Role of Government and State Financial Institutions in Indian Economy Essay Example

also permitted to participate in production. This resolution specifically applied to industries involved in the production of capital and intermediate goods.

The private sector's main focus shifted to consumer goods, resulting in imbalances and structural problems. Extensive government controls and licensing requirements created these issues, as they failed to consider the impact on other sectors. For instance, setting low prices for essential items like food and transportation aimed to protect the poor's living standards but backfired by restricting necessary production.

The implementation of price ceilings during shortages often led to the creation of black markets for those commodities and encouraged tax evasion among participants in these black markets. The extensive controls, large public sector, and numerous government programs all contributed to the significant growth in the administrative structure of the government. Furthermore, the government attempted to provide employment opportunities for the unemployed, resulting in a bloated and inefficient bureaucracy that took excessive amounts of time to process applications and forms. Consequently, business leaders expressed frustration over spending more time obtaining government approval rather than managing their companies. In 1985, India initiated its current economic reforms by eliminating certain licensing regulations and other controls that hindered competition.

Since 1991, various reforms have been implemented in the form of new economic policies. These reforms encompass currency devaluations, partial convertibility of currency, reduced quantitative restrictions on imports, decreased import duties on capital goods, subsidies reduction, liberalized interest rates, removal of licenses for most industries, sale of shares in selected public enterprises, and tax reforms. Furthermore, the pace of liberalization quickened after 1991. By the mid-1990s, several sectors reserved for public ownership were significantly reduced to promote private-sector investment in energy, steel,

oil refining and exploration, road building, air transportation, and telecommunications. However, the defense industry remained closed to private sector involvement by the mid-1990s.

Foreign-exchange regulations were liberalized, foreign investment was encouraged, and import regulations were simplified. The average import-weighted tariff was reduced from 87 percent in FY 1991 to 33 percent in FY 1994. Economic Development Planning in India dates back to the 1930s. Even before independence, the colonial government had established a planning board that lasted from 1944 to 1946. Private industrialists and economists published three development plans in 1944.

India's leaders adopted formal economic planning as a means to intervene in the economy and promote growth and social justice after gaining independence. The Planning Commission, established in 1950, operates independently of the cabinet and reports solely to the prime minister. The government's efforts are channeled through Five Year plans, beginning with the First Five-Year Plan (FY 1951-55), which aimed to stimulate balanced economic development while addressing imbalances resulting from World War II and partition. The plan prioritized agriculture, including projects that integrated irrigation and power generation. In contrast, the Second Five-Year Plan (FY 1956-60) concentrated on industrialization, particularly in the public sector, focusing on basic heavy industries and enhancing the economic infrastructure.

The plan also emphasized social goals, such as achieving a more equal distribution of income and extending the benefits of economic development to disadvantaged individuals. The Third Five-Year Plan (FY 1961-65) aimed to significantly increase national and per capita income while expanding the industrial sector and addressing the neglect of agriculture in the previous plan. It targeted a yearly growth rate of national income of over 5 percent and anticipated achieving self-sufficiency in

food grains by the mid-1960s. The Fourth Five-Year Plan (FY 1969-73) aimed for a 24 percent real increase in public development expenditures compared to the third plan. The Fifth Five-Year Plan (FY 1974-78) was developed in late 1973 during a period of rapidly rising crude oil prices, which necessitated several revisions due to price fluctuations. The Seventh Five-Year Plan (FY 1985-89) envisioned allocating resources more towards energy and social spending, at the expense of industry and agriculture.

During the specified period, the main increase occurred in transportation and communications expenditure, which accounted for 17 percent of public-sector spending. The schedule for the Eighth Five-Year Plan (FY 1992-96) was affected by government changes and uncertainty surrounding the relevance of planning in a more liberal economy. Two annual plans were effective in FY 1990 and FY 1991 until the eighth plan was eventually launched in April 1992. This plan focused on market-based policy reform and prioritized selling off failing and unnecessary industries while promoting private investment in sectors such as power, steel, and transport.

* Secondly, the proposal emphasizes the importance of giving priority to agriculture and rural development.
* Furthermore, it aims to address illiteracy and enhance social infrastructure, including the provision of fresh drinking water.
* Ultimately, the conclusion of the Planning and Economy discussion is that India's economy, which comprises a combination of public and private enterprise, is too vast and diverse to be completely predictable or responsive to planning authorities' directions.
* Key drawbacks include inadequate progress in income distribution and poverty alleviation, delays and cost overruns in numerous public-sector projects, and insufficient returns on various public-sector investments.

Despite not meeting expectations, the plans offer valuable guidance for investment

priorities, policy recommendations, and financial mobilization. The Reserve Bank of India (RBI) plays a crucial role in government's effort to ensure effective economic development. It controls the value of the Indian rupee and manages inflation through regulation or deregulation. Additionally, the RBI facilitates money flow and monitors transactions.

The Reserve Bank of India (RBI) was established in 1935 under the provisions of the Reserve Bank of India Act, 1934. As the central banking authority of India, it plays a crucial role in the Indian government's development strategies. The RBI controls monetary policy and currency reserves and serves as a bank for both national and state governments. Its tasks include formulating, implementing, and monitoring monetary policy to ensure adequate credit flow to productive sectors.

The Bank's establishment had multiple purposes, such as regulating banknotes, maintaining reserves for monetary stability, and operating the credit and currency system for the country's benefit. The Bank utilizes two significant tools: Monetary Policy and Fiscal Policy. These tools can be classified into quantitative tools, which indirectly manage credit volume and inflation, and qualitative tools that control money supply in specific sectors of the economy. An example of a quantitative tool is the Bank Rate, which denotes the rate at which the Bank offers finance to commercial banks. Any alterations in the Bank Rate serve as a signal to banks to adjust their deposit rates and Prime Lending Rate accordingly.

