indian economic reforms

8/8/2019 Indian Economic Reforms

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Indian Economic Reforms

Economic reforms in India should be viewed in terms of a number of distinct eras.

Under normal conditions, economic reform in India describes the post-1991

consequences of various economic practices.

The Pre-British Era

The most significant event of this era is the fact that an appreciable amount of land

areas were brought under the control of a single entity, such as the Suris, the Lodhis or

the Mughals. The G.T. Road (Grand Trunk Road) and structures like the Taj Mahal and

Fatehpur Sikri were built during this era. Urbanization started growing from this era.

The British Period

The British government in India formulated some economic policies to enhance the

trading activities with foreign countries. This led to large scale trading with other

countries and subsequently developed industries like steel and textiles. An oil refinery in

Assam was also set up in this period. The development of industry started on an

extensive scale in notable places, including Calcutta (presently Kolkata), Bombay

(presently Mumbai) and Madras (presently Chennai).

Indian Economic Reforms in 2010

The reforms announced by the UPA government in 2009 have set the agenda to grow

India beyond the anticipated levels after a brief hiccup caused by the global slowdown

triggered by the financial meltdown in mid-2008. Pushed to a low of 6.7 % in 2008-09 by

the aftershocks of the worldwide slowdown, after averaging over 9 % in the preceding

three years, the Indian economy is projected to clock 8% in the current fiscal as



indicated by the 7.9 % growth recorded in Q3 2009, despite a poor showing by the

agriculture sector due to drought in some areas and floods in others.

According to the Finance Minister, achieving 9%-10% growth is very much within reach

in the medium term. The government has already identified 61 state-owned companies

for disinvestment and the process is likely to be completed by the end of FY 2009-2010

for four PSUs - National Thermal Power Corporation (NTPC), Rural Electrification

Corporation (REC), Sutlej Jal Vidyut Nigam and National Mineral Development

Corporation (NMDC).

FDI inflows topped $1.74 billion in November 2009, up 60% from November 2008 when

FDI inflows stood at $1.08 billion. However, the cumulative FDI during April-November

2009 declined to $19.38 billion from $19.79 billion in the corresponding period in the last

fiscal year.

Amendments to the Copyright Act would bring it in conformity with the World Intellectual

Property Organization (WIPO) Internet Treaties - WIPO Copyright Treaty (WCT) and

WIPO Performances and Phonograms Treaty (WPPT), which have set the international

standards in these spheres.



INDIA'S ECONOMIC REFORMS

The reform process in India was initiated with the aim of accelerating the pace of economic growth and eradicationof poverty. The process of economic liberalization in India can be traced back to the late 1970s. However, the

reform process began in earnest only in July 1991. It was only in 1991 that the Government signaled a systemicshift to a more open economy with greater reliance upon market forces, a larger role for the private sector

including foreign investment, and a restructuring of the role of Government.

The reforms of the last decade and a half have gone a long way in freeing the domestic economy from the controlregime. An important feature of India's reform programme is that it has emphasized gradualism and evolutionary

transition rather than rapid restructuring or "shock therapy". This approach was adopted since the reforms wereintroduced in June 1991 in the wake a balance of payments crisis that was certainly severe. However, it was not a

prolonged crisis with a long period of non-performance.

The economic reforms initiated in 1991 introduced far-reaching measures, which changed the working andmachinery of the economy. These changes were pertinent to the following:

y Dominance of the public sector in the industrial activity

y Discretionary controls on industrial investment and capacity expansion

y Trade and exchange controls

y Limited access to foreign investment

y Public ownership and regulation of the financial sector

The reforms have unlocked India's enormous growth potential and unleashed powerful entrepreneurial forces.Since 1991, successive governments, across political parties, have successfully carried forward the country's

economic reform agenda.

Reforms in Industrial Policy

Industrial policy was restructured to a great extent and most of the central government industrial controls were

dismantled. Massive deregulation of the industrial sector was done in order to bring in the element of competitionand increase efficiency. Industrial licensing by the central government was almost abolished except for a few

hazardous and environmentally sensitive industries. The list of industries reserved solely for the public sector --

which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications andtelecom equipment, minerals, oil, mining, air transport services and electricity generation and distribution was

drastically reduced to three: defense aircrafts and warships, atomic energy generation, and railway transport.Further, restrictions that existed on the import of foreign technology were withdrawn.

Reforms in Trade Policy

It was realized that the import substituting inward looking development policy was no longer suitable in themodern globalising world.

