Unit-II: QUS 1-Monetary and fiscal policies

Definition of Monetary Policy

Monetary Policy is a strategy used by the Central Bank to control and

regulate the money supply in an economy. It is also known as credit policy.
In India, the Reserve Bank of India looks after the circulation of money in
the economy.

There are two types of monetary policies, i.e. expansionary and

contractionary. The policy in which the money supply is increased along
with minimization of interest rates is known as Expansionary Monetary
Policy. On the other hand, if there is a decrease in money supply and rise in
interest rates, that policy is regarded as Contractionary Monetary Policy.

The primary purposes of the monetary policy include bringing price

stability, controlling inflation, strengthening the banking system, economic
growth, etc. The monetary policy focuses on all the matters which have an
influence on the composition of money, circulation of credit, interest rate
structure. The measures adopted by the apex bank to control credit in the
economy are broadly classified into two categories:

 General Measures (Quantitative Measures):

 Bank Rate
 Reserve Requirements i.e. CRR, SLR, etc.
 Repo Rate Reverse Repo Rate
 Open market operations
 Selective Measures (Qualitative Measures):
 Credit Regulation
 Moral persuasion
 Direct Action
 Issue of directives

Definition of Fiscal Policy

When the government of a country employs its tax revenue and expenditure
policies to influence the overall demand and supply for commodities
and services in the nation’s economy is known as Fiscal Policy. It is a
strategy used by the government to maintain the equilibrium between
government receipts through various sources and spending over different
projects. The fiscal policy of a country is announced by the finance minister
through budget every year.
If the revenue exceeds expenditure, then this situation is known as fiscal
surplus, whereas if the expenditure is greater than the revenue, it is known
as the fiscal deficit. The main objective of the fiscal policy is to bring
stability, reduce unemployment and growth of the economy. The
instruments used in the Fiscal Policy are the level of taxation & its
composition and expenditure on various projects. There are two types of
fiscal policy, they are:

 Expansionary Fiscal Policy: The policy in which the government

minimises taxes and increase public spending.
 Contractionary Fiscal Policy: The policy in which the government
increases taxes and reduce public expenditure.

BASIS FOR
FISCAL POLICY MONETARY POLICY
COMPARISON

Meaning The tool used by the government in The tool used by the central bank
which it uses its tax revenue and to regulate the money supply in
expenditure policies to affect the the economy is known as
economy is known as Fiscal Policy. Monetary Policy.

Administered by Ministry of Finance Central Bank

Nature The fiscal policy changes every year. The change in monetary policy
depends on the economic status
of the nation.

Related to Government Revenue & Expenditure Banks & Credit Control

Focuses on Economic Growth Economic Stability

Policy Tax rates and government spending Interest rates and credit ratios
instruments

