10 EM Industrial policy Session 11

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.
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
•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
•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
(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
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.
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
• 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
“Whatever can be produced by the small and cottage
industries must only be so produced”
• 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
• Promotion to technological self-reliance
• Restricted role towards foreign capital and collaboration
• Rehabilitation programmes for sick units
Industrial Policy Statement of 1980
“Emphasized the Ancillarisation and the Creation of
clusters for the growth of this sector”
• Modernization of SSI by adopting the right
technology and energy conservation
• Thrust to export-oriented units
• Selective but speedy approval to foreign capital
• Integrated Industrial Development
• Enhanced limits for investment in Plant &
Machinery for tiny, SSI and ancillary units to Rs.
2,20 and 25 lakhs respectively
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%
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
• Maintain a sustained growth in productivity and gainful
• 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
• Equity participation up to 24% by other industrial
• 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
• 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
•49 per cent in telecommunications;
•40 per cent (100 per cent for NRIs) in domestic air taxi
•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
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
Problems of private sector
•Lack of positive role in economic development
•Development of non priority industries and wastage of
•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
•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
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 Nadkarni
Capitalism, Socialism and Communism Compared
Freedom to compete
with right to invest.
Limited competition
with state owned
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
Obtained from
owners and from
state – issued bonds
for state-owned
State provides all the
resources to start
business owned by
the state.
Economic Markets
Capital invested by
owners who may
also borrow on
credit. Capital may
be re-invested from
Entrepreneurship : Prof Bharat Nadkarni
Capitalism, Socialism and Communism Compared
Workers are free to
select an employer
and an occupation.
Workers allowed to
select occupation.
State planning
The state determines
one’s employer and
Managers are
selected on the basis
of ability. Managers
have freedom to
make decisions.
Managers in stateowned 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
State owns all
productive capacity.
Entrepreneurship : Prof Bharat Nadkarni
Capitalism, Socialism and Communism Compared
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.
production owned by
the state. Risks
assumed by the state.
Losses reduce
standard of living.