ECONOMIC REFORM :- Since independence, India has built a mixed economy framework combining the advantages of both capitalist and socialist (planned) economy. This policy resulted in the creation of various rules and regulations, which aimed to control and prosper the economy, but it became a major hindrance in the growth and development of the economy. However, some scholars say that the increasing role of the public sector in economic activities has helped the Indian economy to:
- Increase savings
- An industrial sector developed which produces a variety of goods such as food grains and capital.
- Achieving food security through continuous expansion of agricultural production.
- In 1991, the Indian government initiated a new series of economic reforms in the face of the financial crisis and pressure from international organizations such as the World Bank and the IMF. These reforms came to be known as the New Economic Policy (NEP).
What is economic reform?
The new economic policy introduced by the government since 1991 to overcome the economic crisis and accelerate the rate of economic growth is called economic reforms. It is also known as New Economic Policy which includes liberalization, Privatization and Globalization (LPG).
Why were economic reforms needed?
1. Decline in Foreign Exchange Reserves :- In 1991, India was facing a crisis of foreign exchange or foreign debt. Because the government was not able to make repayment on its borrowings from abroad. And the foreign exchange reserves fell to such a level that it was not enough to pay for imports and also to pay interest to international lenders for more than two weeks. Was-
2. Financial Crisis :- The origin of the financial crisis can be traced back to the inefficient management of the Indian economy in the 1980s.
A) The government had to spend more than its revenue to meet the challenges like unemployment, poverty and population explosion. Continuing expenditure on development programs of the government did not generate additional revenue. Revenue was getting very less due to wrong development policies which led to financial crisis
B) Further, the government was not able to generate taxation and non-tax revenue.
C) The government was spending a major part of its income on sectors like social sector and defense sector which do not provide immediate returns.
D) The income from Public Sector Undertakings (PSUs) was also not sufficient to meet the rising expenditure.
So our foreign exchange, money borrowed from other countries and international financial institutions were being used to meet these needs.
3. Rising Government Debt (Fiscal Deficit):- In the late 1980s, the government was forced to take loans as the expenditure on subsidies and welfare schemes was more than the revenue. Between 1980 and 1990, India’s internal debt increased from 36 per cent to 56 per cent and external debt to nearly $70 billion. India was on the verge of declaring bankruptcy in payments.
4. Unfavorable Balance of Payments:- Imports were growing at a very high rate while the growth of exports was slow. Indian goods were in low demand in the international market due to their low quality and high prices. Moreover, sufficient attention was not given to boost exports to pay for the increasing imports. International banks stopped honoring Indian letters of credit (Cheques) for import transactions as India lost confidence in investors. Thus a serious problem of balance of payments had arisen.
5. Rising Prices of Essential Commodities:- The economic crisis in 1991 was further aggravated by rising prices. The poor performance of the private and public sector led to a fall in production and high duties on essential imports also led to a sharp rise in the prices of many essential commodities.
6. Gulf Crisis:- The Iraq War in 1990-91 led to a rise in petrol prices. Apart from this, India used to receive huge amount of remittances (receiving money from abroad) from Gulf countries in the form of foreign exchange.
To overcome the economic crisis in 1991, India approached the International Bank for Reconstruction and Development (IBRD), known as the World Bank and the International Monetary Fund (IMF) and received $7 billion in loans. In order to get the loan, India had to accept certain conditions which are as follows.
reducing the role of government in many areas (or liberalization),
Removal of restrictions on the private sector (or privatization)
Removal of trade restrictions between India and other countries (globalization).
Thus, The New Economic Policy (NEP) was announced in July 1991.
The new economic policy included macroeconomic reforms. The NEP has three broad components – liberalization, privatization and globalization. The main objective of the policy was to create a more competitive environment in the economy and to remove barriers to entry and growth of firms. This policy was mainly seen in the form of two measures:- Stabilization measures and Structural reform measures.
Classification of New Economic Policy ( NEP ) :-
1. Stabilization measures are short-term measures aimed at addressing some of the vulnerabilities developed in the balance of payments and bringing inflation under control. (e.g. devaluation of rupee which means reduction in the value of rupee i.e. domestic currency in terms of foreign currency.)
