Industrial Policy & Environment

Entrepreneurship Management

Prof Bharat Nadkarni

• Introduction• Industrial licensing, IDRA 1951• Industrial policy- outline• liberalization policy 1991,• Indian Industrial structure – public sector, private sector, joint sector, and small scale sector.

Topics

Introduction – Indian industry

• India was industrially backward in 1947 and resources were grossly under utilized

• About 56.6%of the GDP was accounted by the primary sector-agriculture, forestry, fishing, mining and quarrying.

•Manufacturing,construction,electricity,gas and water supply accounted for only 15%of the GDP.

Hence there was urgent need for development of the industrial sector. The government initiated the process of industrialization through the industrial policies

Industrial policy

•Industrial policy resolution of 1948

•Industrial policy resolution of 1956

•Industrial Licensing policy of 1970

•Industrial policy statement of 1977

•Industrial policy statement of July 1980

•New industrial policy 1991

Industrial policy resolution of 1948

• Acceptance of the importance of both private and public sector.

• Division of the industrial sector – the industry was divided into four categories a)industry where state had a monopoly b)mixed sector c) field of government control and d) the field of private enterprise.

• Role of the small and cottage industries

• Other important features of the industrial policy

-role of foreign capital in industrial development and its regulation, industrial relations.

Industrial policy resolution of 1956

Background

•The 1948 policy remained in vogue for full eight years and determined the nature and pattern of industrial development in the country.

•significant changes in the economy. The country had completed one five year plan in the period 1951-56.

•Industries (Development and Regulation) Act, was passed in 1951

•The ruling party had declared 'socialist pattern of society' as the goal for the country.

Because of these factors, a new declaration of industrial policy seemed essential. This came in the form of Industrial Policy Resolution of 1956.

Objectives of the 1956 industrial policy

(i) to accelerate the rate of growth and to speed up industrialization

(ii) to develop heavy industries and machine making industries

(iii) to expand public sector

(iv) to reduce disparities in income and wealth

(v) to build up a large and growing cooperative sector

(vi) to prevent monopolies and the concentration of wealth and

income in the hands of a small number of individuals.

(vii) To give high priority to small sector

Salient Features of the Industrial Policy of 1956

Division of the industrial sector~. As against four categories in the 1948 Resolution, the 1956 Resolution divided industries into the following three categories: .

• Monopoly of the State

In the first category, those industries were included whose future development would be the exclusive responsibility of the State. Seventeen industries were included in this category and were listed in Schedule A (appended to the Resolution). These industries can be grouped into the following five classes:

(i) defense (ii) heavy industries, (iii) minerals, (iv) transport and communications (v) power

Of these, four industries-arms and ammunition, atomic energy, railways and air transport, were to be government monopolies.

In the remaining 13 industries, all new units were to be established by the State.

However, existing units in the private sector were allowed to exist and expand. The State could also elicit the cooperation of private sector in establishing new units in these areas 'when the national interest so required'.

(b) Mixed sector of public and private enterprise.

In this section 12 industries listed in Schedule B (appended to the Resolution) were included. These were: all other minerals (except minor minerals), road transport, sea transport, machine tools, ferro-alloys and tool steels, basic and intermediate products required by chemical industries such as drugs, dyestuffs and plastics

Fertilizers. synthetic rubber, chemical pulp, carbonization of coal, and aluminum and other non- ferrous metals not included in the first category. In these industries, State would increasingly establish new units and increase its participation but would not deny the private sector opportunities to set up units or expand existing units.

c) Industries left for private sector.

All industries not listed in schedules 'A' or 'B' were included in the third category. These industries were left open to the private sector. Their development was to depend on the initiative and enterprise of the private sector, though even here the State could start any industry in which it was interested. However, the main role of the State in this category was to provide facilities to the private sector to develop itself.

SSI was defined earlier in 1950 as one having fixed asset below Rs. 5 lakhs and number of workers employed per day below 50 / 100

other features

• Mutual dependence of public and private sectors:

2. Assistance and control of private sector:

The private sector was to remain subject to various government regulations and controls.Such regulation and control was to be exercised by the government through the Industries (Development and Regulation) Act, 1951, and other related legislations. .

3. Importance of small-scale and cottage industries.

4. Reduction of regional inequalities.

5. Technical and managerial personnel.

6. Industrial peace.

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The government control and regulations of industry

The government in order control and regulate industry formulated the following acts

•Industrial development and regulation act 1951

•The securities contracts and regulation act 1956

• Capital issues (control) act 1947 –controller of capital issues (CCI)

• The Monopolies and Restrictive Trade Practices Act 1969-(MRTP)

•The Indian companies Act -1956

• The Foreign Exchange Regulation Act –1985 (FERA)

Industrial Licensing Policy of 1970

•Restricted the role of large Industrial houses and foreign concerns to the core, heavy and export-oriented units

•District Industries Centers (DIC) were proposed to be set up to provide under a single roof all the services for SSI

Industrial Policy Statement of 1977

• Expansion of the list of reserved items for exclusive production by the SSI sector from 180 to 807

