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INDUSTRIAL GROWTH AND POLICY THE INDUSTRIAL SCENE AT INDEPENDENCE

The main features of the industrial scene in India on the eve of planning (1950) were as under:

 There was the preponderance of consumer goods industries vis-a-vis producer goods industries resulting in lopsided industrial development. In 1953, the ratio of consumer goods to producer goods worked out to be 62:38.

 The industrial sector was extremely underdeveloped with a very weak infrastructure.

 The lack of government intervention in favour of the industrial sector was considered as an important cause of under-development.

 Export orientation had been against the country's interests.

 The structure of ownership was highly concentrated.

 Technical and managerial skills were in short supply.

INDUSTRIAL CONTROL REGIME 1950S TO 1970S

The system of Indian industrial licensing, therefore, has its origins in a combination of thinking resulting from the exigencies and requirements of a war situation, Indian nationalistic aspirations and the socialistic leanings of some of the founding fathers of the country. The leaders of the private sector of the time were also in favour of strong governmental assertion.

PERFORMANCE OF THE INDUSTRIAL LICENSING SYSTEM

Until the recent industrial and trade policy reforms, the establishment and operation of an industrial enterprise in India required approvals from the Central government at almost every step. In addition to these approvals, since the enactment of the MRTP Act in 1969, the firms covered under this needed to obtain separate MRTP clearances from the Department of Company Affairs. Further, resulting from the desire to promote small-scale industries, 836 items have been reserved for production in small-scale enterprises. Since 1956, there has also been a list of industries reserved for exclusive production in the public sector.

INDUSTRIAL POLICY REFORMS 1980 S

Industrial policy changes of the 1980s represented a response to the heavily felt need for domestic deregulation. Experiments with industrial delicensing, weakening of MRTP provisions to provide larger scope for large industrial houses, incentives for modernization of capital stock, policies for major industries such as textiles and sugar, gradual introduction of price decontrol

for cement and aluminum, etc., were some of the major steps taken in the direction of domestic deregulation.

A major exception to this thrust was the continuation of the policy of reservation of production for the small-scale sector particularly since it constituted an important hurdle in the way of developing export capability in sectors such as garments, leather products, sports goods, etc., where India has a comparative advantage.

THE POLICY REGIME IN THE 1990S

A process of reflection and debate on the need for a change in policies had been set in motion in India in the second half of the 1970s, i.e., about the same time that China was preparing for a major change in policy. It is worth noting that China went ahead with full force towards market orientation and doubled its GDP between 1978 and 1991. By contrast, India used the decade of the 1980s for hesitant experimentation in domestic deregulation, while retaining its highly protectionist trade policy regime and keeping its loss-making public sector intact. The reform on the industrial policy front, however, coincided with a sharp deterioration in the fiscal accounts of the government. As the Government of India's policies became increasingly expansionary to support growing levels of current government expenditures on sharply rising interest payments, defence and subsidies, the gross fiscal deficit of the government increased from 6.2 per cent of GDP in 1980-81 to 8.3 per cent by 1990-91.

The response to the crisis therefore was twofold-more domestic deregulation and foreign competition and striving to attain macroeconomic balance. In opening up the economy to foreign trade and foreign investment, the policies represented a more radical break with the past.

NEW ECONOMIC POLICY 1991

The year 1991 is an important landmark in the economic history of post-Independent India.

The country went through a severe economic crisis triggered by a serious balance of payments situation. The crisis was converted into an opportunity to introduce some fundamental changes in the content and approach to economic policy. The response to the crisis was to put in place a set of policies aimed at stabilisation and structural reform. While the stabilisation policies were aimed at correcting the weaknesses that had developed on the fiscal and the balance of payments fronts, the structural reforms sought to remove the rigidities that had entered into the various segments of the Indian economy. The structural reforms introduced in the early 1990s broadly covered the areas of industrial licensing, foreign trade, foreign investment, exchange rate management and the financial sector. Changes in foreign trade policy focused on reducing the tariff rates and dismantling quantitative controls over imports. The tariff rates have been brought down in stages. Some caution in this regard had become necessary to enable the Indian industries set up behind high protective tariff walls to adjust to the changed situation.

The thrust of the New Economic Policy has been towards creating a more competitive environment in the economy as a means to improving the productivity and efficiency of the system. This was to be achieved by removing the barriers to entry and the restrictions on the growth of firms. The private sector was to be given a larger space to operate in as much as some of the areas, reserved exclusively earlier for the public sector were now to be opened to the private sector. In these areas, the public sector would have to compete with the private sector, even though the public sector might continue to play the dominant role in the foreseeable future. What was sought to be achieved was the improvement in the functioning of the various entities, whether they were in the private or in the public sector.