2. Structural reform policies are long-term measures aimed at improving the efficiency of the economy and increasing its international competitiveness by removing rigidities in various sectors.
NOTE :-
In the event of devaluation of the currency, the external value of the currency is reduced only, but its internal value is kept as before. Thus after devaluation, the purchasing power of currency within the country remains the same but becomes cheaper for foreigners. In short, devaluation is the reduction in the external value of a country’s currency.
The devaluation of currency can be explained with the help of an example. in terms of currencies, the exchange rate was pegged to pound sterling at Rs. 13.33 or Rs. 4.75/dollar in Sept. 1949. This was remained unchanged till June 1966, when the rupee was devalued by 36.5% to Rs. 21/pound or 1$ = Rs. 7.10. This system continued till the 1971 Due to this, US imports became expensive for India and Indian exports became cheap for America. In other words, devaluation led to reduction in India’s import expenditure. While export earnings increased. Thus by devaluation, equilibrium is established by reducing the adversity of the balance of payments of any country.
The structural reforms in The New Economic Policy 1991 can be seen in relation to
1. Liberalisation. 2. Privatisation 3. Globalization
1. Liberalisation : It means freeing the economy from the direct and physical control imposed by the government. In other words, it means removing all unnecessary controls and restrictions such as permit licenses.
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Reforms in the Industrial Sector:
Before 1991, industries were regulated in various ways:
- Industrial license was mandatory for starting a firm, winding up a firm or expanding or diversifying production.
- The private sector was not allowed in many industries.
- Some goods were reserved only for small scale industries.
- The government had control over the pricing and distribution of certain industrial products.
The main steps taken towards liberalization in 1991 :-
1. Licensing of Industries:- Industrial licensing was abolished for almost all products except alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, drugs
2. Amendment of the Monopolies and Restrictive Trade Practices Act (MRTP) :- The government imposed investment controls on industries. These restrictions were removed.
3. Liberalization in trade and investment:- Quantitative restrictions on trade such as tariff and non-tariff barriers were removed.
4. Liberalization in the financial sector:- Allow tax rates to be reduced, and give more freedom to financial institutions in their lending and deposit policies.
5. Non-reservation of public sector:- Now only for the public sector, defense equipment, nuclear power generation and railway transport are part of the reserve industry.
6. De-reservation of small scale industries:- Many items produced by small scale industries have now been de-reserved.
7. Removal of price controls:- In many industries the market has been allowed to set the prices.
Financial Sector Reforms (Banking Sector Reforms) :-
Before 1991 RBI used to make rules and decide how much amount bank can keep with it, fix interest rates, nature of lending to different sectors etc. but in new policy
The following reforms are included under the financial sector:
A) The financial sector was allowed to decide on a number of matters without consulting the RBI.
B) Reform policies led to the establishment of private sector banks in India.
C) The foreign investment limit in banks has been increased to about 50 per cent.
D) Banks that fulfill certain conditions have been given the freedom to set up new branches and run the existing branch as per their plan without the approval of RBI.
E) Foreign Institutional Investors (FIIs) like commercial bankers, mutual funds and pension funds are now allowed to invest in the Indian financial markets.
Thus, it can be said that before liberalisation, RBI was controlling the operations of the financial sector, whereas in the post-liberalisation period, the operations of the financial sector were mostly based on market forces.
Note :- RBI regulates commercial banks through various instruments like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending (PLR), Repo Rate, Reverse Repo Rate and fixes the interest rates. and determines nature. loans to various sectors. These are the ratios and rates which are decided by RBI and it is mandatory for all commercial banks to follow or maintain these rates. All these measures control the operation of commercial banks and also control the money supply in the Indian economy.
Financial Sector: The financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations and the foreign exchange market. The financial sector in India is regulated by the Reserve Bank of India (RBI) through various norms and rules. RBI decides how much amount the bank can keep, decides the interest rates, nature of lending to various sectors etc.
Types of Taxes
There are two types of taxes:-
(i) Direct taxes include taxes on the income of individuals as well as on profits of business enterprises. The burden of such taxes cannot be transferred. Example :- Income Tax, Wealth Tax, Corporate Tax etc.
