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INDUSTRIAL POLICY
Before independence, policy of the government was charaterised by laissez-faire i.e. non-
interference policy in the affairs of industries. Industrial development was left to the exclusive
care of private sector. However, in the post independence era, government has been taking an
active interest in the development of industries in India. So far, government has formulated five
industrial policies i.e. Industrial Policy 1948, 1956, 1977, 1980 and 1991 respectively.
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(5) The policy stressed the necessity of reducing regional disparities. Industrially backward regions
will receive priority in the establishment of new industries.
(6) The policy welcomed the foreign capital but the effective control should remain in Indian hands.
Industrial Licensing
The industries (Development and Regulation) Act, 1951, empowered the government to issue
licences for the setting up of new industries, expansion of existing ones and for diversification of
products. The main aims of the industrial licensing policy were the development and control of
industrial investment and production as per national priorities, checking the concentration of industries
and ensure balanced regional development.
However, from time to time, many deficiencies in the licensing system came to light. The
government set up several committees for the study of the licensing system and giving suggestions for
its improvement. Such committees included R.K Hazari Committee,1964 and Dr. Subimal Dutt
Committee-1967. These committees revealed that the system of licensing had resulted in increased
concentration of economic power in the hands of few business houses , Dr Subimal Dutt Committee
(viz. Industrial Licensing Policy Enquiry Committee) was the most important, which submitted its
report in 1969. On the basis of its recommendation, government enacted the Monopolies and
Restrictive Trade Practices (MRTP)Act, 1969.
The Government of India announced the New Industrial Policy on July 24, 1991. The main objective
of this policy is to unshackle the Indian industrial economy from administrative and legal controls. Its
main aim is to raise industrial efficiency to the international level through substantial deregulation of
the industrial sector of the country.
Salient Features
Delicensing: The industrial licensing was abolished irrespective of the level of investment,
except for 18 specified industries like defence, atomic energy, etc. Since then, most of these
industries were delicensed and now only 4 industries fall under the purview of industrial
licensing.
Foreign investement: foreign capital investement limit was raised from 40% to 51% in high
technology and high investement priority industries.
Foreign Technology : Automatic approval was granted for foreign technology
agreements upto the limit of 200 crore subject to 5% royalty oh domestic sales and
8% on exports.
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Foreign Investment Promotion Board (FIPB) :- FIPB was established to
expeditiously clear foreign investment proposals. It serves as a single window
clearing agency for the FBI proposals.
Industrial Location Policy : Excepting the big cities with population of one million,
in other cities industrial licensing will not be required but for those industries where
licensing is compulsory. In case of cities with population of one million or above,
excepting"non-pollutant industries, all other units will be set up at a distance of 25
kms from the city limits.
MRTP limit scrapped '• The threshold limit of Rs. 100 crore .worth of assets for
classification of a company as MRTP company was removed, such companies were
to be recognized on case-by-case evaluation basis.
Phased Manufacturing Programme was abolished Under this programme,
government use to impose a condition on foreign firms to gradually reduce and
finally eliminate the use of imported inputs.
Mandatory Convertibilitv Clause was abolished • It is the condition imposed by the
financial institutions on private companies that a part of their lending would be
converted into equity at some future date.
New small enterprise policy : A separate policy was announced by the government in
August 1991 for the promotion of small-scale industries.
Public Sector's role diluted :. The following measures were undertaken to reform the
public sector enterprises.
1. The number of industries reserved exclusively for the public sector were
reduced from 17 to 8 under NIP, 1991. Now, it has been reduced to just three
viz. atomic energy, minerals specified under the schedule of atomic energy
and rail transport.
2. Like the private enterprises, sick PSUs were also placed under the perview of
the Board for Industrial and Financial Reconstruction(BIFR).
3. Professionalisation of management by inducting non-official members in the
boards of PSUs.
4. Disinvestment of the share of PSUs was initiated.
PUBLIC SECTOR
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At the time of independence, the country was predominantly agrarian and lacked
basic industries and infrastructure facilities. The economy needed a big push. The push could
not come from the Indian private sector which was starved of funds and lacked technical and
managerial abilities. Further, it was incapable of taking risk involved in long gestation
investments. So, the development in the public sector became imperative.
