POLICY FRAMEWORK
 

Introduction

4.1 The Eighth Plan aims at an average annual growth rate of 5.6 percent and an average industrial growth rate of about 7.5 percent. These growth targets are planned to be achieved with relative price stability and a substantial improvement in the country's balance of payments position. It is envisaged that there will be a reasonable degree of price stability and that the ratio of current account deficit to GDP will be maintained at about 1.6 percent.

4.2. Performance of the economy in the base year has not been that encouraging. Industrial growth in 1991-92 is estimated to be negligible and the overall growth of the economy is estimated to be not more than 3 percent. The annual inflation rate in 1991-92 has been about 13 percent. on the balance of payments front, although there has been some improvement in the foreign exchange reserves (partly due to the borrowings from International Monetary Fund and partly because of enhanced foreign exchange remittances by non-residents), exports are exceptionally sluggish. Given this performance in 1991-92, a quick turn-around in the economy is required, if the major macroeconomic targets of the Eighth Plan are to be achieved.

4.3. One of the reasons for the sluggish export performance in 1991-92 was the collapse of our trade with the Rupee Trade Area. The dollar value of our exports to the Rupee Trade Area declined by over 40 percent in 1991- 92. This adverse effect on our exports was further confounded by the recession in the major industrialised countries of the West. The poor export performance, among other factors, had its toll on industrial growth. To some extent, therefore, our economic performance during the Eighth Plan period will depend upon the external economic environment. A quick recovery in the industrialised economies of the West should give a boost to our exports and this will not only be of great help in tackling our balance of payments problems but also in giving a fillip to industrial growth.

4.4. While external environment is extremely important, it will be unrealistic to rely solely on favourable external conditions for a turn- around in the economy. Instead, it will be safer to take the external economic condition as it unfolds and concentrate on providing a domestic economic environment which is conducive to efficient growth of the economy. Experience shows that a set of well coordinated macroeconomic policies is of utmost importance in ensuring

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such an economic environment. In general, the following macroeconomic policies need careful consideration during the Eighth Plan period:

(a) The policy regime governing trade, technology and transborder capital flows,

(b) Industrial deregulation and administered price policy,

(c) Financial sector reforms, and

(d) The stance of demand management as reflected in monetary and fiscal policies.

4.5 Broadly speaking, the first three of these policies taken together constitute what has now come to be known as "structural" policies, i.e. policies by and large aimed at improving the supply-side of the economy. The last one corresponds to what has traditionally been covered under "stabilisation" policies, i.e., policies aimed at controlling aggregate demand in accordance with the long run growth path of an economy. Recently, Government has initiated significant policy changes on both these areas of economic policy. However, the process of reforms initiated recently represents only a beginning. We have to carry it further if we want to reap the full benefits of these reforms. Therefore, sustaining the pace of economic reforms will be the major challenge during the Eighth Plan period. While both macroeconomic stabilisation and structural policies are important to ensure an economic environment which is conducive to efficient growth of the economy, a whole set of sector-specific policies also has an important bearing on efficiency and growth. This chapter, however, limits its focus only on the macroeconomic policy issues. The sector-specific policy issues are discussed in volume II.

Policies on Trade, Technology and Capital Flows

4.6. Global development experience of the past few decades shows that a policy regime with fewer barriers to trade, both tariff and non-tariff, and which provides equal incentives for exports as well as production for the domestic market enables countries to achieve not only impressive export growth but also rapid and sustainable economic growth. Furthermore, experience of many countries including our own has also exposed the inherent limitations of an inward-oriented, import substituting trade regime. It is not only that such a trade, regime hampers the efficiency of resource use and consequently growth but also that it is unsuccessful in even ensuring a viable balance of payments. A key task during the Eighth Plan, therefore, is to move our trade policy regime towards greater openness and to reap the full benefits of international trade.

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4.7. Since June, 1991, the Government has initiated a series of trade policy changes with a view to integrating the Indian economy better with the rest of the world. The value of the rupee was adjusted downward by about 20 percent in July, 1991. This was followed by a liberalisation of the foreign trade regime through some reduction in the quantitative restrictions. The import policy regime was revamped by shifting a significant number of items outside the purview of import licensing. Exporters were given entitlements equal to 30 to 40 percent of their export earnings in the form of EXIM Scrips against which even restricted items were allowed to be imported. Alongwith these, the Government dispensed with a number of export-incentives including the cash compensatory support to exports. As a first step towards a gradual reduction in the tariffs, the Union Budget for 1991-92 reduced the maximum rate of import duty from more than 300 percent to 150 percent.

