Industrial Policy:

IP is rules regulations principles policies and procedures laid down by government for regulating developing and controlling industrial undertaking

in the country.

Also indicates large medium and small scale sectors.

OBJECTIVES:

• Achieving socialistic pattern of society.

• Control on concentration of economic power.

• Achieving industrial development.

• Reducing disparity in regional development.

• Providing opportunities for employment.

OBJECTIVES:

• Achieving self-sustained economy.

• Alleviating poverty.

• Building up large cooperative sector.

• Updating technology and modernization of industries.

• Liberalization and Globalization of economy.

INDUSTRIAL POLICY:

• Industrial Policy Resolution of 1948.• Industrial Policy Resolution of 1956• Industrial Policy Resolution of 1973 • Industrial Policy Resolution of 1977• Industrial Policy Resolution of 1980• Industrial Policy Resolution of 1991

Case on Birla corporation:

• This company manufactures cement jute products automobile components etc. By 2003-04 their sales short up by 10.6% to Rs. 1243.18 crore from the previous year . Profit after tax was rs.41.56 crore against Rs. 4.19 crore in 2002-03. This was achieved improved performance of cement division and by a well planned cost management.

Case on Birla corporation:• The cement division division alone contributed for 88.75% of the

company’s sales in 2002-03 and in 2003-04 they achieved higher capacity utilization. Total export increased to 48.19 corers in 2002-03.

• In 2003-04 jute export increased and the company had good performance rate. the automobile sector had to face a decline. Their calcium –carbide industry struggled much due to competition from low priced markets from China and Romania and duty free imports from Bhutan . Increase in power tariff also contributed much to their struggle.

• Taking into advantage , Birla Corporation has decided to expand capacity at its Durgapur Cement Plant by 1 million ton.

• They are also working hard to make the production capacity of Chanderia Cement 3 lakh tons per annum.

• Project are underway to set up a power plant of 27 MW as new industrial undertaking at M.P. and Rajasthan.

• Discuss the business activities of Birla Corporation on recent developments.

Industrial Policy 1948:

• Government recognised the need for mixed economy .• Reserved the national monopolies for Atomic Energy and Rail

and Road industry.

• Government had the right to initiate projects in 6 industries and they are:

• Coal iron and steel aircraft manufacturing ship building telephone and minerals.

• The government could regulate and license 18 other industries of national importance.

Industrial Policy Resolution 1956:

• Parliament accepted ‘the socialistic pattern of society’ as the basic aim of social and economic policy.

• These important developments necessitated a fresh statement of industrial policy of 1956.

• The resolution laid down 3 categories of industries.

• Schedule A:• The state government was responsible for them.

• Schedule B:• State owned companies.• Private enterprises only supplement the efforts.

Schedule C:

All the remaining industries and their future development would in general be left to the initiative and enterprise of the private sector.

Other features of the resolution are:

Fair and non-discriminatory treatment for private sector.

Encouragement to village and small enterprises.

Removing regional disparity.

Development of ancillary industries in areas where large industries were to be set up.

Industrial policy Statement 1977:Due to some disparities there were certain problems like:

Unemployment was increasing rural urban disparity widened and real investment stagnated.

The growth rate of industrial segment was not more than 3-4% per annum.

The incidence of industrial sickness also became widespread.

The concept of District Industrial Centers was introduced for the first time. Each district would have such a district centre which would extent all support and services required by small entrepreneurs.

Within the SSI sector , a new concept of the tiny sector was introduced.

TINY SECTOR: Industrial unit with investment in machinery and equipment of up to rs. One lakh and situated in a town with population less than 50,000. this concept was given by Karve Committee in 1967 with 47 products .

Industrial policy 1980:

Focused on the need for promoting competition in the domestic market, technological upgradation and modernization.Laid the foundation for increasingly competitive export base and for encouraging foreign-investment in high- tech areas. The policy suggested following measures:Effective operational management of public sector.Integrating industrial development in the private sector.Regularization of unauthorized excess capacity installed in the private sector.Encouragement of Merger and Acquisition of sick units.

Drawback: it underplayed the employment objective as was technology centric.

Industrial Policy 1991(july):Announced at the time of Mr. P.V. Narsimha Rao .The reforms in 1991 did make significant changes in industrial , trade and public sector policies.

Significant changes are:

Abolished licensing for all projects except in 18 industries.MRTP act amended to eliminate prior approval to large companies for capacity expansion.The requirement of Phased Manufacturing Programs discontinued for all new projects.Schedule A of industries reserved exclusively for state enterprises cut down from 17 to 8 .Schedule B of industries , where state enterprises were to acquire a dominant positions, abolished.Small scale enterprise allowed to offer up to 24% of share holdings of large enterprises.