At the time of independence, the public sector was confined only to areas like Railways,
posts, telegraphs, ports etc. The growth of the public sector as a part of development strategy,
however, started since the beginning of planning in 1951. The expansion of public sector in
the field of industries took place in a big way with the launching of the second plan (1956-
61), which gave top priority to the industrial growth of the country.
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The public sector also contributed significantly in reducing regional economic
imbalances. For instance, over 35% of the cumulative investment of the PSU till 1990-91,
were made in four backward states of Bihar, U.P., M.P, and Orissa.
There were altogether 246 CPSEs under the administrative control of various ministries/
departments as on March 31, 2009. The cumulative investment (paid-up capital plus long-term
loans) in all the CPSEs together stood at Rs 5,28,951 crore as in end-March 2009 (Table 9.16).
The largest share in this investment belonged to the service sector (46.1 per cent) followed by
electricity (26.2 per cent), manufacturing (18.1 per cent) and mining (8.8 per cent). A great deal
of investment in CPSEs is being made through internal resources rather than through investment
from outside.
Of the total, 158 CPSEs made net profit and 54 net loss in 2008-09. The year witnessed
severe financial under-recoveries by public-sector Oil Marketing Companies (OMCs) as they had
to keep the prices low on sale ofpetroleum products in the domestic market. The foreign exchange
outgo exceeded the foreign exchange earnings of CPSEs during 2008-09.
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• Lack of autonomy to the management of the PSUs due to excessive political interference.
• Low efficiency due to lack of incentives for better performance.
• Excessive overheads especially in providing housing and other amenities to the
employees eg. townships.
• Over staffing inflated the wage bills.
• Inappropriate investment decisions like inappropriate location, technology, product
mix etc.
• Indiscriminate expansion of the public sector in almost all areas.
New Industrial Policy, 1991: The policy contained the following reformative
measures for PSUs; dereservation, disinvestment, profession-alisation^fjnanagement,
Reference of sick PSUs to the BIFR and expanding the scope of Molls. (For details
refer to the NIP, 1991}
Voluntary Retirement Scheme (VRS) : The VRS (or Golden Handshake scheme)
was launched in 1988 for the rationalization of manpower in the central PSUs. The
scheme enabled the PSUs to shed their excess staff by offering attractive
compensation package to the workers who seek voluntary retirement. Cumulatively
around 4.23 lakh employees have opted for VRS from the central PSUs since October
1988 till March 2002.
Policy of Navratnas- Navratna was the title given originally to nine Public Sector
Enterprises (PSEs), identified by the Government of India in 1997 as its most
prestigious, which allowed them greater autonomy to compete in the global market.
The Navratna status is offered to PSEs, which gives a company enhanced financial
and operational autonomy and empowers it to invest up to Rs. 1000 crore or 15% of
their net worth on a single project without seeking government approval. In a year,
these companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr.
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They will also have the freedom to enter joint ventures, form alliances and float
subsidiaries abroad.
Navratna status is conferred by Department of Public Enterprises. To be qualified as a
Navratna, the company must obtain a score of 60 (out of 100). The score is based on
six parameters which include net profit to net worth, total manpower cost to total cost
of production or cost of services, PBDIT (Profit Before Depreciation, Interest and
Taxes) to capital employed, PBDIT to turnover, EPS (Earning Per Share) and inter-
sectoral performance. Additionally, a company must first be a Miniratna and have
four independent directors on its board before it can be made a Navratna
The Maharatnas: Maharatna Scheme was introduced for Central Public Sector
Enterprises (CPSEs), with effect from 19th May, 2010, in order to empower mega
CPSEs to expand their operations and emerge as global giants. The objective of
the scheme is to delegate enhanced powers to the Boards of identified large-sized
Navratna CPSEs so as to facilitate expansion of their operations, both in domestic
as well as global markets.
CPSEs fulfilling the following criteria are eligible to be considered for grant of
Maharatna status:
i) Having Navratna status
ii) Listed on the Indian stock exchange, with a minimum prescribed public shareholding
under SEBI regulations
iii) An average annual turnover of more than Rs. 25,000 crore during the last three years
iv) An average annual net worth of more than Rs.15,000 crore during the last three years
v) An average annual net profit after tax of more than Rs. 5,000 crore during the last
three years
vi) Significant global presence or international operations
The coveted status empowers the boards of these firms to take investment
decisions up to Rs 5,000 crore as against the present Rs 1,000 crore limit for navratnas
without seeking government approval. The Maharatna firms would now be free to decide
on investments up to 15% of their net worth in a project, limited to an absolute ceiling of
Rs 5,000 crore.
