Economic Policy Meaning, Types, Regulations

Table of Contents:-

Economic Policy Meaning
Types of Economic Policy
Regulations of Economic Policy
Impact of Economic Policy on Business

Economic Policy Meaning

Economic policy refers to the actions, strategies, and measures implemented by a government to manage/ influence various aspects and the overall performance of the country’s economy.

To speed up the country’s development and remove economic difficulties (like poverty, poor infrastructure, low industrial production, etc.), India embarked on the process of economic reforms in 1991. With the help of economic policy, the government can devise different actions for the economy’s welfare. These actions include designing annual budgets, tax rates, and other plans in a business environment. This economic policy affects the nature of ownership, industrial relations, labour markets, and other related areas.

Both internal and external factors affect the development of the country’s economic policy. Different political parties’ political schemes and beliefs are classified under internal factors. In contrast, international institutions, such as the International Monetary Fund (IMF) and the World Bank, are classified under external factors. By designing the economic policy, a broad approach was taken to achieve a remarkable position in the world economy.

The economic reforms of 1991 changed India’s prevalent economic mindset. The protectionism image was removed, and the country became liberal. The doors were opened to foreign investors, who were allowed to invest their capital in Indian companies. Large sums of money flowed into the Indian economy through FDI and portfolio investments. Consistency between the type of trade and economic policies was maintained to have the maximum benefit from such economic policies. However, while the new economic policies are framed, the earlier policies are also considered. This is done to keep developmental objectives in mind.

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Large sums of money flowed into the Indian economy through FDI and portfolio investments. To have the maximum benefit from such economic policies, a level of consistency between the type of trade and economic policies was maintained. However, while the new economic policies are framed, the earlier policies are also kept in mind. This is done to keep developmental objectives in mind.

To speed up the development of the country and to remove the economic difficulties (like poverty, poor infrastructure, low industrial production, etc.), India embarked on the process of economic reforms in the year 1991.

Types of Economic Policy

Economic policy can have a significant impact on various aspects of a country’s economy. The different types of economic policies are given as follows:

1) Fiscal Policy

Fiscal policy is one of the important types of economic policy which aims at increasing the revenue receipts of the government. It brings the expenditure under control while ensuring that the various developmental and societal objectives of the government are not impacted adversely. With the help of introducing compensatory variations in public expenditure and taxes, private investments as well as the consumption level are changed. Changes in fiscal policy cause changes in monetary policy.

The fiscal policy of a country is concerned for:

i) Maintaining the balance of payment equilibrium,
ii) Stabilising the price level,
iii) Achieving and maintaining full employment,
iv) Improving the growth rate of the concerned economy, and
v) Facilitating the economic development of the country.

2) Monetary Policy

The monetary policy of any country is responsible for regulating the money supply in the market with the help of controlling interest rates. To attain significant economic growth as well as price stability, the monetary authority of the concerned country devises the monetary policy. In India, the Reserve Bank of India (RBI) is responsible for formulating the monetary policy.

The monetary policy of a country is concerned for:

i) Controlling and regulating the banking system of the country,
ii) Maintaining the rate of money supply in the market,
iii) Providing credit for the priority sector,
iv) Achieving price stability, and
v) Achieving and maintaining economic growth.

3) Foreign Trade Policy

The act of trading goods, services, and capital across international borders, is called foreign trade. The Central Government of the country formulates its foreign trade policy, to regulate and promote the International Trading Environment. This policy is specially designed to effectively manage and enhance the country’s engagement in global commerce. This policy is focused towards improving International Trading/ foreign trade as well as the balance of payment, developing export capacity and facilitating export performance. This policy includes different outlines such as guidelines, regulations, incentives governing global commerce, and import and export-related instructions suggested by the Ministry of Commerce (Directorate General of Foreign Trade).

4) Industrial Policy

The Industrial Policy (IP) of a nation or economy is a declared and official plan with a strategic attempt to influence the growth of various sectors. This policy measure involves specific activities that encourage and facilitate structural changes. It refers to a comprehensive framework of government schemes, procedures, principles, rules and regulations. It aims to effectively manage, foster, and oversee industrial entities within a nation. To facilitate industrial development, specific roles are allotted to different types of industrial organisations, including public, private, joint and cooperative sectors. Each sector plays a specific role in promoting industrial growth and contributing to the overall economy of a country.

5) Labour Policy

To support economic development and social justice, a reasonable labour policy is designed by the Government of India. This policy is engaged in effective training, employing and distributing the labour in the labour market. It is also responsible for maintaining effective relations between employers and employees. Different employers, working class and government executives participate in developing labour principles through joint consultation. To assist the formulation as well as the execution of the labour policies, different joint committees have been designed. Indian Labour Conference is the topmost authority responsible for regulating labour policies in India. It focuses on two major aspects, i.e., welfare of the labour and the maintenance of industrial peace.