Political Yes No
influence
The following are the major differences between fiscal policy and monetary
policy.
1. The policy of the government in which it utilises its tax revenue and
expenditure policy to influence the aggregate demand and supply for
products and services the economy is known as Fiscal Policy. The policy
through which the central bank controls and regulates the supply of
money in the economy is known as Monetary Policy.
2. Fiscal Policy is carried out by the Ministry of Finance whereas the
Monetary Policy is administered by the Central Bank of the country.
3. Fiscal Policy is made for a short duration, normally one year, while the
Monetary Policy lasts longer.
4. Fiscal Policy gives direction to the economy. On the other hand,
Monetary Policy brings price stability.
5. Fiscal Policy is concerned with government revenue and expenditure,
but Monetary Policy is concerned with borrowing and financial
arrangement.
6. The major instrument of fiscal policy is tax rates and government
spending. Conversely, interest rates and credit ratios are the tools of
Monetary Policy.
7. Political influence is there in fiscal policy. However, this is not in the case
of monetary policy.
QUS2- Industrial Policy
At the time of Independence, Indian economy was facing severe problems of
illiteracy, poverty, low per capita income, industrial backwardness and
unemployment. After India attained its Independence in 1947, a sincere effort
was made to begin an era of industrial development. The government adopted
rules and regulations for the various industries. This industrial policy
introduction proved to be the turning point in the Indian Industrial history.
Industrial Policy
Industrial policy is a document that sets the tone in implementing, promoting
the regulatory roles of the government. It was an effort to expand the
industrialization and uplift the economy to its deserved heights. It signified the
involvement of Indian government in the development of industrial sector.
With the introduction of new economic policies, the main aim of the
government was to free the Indian industry from the chains of licensing. The
regulatory roles of the Indian government refer to the policies towards
industries, their establishments, their functioning, their expansion, their
growth as well as their management.
Industrial growth of a country is guided and regulated through its industrial
policies. Let’s understand the journey of various industrial policies
I. Industrial Policy of 1948
The first industrial policy after independence was announced on 6th April
1948. It was presented by Dr Shyama Prasad Mukherjee then Industry
Minister. The main goal of this policy was to accelerate the industrial
development by introducing a mixed economy where the private and public
sector was accepted as important in the development of the economy. It saw
Indian economy in socialistic patterns. The large industries were classified into
four categories:
 Industries with exclusive State Monopoly/Strategic industries: It
included industries engaged in the activity of atomic energy, railways
and arms and ammunition.
 Industries with Government control: This category included industries of
national importance. 18 such categories were mentioned in this
category such as fertilizers, heavy machinery, defence equipment, heavy
chemicals, etc.
  Industries with Mixed sector: This category included industries that were
allowed to operate independently in private or public sector. The
government was allowed to review the situation to acquire any existing
private undertaking.
 Industry in the Private sector: Industries which were not mentioned in
the above categories fall into this category. High importance was
granted to small businesses and small industries, leading to the
utilization of local resources and creating employment.
II. Industrial Policy Resolution, 1956
This second industrial policy was announced on April 20, 1956, which replaced
the policy of 1948. The features of this policy were:
 A new classification of Industries.
 Non-discriminatory and fair treatment for the private sector.
Promotion of village and small-scale industries.
 To achieve development by removing regional disparity.
 Labour welfare.
The IRDA divided industries into three categories:
 Schedule A industries: The industries that were under the monopoly of
the state or government. It included 7 industries. The private sector was
also introduced in this industries if national interest required.
 Schedule B industries: In this category of industries, the state was
allowed to establish new units but the private sector was not denied to
set up or expand existing units e.g. chemical industries, fertilizer,
synthetic, rubber, aluminium etc.
 Schedule C industries: So the industries that were not a part of the
above-mentioned industries then it formed a part of Schedule C
industries.
III. Indian Policy Statement, 1973
Indian Policy Statement of 1973 identified high priority industries with
investment from large industrial houses and foreign companies were
permitted. Large industries were permitted to start operations in rural and
backward areas with a view to developing those areas and enabling the growth
of small industries around. And so the basic features of Indian Policy Statement
were:
 The policy was directed towards removing the distortions, it provided for
closer interaction between agriculture and industrial sector.