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3. Steel Authority of India Limited
4. NTPC Limited
Navratna CPSEs
1. Bharat Electronics Limited
2. Bharat Heavy Electricals Limited
3. Bharat Petroleum Corporation Limited
4. Coal India Limited
5. GAIL (India) Limited
6. Hindustan Aeronautics Limited
7. Hindustan Petroleum Corporation Limited
8. Mahanagar Telephone Nigam Limited
9. National Aluminium Company Limited
10. NMDC Limited
11. Oil India Limited
12. Power Finance Corporation Limited
13. Power Grid Corporation of India Limited
14. Rashtriya Ispat Nigam Limited
15. Rural Electrification Corporation Limited
16. Shipping Corporation of India Limited
Disinvestment
The New Industrial Policy, 1991 envisaged divestment of a part of government share
holdings in selected PSUs as an important element of public sector reforms. In pursuit of this,
the process of disinvestment began in 1991-92 with the sale of minority stakes in some PSUs.
The primary aim disinvestment in this phase was to raise non-inflationary finance to plug
budgetary deficit. But the focus of disinvestment shifted to strategic sale since 1999, in which
substantial chunk of government equity is sold to a private sector enterprise with an objective
to improve the performance of the PSU and to reorient public investment.
Objectives of disinvestment
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To transfer the resources from non-strategic sector to the strategic sector, which is much
higher on social priority such as basic health, family welfare, primary education etc.
To raise funds to cover up the fiscal deficit of the government.
To improve efficiency of the public sector by inducing private initiative and competition.
To enhance accountability of the PSUs by exposing them to the capital market.
To reduce political interference by imparting market orientation to the enterprise.
Bring down Government equity in all non-strategic PSUs to 26 % or lower, if necessary.
Restructure and revive potentially- viable PSUs
Close down PSUs which can not be revived
Fully protect the interest of workers.
Strategic sale/disinvestement: it refers to the sale of majority stake of government along with
transfer of control and management of PSU to a well establish private sector enterprise. It’s objective
is to induct technical and managerial acumen of the private enterprise in the functioning of the PSU.
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income of the Fund will be used to meet the capital investment requirements of profitable and
revivable CPSUs that yield adequate returns, in order to enlarge their capital base to finance
expansion/diversification. The following Public Sector Mutual Funds have been appointed
initially as Fund Managers, to manage the funds of NIF.
(i) UTI Assets Management Company Limited
(ii) SBI Funds Management Company (Private) Limited
(iii) Life Insurance Corporation, Asset Management Company Limited
However, in view of the difficult economic situation caused by the global slowdown of
2008-09 and a severe drought that was likely to adversely affect the 11th Plan growth
performance, the Government, in November 2009, decided to give a one-time exemption to
utilization of proceeds from disinvestment of CPSEs for a period of three years – from April 2009
to March 2012 – i.e. disinvestment proceeds during this period would be available in full for
meeting the capital expenditure requirements of selected social sector programmes decided by the
Planning Commission/Department of Expenditure. The status quo ante will be restored from
April 2012
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Over the last five decades, the small-scale industries (SSIs) sector has acquired
place of prominence in the economy the country. It has contributed significantly to the
growth of the GDP, employment generation and exports. The sector now includes not
only SSI units but also small-scale service and business enterprises (SSSBEs) and is thus
referred to as the small enterprises sector.
In India, small-scale industries (SSIs) can be differentiated from the large-scale
industries on the basis of three criteria viz. volume of investment in the unit, annual
turnover and number of workers employed. As per the Industries (Development and
Regulation) Act, 1951, SSIs are defined as the units employing less then 50 workers with
power or 100 workers without power. Such industries are exempted from compulsory
registration. As per fiscal criterion, SSIs are those units whose annual turnover is not
more than one crore. Such units are fully exempted from the excise taxes.
However, investment criterion is used for general policy formulation and analysis.
According to this criterion, SSI include all those units having a fixed investment of not
more than one crore.