6) Agricultural Policy

To improve the standard of living and the level of income of the farmers through improving agricultural production, the government of the concerned country devises an agricultural policy. The primary objective of this policy is to develop the agricultural sector of the country. It is a combination of laws regulating agriculture as well as the exchange of agricultural products at the international level.

The agricultural policy aims to solve the problems relating to:

i) Dominance of poor-value agriculture.
ii) Poor progress of co-operatives and other similar institutions,
iii) Improper consumption of natural resources, and
iv) Poor revenue structure of the agricultural sector.

Regulations of Economic Policy

The government has decided to take a series of initiatives and regulations in respect of the economic policy relating to the following areas:

Regulations of New Economic Policy
Industrial Licensing
Foreign Technology Agreement
Foreign Investment
Public Sector Policy
Monopolies and Restrictive Trade Practices (MRTP Act)

1) Industrial Licensing

Industrial licensing is regulated by the Industries (Development & Regulation) Act of 1951. The Industrial Policy Resolution of 1956 identified the following three categories of industries which are mentioned as follows:

Basic Industries: These types of industries are important for the development of the economy as they provide a foundation for other industries as well. They include iron and steel, petroleum, coals and power generation.
Capital Goods Industries: These types of industries produce machinery, equipment and other tools important for the production of goods and services. They play an important role in enhancing productivity and technological advancement.
Consumer Goods Industries: These types of industries cater to the needs and demands of the general public. They include a variety of products, such as textiles, food processing, electronics, and automobiles.

Over the years, there have been amendments to the industrial policy of the country keeping in view the emerging industrial scenario. Industrial licensing policies and procedures have been liberalised from time to time. A full realisation of the industrial potential of the country is imperative to maintain and further advance this ongoing process of change.

2) Foreign Investment

To enhance the growth of the Indian industry and promote economic development, it is imperative to free the Indian industry from excessive government regulations. It is important to fully exploit the potential of opportunities to attract and promote foreign investment. With the significant growth of countries’ industrial economies over the past 40 years, including the substantial growth in flexibility, size and level of sophistication, it is imperative to foster more dynamic relationships between domestic and foreign industries. Investment needs to be encouraged.

This recognition has also arisen from the significant changes in the global industrial economy, especially given the significant changes taking place in the global industrial landscape. Towards liberalizing the investment landscape, foreign equity up to 51 per cent will be permitted in high-priority industries, thereby promoting foreign direct investment (FDI). The initiative aims to attract foreign capital, promote technology transfer and encourage development in strategic sectors. This process will ensure that there is no hindrance in investment flow. This streamlined process will enable greater participation of foreign investors in key industries.

3) Foreign Technology Agreement

There is a great need to promote an industrial environment that prioritizes the acquisition of technological capabilities. In a rapidly evolving world of technology, it is imperative to maintain a continuous relationship between technology suppliers and users. Establishing a successful relationship becomes more challenging when unnecessary government interference in the approval process is involved, leading to endemic delays and uncertainty. Indian entrepreneurs have now reached a stage where bureaucratic approval is no longer necessary for their commercial technology relationships with foreign technology suppliers. If the Indian industry continues to operate in such a regulatory environment, it will struggle to compete globally.

4) Public Sector Policy

The public sector has been central to our development philosophy. In the pursuit of our development objectives, public ownership and control in critical sectors of the economy have played an important role in preventing the concentration of economic power, reducing regional disparities and ensuring that planned development is in the common interest of the collective welfare.

The Industrial Policy Resolution of 1956 gave the public sector an important strategic role in the economy. Massive investments have been made over the past four decades to establish a robust public sector that wields substantial influence over the economy. Today the major sectors of the economy are mainly controlled by well-established public enterprises that have successfully and effectively expanded their production capabilities, explored new technological domains, and accumulated a wealth of technical expertise in various fields.

5) The Monopolies and Restrictive Trade Practices Act (MRTP Act)

The MRTP Act aims to accomplish the following principal objectives:

Prevention of concentration of economic power to a general disadvantage, and controlling monopoly
Prohibition of restrictive, monopolistic and unfair trade practices.

The MRTP Act became effective in June 1970To increase productivity during the Sixth Plan, amendments were made to the MRTP Act in the years 1982 and 1984. These amendments were implemented to remove those factors that create hindrances in industrial growth and expansion and thereafter promote a more efficient and prosperous business environment. This process of change was given new momentum in 1985 by an increase in the threshold limit of assets. The increasing complexities of international business, organisational structure and the need to achieve economies of scale have led the government intervention through the MRTP Act in the investment decisions of large companies. This ensures higher productivity and competitive advantage in the global market. It even had a detrimental effect on the industrial development of the country.

