The New Economic Policy and the Age of Market Led Growth

INTRODUCTION #

Indian economic policy underwent a sea change in the year 1991. This “sea change” liberalized the hitherto largely insulated economy, dismantled the regulatory apparatus, altered the development strat- egy, and integrated the Indian economy with the world economy.

THE BACKGROUND AND REASONS FOR LIBERALIZATION #

Indian economy in 1990-91 entered into a period unprecedented crisis. The lack of fiscal discipline by earlier governments, failure of monsoon and collapse of erstwhile USSR which was India’s major trading partner brought India close to default its international commitments. As a result the country’s credit rating was downgraded.

The situation was worsened by the Gulf crisis which resulted in increase in oil prices in the inter- national market. The macroeconomic indicators of this period reached to the alarming levels depicting the grave situation.

• The annual rate of inflation touched 17% during August 1991.
• Fiscal deficit rose to 8.4% of G.D.P.
• Current account deficit in Balance of Payment was an unsustainable $9.9 billion.
• Foreign exchange reserves of the country plummeted to the levels where they could barely meet the country’s import bill for a week.

It was against this backdrop that India had to borrow from IMF for balance of payment corrections and had to adhere to the reform agenda. This reform agenda could be broadly categorized into two:

1. The short term stabilization program to bring economy back on its track.
   1. The medium term and long term structur- al adjustment program to get away with the structural rigidities and bottlenecks.

The Stabilization Program #

The aim of this program was to control infla- tion and remove balance of payment deficit, thus put house in order in short term. The program was meant to incorporate the corrective measures for fiscal policy, monetary policy, exchange rate policy and social sector policy. The following table shows various aspect of the stabilization program.

S.N.	Sector/Policy	Aim of stabilization program	Measures Taken
1.	Fiscal Policy	Fiscal Consolidation and inflation control	Reduction in government’s Expenditure.Expansion in tax base.
2.	Monetary Policy	Inflation control
3.	Exchange Rate	Remove Balance	The rupee was devalued by 3%.The exchange rate was now governed by market forces.

4.

Social Sector

Check the fiscal deficit in such a manner that allocation for merit subsidies and poverty alleviation schemes were increased.

Cut in subsidies. Reduction in pub- lic expenditure for various schemes and programs in social sector.

Structural Program #

The structural reforms or macroeconomic reforms were intended to accelerate the economic growth in the medium and long turn. This consisted of industrial policy liberalization, public sector reforms, financial and trade policy reforms.

Industrial Policy Liberalization #

• The hitherto highly regulated industrial policy was liberalized. This liberalization put an end to the high bureaucratic controls i.e. license and permit Raj. The licensing of all the industries (except a small list) was abolished.
  • Monopoly and Restrictive Trade Practice (MRTP) Act was liberalized to encourage domestic investment in the industrial sector. Likewise to encourage foreign investment, Foreign Exchange Regulatory Act (FERA) was amended and in its place Foreign Exchange Management Act (FEMA) was enacted.

Public sector reforms #

• The reforms in public sector were based on the premise that government should roll back from the sectors which could be efficiently taken care by the private sector. So disinvest- ment of government’s equity in selected units was envisaged. As various public sector units were chronically making losses and account for the large share in government’s debt, another policy option is to cut the budgetary support to such units.

Financial sector reforms #

• The aim of the financial sector reforms was to limit the excessive government control and to put an end to the administered interest rate structure. Purpose was also to relieve the finan-

cial institutions from the government pressure which undermine the quality of loans. In a nut shell the reforms in the financial sector were aimed to provide greater autonomy to the financial institutions in terms of interest rate structure and operational matters.

Trade Policy reform #

• It led to major changes in the import licensing system. Except for consumer goods, all Non Tariff barriers have been lifted. As a signa- tory of WTO, India is committed to gradually dismantle the trade barriers.

PERFORMANCE OF INDIAN ECONOMY IN THE POST REFORM ERA #

The performance of Indian economy in the post reform era has been mix. There are areas where the performance has been remarkable; on the other hand in contrast to this there are areas where the performance has been dismal.

Positive Sides of Reform #

1. The economy has performed exceptionally well in terms of GDP growth. In the post re- form era, the country entered into an unprece- dented economic growth phase after 1991. In the recent past the country is even targeting impressive double digit growth which seems realistic.
2. India proved to be largely unaffected by the global recession and slowdown.
3. Foreign direct investment inflows hit an all- time high of $60.1 billion in 2016-17, as the Narendra Modi government eased rules to lure global conglomerates to set up shop in sectors such as defence and railways. In the last three years, the government has eased 87 FDI rules across 21 sectors to accelerate eco- nomic growth and boost jobs.
4. FDI inflows were at $55.6 billion for the year ending March 2016, which was a record. In 2016-17, the FDI inflows were even higher at

$60.08 billion.

• Since 2014, the Modi government opened up “conservative” sectors like rail infrastructure

and defence. FDI reforms were also carried out in financial sector, medical devices and construction sectors.