4.8. Within eight months of introducing these trade policy changes, the Government initiated another set of policy changes in the areas of trade and transborder capital flows coinciding with the Union Budget for 1992-93, these changes being more far reaching than the ones initiated in July 1991. The EXIM scrip scheme was replaced by a system of partial convertibility of the rupee on the current account of the balance of payments. Under the new system, all foreign exchange remittances, whether earned through exports of goods and services or remittances, can be converted into rupees in the following manner: 40% of the foreign exchange remitted can be converted at the official exchange rate while the remaining 60% at a market determined rate. The foreign exchange surrendered at the official exchange rate will be available to meet the foreign exchange requirements of essential imports such as petroleum and oil products, fertilisers, defence and life saving drugs. All other imports, except for a "negative" list are freely importable provided the foreign exchange for these imports are obtained from the market. Similarly, the foreign exchange required for other payments on private account including travel, debt service payments, dividends, royalties and other remittances will have to be obtained at the market rate. In another significant step, to arrest the diversion of foreign exchange to illegal channels, the Government has legalised the import of gold. Returning Indians and NRIs are now allowed to import 5 kilograms of gold per passenger with a modest import duty. Along with this, the Government has introduced a Gold Bond Scheme, with a view to help mobilise the idle gold reserves of the country to supplement official reserves.

4.9. The Export-Import Policy (EXIM policy) for the Eighth Plan period announced subsequent to the Union budget has operationalised many of the trade policy changes announced in the Budget. The new EXIM policy has now specified the "negative" list of imports, the import of which is either

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banned, canalised or subject to import licence. Similarly, the EXIM policy has specified a "negative" list of exports, the exports of which is either banned, canalised or subject to export licence. In addition to specifying the negative lists of imports and exports, the EXIM policy has announced a set of incentives for exports and deemed exports.

4.10. The process of lowering the customs tariff rates, which was initiated in the 1991-92 Union budget was carried further in the 1992-93 budget. The maximum tariff rate which had been reduced from over 300 percent to 150 percent in 1991-92 was further lowered to 110 percent in the 1992-93 Budget. The items on which tariffs have been lowered comprise capital goods, petrochemicals, newsprint, asbestos, and pesticides used in agriculture.

Further Trade Policy Reforms:

4.11. During the Eighth Plan period, further trade policy reforms are needed to be carried out so that the economy is better integrated with the rest of the world. The key objectives of these reforms should be two-fold: (i) a further pruning of the "negative" lists of imports and exports, and (ii) a gradual reduction in both the level and dispersion of tariff rates. At this stage, it is difficult to pinpoint the specific items which need to be taken out of the negative lists. As a broad guideline, as the foreign exchange situation improves and the economy becomes more resilient, our objective should be to remove most raw-materials and components from the negative list of imports. In later phases of reforms, the manufactured items should also be removed from the "negative" list and by the end of the Eighth Plan the negative list of imports should contain only items which would be banned for reasons such as environment and safety. Any protection deemed necessary for domestic industry should basically be given through the exchange rate and the tariffs. Regarding the exchange rate, the introduction of the partial convertibility on the current account is a highly desirable move. However, as the domestic economy gets more stabilised and as the external environment improves, we should move away from the dual exchange market system, unify the exchange rates and make rupee fully convertible on the current account. It should be possible to achieve the objective in stages before the end of the Plan period.

4.12. Along with the reforms of the import policy and the exchange rate regime, the structure of our tariffs requires substantial rationalisation. Broadly, our objective should be to eliminate the existing distortions in the tariff structure and effect a substantial reduction in the tariffs by the end of the Eighth Plan. The recent tariff reductions, though substantial, still leave us with tariff levels on manufactured items which are far too high. It should be the objective of policy to move to a trade regime in which the

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average tariff level comes down to about 25% within a period of three to four years. As a first step towards this, our efforts should be to eliminate the most serious distortions first. One of the Post serious distortions of our tariff structure has been the unusually high tariff rates on intermediate and capital goods. The Union Budget for 1992-93 has reduced these rates marginally. We need to reduce these rates further. subsequently, as the domestic industry becomes more resilient, we may liberalise import of certain consumer goods and lower their tariffs.

Policies on Capital Flows:

4.13. As part of the package of recent trade policy reforms, the Government has liberalised capital flows in the form in the foreign direct investment.Specific measures in this direction are (i) automatic approval of foreign technology collaboration as well as foreign equity participation upto 51 percent in about 31. areas; (ii) delinking technology transfer from equity investment to impart flexibility in sourcing of technology imports ; (iii) automatic clearance for import of capital goods in cases where foreign exchange flows through foreign equity.More recently the Foreign Exchange and Regulations Act (FERA) has been amended to FERA companies on par with Indian companies for all operational purposes.Foreign companies are now permitted to use their trade marks, accept appointment as agents or technical or management advisors.They are also allowed to borrow and accept deposits from the public and acquire and sell removable property.