The pre-entry scrutiny of investment decisions by so-called MRTP companies will no longer be necessary. Instead, the focus will be on controlling and regulating monopolistic, restrictive and unfair trade practices instead of making it necessary for the monopoly house to obtain prior approval of the central government for expansion, the establishment of new undertakings, merger, amalgamation and takeover and appointment of certain directors.

Impact of Economic Policy on Business

The positive and negative impact of the new economic policy on business is as follows:

1) Positive Impact

The following points discuss the positive impact of the new economic policy:

i) Improvement in the Performance of the Economy

The economy’s performance in the post-reform era has been quite impressive. The reforms started in the year 1991 and if one leaves out 1991-92, which was exceptionally a bad year, the average annual growth rate between 1992-93 and 1999-2000 was 6.3%. Per capita income and capital accumulation were all higher and their coefficients of variation were lower during 1992-2001 than in the 1970s or 1980.

ii) Growth in Employment Opportunities and Better Emoluments

Employment opportunities have tremendously increased due to the coming up of many new domestic private companies as well as Multinational Companies (MNCs). Many foreign companies are now outsourcing their jobs to India thereby increasing the job opportunities available in the country. In 1991, many people were terrified that globalization would cost them millions of jobs. The economic reforms have not only increased job opportunities in India but have also raised pay packages in many sectors benefiting youngsters from the middle class.

iii) Large Reserves of Foreign Exchange

In the pre-reform era, the country did not have large reserves of foreign exchange and therefore, was not easily available for a person travelling abroad. The process of obtaining foreign exchange was very complex, requiring one to go through various channels to secure even small amounts of foreign exchange. This involved getting approvals and meeting various requirements. This typical process caused people to run around from one place to another, causing a lot of inconvenience and frustration. Overall, there were illegal transactions in foreign exchange. The situation has changed and today foreign exchange is easily available in any amount for persons travelling abroad.

The removal of restrictions has helped to eliminate the generation of black money which resulted because of illegal foreign exchange transactions. It has also been instrumental in significantly increasing the country’s foreign exchange reserves. The foreign exchange reserves increased from U.S. $5.8 billion (amounting to 2.5 months import bill) in 1990 to U.S. $315.779 billion in June 2014.

iv) Easier Access to Foreign Technology

One of the greatest benefits of economic reforms is the unrestricted exchange of global technology. A case in point is cellphone technology, which came into India after liberalisation. Without the implemented reforms, the introduction of this technology in India would have taken much longer. Due to easy accessibility to the latest foreign technology, many private companies are adopting the latest technology in their production processes to increase production and productivity, as well as to lower production costs to benefit the consumer.

v) Significant Fall in Poverty Ratio

There has been a spectacular achievement in the sphere of poverty alleviation. The poverty ratio decreased from 36% in 1993-94 to 26.1% in 1999-2000- a fall that was steeper than that in the 1970s or 1980s. Over the six years 1977-1978 to 1983, the poverty ratio fell from 51.3 to 44.5 per cent; the decline between 1987-1988 and 1993-94 was from 38.9% to 36%. Poverty in India was reduced to a record 22% in the year 2011-12. The estimated number of people living in poverty in India has reached 269.3 million, of which 216.5 million live in rural areas.

vi) Fall in Inflation Rate

Economic reforms pushed up the production of goods and services in the country resulting in either prices falling or remaining constant. The fall in the inflation rate can be attributed to some extent to a substantial decline in consumer price inflation. The rate of consumer price inflation. which was always in double digits during 1990-1993, fell sharply to less than 4% by the end of the millennium. It has to be noted that prices of many consumer durables like TVs, washing machines, ACs, fridges, and computers have either remained constant or nose-dived.

vii) Better Performance after Privatisation

Many public sector companies have been privatised since 1991. It has been reported that productivity and production in all these companies have gone up very high after privatisation. The liberalised economic policy freed entrepreneurs to enable them to innovate and go in for the modernisation of their plants.