Major issues covered by Industrial policy 1991 are:

Foreign Direct Investment:

Limit on foreign equity holdings raised from 40% to 51% in a wide range of industry.Foreign equity proposals need not be accompanied by foreign technology transfer agreement.Technology imports liberalized by increasing royalty limits.

Public Sector Policy:

Disinvestment in selected public sector enterprises to raise finances for development , bring in greater accountability and help create a new culture in their working for improved efficiency.Government equity ranging from 5% to 20% in 31 PSEs with ‘good track record’ disinvested to public sector mutual funds and financial institutions.

Trade policy:

Administered licensing of imports replaced by import entitlements linked to export earnings. These entitlements called exim scrips made freely tradable.

permission to import capital goods without ‘indigenous clearance’ provided import covered by foreign equity .

Scope of canalization narrowed. A process which exists for some categories - which means these can be imported only by designated agencies.

Current update:

A number of items like urea are canalized. This means they can be imported only by designated agencies like MMTC and STC, the government's trading arms. An item like gold, in bulk, can be imported only by specified banks like SBI and some foreign banks or designated agencies.

Environmental issues:

Government came up with environmental policy . The policies are implemented through various acts such as Wildlife protection act 1972.water (Prevention and Control of Pollution) Act 1974 .

Industrial Licensing:

• Licensing is a written permission issued by the central government to an industrial undertaking stating details like location, article to be manufactured , production capacity , and other relevant particulars including the validity period.

OBJECTIVES OF LICENSING

• To limit the capacity within the targets set by plans.

• To direct investments in industries according to plan priorities.

To regulate the location of industrial units so as to secure a

balanced regional development.

• To prevent monopoly.

To protect small scale industries against undue competition from large scale industries.

To foster technology and economic improvements in industries by ensuring units of economic size and adopting.

To encourage new entrepreneurs to start industrial units.

Industrial Licensing Policy:

Industries (Development and Regulation) Act 1951:

provisions of the Act were:No new industrial units could be established or substantial extension to existing plants be made without a license from central government.Government could take under its own management undertaking which failed to carry out its instructions in management and policies.This act also empowered the government to prescribe prices, methods and volume of production and channels of distribution.The act empowered the government to set up Development council for groups of industries.

New Industrial Policy and Procedure, 1970:

In February 1970 government announced its new industrial licensing policy which consisted of list of core industries in the economy (instructed by Industrial Licensing Policy Inquiry Committee). The industries were.

Agriculture input Non-ferrous metal petroleum Iron and Steel coal heavy industrial machinery

ship building

news print and electronics.

DISINVESTMENT in PUBLIC SECTOR:

• Needs of public sector:

• To increase the growth of core-sectors in the economy by creating a solid foundation in industrial growth.

• To serve the financial and technological needs of important sectors like Railways, telecommunication.

• To ensure easy availability of articles of mass-consumption and to check production of unimportant luxury articles.

Failing of PSU:

In spite of monopoly in certain areas PSUs are never profitable.

Facts and figures:

1997-98: Public Manufacturing Enterprises showed profitability of minus (-) 3.9%.

Reasons for failure of PSUs are

Low rate of return on investment, poor capacity utilization, declining contribution to national savings , red tapism.

Disinvestment:

• The main objective of DISINVESTMENT is to put national resources and assets to optimal use and in particular to unleash the productive potential inherent in our PSEs.

• The policy of disinvestment aims at modernization of PSEs, creation of new assets , generation of employment and retiring of public debt.

• Privatization and Disinvestment: Privatization leads to change in management with change in

ownership whereas change in ownership is not a necessary condition in Disinvestment. It refers to dilution of the stakes of the government to a level where there is no change in control .

Disinvestment Procedure:

1. Proposal for disinvestment in any PSU are placed for consideration of Cabinet Committee on Disinvestment

(CCD).

2. An Advisor is appointed to invite Expression of Interest (EOI) from parties.

3. The prospective bidders undertake due diligence of the PSU.

4. Concurrently the task of valuation of the PSU is undertaken.

5.Calculation of reserve price of PSU is done using any of the 3 methods.

Discounted cash flow method. Asset valuation method, Balance sheet method.

6.Share purchase agreement is sent to prospective bidders for inviting the final binding bids.

7.The bids received are placed before the CCD for final approval. CCD then approves the final buyer.

After the transaction is complete the papers are forwarded to the Controller and Auditor General of India (CAG) for

undertaking the evaluation of disinvestment, He place it in the parliament and release it for public.

Merits of Disinvestment:

• To obtain release of large amount of public resources locked up in non-strategic Public sector units for re-employment in areas of higher social priority.

• Facilitates transferring the commercial risk to which the tax payer’s locked up in public sector is exposed to the private sector wherever they are willing to step in.

• More and more man-power is utilized which was dumped in PSU.