• FDI rules were radically overhauled across sectors such as broadcasting, retail trading and air transport. The Modi government amended legislation to hike the foreign in- vestment cap to 49% in insurance and pension from the earlier 26%. In addition, initiatives such as introduction of composite caps in the FDI policy and raising the FIPB approval limit were also undertaken to promote ease of doing business in the country. For retail trad- ing of food products, the government permit- ted 100% FDI with unqualified condition that such food products have to be manufactured or produced in India.
• Fiscal deficit has been brought down to man- ageable levels from unsustainable 7-8% in the years 1985 – 91 i.e. pre–reform era.
• Service sector in India has seen an outstand- ing growth in the post reform era. This is par- ticularly true for IT and ITES sector.
• The proportion of trade in India’s GDP has gone up in post reform era.

Negative sides of Reform #

1. The macroeconomic indicators like impres- sive growth rates and FDI inflows have failed to address the problems like poverty, unem- ployment etc.
2. Only about a million people or around 0.1% of India’s population are benefiting from employment in India’s rapidly growing out- sourcing, IT, and services industries.
3. The agriculture sector has not been able to perform well as per the expectations in the post reform era. This become a critical factor as still more than 50% of the population en- gaged in agriculture and allied activities.
4. In various human development indices the economic reforms have failed to produce the desirable impact. The United Nations Devel- opment Program ranked India lower based on its life expectancy, access to education, and standard of living than many countries with comparable, or lower, GDP per capita. India

also has the world’s largest illiterate and HIV infected populations.

• That about 20% of children’s deaths in the world and a quarter of all maternal Child birth mortality occurs in India further indicate the depth of India’s neglect of health. Even among similar-income countries, India’s ex- penditures on health are woefully low, at less than 1% of the country’s GDP.
• The absolute poverty in the post reform era has decreased, however the relative poverty has increased, resulting in sharp income in- equalities. This has resulted in the inter-re- gional and inters sectoral imbalances. About a quarter of India’s one billion-plus popu- lation, who constitute a third of the world’s poor, continue to live in poverty.

Inflation is also another area where the reforms have failed to perform the desired result. In the recent past the inflation in general and food inflation in particular has remained to be a cause of serious concern.

INDUSTRIAL POLICY #

In 1948, immediately after Independence, Gov- ernment introduced the Industrial Policy Resolution. This outlined the approach to industrial growth and development. It emphasized the importance to the economy of securing a continuous increase in production and ensuring its equitable distribution. After the adoption of the Constitution and the socio-economic goals, the Industrial Policy was comprehensively revised and adopted in 1956. To meet new challenges, from time to time, it was mod- ified through statements in 1973, 1977 and 1980.

The Industrial Policy Resolution of 1948 was followed by the Industrial Policy Resolution of 1956 which had as its objective the acceleration of the rate of economic growth and the speeding up of industri- alization as a means of achieving a socialist pattern of society. In 1956, capital was scarce and the base of entrepreneurship not strong enough. Hence, the 1956 Industrial Policy Resolution gave primacy to the role of the State to assume a predominant and direct responsibility for industrial development.

The Industrial Policy statement of 1973, inter alia,  identified  high-priority  industries  where

investment from large industrial houses and foreign companies would be permitted.

The Industrial Policy Statement of 1977 laid emphasis on decentralization and on the role of small-scale, tiny and cottage industries.

The Industrial Policy Statement of 1980 focused attention on the need for promoting competition in the domestic market, technological upgradation and modernization. The policy laid the foundation for an increasingly competitive export based and for encouraging foreign investment in high-technology areas. This found expression in the Sixth Five Year Plan which emphasized the need for productivity to be the central concern in all economic and produc- tion activities.

These policies created a climate for rapid indus- trial growth in the country. Thus on the eve of the Seventh Five Year Plan, a broad-based infrastruc- ture had been built up. Basic industries had been established. A high degree of self-reliance in a large number of items – raw materials, intermediates, finished goods – had been achieved. New growth centres of industrial activity had emerged, as had a new generation of entrepreneurs. A large number of engineers, technicians and skilled workers had also been trained.

The Seventh Plan recognized the need to con- solidate on these strengths and to take initiatives to prepare Indian industry to respond effectively to the emerging challenges. A number of policy and pro- cedural changes were introduced in 1985 and 1986 aimed at increasing productivity, reducing costs and improving quality. The accent was on opening the domestic market to increased competition and readying our industry to stand on its own in the face of international competition. The public sector was freed from a number of constraints and given a larger measure of autonomy. The technological and managerial modernization of industry was pursued as the key instrument for increasing productivity and improving our competitiveness in the world. The net result of all these changes was that Indian industry grew by an impressive average annual growth rate of 8.5% in the Seventh Plan period.