Before the reforms, trade policy was characterized by high tariffs and pervasive import restrictions. Imports of

manufactured consumer goods were completely banned. For capital goods, raw materials and intermediates,certain lists of goods were freely importable, but for most items where domestic substitutes were being produced,

imports were only possible with import licenses. The criteria for issue of licenses were non-transparent, delayswere endemic and corruption unavoidable. The economic reforms sought to phase out import licensing and also to

reduce import duties.

Import licensing was abolished relatively early for capital goods and intermediates which became freely importable

in 1993, simultaneously with the switch to a flexible exchange rate regime. Quantitative restrictions on imports of

manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly tenyears after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on

a complaint brought by the United States.

Financial sector reforms



Financial sector reforms have long been regarded as an integral part of the overall policy reforms in India. India

has recognized that these reforms are imperative for increasing the efficiency of resource mobilization andallocation in the real economy and for the overall macroeconomic stability. The reforms have been driven by a

thrust towards liberalization and several initiatives such as liberalization in the interest rate and reserverequirements have been taken on this front. At the same time, the government has emphasized on stronger

regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the prospects of systemic risks. Today the Indian financial structure is inherently strong, functionally diverse, efficient and globally

competitive. During the last fifteen years, the Indian financial system has been incrementally deregulated and

exposed to international financial markets along with the introduction of new instruments and products.

Investing in India

1. About India 2. Reforms in Industrial Sectors in India 3. Industrial Policy 4. Foreign Direct Investment Policy 5. Foreign Investment Promotion Board (FIPB)

6. Entry Strategies and setting up a company 7. Approvals/Clearances required for new projects 8. Foreign Exchange Management Act (FEMA) 9. Taxation in India 10. Repatriation of Earnings 11. Ready Reckoner for NRI Investment 12. Labour Rules/Regulations 13. Intellectual Property 14. Incentives Offered by States to Foreign Investors 15. Foreign Investment Implementation Authority (FIIA) 16. Related Websites

17. Frequently Asked Questions (FAQ)

1. About India

India is the 7th largest and 2nd most populous country in the world. It is also the 4 th largest economy in the world in terms of PPP. A series of ambitious economic reformsaimed at deregulating the economy and stimulating foreign investment has moved Indiafirmly into the front runners of the rapidly growing Asia Pacific Region and unleashedthe latent strength of a complex and rapidly changing nation. Today India is one of themost exciting emerging markets in the world. Skilled managerial and technicalmanpower that matches the best available in the world and a middle class whose size

exceeds the population of the USA or the European Union, provide India with a distinctcutting edge in global competition. India¶s time tested institutions offer foreign investorsa transparent environment that guarantees the security of their long term investments.These include a free and vibrant press, a well established judiciary, a sophisticatedlegal and accounting system and a user friendly intellectual infrastructure. India¶sdynamic and highly competitive private sector has long been the backbone of itseconomic activity and offers considerable scope for foreign direct investment, jointventures and collaborations.



2. Reforms in Industrial Sectors in India

Industrial Sector was among the first sectors to be liberalized in India in a series of measures. Industrial licensing has been abolished except in a small number of sectorswhere it has been retained on strategic considerations.

3. Industrial Policy:

The Government¶s liberalization and economic reforms programme was initiated in July1991, under the new Industrial Policy Resolution. The industrial policy reforms havesubstantially reduced the industrial licensing requirements, removed restrictions onexpansion and facilitated easy access to foreign technology and foreign directinvestment.

4. Foreign Direct Investment Policy:

Foreign Direct Investment in India is allowed on automatic route in almost all sectorsexcept

yProposals that require an industrial licence and cases where foreign investment ismore than 24% in the equity capital of units manufacturing items reserved for the smallscale industries.

yProposals in which the foreign collaborator has a previous venture/tie-up in India.

yProposals relating to acquisition of shares in an existing Indian company in favour of aForeign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and

yProposals falling outside notified sectoral policy/caps or under sectors in which FDI isnot permitted and/or whenever any investor chooses to make an application to theForeign Investment Promotion Board and not to avail of the automatic route.

5. Foreign Investment Promotion Board (FIPB) is a competent body to consider andrecommend foreign direct investment (FDI), which do not come under the automaticroute. With the shifting of the FIPB to the Department of Economic Affairs, Ministry of Finance, the FIPB has been reconstituted as under:

- Secretary, Department of Economic Affairs Chairman

- Secretary, Department of Industrial Policy & Promotion Member - Secretary, Department of Commerce Member - Secretary, (Economic Relation), Ministry of External Affairs Member

The Board would be able to co-opt Secretaries to the Govt. of India and other topofficials of financial institutions, banks and professional experts of industry andcommerce, as and when necessary



6. Entry Strategies and setting up a Company

(i) Entry Into India

Foreign nationals (except citizens of Nepal and Bhutan) entering into India are required

to carry a valid passport/travel documents and a valid visa. Visas for the purpose of tourism, entry, transit, conferences, business and employment in India re issued toforeign nationals by Indian Embassies and Consulates abroad.

