Roman Saini is teaching live on Unacademy Plus
Effects Of Liberalization On The Indian Economy Lesson-2 Presented By: Roman Saini
In This Lesson Economic Reforms Tax Reforms Foreign Exchange Reforms
Economic Reforms Tax Reforms Before 1991, taxation policy was highly inefficient and plagued by numerous problems. The fiscal deficit during 1990-91 was as large as 8.4 percent of GDP. . Both Direct tax and corporation tax was high earlier. Higher tax rates tend to stimulate tax evasion. .During Fiscal year 1991, India's tax system was highly dependent on indiredt taxes, which is widely considered as more regressive than direct taxes because they affect the rich and the poor alike. Investments were meagre because of discrimination among various companies with respect to corporation tax
Economic Reforms So the challenge back then was to restore the fiscal discipline and 1991 reforms took various measures to reform taxation policy . .Since 1991, there has been a continuous reduction in the taxes on individual incomes and gradual reduction in corporation tax. Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities. Tax procedures have also been simplified in order to encourage better compliance on the part of taxpayers.
Economic Reforms The share of income taxes has also risen because of simplification of tax rules and better tax administration. . .The surge in corporate taxes is directly linked to the opening up of the economy, lowering of marginal tax rates, and the development of India's capital market since 1991. .Prior to 1991, high tax rates and the lack of a well-developed capital market meant that most corporations and their promoters had an incentive to under-report profits or net incomes. That changed after 1991, as more companies were listed on the bourses, and Indian stock markets emerged as a key source of funds for corporations .
Economic Reforms The market capitalization of all firms listed on BSE as a proportion of India's gross domestic product (GDP) was a lowly 17% in 1991. . The market-cap to GDP ratio crossed the 50% mark at the end of fiscal 2000, and it is above 100% now. All these reforms benefited Indian economy because of higher tax revenues even as tax rates fell.
Economic Reforms Goods and Services Tax (GST) The Government introduced GST in 2017, an Indirect Tax which has replaced many Indirect Taxes in India. . The main feature of GST is it will remove the Cascading effect on the sale of goods and servi ces. Removal of cascading effect will directly impact the cost of goods. Since tax on tax is eliminated in this regime, the cost of goods decreases. GST is also mainly technologically driven. All activities like registration, return filing, application for refund and response to notice needs to be done online on the GST Portal. This will speed up the processes.
Economic Reforms Foreign Exchange Reforms One of the important reform in the external sector was made in the foreign exchange market. In July 1991, the rupee was devalued against foreign currencies by around 20 percent to resolve the balance of payments crisis. This led to an increase in the inflow of foreign exchange. . The main purpose behind this move was to bridge the gap between the real and the nominal exchange rates that had emerged on account of rising inflation and thereby to make the exports competitive.
Economic Reforms It also set the tone to free the determination of rupee value in the foreign exchange market from government control. . Nowadays, markets determine exchange rates based on the demand and supply of foreign exchange.
Economic Reforms Trade and Investment Policy Reforms: The intent behind Liberalisation of trade and investment regime was to increase international competitiveness of industrial production, greater openness of economy and also to increase foreign investments and technology into the economy . The aim was also to promote the efficiency of the local industries and the adoption of modern technologies. . New initiatives were taken in trade policy to create an environment which would provide a stimulus to export while at the same time reducing the degree of regulation and licensing control on foreign trade.
Economic Reforms The aims of Trade policy (i) dismantling of quantitative restrictions on imports and exports (ii) reduction of tariff rates and (i) removal of licensing procedures for imports. Import licensing was abolished except in case of hazardous and e sensitive industries. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001. .Export duties have been removed to increase the competitive position of Indian goods in the international markets.