Essay on the Industrial Policy Reforms in India
There have been attempts since the 80s to liberalize the industrial policy framework. But it is the new industrial policy of July 24, 1991 that has really ushered in an era of reforms and liberalization.
Development of Thought:
The two principal instruments of industrial policy before the reform were a system of industrial licensing and a system of import licensing designed to foster import substituting industries.
These polices however led to adverse consequences. There had been attempts during the 1980s to liberalize the industrial policy framework and the process of re-orientation Gaines further momentum during the Seventh Plan (1985′ 1989).
However, it was the new industrial policy of July 24, 1991, that really heralded the Industrial Policy reforms. The main objectives of the policy were to dismantle the regulatory systems, develop the capital market and increase the competitiveness of industry for the benefit of the common man.
A major policy decision was regarding the public sector. The role of public sectors would be confined only to the strategic and basic infrastructure sectors. Another area where further changes were contemplated was the exit policy.
While much liberalization has taken place in the spheres of trade and industrial sectors, there is scope for farther improvement and privatization.
The overall objectives of industrial policy in India have been periodically articulate in the Industrial Policy Resolutions of 1948, 1956 and 1973, the Industrial Policy Statements of 1980 and 1990 and the New Industrial Policy of July, 1991 and August, 1991.
The basic objectives of industrial policy are increasing production and efficiency in priority sectors, bringing about regional dispersal of growth, promoting small-scale sector and preventing concentration of power. Initially the objectives were to be achieved within the framework of government regulation and protection from foreign competition.
The public sector was to provide basic infrastructure and a leadership role for industrial growth while the private sector was expected to play a complementary role in the mixed economy.
Two principal instruments for industrial policy were: (i) a system of industrial licensing and (ii) a system of import licensing designed to foster import-substituting industries. These policies led to certain adverse consequences. Barriers to entry limited domestic competition.
The proliferation of small scale. Industries and regional dispersal had adverse effects on economies of scale. Barriers to entry restricted transfer of resources from sick to growing industries.
There were few incentives for technological up gradation and administrative hurdles and bureaucratization was inherent in physical controls and the plethora I of rules and regulations.
There had been attempts during the 1980s to liberalize the industrial policy I framework, and the process of reorientation gained further momentum during the Seventh Plan (1985-1989).
These were supplemented by the Long Term Fiscal Policy (1985), Long-Term Trade Policy (1985 and 1988) and Administered Price Policy (1986).
On the whole, the emphasis had been on reducing the reliance on physical controls and increasing the role of financial and fiscal incentives for channel sing investment in the desired line. In March, 1985, 25 industries were deli censed subject to the condition that these are not reserved for the small sector and these are located outside standard urban limits.
In June, 1985, 82 bulk drugs along with their formulations were deli censed. In March, 1986, 29 industries out of list of 27 which were exempted in May, 1985, from obtaining approvals under sections 21 and 22 of the MRTP Act, were deli censed provided the undertaking was set up in a centrally declared backward area.
The list was expanded to 28 industries in October, 1987. In June, 1988, MRTP companies were exempted from licensing where investment did not exceed Rs. 50 million and the unit did not fall within standard urban limits.
The limit of exemption was Rs. 500 million in case the investment was in backward areas; these limits compare well mil the earlier limits of only Rs. 50 million (in force since 1980) for all regions will some exceptions.
The 1990 industrial policy further raised these limits to Rs.2S0I million for investment in non-backward areas and Rs. 750 million for invested in backward areas.
There was also an increase in the economic space available to large oil MRTP companies. There was also an increase in threshold limits of assets from Rs. 200 million to Rs. 1000 million under the MRTP Act. Export obligation was reduced from 50 per cent to 25 per cent for Category B and Category C industries.
The re-endorsement of capacity was made more attractive. In 1986, the scheme was made available to units that unused 80 per cent of their capacity from the earlier 94 per cent requirement, and the scheme was available to a number of industries. Minimum economic size was specified for 106 industries over the period. The broad banding scheme was extended to 46 industries.