Business visas may be issued for upto 5 years, with multiple entry provision. While abusiness visa is issued by an Indian Embassy abroad, it can be renewed/extendedwithin India if the applicant so desires. Foreign nationals who wish to work in India mustobtain a Residential Permit from the Foreigners Regional Registration Office (FRRO)that are located in all major cities, or, in the case of smaller cities, from the principalpolice station.

A foreign national, holding a visa (other than a tourist visa) valid for a period exceeding180 days, is required to be registered with the FRRO within 15 days of arrival in India.Change of purpose or type of visa is a not permitted. Further, visa other thanemployment, student and entry are normally not considered for extension.

The transfer of residence scheme applies to foreign nationals visiting India for longdurations. Under this scheme, foreign nationals can import certain personal effectswithout paying customs duty. A bank guarantee has to be provided for this purpose,which is returnable after the individual has stayed in India for a year. To avail of thisscheme, the goods have to be shipped within two months before the entry into India or one month after entry into India. The goods brought into India under the transfer of

residence scheme have to be owned by the importer or his family for at least one year.

(ii). Setting up of a company

The principal forms of business organisation in India are:

Companies ± both public and private Partnerships Sole proprietorships

Companies incorporated in India and branches of foreign corporations are regulated by

the Companies Act, 1956 (the Act). The Act, which has been enacted to oversee thefunctioning of companies in India, draws heavily from the United Kingdom¶s Companies Acts and although similar, is more comprehensive. The Registrar of Companies (ROC)and the Company Law Board (CLB), both working under the Department of Company

Affairs, ensure compliance with the Act.

(a) Types of Companies



A company can be a public or a private company and could have limited or unlimitedliability. A company can be limited by shares or by guarantee. In the former, thepersonal liability of members is limited to the amount unpaid on their shares while in thelatter, the personal liability is limited by a pre-decided nominated amount. For acompany with unlimited liability, the liability of its members is unlimited.

Apart from statutory government owned concerns, the most prevalent form of largebusiness enterprises is a company incorporated with limited liability. Companies limitedby guarantee and unlimited companies are relatively uncommon.

(i) Private Companies

A private company incorporated under the Act has the following characteristics:

y The right to transfer shares is restricted.y The maximum number of its shareholders is limited to 50 (excluding

employees).y No offer can be made to the public to subscribe to its shares and

debentures.y Private companies are relatively less regulated than public companies as

they deal with the relatively smaller amounts of public money. A privatecompany is deemed to be a public company in the following situations:

y When 25 percent or more of the private company¶s paid-up capital is heldby one or more public company.

y The private company holds 25 percent or more of the paid-up sharecapital of a public company.

y The private company accepts or renews deposits from the public.y

The private company¶s average annual turnover exceeds Rs. 250 millionduring a period of 3 consecutive financial years.

(ii) Public Companies

A public company is defined as one which is not a private company. In other words, apublic company is one on which the above restrictions do not apply. Regarding thenecessary procedures to be followed for registering the company, a flow chart presentsthe summary of the steps involved in formation of a company with Registrar of Companies.

(iii) Foreign Companies

Foreign investors can enter into the business in India either as a foreign company in theform of a liaison office/representative office, a project office and a branch office byregistering themselves with Registrar of Companies (ROC), New Delhi within 30 days of setting up a place of business in India or as an Indian company in the form of a JointVenture and wholly owned subsidiary. For opening of the foreign company specificapproval of Reserve Bank of India is also required.



7. Approvals/clearances required for new projects

For starting a new project, a number of approvals/clearances are required from differentauthorities such as Pollution Control Board, Chief Inspector of Factories, ElectricityBoard, Municipal Corporations, etc.

8. Foreign Exchange Management Act (FEMA)

The Parliament has enacted the Foreign Exchange Management Act, 1999 to replacethe Foreign Exchange Regulation Act, 1973. This Act came into force on the 1st day of June 2000. The object of the Act is to consolidate and amend the law relating to foreignexchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market inIndia.

This Act extends to the whole of India and will also apply to all branches, offices and

agencies outside India owned or controlled by a person resident in India. It will also beapplicable to any contravention committed outside India by any person to whom this Actis applicable.

9. Taxation in India

Since the onset of liberalization in the country, tax structure of the country is alsobeing rationalized keeping in view the national priorities and practices followed in other countries. Foreign nationals working in India are generally taxed only on their Indianincome. Income received from sources outside India is not taxable unless it is receivedin India. The Indian tax laws provide for exemption of tax on certain kinds of income

earned for services rendered in India. Further, foreign nationals have the option of being taxed under the tax treaties that India may have signed with their country of residence.