PUBLIC SECTOR REFORMS, PRIVATISATION AND INFRASTRUCTURE

A major gap in domestic policy reform has been in the area of public sector with maximum adverse effect on the infrastructure sectors with its consequences for the industrial sector as a whole. During the 1980s, while there was disillusionment with respect to the resource generation aspects of the public sector undertakings (PSUs), the objective of the public sector as the guiding spirit for development continued to be at the core of planning. Some effort was made to grant greater autonomy to the PSUs from the control of their administrative ministries, but even at the end of the 1980s there was little improvement in the situation with respect to the operating surpluses of the PSUs.

Public sector reform remained an area of darkness in the 1990s. A significant practical approach was adopted in which the better performing PSUs were given the freedom to access capital markets on the strength of their own performance. They were also given more autonomy in shaping their future. The non-performing PSUs, on the other hand, languished for want of budgetary support or reform.

Privatisation was not pursued as an option in the early phase of reforms. Instead, government policy concentrated on selective disinvestments of public sector equity with a view to finance fiscal deficits rather than address the issue of improving the returns on the capital invested. In 1997, the Government of India set up the Disinvestment Commission. The Commission gave a series of reports analysing the 50 or so cases of PSUs, which were referred to it and made detailed recommendations. Subsequently, the Commission was wound up and a Department of Privatisation was created. While there have been some major privatisations, e.g., BALCO, VSNL, Maruti and IPCL, it remains a highly contentious issue.

INDUSTRIAL POLICY: RECENT POLICY INITIATIVES

Industrial licensing had already been substantially dismantled. Drugs and pharmaceuticals including biotechnology were de-licensed in 2005. At the end of the Tenth Five Year Plan period, only the following manufacturing activities needed industrial license:

 Distillation and brewing of alcoholic drinks;

 Cigars and cigarettes of tobacco and manufactured tobacco substitutes;

 Electronic aerospace and defense equipment;

 Industrial explosives;

 Specified hazardous chemicals.

Apart from the licensing restrictions, there are some restrictions arising from certain industries reserved for the public sector and for the small-scale sector. Reservation for the public sector is now very limited, covering only manufacturing involving certain substances relevant for atomic energy (as well as production of atomic energy and provision of railway transport). The list of items reserved for SSIs has been reduced to 114. Larger units are allowed to manufacture items reserved for the small-scale sector only if they undertake an export obligation of 50 per cent of their industrial production.

The Foreign Direct Investment (FDI) policy was also successively liberalised during the Tenth Five Year Plan. Following a comprehensive review in 2006 it was further liberalised, particularly by allowing FDI under the automatic route for manufacture of industrial explosives and hazardous chemicals and making it easier for new investments by foreign investors who had entered into joint ventures with Indian partners earlier.

RECENT INDUSTRIAL GROWTH

Recent industrial growth, measured in terms of IIP, shows fluctuating trends. Growth had reached 15.5 per cent in 2007-8 and then started decelerating. Initial deceleration in industrial growth was largely on account of the global economic meltdown. There was, however, a recovery in industrial growth from 2.5 per cent in 2008-9 to 5.3 per cent in 2009-10 and 8.2 per cent in 2010-11. Fragile economic recovery in the US and European countries and subdued business sentiments at home affected the growth of the industrial sector in the current year.

Overall growth during April-December 2011 was 3.6 per cent compared to 8.3 per cent in the corresponding period of the previous year.

Contribution to IIP Growth–April-December

Weight 2008 2009 2010 2011

Mining 14.16 6.4 32.1 9.4 -8.3

Manufacturing 75.53 89.4 46.8 85.6 85.6

Electricity 10.32 4.2 21.2 5.0 22.6

In terms of Use-based classification

Basic foods 45.68 16.2 64.8 27.8 65.7

Capitals goods 8.83 52.2 -52.9 30.2 -12.0

Intermediates 15.69 3.7 24.1 13.6 -3.3

Consumer Goods

29.81 28.0 64.0 28.4 49.4

Durables 8.46 32.7 67.3 23.0 21.3

Non Durables 21.35 -4.8 -3.3 5.5 28.1

WHY DID THE REFORMS FAIL TO DELIVER THE EXPECTED RESULTS?

 Labour Market Rigidity Hypothesis: The reformists believe that India's labour laws are the most protective of the organised labour, which makes firing of workers almost impossible, rendering labour a quasi-fixed capital, leading to substitution of capital for labor, yielding little employment growth. Such a reading of the labour law is perhaps facile as it overlooks the 'fine print' of exemptions and loopholes that are build into them.

 Infrastructure Bottlenecks: That infrastructure bottlenecks are throttling industrial progress is undisputed.

