What Is Economic Policy

WHAT IS ECONOMIC POLICY? Economic policy refers to the actions that governments take in the economic field. It covers the systems for setting interest rates and government deficit as well as the labour market, national ownership, and many other areas of government. Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties.

TYPES OF ECONOMIC POLICY:Economic policy is a complicated area and can be broken down into three principal areas: •

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Fiscal policy is the size of the government deficit and the methods it uses to finance it. ○

Fiscal stance: The size of the deficit

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Tax policy: The taxes used to collect government income.

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Government spending on just about any area of government

Monetary policy is concerned with the amount of money in circulation and, consequently, interest rates and inflation. ○

Interest rates, if set by the Government

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Incomes policies which aim at imposing non-monetary controls on inflation

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Bank regulations which affect the money multiplier

Trade policy refers to tariffs, trade agreements and the international institutions that govern them.

Almost any aspect of government has an economic aspect and so many terms are used. However, they can usually be seen to apply to one of these areas. For instance, agricultural policy is generally a matter of the burden of taxation and of trade in agricultural goods.

TOOLS AND GOALS:Policy is generally directed to achieve particular objectives, like targets for inflation, unemployment, or economic growth. Sometimes other objectives, like military spending or nationalization are important.

These are referred to as the policy goals: the outcomes which the economic policy aims to achieve. To achieve these goals, governments use policy tools which are under the control of the government. These generally include the interest rate and money supply, tax and government spending, tariffs, exchange rates, labour market regulations, and many other aspects of government. The government's economic policy determines the tools and hopes that they will achieve its goals. FISCAL POLICY:Fiscal policy, taking the scope of budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances). Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: •

Aggregate demand and the level of economic activity

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The pattern of resource allocation

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The distribution of income.

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ROLE OF FISCAL POLICY- ITS SIGNIFICANCE TO BUSINESS ECONOMY IN DEVELOPING COUNTRIES LIKE INDIA:-

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The main goal of the fiscal policy in developing countries is the promotion of the highest possible rate of capital formation. Underdeveloped economies are in the constant deficit of the capital in the economy and thus, in order to have balanced growth accelerated rate of capital formation is required. For this purpose the fiscal policy has to be designed in a way to raise the level of aggregate savings and to reduce the actual and potential consumption of people.

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To divert existing resources from unproductive to productive and socially more desirable uses. Hence, fiscal policy must be blended with planning for development.

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To create an equitable distribution of income and wealth in the society.

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To protect the economy from the ills of inflation and unhealthy competition from foreign countries.

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To maintain relative price stability through fiscal measures.

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The approach to fiscal policy must be aggregate as well as segmental. the sectoral imbalances can be curbed by appropriate segmental fiscal measures.

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Public borrowing, loans from foreign nations etc can be used in the development of the resources for public sector.

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Fiscal policy in the developing economy has to operate within the framework of social, cultural and political conditions which inhibit formation and implementation of good economic policies.

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In order to reduce inequalities of wealth and distribution, taxation must be progressive and government spending must be welfare-oriented.

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The hindrances in the effective implementation of fiscal policy in the developing countries are loopholes in taxation laws, corrupt tax administration, a high population growth, extravagant governmental spending on non-developmental items, an orthodox society etc.

MONETARY POLICY:Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy should be contrasted with fiscal policy, which refers to government borrowing, spending and taxation

FOREIGN TRADE POLCIES:Trade is the exchange of goods and services for money or other goods and services, you can trade within or out of the country. Trade is the exchange of goods, services, or both. Trade is also called commerce. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Modern traders instead generally negotiate through a medium of exchange, such as money. As a result, buying can be separated from selling, or earning. The invention of money (and later credit, paper money and non-physical money) greatly simplified and promoted trade. Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. Trade exists for many reasons. Due to specialisation and division of labor, most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions' size allows for the benefits of mass production. As such, trade at market prices between locations benefits both locations. Trading can also refer to the action performed by traders and other market agents in the financial markets.