Remuneration for work done in India is taxable irrespective of the place of receipt.Remuneration includes salaries and wages, pensions, fees, commissions, profits in lieuof or in addition to salary, advance salary and perquisites. Taxable payments include allallowances and tax equalisation payments unless specifically excluded. The stockoptions granted by the employer are taxable as capital gains at the time of sale of shares acquired due to exercise of options.

10. Repatriation of Earnings

A foreign national may open bank accounts in India and receive funds from abroad. Aforeign national is allowed to repatriate 75 percent of his net after-tax earnings after hisemployment is approved by the government and the exchange control authorities. If employment is for a short duration, such approvals are not necessary, provided theamount of remittance is within approved limits.



11. Ready Reckoner for NRI Investment

The Ready Reckoner for Non-Resident Indians (NRIs) Investment providesinformation, at a glance, about investment opportunities available to Non ResidentIndians (NRIs)/Persons of Indian Origin (PIO)/Overseas Corporate Bodies (OCBs).

12. Labour Rules/Regulations

Under the Constitution of India, Labour is a subject in the Concurrent List where boththe Central & State Governments are competent to enact legislation subject to certainmatters being reserved for the Centre. Some of the important Labour Acts, which areapplicable for carrying out business in India are:

Employees¶ Provident Fund and Miscellaneous Provisions Act, 1952 | Employees¶ State Insurance Act,1948

Workmen¶s Compensation Act, 1923 | Maternity Benefit Act, 1961 | Payment of Gratuity Act, 1972 |Factories Act, 1948

Dock Workers (Safety, Health & Welfare) Act, 1986 | Mines Act, 1972 | Minimum Wages Act | Payment of Bonus Act 1965 Contract Labour [Ragulation & Abolition] Act 1970 | Payment of Wages Act, 1936 |

13. Intellectual Property

India is a signatory to the agreement concluding the Uruguay Round of GATTnegotiations and establishing the World Trade Organisation (WTO). This Agreement,inter-alia, contains an Agreement on Trade Related Aspects of Intellectual PropertyRights (TRIPS), which came into force from 1st January 1995. It lays down minimum

standards for protection and enforcement of Intellectual Property Rights in member countries, which are required to promote effective and adequate protection of Intellectual Property Rights with a view to reducing distortions and impediments tointernational trade. The obligations under the TRIPS Agreement relate to provision of minimum standards of protection within the member country's legal systems andpractices.

As regards the status of various Intellectual Property laws in India and standards inrespect of various areas of intellectual property, a law on Trade Marks has beenpassed by Parliament and notified in the gazette on 30.12.1999. This law repeals andreplaces the earlier Trade & Merchandise Act, 1958. A new law for the protection of

Geographical Indications, viz., the Geographical Indications of Goods (Registration andthe Protection) Act, 1999 has also been passed by the Parliament and notified on30.12.1999. A law called the Designs Act,2000 relating to Industrial Designs whichrepeals and replaces the earliar Designs Act, 1911 has also been passed byParliament in its Budget Session, 2000. The Act has been brought into force from11.05.2001. A Bill on Patents to amend the Patents Act, 1970 was introduced in RajyaSabha on 20.12.1999 and the Bill was passed by Parliament on 14.05.2002.



14. Incentives offered by States India is a federal country consisting of States and Union Territories. States are alsopartners in the economic reforms being undertaken in the country. Most of the Statesare making serious efforts for simplifying the rules and procedures for setting up and

operating the industrial units. Single Window System is now in existence in most of theStates for granting approval for setting up industrial units. Moreover, with a view toattract foreign investors in their states, many of them are offering incentive packages inthe form of various tax concessions, capital and interest subsidies, reduced power tariff,etc. The specific website addresses containing the incentive packages offered by variousstates/UTs are given in the List.

15. Foreign Investment Implementation Authority (FIIA)

Government of India has set up Foreign Investment Implementation Authority (FIIA) tofacilitate quick translation of Foreign Direct Investment (FDI) approvals intoimplementation by providing a pro-active one stop after care service to foreigninvestors, help them obtain necessary approvals and by sorting their operationalproblems. FIIA is assisted by Fast Track Committee (FTC), which have beenestablished in 30 Ministries/Departments of Government of India for monitoring andresolution of difficulties for sector specific projects.

Senior officers of the Department have been designated Nodal Officers for specificstates for follow up of FDI cases and to bring to notice of FIIA any difficulties inimplementation. In case of any difficulties, nodal officers can be contacted.

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