 Priority was given towards generation and transmission of power.
III. Indian Policy Statement 1977
Indian Policy Statement was announced by George Fernandes then union
industry minister of the parliament. The highlights of this policy are:
A] Target on the development of small-scale and cottage industries.
 Household and cottage industries for self-employment.
 Tiny sector investment up to 1 lakhs.
 Smallscale industries for investment up to 1-15 lakhs.
B] Large-scale sector
 Basic industries: infrastructure and development of small-scale and
village industries.
 Capital goods industries: meeting the requirement of cottage industries.
 High technological industries: development of agriculture and smallscale
industries such as petrochemicals, fertilizers and pesticides.
C] Restrict the control of big business houses.
D] Role of the public sector:
 Development of ancillary industries.
 To make available expertise in technology and management in small and
cottage industries.
E] Revival and rehabilitation of sick units.
V. Industrial Policy, 1980
The Congress government announced this policy on July 23rd, 1980. The
features of this policy are:
 Promotion of balanced growth.
  Extension and simplification of automatic expansion.
 Taking over industrial sick units.
VI. New Industrial Policy, 1991
The features of NIP, 1991 are as follows:
 Public sector de-reservation and privatization of public sector through
disinvestment.
 Industrial licensing.
 Amendments to Monopolies and Restrictive Trade Practices (MRTP) Act,
1969.
 Liberalised Foreign Investment Policy.
 Foreign Technology Agreements (FTA).
 Dilution of protection to SSI and emphasis on competitiveness
enhancement.
Meaning:
Industrial policy is a statement which defines the role of government in
industrial development. The place of the public and private sectors in
industrialisation of the country. The relative role of large and small industries.
Objectives:
The major objectives of industrial policy are:
(i) Rapid Industrial Development:
The industrial policy of the Government of India is aimed at increasing the
tempo of industrial development. It seeks to create a favourable investment
climate for the private sector as well as mobilise resources for the investment
in public sector. In its way the government seeks to promote rapid industrial
development in the country.
(ii) Balanced industrial Structure:
The industrial policy is designed to correct the prevailing lopsided industrial
structure. Thus, for example, before independence, India had some fairly
developed consumer goods industries. But the capital goods sector was not
developed at all and basic and heavy industries were by and large absent.
(iii) Prevention of Concentration of Economic Power:
The industrial policy seeks to provide a framework of rules, regulations and
reservation of spheres of activity for the public and the private sectors. This is
aimed at reducing the monopolistic tendencies and preventing concentration
of economic power in the hands of a few big industrial houses.
(iv) Balanced Regional Growth:
Industrial policy also aims at correcting regional imbalances in industrial
development. It is the task of industrial policy to work out programmes and
policies which lead to industrial development or industrial growth.
QUS 3-Industries (Development and Regulation) Act
Growth of the industrial sector at a higher rate and on a sustained basis is a
major determinant of a country's overall economic development. In this
regard, the Government of India has issued industrial policies, from time to
time, to facilitate and foster the growth of Indian industry and maintain its
productivity and competitiveness in the world market.
In order to provide the Central Government with the means to implement its
industrial policies, several legislations have been enacted and amended in
response to the changing environment. The most important being
the Industries (Development and Regulation) Act, 1951 (IDRA) which was
enacted in pursuance of the Industrial Policy Resolution, 1948. The Act was
formulated for the purpose of development and regulation of industries in
India by the Central Government.
The main objectives of the Act is to empower the Government:- (i) to take
necessary steps for the development of industries; (ii) to regulate the pattern
and direction of industrial development; (iii) to control the activities,
performance and results of industrial undertakings in the public interest. The
Act applies to the 'Scheduled Industries' listed in the First Schedule of the Act.
However, small scale industrial undertakings and ancillary units are exempted
from the provisions of this Act.
1. Council Board Central Advisory Council: Establish under section-5 a
council for the purpose of advising the Govt. on the issues of
development and regulation of the scheduled industry, in a process of
making of rules under the act and the overall administration of the act.
2. Functions of the Council  Development Council which shall consist of
members who in the opinion of the Central Government  Promoting
arrangements for better marketing  Commanding targets of
production, coordinating production programmes and reviewing
progress from time to time  Advising on any matter relating to the
industry  Suggesting norms of efficiency with a view to eliminating
waste, obtaining maximum production, improving quality and reducing
costs
3. Features  Existing undertakings need to be registered with the