Annual Plans (1990-92): Liberalization: it refers to procedural simplification, removal of restrictions,

delicensing and removal of unnecessary bureaucratic hurdles. Privatization: It refers to opening the econ- omy for privatization. In privatization, the areas earlier reserved for public sector public sector were made open for private sector was given the main importance.

Globalization: It refers to opening of the domestic economy for foreign enterprises. Import duties were reduced. The average annual growth rate was 4.4% per annum.

8th Five Year Plan (1992-97): Private sector was given more importance. Earlier capital goods were given priority but during this plan all industries were given equal importance. Foreign companies were assign important role. Modernization of Indus- tries was given importance. Protection given to the domestic industries has been reduced to increase their efficiency. Some areas reserved for public sector were opened for the private sector. 18.8% of total plan outlay was allocated for the industries. Growth rate of industrial production was 6.8% per annum.

9th Five Year Plan (1997-2002): Private sector was given more importance. More areas were opened for the private sector. Special efforts were made for setting up new industries in backward areas. It was done to reduce regional imbalances. More stress was given on attracting foreign investments. The domes- tic economy was open for the foreign companies. Modernization and import of capital goods were considered important for improving the efficiency of the industrial sector.

Companies under MRTP Act were given vari- ous concessions. E.g. such companies need not to take special permission for mergers, diversification, expansion etc. Licensing policy was liberalized. In some industries, foreign equity participation was increased to 100%. Total expenditure on develop- ment of large scale industries was Rs. 33,587 Crore and on the development of small scale industries was Rs. 8,384 Crores. Growth rate of industrial produc- tion was 5% per annum (due to slower growth of the world economy).

10th Five Year Plan (2002-07) : The industrial sector will have to grow at over 10% to achieve the target of 8% growth for GDP. Special emphasis

is given for the infrastructure development, power generation, development of roads, railways, air-ports etc. It was thought that rapid industrial growth can be achieved through improving the quality of infrastructure. Special concessions were extended to ready-made garment industry like liberal import of capital goods; tax-concessions etc. were extended. Apparel-parks have been established to promote the same. To make the industry more competitive, R&D, modernization and technological upgradation activities have been emphasized.

Losses making public sector units have been disinvested Special concessions were given to export oriented units in order to promote exports. Special Economic Zones have been set up for promoting rapid industrialization of the economy. For promot- ing agro based industrial units, agro export zones have been set up. For promoting leather industry, leather industry development programmes have been undertaken. More privatization has been encouraged. The funds from global capital market are also encouraged. Foreign investments are encouraged in the service sector like banking, insurance etc.

Implementation of NIP 1991 #

• Contraction of Public Sector.
• Liberalization of Industrial Licensing Policy: Only Five Industries are under Compulsory Licensing.
• Introduction of Industrial Entrepreneurs’ Memorandum (IEM) for industries not requir- ing compulsory licensing.
• Liberalization of the Location Policy.
• Five Year Tax Holidays to Power Generation Industries.
• Increase in Lending Limit of Banks.
• Amendments in SICA in 1993 and 2003.
• Increase in Investment Limit of Small Enter- prises.
• Micro Enterprises – 25 Lakh (10 Lakh).
• Small Enterprises – upto 5 Crore (5 Crore).
• Medium Enterprises – upto 10 Crore (5 Crore).
• MRTP act Replaced with Competition Act.
• Tax Holidays for Industries in Backward Areas.

• Encouragement to Private Sector Participation in Infrastructure.
• Reimbursement    Scheme    for    Technology Upgradation.
• Setting up of Foreign Investment Promotion Board (FIPB).
• Permission to Raise Capital from Foreign Markets.
• Encouragement to Foreign Investment.
• Disinvestment of PSUs.

Positive Impact of NIP 1991 #

• Increase in Production.
• Removal of Bureaucratic Hurdles
• Increase in Competition.
• Increase in Efficiency of Public Sector.
• Increase in Foreign Investment.
• Increase in Exports.
• Balanced Regional Development.
• Less Economic Burden on Government.

Criticism of NIP 1991 #

• Concentration of Economic power.
• Increase in Unemployment.
• No Evidence of Positive Effect on Productivity.
• Ignore Social Objectives.
• Distortion in Production Structure: Growth of Capital Goods Industries Declined.
• Adverse Effect of Small Scale Industries.
• Misplaced Faith in Foreign Investment.
• Danger of Business Colonization.
• Personalized Relationship and Corrupt Prac- tices still Continue.
• Increase in Regional Imbalances.

Effects of Industrial Policy Changes on Industrial Growth #

Industrial policy changes started in India in a big way from the year 1991 which marked the begin- ning of economic reforms and LPG. Major changes initiated in 1991 were:

• Delicensing of large number of industries.
• Dilution of the role of public sector
• Opening up foreign investment
• Relaxation of MRTP Act.

Subsequent changes in industrial policy have been, by and large, extension of the above and enactment of competition Act, FEMA, import liber- alization, convertibility of rupee and further opening up foreign investment in tune with WTO making Indian industry global.