New Definitions of Micro, Small & Medium Enterprises
In accordance with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified
in two Classes:
(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or
production of goods pertaining to any industry specified in the first schedule to the
industries (Development and regulation) Act, 1951). The Manufacturing Enterprise are
defined in terms of investment in Plant & Machinery.
(b) Service Enterprises: The enterprises engaged in providing or rendering of services
and are defined in terms of investment in equipment:
Manufacturing Sector
Enterprises Investment in plant & machinery
Micro Enterprises Does not exceed twenty five lakh rupees
Small Enterprises More than twenty five lakh rupees but does not
exceed five crore rupees
Medium Enterprises More than five crore rupees but does not exceed ten
crore rupees
Service Sector
Enterprises Investment in equipments
Micro Enterprises Does not exceed ten lakh rupees:
Small Enterprises More than ten lakh rupees but does not exceed two
crore rupees
Medium Enterprises More than two crore rupees but does not exceed five
core rupees
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It contributed significantly towards the economic growth of the nation, with over
39% of the industrial_production.
The small-scale accounts for over 34% of the total exports and about 45% of the
manufacturing exports. Further over 90% of exports of the SSIs consists of non-
traditional items like sports goods, readymade garments, processed foods, chemicals
etc.
SSIs are conducive for the economic development of underdeveloped countries like
India. Such industries are relatively labour intensive so they make economical use of
the scarce capital.
Small scale industries are instrumental in reducing the inequalities in wealth. In these
industries capital is widely distributed in small quantities and the surplus of these
industries is distributed among large number of people.
Small scale industries brings about regional dispersal of industries and alleviates
regional imbalances.
Small-scale industries make use of local resources including the capital and
entrepreneurial skills which would have remained unused for want of such industries.
Small industry sector has performed exceedingly well and enabled the country to
achieve a wide measure of industrial growth and diversification.
In these industries relations between employers and employees are direct and cordial.
There is hardly any scope of exploitation of labour and industrial disputes.
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The total factor productivity (ratio of output to inputs) was relatively high in small-
scale industries i.e. the small scale industries are more efficient than the large-scale
industries.
Small-scale industries were relatively more profitable i.e. the profit per unit of capital
invested was higher in small scale industries as compared to the large scale industries.
Problems of Cottage and Small-Scale Industries
Non-availability of timely and adequate credit.
Inefficient management
Lack of infrastructure
Technological obsolescence
Limited availability of raw materials
Marketing problems
Competition with large-scale industries and imports.
Excessive burden of local taxes,
Widespread sickness.
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Industrial Estates :—-The policy of setting up Industrial Estates was initiated in 1955,
for the construction of factory premises and to provide basic facilities like power, water,
roads etc.
District Industries Centre (DIC):—The concept of DIG was introduced in the Industrial
Policy Statement of 1977. This programme was initiated in 1979 to cater to all the
requirements of small scale" and village industries, under one roof.
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total output of the SSIs. Thus, the committee recommended that the policy of reservation of items for
SSIs should be abandoned.
Government did not abandoned the policy of reservation altogether, however government has
dereserved few items in the recent past. Government dereserved 79 items in February, 2008. The total
number of reserved items now stands at 35.
INDUSTRIAL SICKNESS
The government defined the industrial sickness for the first time in the Sick Industrial
Companies (Special Provisions) Act, 1985. According to this Act, a medium or large (i.e. non-SSI)
company was defined as sick if :
(1) it was registered for atleast 7 years (later reduced to 5 years)
(2) it incurred cash losses in the current year and the proceeding year.
(3) its entire net worth (i.e. paid-up capital and reserves) was eroded.
A company is regarded, as weak or incipiently sick on the erosion of 50% of its peak net worth during
any of preceeding five financial years.
The industrial sickness has been redefined in the Companies (Second Amendment) Act, 2002.
New Definition of ‘Sick Company’
Under S.2 (46AA) of the amended companies act, a ‘Sick Company’ is defined as
one whose accumulated losses in any financial year are equal to or more than fifty
percent of its average net worth during four financial year immediately preceding such
financial year or a company which has failed to repay its creditors for three consecutive
quarters on demand made in writing for its repayment by a creditor or creditors of such
company. The term "net worth" means the sum total of the paid-up capital and free
reserves after deducting the provisions or expenses as may be prescribed.
The Government redefined the concept of industrial sickness for small enterprise sector in
1989 as follows:
(a) erosion of over 50% of the peak net worth in the immediately preceding five years.