Government within the prescribed time limit  New units are permitted
only through an industrial license  Government has the power to
conduct an investigation, assume management control provide relief or
control supply and distribution of products of certain industrial
undertakings.  To change the location of the unit.
4. Licensing (Section11-A) It is required for-  To set-up a new unit 
Manufacturing a new article  Licence for Shifting Location  Licence to
carry on Business  Licence of effecting Substantial Expansion
5. Power of Central Government  Fix the standard of production 
Prohibit any practice which reduce there production  Power to take
over management or control  Take over without investigation 
Control supply and price of certain articles
6. Sector open to foreign Investors. • Hotel & tourism • Advertising Sector
• Insurance sector • Telecommunication • Power sector with approval •
Film Industry • Drugs & Pharmaceuticals
7. List of Industries reserved for Public Sector  Arms and ammunition and
allied of defense equipment  Atomic Energy  Mineral Oils  Railway
Transport
8. Industrial License is compulsory  Alcoholic drinks  Cigar and
Cigarettes of tobacco  Defense equipment  Hazardous chemicals 
Drugs and pharmaceutics
9.  Electrical Equipment  Telecommunication  Transportation 
Agricultural Machinery  Earth Moving Machinery  Medical & Surgical
 Appliances  Chemical  Textile  Sugar  Defence Industries  Iron &
Steel Industries
[Link] Where any person failure on-  Provision sec10(1)- Failure to
get Registration  Failure to obtain License for manufacture new article
 Failure to comply direction u/s 16 after investigation The Act contains
penalties for contravention of the provisions of the Act and for making
false statement by any person under the provisions of the Act These
contravention attract imprisonment up to 6 months or fine extending up
to Rs.5000/-
QUS 4- Industrial Licensing Policy
The changed industrial licensing policy was announced in February 1970, by
the Government of India, according to the recommendations of the
Administrative Reforms Committee (ARC), Industrial Licensing Policy Enquiry
Committee (Dutt Committee) and Planning Commission.
This licensing policy mainly aims to giving much freedom to private enterprise.
The objective of eliminating excessive concentration of economic power is
sought to be achieved both by modification in the licensing policy with regard
to large industrial houses and through enactment of the Monopolies and
Restrictive Trade Practices Act, which came into operation with effect from 1st
June 1970.
Clearance under the Monopolies and Restrictive Trade Practices Act is
necessary before industrial licence can be granted to such firms as are already
within the ambit of the Act or likely to be subject to its provisions after the
inclusion of the schemes for which licences are sought.
The new industrial licensing policy is oriented towards providing greater
opportunities to fresh entrants in the industrial field and the small
entrepreneurs. New undertakings as well as expansion of existing units,
requiring an investment of Rs. 1 crore or less, have been generally exempted
from the licensing requirements, Subject to certain considerations relating to
the requirements of foreign exchange.
In the other category of industries requiring investment ranging from Rs. 1
crore to 5 crores, licences will be issued liberally to parties other than large
industrial houses and foreign concerns, except in such cases where exigencies
of foreign exchange requirements necessitate careful scrutiny.
A ‘core sector’ has been formed to watch and ensure timely implementation of
programmes in the industries and the imputs required for the industries will be
provided on a priority basis.
Industries in this sector and heavy investment sector involving an investment
of more than Rs. 5 crores, will be opened to large industrial houses and foreign
concerns are subject to the reservation made in favour of public sector by the
Industrial Policy, 1956.
The new industrial licensing policy also envisages that there will be a joint
sector of enterprises, comprising both public and private entrepreneurs,
covering major projects in the core and heavy investment sectors.
This decision was taken in view of the fact that several of the large industrial
units tend to draw heavily upon the resources of public financial institutions. It
is also considered desirable to allow to these institutions a larger say in
matters concerning the policy of these units.
The delineation of sectors under new industrial licensing policy imposes certain
restrictions on large industrial houses and foreign concerns. These restrictions
may be relaxed in case the interests of the economy, so require.
That is in the middle sector involving investment between Rs. 1 crore to five
crores, applications for normal expansion can be considered from established
firms wherever such expansion is considered desirable in the interest of cost
efficiency.
Moreover, even the larger industrial houses and foreign concerns will be
permitted to start new units or to expand the older units where certain
minimum export commitments are undertaken.
QUS 5- Public, Private, Joint and Co-operative sectors
THE PUBLIC SECTOR Any organisation that is under government oumership
and control are called public sector units. Here, public means the govenmt:nt