Industrial growth in India is measured on the basis of IIP which has nearly 80 percent weight of the manufacturing sector. Initial euphoria of liber- alization resulted in robust industrial growth in the 8th Five Year Plan (1992-1997) during which the growth rate peaked to 13 percent in 1995- 96.

However, the average annual growth rate of industrial sector was only 7.3 percent during 1992- 97, i.e. 8th Five Year Plan, which was below the annual growth rate of 8.5 percent in the pre- reform period of 1985-90 viz., the 7th Five Year Plan. Dur- ing the Ninth Plan (1997-2002) industrial growth rate slipped to 4.6 percent per annum but picked up to 8.2 percent per annum in Tenth Plan. The performance of the industrial sector during 11th Plan has been modest and below the rate achieved in the 10th plan.

Industry has failed to act as harbinger of over- all GDP growth in the post reform period during which industrial growth has been confined largely to consumer durable goods and to some extent capital goods. It is mainly the services sector which has been the main catalyst of growth. The share of industry in national income in 1948-49 was 17 percent which at present is only close to 22 percent which shows a very dismal growth rate and contribution of the industrial sector. The share of manufacturing sector continues to be very low as compared to advanced nations where this share is between 30 to 50 per- cent. This has prompted the government to unveil a New National Manufacturing Policy which targets a 12-14 percent growth rate of manufacturing sector and its share in GDP at 25 percent in 2022.

There has been alarming slowdown of the indus- trial growth rate, particularly in the last five years due to severe constraints of infrastructure and factors

like virtual halt of economic reforms, policy paral- ysis due to compulsion of coalition governments, widespread corruption and scams, all of which have caused to collateral damage to the credibility of the government and its governance.

Industry – Environment linkages have further resulted in inordinate delays in clearance of projects due to lack of coordination among different depart- ments. Major determinants of industrial growth in India are agricultural growth and rural incomes, infrastructure development and exports. While infra- structure has been a vital bottleneck, export growth rate has slowed down due to Euro zone crisis while agriculture continues to be uncertain.

The post reforms period has no doubt made Indian Industry competitive due to increasing role of foreign direct investment and enactment of Competition Act. Besides public sector has also improved its performance as 170 out of 220 opera- tional PSUs are profit making. It is time to focus on fast-tracking second generation reforms like factor market reforms, legal and institutional reforms, and governance reforms and most importantly reforms of infrastructure.

ECONOMIC SURVEY-2017 #

The Economic Survey 2017 projected a decline in the industrial sector’s growth to 5.2% in the current fiscal year from 7.4% in the last.

The sector comprises job-creating industries such as mining, manufacturing, electricity and con- struction. Last year’s railway budget had projected a rise of 50 million tonnes in the national carrier’s freight traffic.

The demonetisation drive set in motion by the centre on 8 November had its overhang on the survey. “In the last quarter of the current year, the pace of economic activity can be affected by the demonetisation of high-domination currency and the response to the gradual re-monetization,” stated the survey, prepared by chief economic adviser Arvind Subramanian and his team in the finance ministry.

“For 2017-18, it is expected that the growth would return to normal as the new currency notes in required quantities come back into circulation and as follow-up actions to demonetisation are taken,” it added.

The National Democratic Alliance government has been focusing on schemes such as ‘Make in India,’ ‘Invest India’ and ‘Startup India’ to boost job creation. “There is a job challenge and the question is what should be the response to those challenges,” Subramanian said.

From an infrastructure perspective, once the pri- vate sector starts pumping money, then a significant part of it should be going to the infrastructure sector.

The survey said production of refinery products, fertilizer, steel, electricity and cement increased substantially, while the production of crude oil and natural gas fell during April-November. Coal pro- duction growth slowed in the same period.

Monthly coal production, which had fallen dur- ing August-October, rebounded in November with a 5.3% rise over the year-ago period and a 4% rise in December due to cyclical winter demand.

The eight core infrastructure-supportive indus- tries such as coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity registered cumulative growth of 4.9% during April-November compared to 2.5% in the year-ago period.

The Index of Industrial Production (IIP) rose 0.4% in April-November. “This was the composite effect of strong growth in electricity generation and moderation in mining and manufacturing,” the survey said.

The growth in electricity generation came on the back of thermal power, which grew by 6.9% during the April-September period. Of India’s installed electricity generation capacity of 310,005 megawatts (MW), 61% (188,968 MW) is coal-powered.

RECENT DEVELOPMENTS #

E-Commerce in India #

The report by CII-DELOITTE REPORT calls the e-commerce in India as a game changer for the economy.

• The e-commerce industry has grown rapidly in India logging a growth rate of over 60 per cent.
• Studies have pegged the size of the industry at around USD 38 billion by 2016 and it is

expected to touch USD 50 billion mark in 2020.