On July 24, 1991 the Government announced a new industrial policy in Parliament. The major objectives of this policy were:
(a) development and utilization of indigenous capabilities in technology and manufacturing as well as its up gradation to world standards,
(b) dismantling of the regulatory system, development of the capital market and increasing competitiveness for the benefit of the common man,
(c) running of the public sector on business lines, and promoting workers’ participation in management, enhancing their welfare and equipping them to deal with the in verifiability of technological change. Salient features of the new industrial policy are summarized below:
Industrial licensing will be abolished for all industries except for those related to security and strategic concerns, social reasons, hazardous chemicals and over-riding environmental concerns, and items of elite consumption.
Industries reserved for the small-scale sector will continue to be so reserved existing units will be provided a new broad banding facility to produce any article without additional investment.
The exemption from licensing will also apply to all substantial expansions of existing units the mandatory convertibility clause will no longer be applicable for term loans from the financial institutions; foreign investment approval will be given for direct foreign investment up to 51 per cent foreign equity in high priority areas.
Such clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods; while the import of components, raw materials and intermediate goods, and payment of know-how fees and royalties will be governed by the general policy as applicable to other domestic units.
The provisions relating to merger and takeover will be repealed; simultaneously, provisions of the MRTP Act will be strengthened to enable it to take appropriate action in ‘respect of the monopolistic, restrictive and unfair trade practices.
In recognition of the fact that certain sections of the population may have to face some hardship, the Central Government Budget for 1991 had proposed to establish a National Renewal Fund with the objective of ensuring that the cost of technical change and modernisation of the productive apparatus does not devolve on the workers.
Apart of the Fund would be financed by a loan from the World Bank under the structural adjustment programme.
The small-scale sector has been assigned an important role in the industrial development of the country on account of its inherent advantages, like lower capital intensity and higher employment generation potential compared to large- scale industries.
It has been estimated that at the end of the Seventh Plan it accounted for nearly 35 per cent of the gross value of output in the manufacturing sector and over 40 per cent of the total exports from the country. Besides, the sector promotes decentralization and helps regional dispersal of industrial activity and widening of entrepreneurial base.
Recognizing the need to promote this sector, some important policy measures were initiated’ during 1990. Further major policy changes in this regard were announced by the Government in August, 1991.
With effect from April 2, 1991, ceiling on investment in plant and machinery of small scale industries was raised from Rs. 35 lakhs to Rs.60 lakhs. The investment limit for ancillary units and export oriented units was fixed at Rs. 75 lakhs and scheme modification was also affected in the definition of ancillary units.
Subsequent policy measures announced on August 1, 1991, allow such limits in respect of ‘tiny’ enterprises to be raised from the present Rs. 2 lakhs to Rs. 6 lakhs.
To provide access to the capital market and to encourage modernisation and technological up gradation, it has been decided to allow equity participation by; other industrial undertakings in the SSI not exceeding 24 per cent of the total shareholding.
An apex bank known as Small Industries Development Bank of India (SIDBI) became operative from April 2, 1990 for financing small-scale industries.
In order to facilitate access of finance to a larger number of entrepreneurs in like ‘tiny’ sector, it has been decided to widen the scope of the National Equity Fund Scheme, and enlarge the Single Window Loan Scheme. It is proposed to set up factoring services and a Technology Development Cell with SIDBI.
As a part of the industrial policy, government announced the following major policies for the public sector.
The priority areas for growth of public enterprises in the future will be limited to Appendix- I industries, which include essential infrastructure goods and services.
Exploration and exploitation of oil and mineral resources, and manufacture of products where strategic considerations predominate, such as defense equipment. However, there would be no bar for areas to be opened up to the private sector selectively.
Public enterprises which are chronically sick will be referred to the Board for Industrial and Financial Reconstruction (BIFR) A social security mechanism will be created to protect the interests of work likely to be affected by such rehabilitation packages.
In order to raise resources and encourage wider public participation, a part of the government’s shareholding in the public sector would be offered to mutual funds, financial institution general public and workers.
Boards of public sector companies would be made more professional and given greater powers. There will be greater thrust on performance improvement through MOU System.