Disinvestment would expose privatized companies to market disciplines and help them to become self reliant.

Wider distribution of wealth by offering shares of privatized companies to small investors and employees.

Beneficial for capital market. Increase in floating stock

would give market more liquidity, give investors early exit options which will help raising of funds by privatized

companies for their projects .

Demerits of Disinvestment:

• The amount raised through disinvestment in the year 1991-2001 was only Rs.2051 cr which is very less amount.

• Only when the government ensures that the market system regulates privatized firms take care of public’s interest otherwise not.

• In most of the cases shares of disinvested PSU ‘s are by and large in the hands of institutions of with little floating stock.

• No monopoly is good only fair and full competition can bring relief to consumers.

Let us know…

• BALCO: Bharat Aluminium Company Ltd (BALCO)

• It is a fully integrated aluminium producing company set up in 1965 . The government of India had 100% stake in BALCO prior to disinvestment. In 1998, the disinvestment commission recommended 51% disinvestment in favour of strategic buyer along with transfer of management .Sterlite company acquired stakes in march 2001 for Rs. 551.50 crs.

VSNL: Videsh Sanchar Nigam Limited:

Govt. sold 25% of equity share holdings out of its total holdings of 52.97% in VSNL in 2002 . The total paid-up capital was rs. 285 crore ,the govt. holding being Rs.

151crs. Rs. 71.25 crs was sold to M/s Panatone (TATA group) at a price of Rs. 1439 crs. The govt. received

approx Rs. 3689crs. Thus govt. sold its shares at a price of Rs. 202 per share .

Some other privatized PSUs:

• Modern Food Industries Limited ( MFIL) : Hindustan Lever.• Computer Maintenance Corporation (CMC) : Tatas.• 9 Hotels of Indian Tourism Development Corporation (ITDC) • Indian Petrochemical Complex Limited (IPCL) : Reliance.• Maruti Udyog Limited (MUL) : Suzuki.• Hindustan Zinc Limited (PPC) : Ruia.• Paradeep and Phosphates Limited (PPC) • Hotel Corporation of India Limited (HCL)

Disinvestment and FDI• In India the success of disinvestment has depended on

domestic investment and foreign investors have kept away. On the contrary privatization has failed to attract FDI in India.

• The main reasons for failure are:• It took almost a decade to finalize disinvestment policy and

there is lack of transparency.• Till 1991 the policy was harped on controlling power and

protecting workers.• The disinvestment of 25% equity holdings of VSNL was decided

in 2001 but actual disinvestment took a year. Global investors wont wait for long.

• Globally M and A have been a major source of FDI inflows. In India regulatory laws make M and A’s low profile.

Modes of Disinvestment :

• Involving a change in ownership.

• Involving no change in ownership.

• No change:• 1. disinvestment deferred.• 2. no disinvestment.

• Closure of Assets.

In the budget 2000-01 , the main elements of the disinvestment policy were enunciated , which are as follows:

Restructure and Revive potentially viable PSEs.

Closedown PSE’s which cannot be reviewed.

Bring down government equity in all non-strategic PSE’s to 26% or lower if necessary.

Fully protect the interest of workers.

Use the entire receipt from disinvestment and privatization for meeting expenditure in social sector .

Setting up Ministry of Disinvestment (Department of Disinvestment was set up in December 1999 and is made a full fledged Ministry under Government of India)

International Trade Theories

Adam Smith said - each nation should specialize in producing things it has an "absolute advantage" . The theory of "Absolute Advantage" seems to make

sense in situations where the circumstances of the geographic and economic environment are relatively

simple and straight forward - example: - Switzerland and watches, Canada

and cereal grain.

An Example:

• India needs 30 man-hours to produce one quintal of rice whereas Bangladesh needs 50-man hour. The cost of production of rice is much more in Bangladesh as compared to India. India thus has an absolute advantage in production of rice. In case of jute India needs 60 man hours while Bangladesh needs 20- man hour to produce one quintal of jute. Thus Bangladesh has an absolute advantage in jute production.

• Country Rice Jute• India 30 60• Bangladesh 50 20

In 1817, David Ricardo looked at Adam Smith's theory and

suggested that

"there may still be global efficiency gains from trade if a country specializes in those products that it can produce

more efficiently than other products - regardless of whether other countries can produce those same

products even more efficiently"

Example:Country Rice JuteIndia 30 60Bangladesh 50 80

The Theory of Factor Endowments suggested you should

trade in the products which you can make from the production factors and resources you naturally possess. So for Canada this means we should trade in lumber and minerals and grain since we naturally possess these resources in large quantities. Following this theory it would then make sense for Canada to import citrus fruits since our climate does not naturally give us weather to allow this food to grow without expensive greenhouses. This theory was

espoused by Heckscher and Ohlin.