• It is an industry that has the potential to create jobs and spur economic growth.
• This sector has attracted the maximum FDI in 2015.
• Some of the prominent e-commerce market- place players in India are Amazon, Flipkart, Snapdeal, ShopClues and Paytm – all funded by foreign investors.
• Companies such as Amazon India, Flipkart, Snapdeal and many others hosted thousands of sellers, were described as technology enablers rather than e-retailers. They claimed to have no inventory of their own. That kept them going even with a ban on FDI in e-commerce.

Challenges to e-commerce industries #

• Lack of uniform taxation across states leading to difficulty in movement of goods.
• Logistics issues and infrastructure.
• Payments and banking penetration as cash transaction comes with high administration cost.
• Internet penetration.
• Skilled manpower.

New Guidelines #

Government permitted 100 per cent FDI in the market place format of e-commerce retailing under the automatic route. The guidelines allowed e-commerce marketplace to provide several support services to sellers, but, it said that such entities will not exercise ownership over the inventory.

The e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field.

Advantages #

• It will give the much-needed clarity to under- take business with certainty in longer term attracting foreign investment in this sector.
• Enabling the marketplace operator to provide value added services.

Disadvantages #

• It has further increased complexity of e-retail by drawing an artificial distinction between inventory based model and marketplace based e-commerce.
• The cap of 25 per cent on sales by a single vendor in a marketplace may prove to be restrictive.
• The above limit of 25 percent, without a strong commercial principle, may result in firms creating newer entities to avoid being caught.
• The rule that states e-retailers “will not directly or indirectly influence price” goes against “pricing freedom” which is central to the functioning of a market and it also faces practical difficulties in enforcing this.

Way forward #

• Uniform tax structure in the form of GST to ensure free flow of goods.
• Timely implementation of programmes like Digital India, Skill India, Startup India etc to support e commerce ecosystem and rural penetration.
• Increasing the number of years within which the tax holiday can be availed by startups in the e-commerce industry.

Issues with Indian Pharma Industry #

Existence of the Poor and non-transparent regulatory environment is the main issue related to Pharma Industry.

• Standards: Lack of enforcement of manu- facturing standards as prescribed by Indian laws and WHO standards.Ban of Indian drugs on ground of poor quality, adulterated drugs, hygiene and sanitation standards by developed nations like US and EU.
• Bulk Drugs: Growing dependence on imports in the area of bulk drugs. Majority of the import is from China. (Discussed in detail below)
• IPR: The R&D investment by the domestic pharma industry has gone down in the recent years.

• Poor and erratic power supply led to decline of the fermentation industry engaged in pro- duction of drugs.
• Lack of coordination among different min- istries which deals with different aspects of pharma industry – like Department of Phar- maceuticals deals with drug policy, Depart- ment of Science and Technology deals with innovation etc.

Solution #

• Easier and transparent regulatory regime in India to foster innovation while protecting the interest of consumers.
• Ethical and transparent clinical trials and faster single window approval process.
• Develop WTO compliant regulations that the domestic players should find easier to conform.
• Coordinated and concerted action by all the ministries.
• Cluster scheme: Setting up of mega parks with common effluent treatment plant, com- mon lab, etc. so that Indian pharma industry can also enjoy economies of scale
• Boost R&D: More industry-academic/ research institution collaborations, encourage- ment of open source drug discoveries in the area of neglected diseases etc.

Fact sheet on Pharma Industry #

• Global pharma industry is estimated at $1,000 billion.
• Indian pharma industry at present is of $32 billion.
• The industry is growing at 8-9 per cent per annum at present.
• 2015 was the year of Active Pharmaceutical Ingredients.
• India is a superpower as far as generic drugs are concerned.

Way Forward #

Government should follow the path outlined in Pharma Vision 2020 for India to acquire global lead-

ership in manufacture of generic drugs. Government also needs to provide more support and incentives than at present to MSMEs in pharma sector.

Draft Bulk Drug Policy #

Based on recommendations of Katoch com- mittee, Department of Pharmaceuticals (DoP) had moved draft on bulk drugs policy.

Bulk drug manufacturers expect the policy to revive India’s active pharmaceutical ingredients (API) market and trigger fresh investments worth Rs 30,000-40,000 crore in setting up new manufac- turing facilities and augmenting existing ones.

What are Bulk Drugs? #

• Bulk Drugs or APIs are basically the active raw materials used in a drug that gives it the therapeutic effect.
• Bulk drugs are used as raw materials by the pharmaceutical industry.

Need #

• Bulk drugs currently constitute only 10-12 percent share in the country’s Rs 80,000 crore-domestic pharmaceutical sector.
• There is dependency on import from china. According to industry estimates, 70-80 per cent of the requirement of the industry is met by imports from China, varying across categories.
• There is problem with quality parameters on imported Chinese bulk drug.