(ii) Indirect taxes are taxes levied on goods and services. The burden of these taxes can be passed on to the consumers. Example :- GST, Value Added Tax (VAT) etc.
Before 1990, The Tax rates for both direct and indirect taxes were very high. The following reforms were carried out in the New Economic Policy:-
- Since 1991, there has been a steady reduction in taxes on personal income as it was felt that a significant cause of tax evasion was higher rates of income tax.
- The corporation tax rate, which was earlier very high, has been gradually reduced.
- Efforts have also been made to reform indirect taxes to facilitate the establishment of a common national market for goods and commodities.
- In order to encourage better compliance on the part of taxpayers, several tax procedures have been simplified and rates have also been reduced to a great extent.
- Recently, The Indian Parliament passed a law, the Goods and Services Act 2016, to simplify and introduce a unified indirect tax system in India. The law came into effect from July 2017. It is expected to generate additional tax revenue for the government, reduce tax evasion and create ‘one nation, one tax’ and one market.
As per the First Discussion Paper released on 10.11.2009 by the Empowered Committee of State Finance Ministers, it is clarified that India will have a “Dual GST”, i.e. the power of taxation to levy tax on goods and services between the Center and the States. Have both. .
Constitutional Amendment:- While the center has the power to tax services and goods up to the production level, states have the power to tax the sale of goods, the states do not have the power to tax the supply of services while the sale of goods The Center does not have the power to levy taxes. Moreover, the Constitution also does not authorize the states to levy taxes on imports. Therefore, it is necessary to have a constitutional amendment for the Center to levy tax on the sale of goods and for the States to levy service tax and tax on imports and other consequential issues.
What is GST?
‘G’ – object
‘S’ – Services
‘T’ – Tax
“GST” is a comprehensive indirect tax that has replaced many indirect taxes in India. The Goods and Services Tax Act was passed in the Parliament on March 29, 2017 to implement a unified indirect tax system in India in a simple manner. The Act came into effect on July 1, 2017. It is a comprehensive and multi-tiered tax that is levied on every value addition. GST has been recognized as one of the most significant tax reforms since independence. GST has been implemented on the basis of the principle of ‘One Nation and One Tax’ to ensure smooth flow of goods and services across
GST has replaced 17 indirect taxes (such as Value Added Tax, Service Tax, Excise Duty, Sales Tax etc.) with 23 cesses levied by the Center and states, eliminating the need for filing multiple returns. It has streamlined the taxation of goods and services along the supply chain from producers to consumers.
‘GST’ is a tax on goods and services under which every person is liable to pay tax on its output and is entitled to receive Input Tax Credit (ITC) on the tax paid on its inputs (tax on value addition only) ) and ultimately the end consumer will bear the tax
Note :- The tax is payable on the goods which are purchased from the firm bill, on the same you get input tax credit by filing GST return, assuming you are a Sovereign businessman. To make his soap, he buys raw material worth Rs.100. Your raw material for that 100 rupees was taxed at 18 % . In this way you get this goods of Rs.118. Paying Rs.118, he paid Rs.18 as tax on his goods worth Rs.100. Now you prepare soap using that raw material. And sell those soaps for 200 rupees. On which the tax amount payable made up of tax rate Rs.36. In the end you will get an input credit of Rs.18 on those Rs.36. Because you have already paid Rs 18 as tax.
There are three types of taxes under ‘GST’:- SGST, CGST, and IGST
1. SGST:- State Goods and Services Tax is the part of the tax remitted to the State Government which is deposited in the Revenue Department of the State Government. It is generally at par with CGST. It compensates the state government for the loss of existing VAT or sales tax revenue. In Ease of Local Sales, 50% of the tax amount under GST is converted into SGST tax.
2. CGST:- Central Goods and Services Tax is the part of GST tax paid to the Revenue Department of the Central Government and is also equal to SGST. This part of local sales tax compensates the central government for the loss of existing excise duty and service tax.
3. IGST:- Integrated Goods and Services Tax is levied on inter-state sales and purchases. A part of this tax is transferred to the central government and the other to the state government, which owns the goods and services. IGST only in case of inter-state sales or transactions between two states.