• Enhanced limits for investment in Plant & Machinery for tiny, SSI and ancillary units to Rs. 1,10 and 15 lakhs respectively

• Mass creation of DICs

• Separate wing of IDBI to deal with credit requirement of small sector

• Promotion to technological self-reliance

• Restricted role towards foreign capital and collaboration

• Rehabilitation programmes for sick units

“Whatever can be produced by the small and cottage industries must only be so produced”

Industrial Policy Statement of 1980

• Modernization of SSI by adopting the right technology and energy conservation

• Thrust to export-oriented units• Selective but speedy approval to foreign capital

collaborations• Integrated Industrial Development• Enhanced limits for investment in Plant &

Machinery for tiny, SSI and ancillary units to Rs. 2,20 and 25 lakhs respectively

“Emphasized the Ancillarisation and the Creation of clusters for the growth of this sector”

INDIAN MACRO ECONOMIC CRISIS –1990-91

The crisis had three important aspects

•The fiscal imbalance – deficit budget to the tune of Rs40,000cr over the years.in 1990-91 the interest payment had eaten up 36.4% of the total revenue collection of the government.

•Fragile balance of payments situation:- the external debt was about 1,20,000cr as per IMF i.e. the current account deficit $9.7billon or 3.69%GDP –1990-91

•Mounting inflationary pressures :- 1990-91 the inflation rate was around 11.2%

NEW INDUSTRIAL POLICY, 1991

In line with the liberalisation measures announced during the eighties the government announced a New Industrial Policy on July 24,1991. This new policy de-regulates the industrial economy in a substantial manner.

Objectives of the new policy

• To build on the gains already made,

• Correct the distortions or weaknesses that might have crept in

• Maintain a sustained growth in productivity and gainful employment

• Attain international competitiveness.

The main features of the policy

• Industrial Licensing

• B. Foreign Investment

• C. Foreign Technology Agreements

D. Public Sector Policy

E. MRTP Act.

A package for the Small and Tiny Sectors of industry was' announced separately on 6th August 1991

New Policy for Small & Tiny Enterprise

• Equity participation up to 24% by other industrial undertakings

• Legislation to ensure payment of SSI bills• Credit demand of SSI to be fully met. Factoring

services from SIDBI• Investment limit for tiny sector Rs. 5 lakhs:SSI Rs. 60

lakhs and ancillary and export-oriented unit Rs. 75 lakhs

• Relaxation from specified Labour Laws to tiny sector• Service sector to be recognised as tiny sector• Marketing assistance through PSU and NSIC

Abolition of Industrial Licensing

•Abolishment industrial licensing for all but 18 industries.

• Coal and lignite;

• Petroleum (other than crude) and its distillation products;

• Distillation and brewing of alcoholic drinks;

• Sugar;

• Animal fats and oils;

• Cigars and cigarettes;

• Asbestos and asbestos-based products;

• Plywood and other wood based products;

• Raw hides and skins and leather;

• Tanned or dressed fur skins;

• Motor cars;

• Paper and newsprint;

• Electronic aerospace and defense equipment;

• Industrial explosives;

• Hazardous chemicals;

• Drugs and pharmaceuticals;_

• Entertainment electronics;

• White goods (domestic refrigerators, washing machines, air conditioners, etc.).

As of now, licensing is compulsory for only 6 industries. These are alcohol, .cigarettes, hazardous chemicals, electronics aerospace and defense equipment, drugs and pharmaceuticals (excepting bulk drug industry which has been delicensed) and industrial explosives.

Public Sector's Role Diluted

The number of industries reserved for the public sector since 1956 was 17. This number has now been reduced to 4. Industries which continue to be reserved for the public sector are in areas where security and strategic , concerns predominate. :

• arms and ammunition and allied items of defence equipment, defence aircraft and warships

• atomic energy,

• minerals specified in the schedule to the atomic energy (control of production and use) order, 1953.

• rail transport.

'The new industrial policy also states that the government will undertake review of the existing public enterprises in low technology, small scale and non-strategic areas as also when there is low or nil social consideration or public purpose. Sick units will be referred to the Board for Industrial and Financial Reconstruction (BIFR) for advice about rehabilitation and reconstruction, For enterprises remaining in the public sector, it is stated that they will be provided a much greater degree of management' autonomy through the system of MOU. (memorandum of understanding).

MRTP Limit Goes

Under the, MRTP Act, all firms with assets above a certain size (R;. 100 crore since 1985) were classified as MRTP firms. Such firms were permitted to enter selected industries only and this also on a case-by- case approval basis. In addition to control through industrial licensing, separate approvals were required by such large firms for any investment proposals, The government felt that this was having a deleterious effect on many large-firms in their plans therefore scrapped the threshold limit of assets in respect of MRTP and dominant undertakings. These firms will now be at par with others, and not require prior approval from the government for investment in the delicensed industries.

The MRTP Act has been accordingly amended. The new amended Act gives more emphasis to the prevention and control of monopolistic, restrictive and unfair trade practices so that consumers are adequately protected from such practices.

Free Entry to Foreign Investment and Technology

•Automatic permission was to be made available for direct foreign investment upto 51 per cent foreign equity..