Salient Features #

• It aims to make India self-dependent of Bulk drug manufacturing.
• An ecosystem to help pharma companies to move up in the value chain and develop new molecules through innovations.
• To grow the Indian pharmaceuticals sector to a $200 billion industry by 2030.
• It will be achieved by developing APIs man- ufacturing capacities.
• Mega Parks for API’s maintained by separate special purpose vehicle.
• 6 large API Intermediate cluster.

• Revival of PSU for manufacturing of essen- tial drugs.
• Soft Loans to Manufacturers.
• Investment in R&D.
• Tax benefits and import duty exemption.
• Separate Institutional mechanism for liaison- ing with other ministry for E.g. for environ- mental clearance, for power etc.

Challenges #

• Regulatory framework need to strengthened and brought on par with international practices.
• Issue with infrastructure requirements of the pharmaceutical industry.
• R & D lacks in developing new molecules and drug discovery.

Way forward #

• Industry need to focus on innovation and adopt international practice.
• India has a potential to be a pharmacy hub for the world.
• At least need to became self sufficient to meet our own requirements.
• Will help in to bring down cost of drugs to consumer.
• There is proposal by central government to create a new ministry for pharmaceuticals and medical devices.
• There is need of voluntary Uniform Code of Pharmaceutical Marketing Practices.
• Make in India initiative will help the industry in a big way.

Withdrawal of Custom Duty Exemption on 76 Life-Saving Drugs #

The Finance Ministry has withdrawn exemp- tion of 76 medicines from custom duties. The list includes 10 HIV drugs and at least four cancer drugs, but haemophilia patients are likely to be the most affected by the decision.

Government’s Stand #

It is to promote indigenous medicines. The Indian drug companies are perfectly capable of

manufacturing these drugs for our domestic market. It is believed that the removal of duty exemption will promote Make In India.

Impact of the decision #

• It will at once make them more expensive.
• It will impact patients who are already paying a high price for such medical treatment.
• Majority of Indians meet health care costs through out-of-pocket expenditure, and any increase is bound to adversely affect them.
• Few drugs which have been removed are either not produced in India or they are not produced in sufficient quantities to meet the local demand.
• Many of the recently launched life-saving drugs which are under patents have not been provided with the custom duty exception.
• Consumers are not the decision makers in drug purchase as they are dependent on doctor’s prescription. Hence it becomes even more important to have similar prices of imported and locally made drugs to prevent consume from partisan doctors.
• Imported active pharmaceutical ingredients (APIs) will also increase the cost of generics made locally.

TRADE #

India’s Foreign Trade: March, 2017 #

Merchandise Trade

EXPORTS (including re-exports) #

In continuation with the double digit growth exhibited by exports during February 2017, exports during March 2017 have shown a significant growth of 27.59 per cent in dollar terms valued at US$ 29232.05 million as compared to US$ 22911.74 million during March, 2016. In Rupee terms, during March 2017 exports were valued at Rs. 192571.13 crore as compared to Rs. 153558.85 crore during March, 2016, registering a positive growth of 25.41 per cent.

Cumulative value of exports for the period April-March 2016-17 was US$ 274645.10 million

(Rs. 1841314.39 crore) as against US$ 262290.11 million (Rs. 1716377.99 crore) registering a positive growth of 4.71 per cent in Dollar terms and positive growth of 7.28 per cent in Rupee terms over the same period last year.

Non-petroleum and Non Gems & Jewellery exports in March 2017 were valued at US$ 21420.91 million against US$ 17071.00 million in March 2016, an increase of 25.5 %. Non-petroleum and Non Gems and Jewellery exports during April-March 2016-17 were valued at US$ 200557.90 million as compared to US$ 192423.94 million for the corre- sponding period in 2016, an increase of 4.2%.

The growth in exports is positive for all major economies, USA (8.99%), EU(9.27%), China (7.85%) and Japan (4.48%) for January 2017 over the corresponding period of previous year as per latest WTO statistics.

Imports #

Imports during March 2017 were valued at US$ 39669.22 million (Rs. 261327.71 crore) which was 45.25 per cent higher in Dollar terms and 42.77 per cent higher in Rupee terms over the level of imports valued at US$ 27310.28 million (Rs. 183038.67 crore) in March, 2016. Cumulative value of imports for the period April-March 2016-17 was US$ 380367.65 million (Rs. 2550926.19 crore) as against US$ 381006.64 million (Rs. 2490298.03 crore) registering a negative growth of 0.17 per cent in Dollar terms and positive growth of 2.43 per cent in Rupee terms over the same period last year.

Crude Oil and Non-oil Imports #

Oil imports during March, 2017 were valued at US$ 9714.01 million which was 101.43 percent higher than oil imports valued at US$ 4822.59 mil- lion in March 2016. Oil imports during April-March, 2016-17 were valued at US$ 86457.87 million which was 4.24 per cent higher than the oil imports of US$ 82944.45 million in the corresponding period last year.

In this connection it is mentioned that the global Brent prices ($/bbl) have increased by 33.02% in March 2017 vis-à-vis March 2016 as per World Bank commodity price data (The pink sheet).