Objectives of GST:-
- One Nation one tax
- Consumption based tax regime at the place of manufacture.
- Same procedure for GST registration, payment and input tax credit,
- Elimination of cascading effect (tax on tax).
- To subsum most of the indirect taxes at the central and state level,
Worldwide GST:-
France was the first country to introduce GST in 1954 . Around the world, around 150 countries have since introduced GST in some form or the other. Most of the countries have integrated GST system. Brazil and Canada follow a dual system.
Tax Rates under GST in India :-
The GST rates are divided into five categories which are 0%, 5%, 12%, 18%, 28%. All items of basic necessity like food grains, roti, salt, books etc. have been kept in 0% category. Cheese, packaged food, tea, coffee etc. goods under 5% category, mobiles, sweets, medicine, less than 12% category, all types of services under 18% category, luxury goods under 28% category. placed under the last heading. Petrol, gas, crude oil, diesel etc. have been kept out of the norm of GST.
Effect of GST :-
In the case of indirect taxes, the burden was on the end customer or consumer. But with the implementation of a single tax across the country, the total cost of production of all the goods will reduce but on the other hand in the case of services, it will increase after the implementation of GST but the CST is abolished thereby reducing the cost of the goods. Is. Currently, we pay 30-35% tax on an item. This will come down after the implementation of GST. GST also reduces the cascading effect of tax which helps in ease of doing business and reduces the tax burden of the entrepreneurs.
Note :- RBI regulates the commercial banks through various instruments like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Repo Rate, Reverse Repo Rate and fixes the interest rates. There are rates which are fixed by RBI and it is mandatory for all commercial banks to follow or maintain these rates. All these measures control the operation of commercial banks and also control the money supply in the Indian economy.
The full form of GST is “Goods and service tax” and the full form of CST is “Central Sales Tax”.
# Goods and service tax is the tax levied on the supply of goods or services, while the Central sales tax is the tax levied on the business between two states.
# Both are taxes but GST is a tax levied everywhere inside and outside the state, whereas CST is a tax levied only on trade between two different states.
# After the arrival of GST, CST has been removed and SGST has been brought.
#GST is a tax levied on the final consumer whereas CST has no role in it.
One India One Tax is an illusion :-
GST is a tax in India is not a correct statement as GST comes only on replacement of various indirect taxes though custom duty or import export duty continues to be levied. Apart from this, some amendments have already been made in the Customs Act and the same will be applicable in India. All other direct taxes like Income Tax, Gift Tax, Wealth Tax etc. will continue to be applicable
One of the best decisions taken by the Government of India is GST. For the same reason, 1st July, 2017 was celebrated as Financial Independence Day in India when all the Members of Parliament participated in the celebrations in the Parliament House. Adopting GST as accepted by 159 countries will not be easy. It is not easy to understand this full of confusion and complications. But such a tax structure would make India a better economy friendly for foreign investment. Till now India was a federation of 29 small tax economies and 7 union territories, with separate fees for each state. This is a highly accepted and laudable decision as it does away with multiple tax rates levied by the Center and the states. And if you are doing any type of business then you should register for GST because this will not only help the Indian government but also help you to track your business weekly because in GST you will get your business every week. Description of the activity is to be given.
Note: – Many changes are taking place in the policies of GST, this is a description of the status of the beginning.
Foreign Exchange Reforms:- (Before 1991, the fixed exchange rate system was followed by RBI.)
Note :- The exchange rate which the government sets and maintains at the same level is called fixed exchange rate. An exchange rate that changes with changes in market forces (demand and supply) is called a flexible exchange rate. The fixed exchange rate is set by the government or the country’s central bank.
The major reforms made in the forex market are:-
a) In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. (Devaluation refers to a decrease in the value of the domestic currency in relation to the foreign currency.) This increased the inflow of foreign exchange making exports cheaper and more competitive.
b) It freed the determination of the value of the rupee in the foreign exchange market from government control. Now the markets determine the exchange rates based on the demand and supply of foreign exchange.
Trade and Investment Policy Reforms:- Trade and Investment Policy Reforms: (Before 1991, India was following an import substitution policy with high tariffs and quotas and quantitative restrictions on imports. These policies reduced efficiency and competitiveness. which led to the slow growth of the manufacturing sector.)
