Summary

Economics Class 37

EVOLUTION OF INDUSTRY- 5:02 PM

Industry accounts for around 28% of GVA at current prices(21-22), this is lower than the average share of 35% for most developing countries.
Indian industry experienced slow and poor productivity performance during the period from 1950 to 80.
The policy regime had a strong preference for the public sector, extensive control over private investment a highly protective trade, and inflexible labor laws.
Promotion of small-scale sector and regional balance were additional objectives of the industrial policy regimes.
The period after the mid-sixties witnessed an aggressive import substitution regime and the strengthening of domestic regulatory structures.
In 1991 in response to the major BOP crisis India made a radical shift away from its long-standing policy of inward orientation and the subsequent reforms have moved the policy regime significantly towards market orientation, deregulation, and liberalization.
Industrial Policy Resolution 1948-
It made it clear that India is going to follow a mixed economic model.
It classified industries into four broad categories-
1. Strategic industries - Public sector - In included three industries in which the central govt. had a monopoly.
These include arms and ammunition, atomic energy, and rail transport.
2. Basic industries - Public + private sector- Six industries coal, iron and steel, aircraft manufacturing, ship-building, manufacture of telephone and wireless apparatus, and mineral oil were designated as basic industries.
These industries were to be set up by the central government however the existing private sector enterprises were allowed to continue.
3. Important industries- Controlled private sector- It included 18 industries including chemicals, sugar, cotton textiles, cement, paper, machine tools, fertilizers, air and sea transport, tractors, etc.
These industries continue to remain under the private sector however the central government in consultation with the state govt. had general control over them.
4. Other industries- Private and cooperative sector- All other industries which were not included in the above-mentioned three categories were left open to the private sector.
Industrial Policy Resolution 1956-
A second industrial policy reso. was adopted in 1956 replacing the resolution of 1948.
IPR 1956 divided industries into three categories-
1. Schedule A industries- The industries that were the monopoly of the state or the government.
It included 17 industries.
The private sector was allowed to operate if national interest so required.
2. Schedule B industries- In this category of industries the State was allowed to establish new units but the private sector was not denied setting up or expanding existing units.
Examples- are chemical industries, fertilizer, rubber, aluminum, etc.
3. Schedule C industries- The industries not mentioned in the above categories formed part of Schedule C.
Supportive measures were suggested for the mutual existence of public and private sector industries.
The policy also encouraged small-scale sectors and cottage industries.
There was an emphasis on the reduction of regional disparities i.e. fiscal concessions were granted to open industries in backward regions and the public sector enterprises were given a greater role to develop backward areas.

MONOPOLY COMMISSION- 5:44 PM

Commission focussed on reducing the concentration of economic power
On the basis of the recommendations of the commission MRTP Act, of 1969 was enacted.
The commission sought to control the establishment and expansion of all industrial units that have asset size over a particular limit.
Industrial policy statement 1973-
The policy statement of 1973 categorized the business to be started by large business houses so that the competitive efforts of small industries were not affected.
The entry of competitive small entrepreneurship was encouraged in all industries.
Large industries were permitted to start operations in rural and backward areas to develop those areas along with enabling the growth of smaller industries.
Industrial Policy Statement 1977-
Development of small-scale sectors which provide self-employment, restrictive approach towards large industries, and expanding the role of the public sector.
Industrial policy 1980-
It focussed on effective management of the public sector and liberalization of industrial licensing.
The policy statement provided liberalized measures in licensing in terms of automatic approval to increase the capacity of existing units under MRTP and FERA.
The asset limit under MRTP was also increased.
The relaxation from licensing was provided for a large number of industries.
Redefining small-scale sector-
The investment limit to define the small-scale industry was increased to boost the development of this sector.
The investment limit was raised to 1 lakh for the tiny sector.
The investment limit was raised 1 lakh to 20 lakh for small-scale units.
For Ancillary investment limit 15 to 25 lakh.
Assessment of pre-1991 policy-
The pre-1991 policy created the climate for rapid industrial growth.
India was able to develop basic industries.
A diverse industrial structure with self-reliance on a large number of items has been achieved.
At the time of independence, capital goods production was less than 4% of the total industrial output.
In 1991 capital goods production increased to almost 24%.
However, it is argued that the industrial licensing system promoted inefficiency and resulted in a high-cost economy.
Due to discretionary powers vested with the licensing authorities, the system tended to promote corruption.
It resulted in restricting the entry of new enterprises and adversely affected the competition.

