Industrial Policy in India Pre-91 and post-91 phase

Industrial Policy up to 1991 Reservation of Industries Dominance of Public Sector Industrial licensing Restriction on growth Restriction on foreign capital and technology

Reservation of Industries Reservation for the public sector Reservation for the small scale industries

Dominance of Public Sector IPR 1948 – Public sector monopoly in 9 industries IPR 56 – 17 most important industries were exclusively reserved for Public Sector PSU gained control over the commanding heights of the economy PSU were expected to take active initiative in non-reserved list as well.

Industrial Licensing A measure under IDRA 1951, empowering the central government to regulate the industrial activities. It is written permission from the government to undertake industrial activity so ensures entry restriction. A license contains particulars of the industrial undertaking, its location, the article to be manufactured, its production capacity and capacity to be utilised.

Objectives of Industrial Licensing Attaining desired pattern of industrial dispersal Encouraging new entrepreneurs and wider dispersal of industrial ownership Prevention of concentration of economic power Protection and promotion of the small scale industries Regulation of foreign capital and technology Use of proper technology and scale economies Achieving demand and supply balance Promotion of exports and import substitution Employment generation

Growth Restriction MRTP Act - Large firms (having assets of Rs. 100 crore or more) and dominant undertakings (having market share of 25 per cent or more) were to obtain clearance under the MRTP Act in addition to the industrial license, for establishing new undertakings, substantial expansions and manufacture of new items. - Restrictions on import of capital goods.

Restrictions on Foreign Capital and Technology Limited scope for use of foreign capital Industries allowed to use foreign capital was subject to a ceiling of 40 per cent of the total equity with exceptions in some cases FERA 1973

IDRA It is the most effective weapons the government Possesses to regulate the development of the industrial activities

Objectives of IDRA The main objective is to empower the government: - to take necessary steps for the development of industrial development - to regulate the pattern and direction of industrial development - To control the activities, performance and results of industrial undertakings in the public interest

Review of Pre-1991 Industrial Policies

Licensing and Underutilisation of of capacity No clear priorities laid down for private sector in plans, so private sector chose more profitable industries Gap between licensed capacity and capacity installed –Restricted output raised prices Over licensing in some industries

Concentration of Economic Power Large industrial houses sought pre-emption of investment opportunities through acquiring as much industrial licenses as possible for improving competitive strength in oligopoly rivalry. Licensing authority often used their discretionary powers in favor of large industrial house –Early intimation of impending licensing to an applicant –Inadequate scrutiny –Expeditious disposal of license application

Discretionary Powers of Licensing Authority Corruption Rent Seeking Nepotism

Licensing and Regional Imbalance License issued from , –Four industrially developed states like Gujarat, Maharashtra TN and W.Bengal received 46.4 percent of total licenses –Combined share of backward states like Bihar, Orissa, UP and MP got only 9.8 percent of licenses. Under the provision fro the backward area development –Share of Backward area of four advanced states was 37.6 percent share –Share of Backward states was 9.8 percent

Delays in Processing of Application Multiplicity of rules and regulations Multiplicity of approvals Haphazard way of screening the application by the licensing committee

POLICY ISSUES Indian industrial sector has long been inhibited by following policy issues. a. Reservation of items for the small scale sector b. High customs tariffs c.Rigidities in Labour Law acting as impediment to build large firms d. Exit barriers for the closure of firms in response to market dynamics e. Distortions in the structure of taxes India achieved progress in in the import liberalisation by reducing `peak’ custom tariffs on non-agricultural goods to 20% (now 12.5%).

Industrial Stagnation Stagnation observed in the Indian industries from 1960s up to 1980s –Low productivity –High Cost –Low Quality of Production –Obsolete Technology

New Industrial Policy Announced on July 1991 which heralded the economic reforms in India. It is a revolutionary Shift towards the liberal economic regime

Objectives of the New Industrial Policy 1.To build on the gains already made 2.To correct the distortions or weakness that may have crept in 3.To maintain a sustained growth in productivity and gainful employment 4.To attain international competition

Salient Features of The New Policy Redefining the role of public sector Expansion of the scope of the private sector Dismantling of entry restrictions - Delicensing (All but 18 industries are delicensed) Dismantling the growth restrictions -Removal of MRTP restrictions Liberalization of foreign Investment Related Measures - EXIM Policy - Convertibility of Indian currency - Easing the price control - Restrictions on foreign investment are eased

NEW INDUSTRIAL POLICY 1991 Highlights: a.Threshold of assets of companies under MRTP Act removed b.FDI upto 51% of equality allowed in high- priority sectors c.Foreign equity proposals need not be accompanied by technology transfer d.Industrial licensing dispensed with except in 18 items e.Part of government shareholding in PSUs to be disinvested.

FDI Foreign Direct Investment gives opportunities to industries for technological upgradation, access to global managerial skills and practices. FDI has become central for India’s integration into global production chains by way of liberalising policy framework. FDI upto 100% permitted in many sectors

FDI TRENDS World FDI inflows declined significantly in the previous three years from US$ 1.4 trillion in 2000 to US$ 824 billion in 2001 and US$ 651 billion in As against this, FDI flows in India has remained unaffected by global decline over the same period. Share of top countries in India’s FDI inflows during 1991 to Mauritius (35%), USA (17%), Japan (8%), Netherlands (7%), U.K (7%).

Trends of FDI Distribution of World FDI Inflows Region Developed Countries Developing Countries Central and Eastern Europe

The New Policy Automatic approval to the foreign equity participation in most of industries In 2000 place all items under the automatic route for for FDI/NRI/ investment except for a small negative list All other proposals that do not get automatic approval are considered by the Foreign Investment Promotion Board (FIPB)

The New Policy Foreign owned Indian holding companies have been permitted to make downstream investments within permissible equity limits through the automatic approval route provided they bring in requisite funds from abroad No need to obtain prior approval of FIPB for increasing equity within already approved limit, where the original project cost was Rs. 600 crore

Foreign Investment in India foeign investment.doc

Govt. has enacted new law, Competition Act, 2002, for upholding competition in the Indian market and established competition commission of India on October 14, COMPETITION POLICY

PRIVATISATION The process began in with the sale of minority stakes in some PSUs. From onwards, the focus shifted to strategic sales.

Disinvestment in India disinvestment.doc

Small enterprise accounts for 55% of industrial production, 40% of exports and over 88% of manufacturing employment. SSI sector continues to remain an important sector of the economy. SSIs provide jobs to 2.5 crore persons in India. Initially only 47 items were reserved for SSI units, which went upto 873 in At present, there are 675 items reserved for SSI units SSIs

Large industries can produce these items, if they agree to export 50% of their production. SIDBI has set up a small and medium enterprise fund of Rs.10,000 crore, to address the problems of inadequacy of financial resources at highly competitive rates for SSIs. Laghu Udyami Credit Card Scheme liberalized with enhanced credit limit of Rs.10 lakhs for borrowers with satisfactory track records. SSI cont.

An Evaluation of the New Policy Welcomed by the industrial sector However, India faces challenges at implementation level - Real Debureaucratisation is a challenge - A strong mandate and political will are missing - Competition from many countries to attract foreign investment - Vulnerability to external shocks - Jobless growth - Growing Inequality - Environmental Degradation