The role of bank rate in India is limited because the structure of interest rates is administered by RBI. Commercial banks have specific refinance facilities such as the Cash Reserve Ratio (CRR) where they must maintain a minimum average daily cash reserve equivalent with RBI.

This ratio can vary between 3 and 15 percent and is used by RBI to either impound excess liquidity or release funds needed for the economy. In addition to the CRR, banks are also required to maintain a minimum proportion of their Net Demand and Time Liabilities as liquid assets, known as Statutory Liquidity Ratio (SLR).

Repos and Reverse Repos are transactions authorized by the RBI. In these transactions, two parties agree to sell and repurchase the same security. The seller sells specified securities with an agreement to repurchase them at a future date and price. On the other hand, the buyer purchases the securities with an agreement to resell them to the seller at a predetermined price on a future date. The seller refers to this transaction as a Repo, while the supplier of funds calls it a Reverse Repo.

Depending on the initiating party, a particular transaction may be called Repo or Reverse Repo. The current monetary policy rates are as follows: Bank rate-6%, Repo Rate-7.25%, Reverse Repo rate-6.25%. The SLR is at 8.6% and the CRR is at 6%. The fiscal policy includes government revenue generation and expenditure.

The government implements a policy called budgetary policy or fiscal policy to generate and spend revenue. This policy encompasses both government expenditure and revenue, determining the amount and flow of expenditure between the government and the economy. In essence, fiscal policy is a component of national economic policy that addresses the central government's receipts and expenditure.

The fiscal policy in India refers to the government's approach towards taxation, public spending, and borrowing. Its primary aim is to effectively gather resources for development by promoting rapid economic growth through

financial resource mobilization. This objective is pursued by both the central and state governments.

The mobilization of financial resources can be accomplished through different approaches, including taxation, public savings, and private savings. Both central and state governments have made efforts to allocate these resources effectively. The allocations are focused on development projects such as railways and infrastructure, as well as non-development activities like defense, interest payments, and subsidies. However, it is essential for fiscal policy to prioritize the allocation of resources towards the production of socially beneficial goods and services. India's fiscal policy aims to promote the production of desirable goods while discouraging the production of socially undesirable ones.

The main goal of fiscal policy is to decrease income inequalities and promote social justice. This is achieved by imposing higher direct taxes, like income tax, on wealthy individuals while lower income groups face lower taxes. Furthermore, indirect taxes are levied more heavily on semi-luxury and luxury goods mainly consumed by the upper middle class and upper class.

The government dedicates a substantial portion of its tax revenue to implement Poverty Alleviation Programmes, with the objective of improving the welfare of individuals living in poverty. Additionally, fiscal policy aims to achieve price stability and manage inflation as a primary goal. Consequently, the government strives to control inflation by decreasing fiscal deficits, introducing tax saving schemes, and efficiently utilizing financial resources.

The government is taking multiple steps to enhance employment in the country. These measures consist of implementing effective fiscal strategies, investing in infrastructure, and generating both direct and indirect job opportunities. Additionally, providing reduced taxes and duties for small-scale industrial units (SSI) stimulates further investment and consequently generates more jobs.

Moreover, the Government of India has initiated various rural employment programs aimed at addressing issues in rural areas.

Similarly, the self-employment scheme aims to provide job opportunities for technically qualified individuals in urban areas. One of the main objectives of fiscal policy is to achieve balanced regional development, and the government offers incentives to establish projects in underdeveloped regions. These incentives comprise cash subsidies, tax concessions and holidays, financing at lower interest rates, and more.

By implementing fiscal policies such as exempting income tax on export earnings, customs, and central excise duties, as well as sales tax and octroi, efforts are made to boost exports. Additionally, the conservation of foreign exchange is achieved by providing fiscal benefits to import substitute industries and imposing customs duties on imports. These measures aim to reduce the deficit in the balance of payments by earning foreign exchange through exports and saving it through import substitutes. The correction of an adverse balance of payment can be achieved by either imposing duties on imports or providing subsidies to exports.

The goal of fiscal policy in India is to increase capital formation and accelerate economic growth. A lack of capital is a major factor keeping underdeveloped countries in a cycle of poverty. To promote capital formation, fiscal policy should prioritize encouraging savings and reducing spending. Additionally, the objective of fiscal policy is to increase a country's national income.

Fiscal policy plays a crucial role in promoting capital formation, leading to economic growth and subsequent increases in GDP, per capita income, and national income. One key area of focus has been the development of infrastructure, which is vital for achieving economic growth. The government utilizes fiscal policy

measures such as taxation to generate revenue.

A portion of the government's revenue is allocated to infrastructure development, benefiting all sectors of the economy. Moreover, fiscal policy aims to increase exports through measures such as income tax exemption on export earnings, sales tax exemption, and octroi exemption.

Foreign exchange provides economic benefits to industries that produce goods domestically and reduce imports. The earnings from exports and the savings from import substitution contribute to addressing the imbalance in the country's balance of payments. In conclusion, India is currently one of the world's largest economies and is projected to become the top-ranked economy globally by 2050. The country's economic growth accelerated after implementing market-oriented reforms in the 1990s, allowing for international competition and foreign investment. Although the government's role shifted from being a controller to a regulator, it remains important in determining factors that impact the economy and establishing rules and regulations that prioritize public welfare.

* As a result of the opening up of the economy, the government chose not to open sectors that are still in early stages and require time to compete with foreign players. Additionally, the government introduces new schemes to support individuals in their personal and professional endeavors.