The Bharat Aluminium Company Ltd. introduced VRS for its employees after privatisation and went in for computerisation in a big way. The plant was also modernised. All this has led to increased efficiency and a significant increase in production.

viii) Regulated Capital Market

There was a “free for all” atmosphere in the stock market before the introduction of regulation of the capital market. There were many “scandals” in the stock market, which pauperised small investors. The establishment of SEBI (Stock Exchange Board of India) has facilitated the government to monitor the stock market to a great extent, thereby regulating it to protect the interests of small investors. Trading in shares has become very accessible, quick, efficient, and transparent. Stock exchange brokers can no longer take small investors for a ride. As a result of the dematerialization of shares, investors are now freed from the hassle of physically receiving the shares and sending them to the respective companies for name transfer and other related procedures.

ix) Increasing Foreign Direct Investment

There is no doubt that after liberalisation, foreign investment as well as domestic private investment has increased by leaps and bounds. During 1991-92 (August- March), the foreign direct investment inflows were only 408 crore and the figure increased to ₹1,094 crore during 1992-93. During 2012-13, the FDI inflows were $16,946 million, which is much more than the figure for 1992-93. Foreign investors are showing a keen interest in investing in India. A confidence survey by global consultancy AT Kearney rated India as the third most favoured FDI destination, next only to China and the United States.

x) Growth in Tax Revenue of Central Government

When investments in industrial and other sectors expand, the benefits of such investments would also accrue to the central government in the form of more taxes. The tax revenue of the central government registered a sharp increase of 85,293.2 crores during the years 2000-01 to 1990-91 whereas the corresponding figure during 1980-81 to 1990-91 was only 33,620 crores. The tax revenues of the Central Government during 1980-81, 1990-91, 2000-01 and 2012-13 were ₹9,358 crore, ₹42,978 crore, ₹1,28,271.2 crore and 78,84,078.3 crore, respectively. When there is more money in the kitty of the central government, it can take up more development-oriented and social welfare schemes.

2) Negative Impact

The negative effects of the new economic policy are given below:

i) Fiscal Deficits Continue to Soar as the Root Cause Remains

Though the reduction of fiscal deficit was high on the reform agenda, the efforts did not lead to many results, as the endeavour was not sustained. The gross fiscal deficit of the central and state government, which reflects the net borrowing requirement of the government, had declined from 9.2 per cent of GDP in the crisis year of 1990-91 to 6.2 per cent. Only by tackling government non-plan expenditures, subsidies, public debt and interest burden can bring down the fiscal deficit of a country. In India, subsidies have been provided by the government at a high level.

ii) Problem of Unemployment

Unemployment has increased with the new economic policy. In manufacturing, if one looks at the detail then it can be seen that employment decreased from 6.85 million in 1998 to 6.62 million in 2000. Similarly, the agriculture sector witnessed a reduction in employment from 1.49 million in 1992 to 1.42 million in 2000, Furthermore, the mining sector experienced a decline in employment from 1.12 million in the year 1994 to 1.01 million in the year 2000. The only sector that has shown improvement is the service sector, where employment went up from 17.53 million in 1990 to 18.92 million in 2000.

iii) Growth of Monopoly Houses

Liberalisation measures have benefited a minuscule section of society. They have encouraged the growth of monopoly houses reflected in the rapid growth of their assets. For example, the assets of Tata increased from 85,310 million in 1991 to 474,460 million in 1998-99, i.e., in just eight years. Over the same period, assets of Reliance rose from 360,00 million to 3,37,570 million and that of Essar rose from ₹7,560 million to 171,450 million. Similarly, other industrial sectors also registered phenomenal growth in their assets. Economic reforms’ particularly the liberalisation measures have enabled private companies to earn huge profits even during the latter half of the nineties when industrial growth was sluggish.

iv) Ruination of Agriculture and PDS

The government has inadvertently reduced the effectiveness of the Public Distribution System (PDS), which has adversely affected agriculture and food security. People have been divided into two categories – those Below the Poverty Line (BPL) and those Above the Poverty Line (APL). A large number of people above the poverty line are poor, but the issue prices of food grains fixed for them under the PDS are either equal to or even higher than the prices prevailing in the market.

Two major factors are responsible for the current downfall of agriculture in the country:

a) In its eagerness to reduce the fiscal deficit, the government has substantially reduced the development expenditure in agriculture. Import liberalisation has contributed in a big way reduction in the prices of agricultural products.

b) Having failed to get remunerative prices for their products, many farmers have curtailed their farm operations, which in turn has increased unemployment among the agricultural workers. Import liberalization is one of the major reasons for the present plight of the farmers. Import liberalization has played a significant role in increasing the challenges faced by farmers with worrying consequences. The consequences of these liberalization measures have been reflected in the unfortunate increase in farmers’ suicide.

v) Other Effects: The other negative effects include growing unemployment; neglect of agriculture, growing personal disparities, infrastructural inadequacies, widespread poverty, demonstration effect (luxury goods), Indian small-scale industries badly affected, failure of MRTP to break the oligopolistic or monopolistic character of the Indian market.