(b) default in payment of interest or installments of principal and there are persistent
irregularities in the operation of its credit limit with the bank.
A large SSI is considered as sick if it satisfies the above mentioned ‘a’ condition, while in
case of tiny and decentralized sector either of the two conditions (a or b) needs to be satisfied.
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Trend of industrial sickness
As per the information compiled by the RBI from scheduled Commercial banks, as on 31
March 2001 these were 2,52,947 sick / weak units with outstanding bank credit of Rs 25,775, Out
of these about 99% of the units belonged to the small-scale sector but their share in the total
outstanding bank credit was merely 17.5%. However over 90% of the sick SSI units and about
45% of the SSI units were non-viable.
The Board for Industrial and Financial Reconstruction has so far received 7,158
references under the Sick Industrial Companies (Special Provisions) Act (SICA), 1985. These
references include 297 from Central and State public sector undertakings (CPSUs & SPSUs). Out
of the total references received, 5,471 were registered under Section 15 of the SICA, 1,857
references were dismissed as non-maintainable under the Act, 825 rehabilitation schemes,
including 13 by AAIFR/ Supreme Court, were sanctioned and 1,337 companies were
recommended to be wound up. Of the 297 references for public sector undertakings, the
references of 92 CPSUs and 122 SPSUs were registered up to December 31, 2007.
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c. Under this scheme, selected sick units are eligible for excise loans not exceeding 50%
d. of the excise duty actually paid over the preceding 5 years.
Industrial Investment Bank of India (IIBI)
a. The government established the Industrial Reconstruction Corporation of India (IRCI) in
1971 as a company registered under the companies Act. Its objective was to revive and
rehabilitate the sick units by providing financial, managerial and technical assistance.
b. In 1985, IRCI was renamed as Industrial Reconstruction Bank of India (IRBI) and was
converted into a statutory corporation. Further in 1997, the IRBI was transformed into a
full-fledged development financial institution and rechristened as Industrial Investment
Bank of India (IIBI).
Board for Industrial and Financial Reconstruction (BIFR)
a. The government set' up BIFR in 1987 under the Sick Industrial Companies (Special
Provisions) Act (SICA), 1985. The BIFR is an autonomous quasi -judicial body to take
final decision regarding revival and rehabilitation or winding up of the sick units. It is
mandatory for a sick / weak unit to refer itself to the BIFR. On receipt of such reference,
the board ascertains whether the company is indeed sick. It sickness is confirmed, the
board may allow the company some time to make its net worth positive on its own,
prepare revival and rehabilitation package or windup the unit.
b. The functioning of the BIFR was severely criticized on two grounds. First; it has adopted
time consuming procedures leading to undue delays in rehabilitation. Second, it has
shown overwhelming bias in favour of revival and rehabilitation over the winding up
option, even in case of non-viable units. So, the government constituted Onkar Goswami
committee to review the functioning of the BIFR.
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The government has not notified the Act because certain provisions of the Act were
challenged in the Supreme Court. However, few provisions of the Act has been notified. NCLT
and its appellate body have not been set up till date. The tribunal can be constituted only after the
Supreme Court verdict. In the meantime, the current framework comprising the CLB and BIFR
continues to function as before.
The main drawback of the SICA scheme is that it seemed to be so heavily loaded in
favour of the debtor company that it created an asymmetry and imbalance between the interests of
the debtor company and that of its creditor. The Part VI A of the Companies Act, 1956,
incorporated by the Companies (Second Amendment) Act, 2002 (the date of commencement of
which is yet to be notified; so far only Sections 2 and 6 have been notified) aims to provide for a
new, efficient and time bound mechanism for both revival/rehabilitation as well as winding up of
sick industrial company within areasonable period of time as against the existing system which
takes about 18 to 25 years. The creation of rehabilitation fund, inclusion of experts and specialists
in operating agency, National Company law Tribunal to act as winding up authority in contrast to
BIFR, doing away with Section 22 of SICA, etc, would make the new provisions more effective
and rational and would provide better mechanism for handling industrial sickness in the country
which is one of the biggest problems plaguing the Indian Economy. This new provisions under
part VI A certainly appear to be a step in right direction and it is hoped that deficiencies noted in
the operation of the SICA would be taken care of under this new mechanism.
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