and not the general public. On the basis of the way they are created, and the
flexib ility and autonomy provided to them, public sector units are divided into
'Departmer ltal Undertakings' (or Departments), 'Corporations', and
'Companies'. For example, anything, which is directly under the ownership,
control, and management of glovernment, such as railways, post & telegraph,
atomic power, etc. are called 'departments'. Likewise, any public undertakings,
which have been formed by tht : special act of the parliament or state
legislatures, are called 'corporations'. Some cbf the examples ofpublic
corporations are Life Insurance Corporation of India, Indl st rial Financial
Corporation of India, Darnodar Valley Corporation, Oil & Natural C3as
Commission, etc. Lastly, the public undertakings, which are formed under the
Companies' Act, 1956, like any other companies, are called government
companies. According to this Act. a government company is that in which not
less than 5 1 % of 'paid-up share capital is owned by the Central government,
or by any State Governml ent or Governments, or jointly by the Central and
State Governments. Examples oi 'government companies are Bharat Heavy
Electricals Limited, Madras Refinexies Ltd., Gujarat State Fertiliser Corporation
Ltd., etc. They are run like any other private coinpanies. The term "public
enterprises" usually refer to non-depa~ trnental undertakings, which include
corporations as well, companies. Depending, on which government is the
owner, organisations in public sector can be categori5 ;ed as central public
enterprises, state public enterprises, and local public enterprisers (enterprises
owned and managed by local government).
In most of the countries, the activities, which are not favoured or undertaken
by private sector, are left to the public sector to perform. In other words,
public (and merit) goods and services, such as water supply, roads and bridges,
health, and education are provided only by public sector (government). In
India, fiom the very beginning since independence, a 'mixed economic system'
was envisaged. Under this system both public and private sectors were
expected to make equally significant contributions to the progress and
prqpperity of the country. In the Indian concept of 'mixed economy',
The major objectives of public sector are to help in rapid economic growth,
rapid industrialisation, and create infrastructure for economic development.
The other avowed objectives of public sector are: to promote redistribution of
income and wealth, to promote balanced regional de velopment, to generate
employment opportunities, and to promote import su .bstitution and save
precious foreign exchanges.
THE PRIVATE SECTOR Any organisation, which does not belong to public
sector, can be taken to be part of private sector. Definitionally the firms,
owned and managed exclusively by private parties (could be individual or
collective) are known as private sector units. Private sector is sub-divided into :
a) private corporate sector, which includes : i) joint stock companies, and ii)
cooperatives, and b) household sector. In India, over the years, the range of
goods and services where private sector has taken initiative and is playing a
major role, has widened substantially. These days, almost everything
conceivable is being manufactured in private sector. In terms of number of
owners involved, private sector can be subdivided into two categories, namely,
'individually owned' and 'collectively owned'. Individually owned firms are
managed by single person and work with the objective of profit maximisation.
Collectively owned private firms can Mer be sub-divided into : i) partnership, ii)
joint-stock companies, arid iii) cooperatives (discussed in Section 14.5). In
partnership ope, the firm is jointly owned and managed/controlled by more
than one person. As partnership is based on the sharing of the profit the main
objective of a partnership fms like indn idm. '! owned firm, is maximisation of
profit.
The private sector plays an important role in the industrialisation and
development Ownership Structure process of a country. Developed countries
have a long history of private sector involvement. Particularly in the West,
private sector has been the prime mover of growth. Because of the profit
motive, private sector tends to be more innovative in its approach towards
production and processes.
Small-scale industries create employment opportunities, make efficient use of
the local resources, provide scope for the exploitation of local entrepreneurial
abilities, help in income generations, reduce interpersonal income disparities
and so on.
THE JOINT SECTOR Joint sector is a type of organisation where both
government and private entities act as collaborating partners. Though joint
sector gained prominence after the Dutt Committee report in 1969, this form
of organisations had already started appearing after the Industrial Policy
Resolution of I 956. This resolution made provisions for collaborative ventures
between private and public sector. In this type of arrangement, both private
sector and public sector own, control, and manage resources jointly, hence the
name 'joint sector'. Earlier, public financial institutions hardly had any control
over the resources they had invested in private sector. The idea ofjoint sector
was broached so that public sector could have some control over the financial
resources. In joint sector, not more than 50% of equity can be owned by the