Non-oil imports during March, 2017 were esti- mated at US$ 29955.21 million which was 33.21 per

cent higher than non-oil imports of US$ 22487.69 million in March, 2016. Non-oil imports during April-March 2016-17 were valued at US$ 293909.78 million which was 1.39 per cent lower than the level of such imports valued at US$ 298062.19 million in April-March, 2015-16.

TRADE IN SERVICES (for February, 2017, as per the RBI Press Release dated 13th April, 2017)

Exports (Receipts) #

Exports during February 2017 were valued at US$ 13060 Million (Rs. 87600.60 Crore) registering a negative growth of 3.76 per cent in dollar terms as compared to negative growth of 1.70 per cent during January 2017 (as per RBI’s Press Release for the respective months).

Imports (Payments) #

Imports during February 2017 were valued at US$ 7235 Million (Rs. 48529.12 Crore) registering a negative growth of 13.96 per cent in dollar terms as compared to positive growth of 1.39 per cent during January 2017 (as per RBI’s Press Release for the respective months).

Trade Balance #

Merchandise: The trade deficit for April-March, 2016-17 was estimated at US$ 105722.55 million which was 10.95% lower than the deficit of US$ 118716.53 million during April-March, 2015-16.

Services: As per RBI’s Press Release dated 13th April 2017, the trade balance in Services (i.e. net export of Services) for February, 2017 was estimated at US$ 5825 million. The net export of services for April- February, 2016-17 was estimated at US$ 59302 million which is lower than net export of ser- vices of US$ 64429 million during April- February, 2015-16. (The data for April-February 2015-16 and 2016-17 has been derived by adding April-February month wise QE data of RBI Press Release).

Overall Trade Balance: Overall the trade bal- ance has improved. Taking merchandise and services together, overall trade deficit for April- March 2016- 17 is estimated at US$ 46420.55 million which is

14.49 percent lower in Dollar terms than the level of US$ 54287.53 million during April-March 2015-16. (Services data pertains to April-February 2016-17

as February 2017 is the latest data available as per RBI’s Press Release dated 13th April 2017).

Falling Oil Prices and its Impact on Indian Economy #

Reasons #

• Demand side factors: Eurozone’s economic stagnation, Japan’s slipping into recession and China’s slowdown.
• Supply side factors: The U.S. shale boom, revival of Libya’s oil production, and con- tinuous increase in production in Iraq, OPEC decision of not cutting the production.

Negative Impacts #

• Reduction in remittances from west Asian countries as their economy is slowing down.
• Increase in pollution as reduction in oil prices increased the demand of oil domestically and globally.

Positive Impacts #

• Improving trade balance and Current Account Deficit of India as it imports oil for meeting four-fifths of its needs.
• Allowed for deregulation of diesel prices resulting into easing of the subsidy burden and reduced inflation.
• Funds saved above can be diverted to infra- structure creation, social welfare programs.
• Companies that use crude or crude derivatives as inputs, such as manufacturers of plastic products, synthetic textiles, tyres and paints, will see profit margins expanding.

Trade Facilitation Agreement (TFA) In Goods #

Government recently cleared TFA in Goods and proposed a National Committee on Trade Facilita- tion (NCTF). There are provisions for expediting the movement, release and clearance of goods. It sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues.

Benefits for India #

• In consonance with India’s “Ease of Doing Business” initiative.

• Aimed at relaxing customs rules for smoother trade flow.
• Projected to cut the cost of trade by an aver- age of 14.5%.
• May Provide permanent solution to the issue of public stockholding for food security pur- poses.
• Mechanism to safeguard poor farmers from sudden import surge of farm products.

Negative implication #

• Ratifying the agreement so early could lead to India losing a bargaining chip to secure its interests.

Way forward #

• Customs Act need to change to fulfil India’s commitments under the pact.
• Changes in rules will need to be instituted in a range of areas.
• India have already ratified TFA in services.

Trade Facilitation and Trade Enforcement Act 2015 #

This is an act passed by US congress, which introduces important measures relating to intellec- tual property rights (IPR) issues.

Background #

United State Trade Representative (USTR), which oversees enforcement of US trade policy, including IP policy, brings out the annual Special 301 list. It categorizes countries based on their IPR rules:

• Foreign Countries (PFC) – most serious violators.
• Priority Watch List (PWL) – Serious offend- ers.
• Watch List (WL) – less serious offenders.
• India is placed in the PWL for the recent years.

Key Provisions of the Act that may influence India #

• The Act requires USTR to develop action

plans with benchmarks for countries in PWL list, unilaterally.

• Trade sanctions for countries that refuse to comply with benchmarks can be taken.
• It creates a new position within the office USTR titled “Chief Innovation and Intellec- tual Property Negotiator” which would protect US innovations and IP interests.
• It also created a separate fund for taking legal actions against foreign countries to ensure fair and equitable market access for US.