4.14. These relaxations of foreign investment policy are in the right direction. Yet, if India were to attract significant flows of foreign investment and technology in an increasingly interdependent world, the GovernMent should continuously monitor the progress on this front, compare our policies on foreign investment with those of the other developing countries and make swift changes in them if required. Afterall, our share of world capital flows, will depend not just on our set of policies, but on cur policies vis-a-vis those of other her developing countries.Overall, our strategy during the Eighth Plan should be one of relying less on external commercial borrowings aide Rome on foreign direct investment for financing the current account deficit.It should be possible to increase the flow of direct foreign investment to about $ 1 billion per year by the end of the Plan period.This would still be a modest amount given the size of the economy. This would require a continuous watch on our foreign investment policy and strong initiatives from our side.

Industrial Deregulation and Administered Price Policy

4.15. Historically, like our trade policy regime, our domestic economic policies, be it in the product or the

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factor markets, have been highly restrictive.Domestic economic activities. have been subject to a wide array of detailed and discretionary Government controls.In the industrial sector, such controls took various forms: barrier to entry and expansion implemented through industrial licensing; reservation of a large number of industries for the public sector as well as the small scale sector; highly time-consuming procedures required for the exit of firms from an industry; and price and distribution controls on various industrial products. In recent years, it has been increasingly realised that this regulatory apparatus on domestic enterprises has led to wide-spread inefficiency in the economy in general and the industrial sector in particular. The Government has, therefore been relaxing some of these controls in recent years and especially during the last few months.

4.16. The thrust of the new industrial policy announced in July, 1991 is on removing bureaucratic controls that thwart industrial development and opening up a large number of industries to the private sector. The requirement of industrial licensing has been abolished for all but 18 product categories such as defence equipments, industrial explosives, electronic aero-space coal, petroleum, alcohal, hazardous chemicals, pharmaceuticals and drugs, and certain consumer goods such as sugar, edible oils, refrigerators, motor cars and consumer electronics. The maximum asset limit on the size of the companies which has hitherto been enforced under the Monopolies and Restrictive Trade Practices Act has been scrapped. As a result, firms will be able to grow to optimum size and reap the benefits of economies of scale - a process which was until now hindered by the anti-monopoly legislation. The location policy for industries has been substantially simplified and liberalised. The Government has also abolished the phased manufacturing programme, under which domestic manufacturers were hitherto required to increase the domestic input-content of their products in a specified time period. In another significant step, the number of industries reserved for the public sector has been drastically reduced, thus opening a large number of industries for the private sector.

4.17. These relaxations of the regulatory apparatus governing domestic economic activity have certainly eased the barriers to entry in the industrial sector. It should help to make the industrial sector more competetive both domestically and internationally. The thrust of the industrial policy during the Eighth Plan period should be to sustain the pace of these deregulatory measures. In this context, two areas appear to need attention (i) industrial deregulation and ii) administered price policy.

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Further Delicensing of Industries:

4.18. With the recent policy changes, industrial production subject to licensing control has been reduced to about 20 per cent. However, some aspects of the new industrial policy seem to be somewhat restrictive. For example, the continuation of the licensing requirements for industries such as sugar and edible oils has no clear justification. Equally important, there are no strong reasons as to why the production of consumer durables such as motor cars, refrigerators and consumer electronics should be subject to industrial licensing. During the Eighth Plan, therefore, there is a need to further shortern the list of industries requiring industrial licensing. Most of the consumer goods industries which now require industrial licensing should be delicensed. Only industries related to defence, explosives and hazardous chemicals should be in the restricted list of industries requiring industrial licensing.

Policy Towards Unviable Units:

4.19. A liberal policy towards the entry and expansion of firms is a necessary condition for inducing competition and enhancing the efficiency of resource use. However, the benefits of such a policy will be greatly reduced if we do not have a rational policy towards unviable firms. For maximum gain in efficiency, removal of entry barriers should also be accompanied by freedom to exit. Our industrial exit policy is highly restrictive and time-consuming. This is one of the major factors behind the wide-spread sickness in the industrial sector, both in the public and the private sectors. Rules and procedures regarding the exit policy for industry, therefore, need a thorough review with the aim of making it much easier for any economically unviable firm to close down.

4.20. A key consideration in evolving a practical industrial exit policy should be that it should protect the legitimate interests of labour, whether in the public or the private sector. In the case of units which can be made economically viable by restructuring the unit and retraining/redeploying the labour, no effort should be spared to do this. Only in the case of units where even restructuring would not render it economically viable should the option of closure of the unit be allowed. Even here, to minimise the adverse effects of closure of a unit on labour, several options like the introduction of compulsory insurance or the creation of a fund to pay retrenchment benefits to employees should be tried. The Government has already set up the National Renewal Fund with a view to providing assistance to cover the cost of retraining and redeployment of labour affected by the restructuring of an industrial unit. It is expected that the National Renewal Fund will help in the restructuring of about 30 to 40 public sector units within the next 2 to 3 years involving effective rehabilitation of

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