NEW INDUSTRIAL POLICY- 6:28 PM

NIP was radical compared to its earlier industrial policy.
It emphasizes the need to promote further industrial development based on consolidating the gains made and correcting the distortions and weaknesses to achieve international competitiveness.
The liberalized industrial policy aimed at rapid economic growth along with integration with the global economy
NIP emphasizes the need to develop indigenous capabilities in technology and manufacturing to world standards.
None of the earlier industrial policies either explicitly or implicitly have made reference to international technology and manufacturing capability in the context of domestic industrial development.
Redefining the concept of self-reliance-
From 1956 to 1991 India emphasized ISI to achieve self-reliance, and economic self-reliance focused on Indigenous development of production capabilities and producing indigenously all industrial goods.
It helped to increase the vast base of capital goods, intermediate goods, and basic goods industries over a period of time.
NIP redefines self-reliance i.e. the ability to pay for imports through foreign exchange earning through exports and not necessarily depending upon the domestic industries.
Important elements of NIP-
Delicensing- The removal of licensing requirements for industries domestic as well as foreign commonly known as delicensing of industries.
Till 1990 licensing was compulsory for almost every industry which was not reserved for the public sector with progressive liberalization and deregulation of the economy industrial licenses which are regulated under the 1956 policy are required in very few cases.
The objective of industrial delicensing is to enable business enterprises to respond to fast-changing external conditions.
Entrepreneurs are free to make industrial decisions based on their own commercial judgment.
This facilitates technological dynamism and international competitiveness
Dereservation and privatization through disinvestment-
Reduction in the number of industries reserved for the public sector.
Currently, only two industries atomic energy and railway operations are reserved for the public sector.
The policy emphasized on bringing down equity in all the non-strategic PSU to 26% or lower.
Restructure or revive potential viable PSUs.
Close down PSUs that cannot be revived and fully protect the interest of workers.
The rationalization of manpower means a VRS scheme in PSUs to reduce the surplus manpower.
Private equity participation.
PSUs have been allowed to raise equity finance from the capital market, this has put additional pressure on PSUs to improve their performance.
Referral to the Board for Industrial and financial reconstruction (BIFR).
Many sick PSUs have been referred to BIFR for rehabilitation for winding up.
Disinvestment and privatization of existing PSUs have been adopted to improve corporate efficiency, financial performance, and competition among PSUs.

MRTP ACT AMENDMENT- 7:14 PM

Since 1991 MRTP Act has been restructured and pre-entry restrictions have been removed with regard to prior approval of the government for the establishment of new undertakings, expansion, mergers, takeover, and appointment of directors of companies.
MRTP has been replaced by CCI.
Liberalized foreign investment policy-
NIP radically reformed the foreign investment policy to attract investment.
FERA 1973 had been repealed and replaced by the foreign exchange management act.
Under FEMA investment returns can be freely patriated except where the approval is subject to specific conditions as specified in the sector-specific policies.
Focus on dilutions on restrictions on FDI, FII, etc.
FDI is also allowed in the service sector which can contribute to the economic growth of the country.
Dilution of protection to small-scale industries (SSI)and emphasis on competitiveness-
SSIs enjoyed a unique status in the economy due to their diversified presence across the country and thereby utilizing resources and skills.
Due to their potential to generate large-scale employment, mask consumption, and poverty alleviation, SSIs were given special preference.
However, since 1991 the SSI sector has been diluted, and the policy focussed on the following aspects.
1. The promotion of competitiveness by addressing the basic concerns of the sector like technology, finance, and marketing.
2. The number of items reserved exclusively for small industry manufacturing was gradually reduced.
Assessment of NIP-
NIP reforms during the 1990s removed various barriers like industrial licensing, entry barriers for foreign investment, replacing FERA with FEMA, replacing MRTP with CCI, etc. to regulate anti-competitive behavior.
The policy also focused on opening up of market which was earlier reserved for SSI.
However, the microeconomic reforms and judicial reforms were slow thereby reducing the efficiency of the 1991 industrial policy.
Trade policy reforms made a radical break with the past by discontinuing the complex system of import licensing and making an open commitment to lower the tariff rates on imports.
In 2001, India also removed quantitative restrictions on consumer goods and agricultural goods thereby increasing competition within the domestic market.
In the 1990s FDI rules were liberalized with the intention of increasing access to foreign technology and the world market.
A foreign investment promotion board was set up to expedite the application of foreign investment (FIPB does not exist now).
In addition, the Indian stock market has been opened for investment in equity through FIIs.
A major challenge of the reforms was how to attract private investment into sectors such as telecommunication, road, ports, and airports in order to meet enormous investment requirements for upgrading infrastructure.

The topic for the next class- MSMEs and Banking