Page 115 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 10: Critique of Indian Economy Policies—Pre and Post Reforms

Instruments of Economic Policy in India Notes
The instruments of economic policy vary according to the types of economic policies. Moreover,
there are two types of economic policies : macro and micro-economic policies.
1. Macro-economic Policies : The big aggregative macro variables, such as employment, national
output, general price level, investment, rate of exchange, and saving are dealt in the macro-
economic policies.
2. Micro-economic Policies : These are sectoral policies which direct and contribute to the growth
in the individual sectors of the economy.
1. Macro-economic Policies : These policies include the whole spectrum of economic activity
where the state has to employ different weapons to achieve the targeted goals. However, these
different weapons cannot be seen in isolation.
The main instruments of macro-economic policy are given below :
(i) Fiscal Policy : It is among the main instruments and is also called the budgetary policy. It
operates through the budgetary operations wherein public revenue (taxes) and public
expenditure form the core constituents of budget. In addition to the taxes of different type
Governments can and do raise large sums of money by way of borrowings. Subsidies,
economic and social sector, etc. are the main items on the expenditure side. The items
whether on the revenue side and the expenditure side have the potential to influence the
course of economic activity.
(ii) Monetary Policy : The volume and price of money in an economy is dealt by the monetary
policy.
Both excess and inadequate supply money in the economy is bad. An inadequate quantity
of money may fail to provide the required liquidity for the growing volume of transactions
and an excessive supply of money may prove inflationary.
(iii) Commercial Policy : Government’s attitude towards the external sector of the economy is
defined by the commercial policy. It is the policy towards investment by foreign capital in
the host country, policy towards inflows and outflows of foreign exchange, goods and
services. There may be a total open-door policy or restrictive or a mild protection in the
economy.
2. Micro-economic Policies : The micro-economic policies refer to individual sectors like
agriculture, industry, and services of different types. Thus, the state may permit and promote
certain lines of activity in agriculture, industry and services. At same time, the state may also
prohibit and discourage certain lines of action. The micro-economic policies may have
instruments such as export control, import control, industrial licensing, quota-permit system,
competition or anti-monopoly policy, policy of buffer stocks, procurement policy and policy of
minimum support prices among others.
10.3 Process of Economic Policy Formulation

People of different inclination and interest are involved in the process of formulation of economic
policy in India. First, legislatures as political institutions are mainly responsible for policy-making.
In the India, the political decision-making is supreme. The Government constitutes a committee or a
task-force to generate policy options, makes ‘necessary political changes’ in those recommendations,
and, then, announces its decision at appropriate forums either in the form of an executive order or a
legislative resolution. The character of political system plays a crucial role in identifying and prioritising
problems. Gradually, an environment of ‘more consultative and responsive’ process of policy
formulation has evolve in India. Today, political parties are speaking about creating ‘village business
hubs’. The role of mass-media and non-governmental organisations advocating new policy options
got acceptance in policy-making process. The National Advisory Council (NAC) is an example of
widening of consultative process. It consists of non-governmental activists and headed by chairperson

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