Objective:- Its objective was to promote efficiency of local industries and to adopt modern techniques.
Important trade and investment policy reforms include:
A) Abolition of Quantitative Restrictions (Quotas) on Import and Export:– Quantitative restrictions on import of manufactured consumer goods and agricultural products were also completely removed from April 2001.
B) Reduction in tariff rates:- To increase the competitiveness of Indian goods in international markets, export duties have been removed and import duties have also been reduced.
C) Removal of Licensing Procedures for Import :– Import licensing was abolished except in hazardous and environmentally sensitive industries.
Purpose of privatization/disinvestment:- According to the government the purpose of sale was mainly. Improve financial discipline and facilitate modernization.
A) It was also felt that private capital and managerial capabilities would be effectively used for improving the performance of PSUs
B) It was felt that privatization could strengthen the flow of FDI.
Privatization :- It refers to giving up the ownership or management of a government owned enterprise and transfer it to the private sector.
It is the process of transferring property from public ownership to private ownership and the transfer of management of a service or activity from the government to the private sector.
Privatization can be done in two ways:-
(i) Removal of the government from the ownership and management of public sector companies (disinvestment) (sale of shares of public enterprises)
(ii) by outright sale (complete privatization) of public sector companies (contraction of public sector)
Disinvestment:- The process of selling the government’s stake in Public Sector Undertakings (PSUs) is called disinvestment or disinvestment.
Types of Disinvestment:
1.Minority Disinvestment:- An investment in which usually more than 51% of the government company holds its own stake, thus ensuring management control by the government itself. Loan :- NTPC (National Thermal Power Corporation)
2. Majority Disinvestment:- Majority disinvestment is one in which the government, after disinvestment, holds a lesser stake in the company i.e. it sells the majority stake. Sale of BALCO to Sterlite.
Note :- In February 2001, the Government of India made its first disinvestment deal in the financial year 2000-01. It approved the sale of its 51% stake in aluminum major, Bharat Aluminum Company Limited (BALCO) to Sterlite Industries Limited (SIL) for Rs 551.5 crore.
3. Complete Privatization:- It is a form of majority disinvestment in which 100% control of the company is passed on to the buyer. Example: Modern Bread, ITDC (India Tourism Development Corporation) Hotel.
Note: * Strategic Disinvestment Sale: This refers to the sale of 51% or more stake of a Public Sector Undertaking, which makes the highest bid, with the aim of improving efficiency, hence the management control is with the strategic partner.
Purpose of privatization/disinvestment:- According to the government, the purpose of sale is mainly
- Improve financial discipline and take advantage of modernization facilities
- It was also felt that private capital and managerial capabilities would be used effectively to improve the performance of the Public Sector Undertakings.
- It was felt that privatization could provide impetus to the flow of FDI.
Navratna (Profit making PSU)
To improve the efficiency of PSUs, promote professionalism and enable them to compete more effectively, the government selected nine PSUs, known as Maharatnas, Navaratnas and Miniratnas, to be liberal to these ventures. By adopting the policy, their efficiency and profit increased.
Some examples of public enterprises along with their status are as follows
(i) Maharatna – Indian Oil Corporation Limited (IOCL), Steel Authority of India Limited (SAIL)
(ii) Navratnas – Hindustan Aeronautics Limited (HAL), Mahanagar Telephone Nigam Limited (MTNL)
(iii) Miniratna – Bharat Sanchar Nigam Limited (BSNL), Airport Authority of India (AAI) and Indian Railway Catering and Tourism Corporation Limited (IRCTC)
Impact:- The performance of these companies improved by giving Navratna status. The government has decided to retain them in the public sector and give them the opportunity to be able to expand themselves and raise their own resources in the financial market and expand in the world markets.
Globalization:- Globalization can be defined as a process that leads to increasing openness in the world economy, increasing economic dependence and integration of the Indian economy with the world economy.
- This is a complex phenomenon.
- It is the result of a set of different policies which aim to transform the world towards more and more interdependent and integration.
- It involves the creation of resources and activities beyond economic, social and geographical boundaries.
In short, globalization means turning the whole world into one or creating a borderless world.