•In January 1997, the first ever guidelines Priority areas for foreign direct investment proposals as mentioned in the guidelines include infrastructure, export potential, large-scale employment potential particularly for rural areas, items with linkages with the farm sector, social sector projects like hospitals, health care and medicines, and proposals that lead to induction of technology and infusion of capital.

•Foreign direct investment approvals will, however, be subject to sectoral caps:

• 20 percent (40'per cent for NRIs} in the banking sector;

•51 per cent in non-banking financial companies;

•100 per cent in power, roads, ports, tourism and venture capital funds;

•49 per cent in telecommunications;

•40 per cent (100 per cent for NRIs) in domestic air taxi operations/airlines;

•24 per cent in small-scale industries;

•51 per cent in drugs/pharma industry for bulk drugs;

•100 per cent in petroleum; and

• 50 per cent in mining ~ except for gold. silver, diamonds and precious stones

Other Liberalisation Measures

Industrial location policy liberalilsed.

• In locations other than cities of more than 1 million population, there will be no requirement of obtaining industrial approvals from the Center,except for industries subject to compulsory licensing.

•In cities with a population of more than 1 million, industries other than those of non-polluting nature, were required to be located outside 25 kms of the periphery

• For notified industries of a non-polluting nature such as electronics, computer software and printing, may be located within 25 kms of the periphery of cities - with more than 1million population.

Abolition of Phased Manufacturing Programmes for new projects.

To force the pace of indigenisation in manufacturing, Phased Manufacturing Programmes have been in force in a number of engineering and electronic industries. The new industrial policy has abolished such programmes in future as the government feels that due to substantial reforms made in the trade policy and the devaluation of the rupee, there is no longer any need for enforcing the local content requirements on a case-by-case, administrative basis.

Removal of mandatory convertibility clause:

A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions, have followed a mandatory practice of including a convertibility clause in their loans into equity if felt necessary by their management..

Indian Industrial structure • public sector • private sector

• joint sector

• small scale sector.

Public sector

Forms of organisation

•Department undertakings :e.g. Indian railways, Posts and telegraph, Ordnance factories etc.

• Public corporations : e.g. LIC, UTI, Nationalised banks, Air India, Indian airlines etc.

• Government company : e.g. GIC,STC, Parga tools,etc.

Role of public sector in the Indian economy

• Capital formation

•Development of infrastructure

•String industrial base

•Economies of scale

•Removal of regional disparities

•Import substitution and export promotion

•Check over concentration of economic power.

Problems of PSU

•Price policy

•Under-utilization of capacity

•Problems relating to planning and construction of projects

•Problems of labour, personnel and management.

Role of the private sector

•Importance of development

•Extensive modern industrial sector

•Potentialities due to personal incentives in the small sector

• Importance for national income generation and employment

Problems of private sector

•Lack of positive role in economic development

•Development of non priority industries and wastage of resources

•Monopoly and concentration

•Sharp rise in manufacturing costs

•Negative economic value added

•Contribution to trade deficit because of heavy imports

•Industrial disputes

•Industrial sickness

•Problems relating to finance and credit

Joint sector (mixed enterprises)

•Mixed private enterprise -effective control with the private

people

•Mixed public enterprise- effective control with the government

Role of the joint sector

• social control over industries

•Better industrial growth

•Broad-basing of industrial entrepreneurship

Small scale industry

An industrial unit having an investment in fixed assets in plant and machinery not exceeding Rs 1.5 crore is called a SSI.

An tiny unit is one which has an investment upto 25 lakh.

The role of SSI and tiny industry contribution to the economic is very large.

Entrepreneurship : Prof Bharat NadkarniCapitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism

Economic Markets Freedom to compete with right to invest.

Limited competition with state owned industries.

Absence of competition with state owned markets and industries.

Individual incentives Profits and wages in relation to one’s ability and willingness to work.

Profits recognised. Wages fairly in relation to efforts.

Profits not allowed. Workers urged to work for the glory of the state.

Capital Sources Capital invested by owners who may also borrow on credit. Capital may be re-invested from profits.

Obtained from owners and from state – issued bonds for state-owned industries.

State provides all the resources to start business owned by the state.

Entrepreneurship : Prof Bharat NadkarniCapitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism

Labour Workers are free to select an employer and an occupation.

Workers allowed to select occupation. State planning encourages employment.

The state determines one’s employer and employment.

Management Managers are selected on the basis of ability. Managers have freedom to make decisions.

Managers in state-owned industries are answerable to the state. Non monetary rewards emphasised

Key managres must be party members. Absence of freedom to make decisions.

Business Ownership Individuals have a right to own a business and to contract with others.

State owns the basic industries. Other businesses may exist.

State owns all productive capacity.

Entrepreneurship : Prof Bharat NadkarniCapitalism, Socialism and Communism Compared

Characteristics Capitalism Socialism Communism

Risk Assumption Losses assumed by owners. May transfer business risks to other businesses through insurance.

People assume risks of state-owned industries. Losses taken from taxes.

Economic production owned by the state. Risks assumed by the state. Losses reduce standard of living.