 The Cost of Doing Business: Two other challenges that beset manufacturers in India illustrate the nature of solutions required to attract more investments into manufacturing. The 'cost of doing business' is much higher in India than in other countries due to the plethora of forms and inspections that manufacturers have to comply with, some of them arising out of legislations long pending review, such as the Factories Act.

PUBLIC SECTOR IN THE INDIAN ECONOMY THE RATIONALE

In India, the rationale for the public sector has been explicit or implicit in all plan documents as well as policy statements, although the emphasis has changed in degrees depending upon the constraints faced and the emerging major issues of the time.

 First, the concentration of economic power that would result from the uncontrolled operation of the market forces can be reduced through the extension in the public ownership of means of production.

 Secondly, private investors may demand a higher risk premium for investment in certain industries than would be socially justified. Off- shore drilling of oil is one example in this connection.

 Thirdly, the scales of investment efforts in certain heavy industries may be beyond the capital-raising capacity of the private sector e.g., steel mills, heavy electrical machinery.

 Fourthly, the public sector, through the appropriate price policy for its output will generate investible surpluses for further investment in the economy.

 Fifthly, by production as well as distribution of certain universal intermediate inputs like coal, steel, electricity etc., the State will be able to control the composition of private economic activity in a socially desirable direction.

 Finally, the public sector would assume the role of a model employer and its employment and wage policies would have a moderating influence on the corresponding policies in the private sector.

PERFORMANCE OF CENTRAL PUBLIC SECTOR UNDERTAKINGS

There were altogether 248 CPSEs under the administrative control of various ministries/departments as on 31 March 2011. Out of these, 220 were in operation and 28 were under construction. The share of cumulative investment (paid-up capital plus long-term loans) in all the CPSEs stood at Rs. 6,66,848 crore as on 31 March 2011 ,showing an increase of 14.8 per cent over 2009-10. The share of manufacturing in gross block, during 2010-11, was 27.8 per cent. The share of mining, electricity, and services in total investment, in terms of gross block, was 23.0 per cent, 25.2 per cent, and 23.2 per cent respectively. The net profit of (158) profit-making CPSEs stood at Rs. 1,13,770 crore in 2010-11. The net loss of (62) loss-profit-making enterprises, on the other hand, stood at Rs. 21,693 crore during the same period. The year also witnessed severe financial 'under-recoveries' by public-sector oil marketing companies (OMCs) as they had to keep the prices of petroleum products low in the domestic market despite high input prices of crude oil.

In spite of industrial deregulation and growing import competition, the public sector has broadly maintained its share in domestic output in producing private goods and services, and its composition has also remained roughly the same.

In contrast, however, the public investment ratio, after peaking at 12.5 per cent of GDP(factor cost) in 1986-87 nearly halved to 6.4 per cent by 2001-02, taking the ratio back to the level where it was in the mid-1950s. Clearly, what took the "big planners" three decades to accomplish, the "reformers" undid in less than two decades!

MICRO AND SMALL ENTERPRISES (MSES) ROLE OF SMES IN GLOBAL ECONOMY

Worldwide, MSMEs have been recognised as engines of economic growth. The overall contribution of small firms-formal and informal-to the GDP and employment remain about the same across low, middle and high- income group countries. As income increases, the share of the informal sector decreases and that of the formal SME sector increases. In Brazil, MSEs represent 20 per cent of the total GDP. Of the country's 4.7 million registered businesses, 96.8 per cent are MSEs and-along with the other 9.5 million informal enterprises-they employ 59 per cent of the economically active population. Similarly, informal and micro enterprises account for 39 per cent of labour force and contribute to 24 per cent of the GDP in South Africa; SMEs employ 27 per cent of the labour force and contribute 32 per cent to the GDP; while large enterprises employ 34 per cent people and account for 44 per cent of GDP. SMEs comprise over 90 per cent of all industrial units in Bangladesh contributing between 80 per cent and 85 per cent of the industrial employment and 23 per cent of the total civilian employment. The real importance of the SMEs, however, can be seen in China where over 68 per cent of the exports come from the SMEs.

DEFINING MSES-MSMED ACT, 2006

Definition of MSMEs

Manufacturing Sector

Micro enterprises Does not exceed Rs. 25 lakh

Small enterprises More than Rs. 25 lakh and less than Rs. 5 crore

Medium enterprises More the Rs. 5 crore and less than Rs. 10 crore

Service Sector

Micro enterprises Does not exceed Rs. 10 lakh

Small enterprises More than Rs. 10 lakh and less than Rs. 2 crore

Medium enterprises More the Rs. 2 crore and less than Rs. 5 crore