Positive impact
1. Increase in Foreign Investment: – There has been a rapid increase in Foreign Direct Investment (FDI) with the opening up of the economy. Foreign Investment (FDI) and Foreign Institutional Investment (FII) increased from about US$ 100 million in 1990-91 to US$ 36 billion in 2016-17.
2. Growth in Foreign Exchange Reserves:- From about US$ 6 billion in 1990-91 to about US$ 321 billion in 2014-15. India is one of the largest foreign exchange reserves holders in the world.
3. Inflation check:- Increase in production, tax reforms and other reforms helped in controlling inflation. The annual rate of inflation declined from a peak level of 17% in 1991 to around 7.6% in 2012-13.
4. Growth in Domestic Product :- The growth of GDP increased from 5.6% during 1980-91 to 8.2% during 2007-12. While the industrial sector has reported ups and downs, the services sector has grown. This shows that this growth is primarily driven by growth in the services sector.
5. Growth in Exports:- During the reform period, India experienced considerable growth in exports of auto parts, engineering goods, IT software and textiles.
6. Spread of consumerism:- The new policy is encouraging a dangerous trend of consumerism by encouraging the production of luxury and superior consumption goods.
7. Shift from monopolistic market to competitive market.
Mention the negative impact of L.P.G policies.
The NEP has been widely criticized for not being able to address some of the fundamental problems facing our economy especially in the areas of employment, agriculture, industry, infrastructure development and financial management.
negative impact
1. Neglect of Agriculture: – Agriculture has not benefited from NEP. There is a decline in the growth rate of the agriculture sector in the period of reform because:-
(i) Decline in public investment:- Public investment in the agriculture sector, especially in infrastructure, including irrigation, power, roads, market connectivity and research and extension, has fallen in the reform period.
(ii) Removal of Subsidies:- Removal of fertilizer subsidy led to increase in production, which adversely affected small and marginal farmers.
(iii) Liberalization and reduction in import duty:- After the start of WTO many policy were made: (A) Reduction in import duty on agricultural products (B) Removal of minimum support price (C) Removal of quantitative restrictions on agriculture the product.
All these policies adversely affected the Indian farmers as they now face increased international competition.
(iv) Shift to Cash Crops:- Due to devising strategies with exports as the main focus in agriculture, agricultural production shifted from food crops to cash crops. This led to a rise in the prices of food grains.
3. Reforms in Industry:- Industrial growth has also registered a slowdown during the recovery period due to the declining demand for industrial products due to various reasons such as:-
- Domestic manufacturers are facing competition from cheap imports, which have reduced the demand for domestic goods.
- Infrastructure, including power supply, remains inadequate due to lack of investment.
- A developing country like India still does not have access to the markets of developed countries due to non-tariff barriers. (For example, although all quota restrictions on the export of textiles and clothing to India have been removed, the United States has not lifted its quota restrictions on the import of textiles from India and China.)
- Although the GDP growth rate has increased in the reform period, scholars say that such growth has failed to create enough employment opportunities in the country apart from the service sector. This is known as ‘jobless development’.
4. Impact of Disinvestment:- The assets of public sector undertakings have been undervalued and sold to the public sector. That is, the government has suffered a lot. Further, the proceeds from disinvestment were used to meet the shortfall of government revenue and not for development of public sector undertakings and building social infrastructure in the country.
5. Fiscal policy and reforms:- Economic reforms have limited the growth of public expenditure, especially in the social sectors.
- Tax cuts in the reform period, aimed at generating more revenue and curbing tax evasion, have not increased the government’s tax revenue.
- Reform policies relating to reduction in tariffs have reduced the scope for raising revenue through customs duties.
- The tax incentives provided to attract foreign investors have further reduced the scope for raising tax revenue.
- This has a negative impact on developmental and welfare expenditure.
4. Effect of Disinvestment Policy :- The government has always encouraged PSUs. The target of disinvestment has been set. For example, in 1998-99, the target was Rs 5,000 crore, while the government was able to raise Rs 5,400 crore.
