Page 143 - DMGT401Business Environment

Business Environment

Notes The procedure of import of capital goods was simplified following the Industrial Policy of
1991. New units and units undergoing substantial expansion would be automatically
granted licenses for import of capital goods without any clearance from the indigenous
availability angle, provided their import is fully covered by foreign equity or the import
requirement was up to 25% of the value of plant and machinery subject to a maximum of
2 crore.
Import of OGL capital goods, non-OGL capital goods and restricted goods would be
allowed without a specific license, provided clearance was given by the RBI and foreign
exchange, because their imports are fully covered by foreign equity.

2. Rationalisation of Tariff Structure: On the recommendation of Chelliah committee, import
duty was drastically reduced to establish parity in prices of goods produced domestically
and internationally.

Example: The 1993-94 Budget reduced the maximum rate of duty on all goods from
110% to 85%, except for few goods, which was further reduced to 40% in 1998-99 and further to
35% in 2000-01.

3. Decanalisation: The new trade policy aimed at progressive decanalisation. The government
decontrolled 116 items allowing their exports without any licensing formalities. Another
29 items were shifted to OGL. It also decanalised 16 export items and 20 import items
including new print, non-ferrous metals, natural rubber, intermediate and raw material
for fertilizers. However, 8 items (petroleum products, fertilizers, etc.) remained canalised.
4. Exchange Rate Reforms: The government devalued the rupee in July 1991, which led to
depreciation in the value of the rupee against the five major international currencies by
roughly 22%. It also made the rupee convertible:
(a) Partial Convertibility of Rupee: In Budget 1992-93, the finance minister announced
Liberalised Exchanged Rate Systems (LERMS) under which 40% of the foreign
exchange receipts were to be exchanged through the RBI at the official exchange rate
and rest was allowed to be converted at market exchange rate. The official exchange
rate was lower than the market exchange rate.
(b) Fully Convertible on Current Account: The rupee was made fully convertible. Current
account convertibility means the freedom to buy or sell foreign exchange for the
following international transactions: (a) all payment due in connection with foreign
trade, current business, and normal short-term banking and credit facilities (b)
payment due as interest on loans and as net income from other investments (c)
payments of moderate amount of amortisation of loans or for depreciation of direct
investment and (d) moderate remittances for family living expenses.

5. Phased Manufacturing Programme: PMP, according to which organisations were required
to substitute all the imported parts with Indian parts in a specified period, was abolished.
6. Trading House: The 1991, the policy allowed export houses and trading houses to import
a wide range of items. The government also permitted the setting up of trading houses
with 51% foreign equity for the purpose of promoting exports. Under the 1992-97 trade
policy, export houses and trading houses were provided the benefit of self-certification
under the advance license system, which permits duty free imports for exports.

7. EOU/EPZ/EHTP/STP: The units undertaking to export their entire production of goods
may be set up at Export Processing Zones (EPZ), Electronic Hardware Technology Park
(EHTP), Software Technology Park (STP) and Export-Oriented Units. EPZs are special
enclaves separated from Domestic Tariff Area (DTA) by fiscal barriers and are intended to

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