Page 142 - DMGT401Business Environment

Unit 6: Fiscal Policy

In early 1990s, the electronic industry was in great pressure as market growth rate was very low. Notes
Understanding this, the then Finance Minister Dr. Manmohan Singh reduced the excise on
electronics, especially CTVs, which resulted in decrease in prices and rise in sales.
Not only this, over the years, the government has reduced taxes which has increased the
disposable household income. This increased demand and gave birth to the great Indian Middle
Class, resulting in a spurt in the sale of white goods and readymade garments.
Taxes on intermediary goods, corporate tax and dividend tax have an obvious impact on business.
One of the reasons that gave rise to the Indian consumer industry is the relaxation in fiscal
policy. The last few budgets have reduced savings rate and have given a free hand to banks to
distribute consumer loans to consumers.
A smart business person always keeps an eye on the fiscal policy to reap the maximum advantage
from opportunities and to minimize the prospective losses because of threats in the budget. Like
the budget of 2005-06 allows one to invest in mutual funds to avoid tax; it is now up to mutual
funds to reap the maximum benefit from this. The budget creates an atmosphere for investment.

Task Consider the economic budget of financial year 2009-2010. Make a note on
the points related to the education and retail sector.

6.2 Foreign Trade Policy and BOP

6.2.1 Import Policy: Prior to 1991

In the pre-reform period Indian import policy had two constituents:
1. Import Restrictions: In the initial phases of development, India had to import capital
equipment, machinery, spare parts, industrial raw material etc. From time to time it had
to import food grains too, but because of stagnant exports, government had to decide to
import curtail. Import was classified under the categories of: Banned items, restricted
items, canalized items and items under OGL (Open General License.). Severe restrictions
were imposed on imports of not-essential goods. High import tariffs were used to control
import.
2. Import Substitution: Import substitution means reducing the dependability on imports
i.e. to produce goods that we are importing. Two broad objectives of the programme of
import substitution in India were:

(a) to save scarce foreign for the import of more important goods,
(b) to achieve self-reliance in the production of as many goods as possible.

6.2.2 New Trade Policy (1991)

The new policy substantially eliminates licensing, quantitative restrictions, and other regulatory
and discretionary controls. The main features of the new trade policy are:
1. Free Import and Export: The new trade policy made major changes in the import licensing
system by replacing a large part of administered licensing of imports by import
entitlements linked to export earnings. The system of advance license, designed to provide
exporters with duty free access to inputs, was strengthened further by simplifying and
speeding up the process of issuing these licenses.

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