Impact on India & way forward #

• This will further pressurize India to align its IPR policy in line with US interests especially related to pharmaceuticals.
• However, India should resist such pressure and ensure that its laws comply with WTO norms.
• In addition, India should engage with US to resolve such issues bilaterally.

Foreign Investment Present Situation: World Investment Report 2016 #

UN Conference for Trade and Development (UNCTAD) has released the World Investment Report 2016.

Salient points #

Global Investment Trends #

• Recovery in FDI was strong in 2015. Global FDI flows jumped by 38 per cent to $1.76 trillion, their highest level since the global economic and financial crisis of 2008–2009.
• Looking ahead, FDI flows are expected to decline by 10–15 per cent in 2016, reflecting the fragility of the global economy, persis- tent weakness of aggregate demand, sluggish growth in some commodity exporting coun- tries, effective policy measures to curb tax inversion deals and a slump in MNE profits.

Regional Investment Trends #

• After three successive years of contraction, FDI inflows to developed countries bounced

back sharply to the highest level since 2007, reach a new high of $765 billion, 9 per cent higher than in 2014.

• India continues to be among the top ten countries in terms of foreign direct invest- ment (FDI) inflows globally and the fourth in developing Asia
• India’s FDI inflows have increased to $44 billion in 2015 as compared to $35 billion in 2014.

Causes for increased FDIs #

• Make in India initiative, alongside liberali- zation measures and reforms initiated by the Government.
• The recent announcement of increasing FDI in seven new sectors, including civil aviation, defence, food products and pharmaceuticals, has huge potential for attracting FDI.
• Huge potential offered by India, the fastest growing major economy.

Outflows #

• In terms of outflows, there has been a decline in most developing and transition regions.
• The declining trend in India’s outflows can be explained by the collapse in the commodity side.

Investment Policy Trends #

• Most new investment policy measures con- tinue to be geared towards investment liber- alization and promotion.
• Governments’ space for applying national security regulations needs to be balanced with investors’ need for transparent and predictable procedures.
• Necessity for striking the right balance between liberalization and regulation to pro- mote investment for sustainable development.

FDI Financing #

Need #

Apart from bringing new technology, enhancing productivity, job creation, and increasing consumer

options, FDI brings in much needed foreign capital into a country.

It also boosts exports and thus helps to bridge the current account deficit (CAD) of the country and maintain a positive balance of payment (BOP). This is called FDI financing of CAD.

Critique   of   FDI   financing   of   current account deficit #

• FDI may target domestic market instead of being export oriented, thus boosting domes- tic consumption and ultimately increasing imports.
• Once initial investment starts to turn profita- ble, it is inevitable that capital returns from the host country to the home country leading to worsening CAD.
• A similar trend is noticed in 2014-15, when despite increase in FDI inflows, CAD com- ponent has risen.

Reforms in FDI #

FDI Norms Relaxed #

The Government has relaxed FDI norms and raised FIPB approval limit to Rs 5,000 crore from Rs 3,000 crore.

• Insurance Sector: The government had increased the composite cap (including FDI and foreign institutional investment) in the insurance sector (and automatically in the pension sector as well) to 49 per cent from the 26 per cent. It will be through the govern- ment approval (through Foreign Investment Promotion Board or FIPB) route.
• Banks and Financial Institutions: The FY’17 Budget has proposed 100 per cent FDI in ARCs through automatic route. Foreign portfolio investors will be allowed up to 100 per cent of each tranche in securities receipts issued by ARCs subject to sectoral caps.
• Defence Sector: The policy has been tweaked to allow 100 per cent FDI by doing away with the condition of access to “state of the art” tech- nology. It has now been modified to “modern or for other reasons”, a move that will widen the scope of investment by foreign players.

• Pharmaceutical Sector: In this sector, 74% FDI would be allowed in the pharmaceutical sector under the automatic route in existing domestic companies (Brown Field projects). Currently, FDI up to 100% is permitted in new projects in the pharmacy sector (Green field projects).
• Aviation Sector: 100% FDI under automatic route in Brownfield airport projects. FDI beyond 74% for Brownfield projects is under government route. Earlier, the FDI policy on airports permitted 100% FDI under automatic route in Greenfield projects.
• Animal Husbandry: 100% FDI allowed in Animal Husbandry. The clause of controlled conditions for 100% FDI under the automatic route for animal husbandry has been done.

• Brand Retail Trading: The new policy relaxes local sourcing norms up to three years and a relaxed sourcing regime for another five years for entities undertaking Single Brand Retail Trading of products having ‘state-of- art’ and ‘cutting edge’ technology.
• Plantation and Food Products: 100 per cent FDI through FIPB route in marketing of food products produced and manufactured in India.

100 per cent FDI allowed in plantation of rubber, coffee, cardamom, palm oil tree and olive oil tree.

• Indian Stock Exchanges: Hike in the invest- ment limit for foreign entities in Indian stock exchanges from five per cent to 15 per cent on par with domestic institutions.