of social expenditures to achieve fiscal consolidation while maintaining the process of inclusive growth.
The sources of economic growth can be grouped under three headings: increases in physical capital, improvements in human capital, and increases in the overall efficiency of the economy. It is now time for all stakeholders to come together and work towards on a common minimum economic program that at least delivers 8% growth on a sustained basis â€“a necessity for India.
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Mukesh Kumar Mishra Secretary General KRITYANAND UNESCO CLUB JAMSHEDPUR
Krityanand UNESCO Club, Jamshedpur is an NGO in Special Consultative Status with the Economic and Social Council (ECOSOC) of the United Nations, New York, USA. The organization support and promote the work of the United Nations and the achievement of the Millennium Development Goals (MDGs). Mukesh Kumar Mishra has Masters Degrees in Political Science and MBA. ---------------------------------------------------------------------------------------------------------------------
KRITYANAND UNESCO CLUB 102/A, KALPANAPURI ADITYAPUR INDUSTRIAL AREA JAMSHEDPUR 832109, INDIA. Tel: +91 657 2101198 Mobile: + 91 9279502203 E- Mail: firstname.lastname@example.org
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