gover&nent&d financial institutions together. Secondly, a single private
investor cannot hold more than 25% of the paid-up capital without the
permission of the Government of India. A joint sector firm can be formed in
accordance with the Companies' Act of 1956. Some of the famous names in
joint sector are Bharat Shell, Container Corporation of India (Concor), Maruti
Udyog Ltd., Gujarat State Fertiliser Corporation, Haldia Petrocl~emicals Ltd.,
Mangalore Refineries and Petrochemicals Ltd. etc.
Role and Advantages of Joint Sector The joint sector was envisaged so that
some of the elements of social development could be provide;. Like pqblic
sector, joint sector also help in achieving social objectives such as creation of
employment opportunities, reduction of inter-regional disparity, and
development of backward regions. Participation of the government in the
business helps control concentration of monopoly power; curb the growth of
monopolies and business malpractices. The advantages ofjoint sector are that
it can combine best of both the public sector and the private sector. In a joint
sector firm, much-needed financial resources can be obtained hmthe public
financial institutions and the private party can put in their best practices so
that it can lead to better industrial growth in the desired direction. Thus joint
sector can broad base the industrial structure by motivating firms to areas or
industries where private sector would not have ventured alone
THE COOPERATIVE SECTOR
The organisations where people join voluntarily to pursue economic interests
are known as cooperative societies, which are collectively known as
cooperative sector. A cooperative society is a voluntary, independent business
enterprise, formed to satisfy comnlon need(s) of the participating members of
the venture. They can be production-, market- and service-oriented. In tem~s
of organisations, cooperatives differ from other types of firms.
These characteristics of the cooperative sector make it essentially different
fiom private and public sector. By virtue of the very nature of the organisation,
cooperatives call for direct responsibility and accountability from the
cooperating agents. Cooperative type organisations, of course of different
variants, are very popular in European countries, (especially the Scandinavian
countries), Japan, Israel, Canada, and India. Cooperative firms were quite
popular in erstwhile USSR. Consumers' cooperatives, agricultural cooperatives,
and other types, such as housing, banking and workers' productive
cooperatives are quite popular in West-European countries. Literature
suggests that some of the largest concenttation of cooperative development is
still there in Western Europe.
Cooperative ventures in India span sectors such as agriculture, industry, and
services. Within these sectors. cooperatives are found in many sub-sectors.
Functionally, these cooperatives work for various purposes such as marketing,
!supply of raw materials, credits, etc. Some of the credit societies in the
cooperative sector are agricultural credit societies, indusirial cooperative
banks, non-agricultural credit societies, and State cooperative agricultural and
rural development banks.
Objectives of Cooperative Sector The objective of cooperative societies is to
provide maximum possible service at the least expense possible. Thus
cooperative societies don't pursue economic objective of maximisation
ofprofits. However, they are treated for tax purpoes like one private sector,
because the cooperatives have economic interests and their effectiveness is
measured by the same standard as that for private sector. Cooperatives were
conceived to create a system of self-help among the poorer lot of the society.
QUS 6-Micro, Small and Medium Enterprises in India
The Micro- Small and Medium Enterprises (MSMEs) are small sized entities,
defined in terms of their size of investment. They are contributing significantly
to output, employment export etc. in the economy. They perform a critical role
in the economy by providing employment to a large number of unskilled and
semi-skilled people, contributing to exports, raising manufacturing sector
production and extending support to bigger industries by supplying raw
material, basic goods, finished parts and components, etc.
As per the ‘MSME at a Glance’ Report of the Ministry of MSMEs, the
sector consists of 36 million units and provides employment to over 80 million
persons. The Sector produces more than 6,000 products contributing to about
8% of GDP besides 45% to the total manufacturing output and 40% to the
exports from the country.
How MSMEs are classified?
The MSMEs are classified in terms of investment made in plant and
machineries if they are operating in the manufacturing sector and investment
in equipment for service sector companies.
Though the primary responsibility of promotion and development of
MSMEs is of the State Governments, the center has passed an Act in 2006 to
empower the sector and also has formed a Ministry (Ministry of MSMEs). It
was the Micro, Small and Medium Enterprises Development (MSMED) Act
which was notified in 2006 that defined the three tier of micro, small and
medium enterprises and set investment limits.
Classification of MSMEs

Classification of the MSME Ceiling on Investment in Plant and

Machinery (in Rs)

Micro Below 25 lakhs

Small 25 lakhs to 5 crores

Medium 5 crores to 10 crores