The Foreign Trade Policy is built around two major objectives. These are: • •

To double our percentage share of global merchandise trade within the next five years; and To act as an effective instrument of economic growth by giving a thrust to employment generation.

For achieving these objectives, the following strategies need to be adopted: •

Unshackling of controls and creating an atmosphere of trust and transparency to unleash the innate entrepreneurship of our businessmen, industrialists and traders.

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Simplifying procedures and bringing down transaction costs.

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Neutralizing incidence of all levies and duties on inputs used in export products, based on the fundamental principle that duties and levies should not be exported.

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Facilitating development of India as a global hub for manufacturing, trading and services.

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Identifying and nurturing special focus areas which would generate additional employment

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opportunities, particularly in semi-urban and rural areas, and developing a series of 'Initiatives' for each of these.

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Facilitating technological and infrastructure up gradation of all the sectors of the Indian economy, especially through import of capital goods and equipment, thereby increasing value addition and productivity, while attaining internationally accepted standards of quality. .

The new Exim-Policy is essentially a roadmap for the development of India's foreign trade. It contains the basic principles and points the direction in which we propose to go. By virtue of its very dynamics, a trade policy cannot be fully comprehensive in all its details. It would naturally require modification from time to time. We propose to do this through continuous updating, based on the inevitable changing dynamics of international trade. It is in partnership with business and industry that we propose to erect milestones on this roadmap. With a view to doubling our percentage share of global trade within 5 years and expanding employment opportunities, especially in semi urban and rural areas, certain special focus initiatives have been identified for the agriculture, handlooms,handicrafts,gems & jewellery and leather sector. AGRICULTURE:A new scheme called the Vishesh Krishi Upaj Yojana (Special Agricultural Produce Scheme) for promoting the export of fruits, vegetables, flowers, minor forest produce, and their value added products has been introduced (Para 3.8). Funds shall be earmarked under ASIDE for development of Agri Export Zones (AEZ)dicraft, gems & jewellery and leather sectors Import of inputs such as pesticides shall be permitted under the Advance Licence for agro exports HANDLOOMS:Specific funds would be earmarked under MAI/ MDA Scheme for promoting handloom exports Duty free import entitlement of specified trimmings and embellishments shall be 5% of FOB value of exports during the previous financial year. Duty free import entitlement of hand knotted carpet samples shall be 1% of FOB value of exports during the previous financial year.

GEMS AND JEWELLERY:Import of gold of 18 carat and above shall be allowed under the replenishment scheme Duty free import entitCutting and polishing of gems and jewellery, shall be treated as manufacturing for the purposes of exemption under Section 10A of the Income Tax Act lement of commercial samples shall be Rs 100,000

LEATHER AND FOOTWEAR:Duty free import entitlement of specified items shall be 5% of FOB value of exports during the preceding financial year. The duty free entitlement for the import of trimmings, embellishments and footwear components for footwear (leather as well as synthetic), gloves, travel bags and handbags shall be 3% of FOB value of exports of the previous financial year. The entitlement shall also cover packing material, such as printed and non printed shoeboxes, small cartons made of wood, tin or plastic materials for packing footwear Machinery and equipment for Effluent Treatment Plants shall be exempt from basic customs duty. EXPORT PROMOTION SCEHEMES:Target plus scheme to accelerate growth of exports. Vishesh krishi upaj yojna for agro-exports. Served from India scheme Additional flexibility under EPCG Import of fuel under DFRC entitlement allowed to be transferred to marketing agencies authorized by Min of Petroleum and Natural Gas. The DEFB scheme will be continued. EOUs shall be exempted from Service Tax in proportion to their exported goods and services. A scheme to establish Free Trade and Warehousing Zone is introduced to create trade-related infrastructure to facilitate import and export with freedom to carry out trade transactions in free currency.