Impact of Reforms on Welfare and Social Justice:-
- It has only increased the income and consumption quality of the high-income groups and growth and employment are concentrated only in a select few sectors in the service sector such as telecommunications, information technology, finance, entertainment, rather than critical sectors such as agriculture and industry, which Provide livelihood to lakhs of people in the country.
- This has adversely affected the income of the agriculture sector due to the removal of subsidies and import duties.
- Due to export-oriented farming strategies and shift to cash crops, prices of food grains have increased adversely affecting the lower income group.
- This has resulted in the elimination of small manufacturing and retail outlets due to cheap imports.
- Globalization has widened the inequalities of income and wealth between the rich skilled and the poor unskilled population.
Demonetization (8 November 2016) The Government of India made an announcement on 8 November 2016 which had a profound impact on the Indian economy. Barring a few specified purposes like paying utility bills, the two largest denomination notes, ‘500’ 1,000, were ‘demonetised’ with immediate effect, in simple words, when the government introduced Rs 500 and Rs 1000 notes. Demonetised, they were no longer valid as legal tender. Typically, a new currency replaces the old currency units. In India, this is not the first instance of demonetisation. In 1946, the Reserve Bank of India demonetized the Rs 1,000 and Rs 10,000 notes that were in circulation at that time. In 1954, the government gave 1,000, Rs. 5,000, and Rs. Introduced new currency notes of Rs 10,000. In addition, these notes were demonetised in 1978 when the Morarji Desai government decided to curb illegal transactions and anti-social activities.
Due to the demonetization of 500 and 1000 notes by the government in 2016, the government made several claims regarding the objectives and results of the demonetization plan in 2016 which are as follows:-
- It will stop financing terrorists
- This will help in detection of black money and will also expand the fiscal scope of the black money government.
- This will help in reducing the interest rates in the banking system.
- The government offered several incentives to motivate people to use digital transactions as well.
Potential benefits of demonetisation:-
Demonetisation was aimed at curbing corruption, eliminating the use of high denomination notes for illegal activities; And especially the accumulation of ‘black money’ which has not been declared to the tax authorities.
Increased Savings:- When currency is demonetised, people deposit their cash in the bank and less physical currency at home. This helps them to save more.
Better economy – Since demonetisation prompts people to deposit their cash in banks, there is more money circulating in the economy. The government receives more taxes and can undertake more development projects. Ultimately, it leads to a better economy.
Curbing Anti-Social Activities:– Generally, anti-social elements like smugglers or terrorists use cash as a mode of transaction. When the government decided to discontinue the Rs 500 and Rs 1000 notes, they were the highest denomination notes in circulation. By demonetizing these, the government forced these anti-social units to find ways to get rid of old notes. It gave an opportunity to the government to get better control over the unaccounted money in the economy and curb anti-social activities.
Reducing Fake Notes :- During demonetisation, people deposit all old notes in banks which check whether the notes are genuine or fake before accepting them. Hence, it allows the government to flush out counterfeit notes running in the market.
Features :-
1. Demonetization is seen as a measure of tax administration as black money holders had to declare their unaccounted wealth and pay tax as fine.
2. Demonetisation is also interpreted as a change on the part of the government to show that tax evasion will no longer be tolerated or accepted.
3. Demonetisation prompted the tax administration to distribute savings across the formal financial system. Although most of the cash deposited in the banking system is set to be withdrawn, some of the new deposit schemes offered by banks will continue to offer loans at low interest rates.
4. Another feature of demonetisation is to create a low-cash or cash-lite economy, although there are arguments against it that require customers to have cell phones for digital transactions and point-of-sale (POS) machines for merchants to use Which will work only if there is internet connectivity.
5. Digitization has affected three sections of the society in a big way:
The poor, who are largely excluded from the digital economy
The less affluent, who are becoming part of the digital economy, covered under Jan Dhan accounts and RuPay cards
Wealthy people who are fully aware of digital transactions
Shri Montek Singh Ahluwalia was the last Deputy Chairman of the Commission in 2014 during the Congress Government. The subsequent Narendra Modi government abolished this commission considering it irrelevant in the new era of liberalisation. In 2014, the name of this institution was changed to NITI Aayog (National Institute for Transforming India) On 13 August 2014, the Planning Commission was abolished and replaced by NITI Aayog.