As mentioned above, with the liberalization in the spheres of trade and industrial sectors, role of public sectors would be confined only to the strategic and basic infrastructural sectors.
Memorandum of Understanding (MOU) signed between public undertakings and the Government, would be made much more specific, clearly indicating the corporate objectives and targets for both physical and financial performance.
Specifically, the Government intends to establish schedule of quantitative targets for the elimination of all budgetary transfers and loans to Central Public Enterprises beginning from 1992-93, and complete elimination of government loans and equity to non-infrastructural PEs over period of three years.
The Government has also decided to disinvest 20 percent of the shares held by it in selected public undertakings. The 1991-92 budgets confirmed the government’s decisions to sell equities to the extent of Rs. 2! Billion through mutual funds.
The objective is for the mutual funds to seek a listing for the shares on the stock market and to dispose of these gradually so as to finally ensure wider holding of shares. Over the course of the next three years, the Government intends to raise a total of up to Rs. 75 billion from partial disinvestments.
The Government is also encouraging privatization of some of the notions or segments of the public sector units. The public sector units have keen directed to increase their efficiency and to generate more internal resources.
Public sector enterprises have absorbed large amounts of budgetary support for their expansion or for operations, but in many cases they have not been able to generate adequate returns on public investments and thereby contribute to an ‘increase, in fiscal deficit.
Many basic industrial inputs have also become high priced leading to the high cost structure of the economy. Therefore Government poses to increase the efficiency and financial viability of the public enterprises.
It does not propose to create new central public enterprises except for industries reserved for the public sector and essential infrastructure, exploitation of oil and rural resources and strategic activities. It also reaffirms its policy against nationalization or take-over of sick private firms, which has already been in effect for the past five years.
The existing units which fall under the special provision of the Sick Industrial Companies Act (1985) will be referred to the Board for Industrial and Financial Reconstruction (BIFR) for restructuring or winding up.
The labour market remains predominantly unorganized. Labour mobility over time, space and industries is also low due to lack of proper skill, lower growth of employment opportunities compared with the growth of labour force, and a very high cost and risk involved in mobility.
Due to labour laws and very strong labour unions for the organised sectors, exit in virtually non-existent. Restrictions against retrenchment of labour force have been tightened, backed up by a requirement for local government approval for closure of any major plant.
While there is more flexibility defector than is implied by a literal interpretation of the applicable regulations, smooth exit is greatly impeded. As per the RBI estimate, there are presently about 1, 60,000 units which are classified as sick involving over Rs. 57 billion in blocked funds.
The main initiative to deal more effectively with the problem of industrial sickness in the 1980s was the establishment of the Board for Industrial and Financial Reconstruction (BIFR) in 1988, which is charged with determining which sick firms can be rehabilitated and which should be allowed to go out of business.
For the former, BIFR recommends viable financial packages to support the approved rehabilitation programme. In addition, the Government has pledged not to take over sick firms. A greater flexibility is required to allow entrepreneurs to divert their resources from sick to more productive investment.
Employment in the organised sector in India has considerable economic rent attached to it due to limited entry and limited exit. An important feature of the labour market is its dual structure in terms of wages and contracts. There is need to remove these distortions in the labour market.
Another area where further policy changes are contemplated is with regard to the formulation of an exit policy which may be properly called a redeployment policy. A National Renewal Fund, with an allocation already made in the 1992. Budget for which substantial amount has been promised by the IDA of the World Bank, is proposed to provide a social safety net to the workers affected by technological up gradation or by the adjustment process.
It is estimated that about Rs. 1,000 crores would be available from the IDA to be used for social safety net schemes under the NRF including special schemes for unorganized sector workers during 1992-93.
The Government will also disinvest shares from public enterprises to the extent of Rs. 1,000 crores for the NRF during 1992-91 in addition to a disinvestments of Rs. 2,500 crores for general purpose.
Financial sector and capital markets are also not competitive as most of the lending institutions are in the public sector and there is scarcity of resources although capital and financial markets have progressed significantly during the 1980s, there is scope for further improvement and privatization.