|__INDUSTRIAL POLICY OF INDIA India's Industrial Policy evolved over the years through resolutions, plan documents and the stat- utes. From time to time, changes have been made in ihe industrial Policy of the government, because ‘of changing needs of Indian economy. The changes in. the policy, for that fatter the original policies ihemselves, were worked out to achieve certain broad objectives. OBJECTIVES The objectives of the Industrial Policies are 4. rapid industrial development to bring about in- creased industrial production Y . tapid expansion of employment opportunities to remove poverty 3. progtessive ‘eduction in disparities to bring about egalitarian society 5 |. balanced regional development to prevent mi- gration of people and to reduce tensions, and 5. attainment of self-retiance To achieve the above mentioned objectives, the Industriel Policy adopted the foliowing methods : 1, a greater role for Public Sector within the framework of mixed economy to achieve rapid industriatisation, y encouragement of small scale and cottage: in- dustries to increase employment opportunities. control of monopolies to. prevent concentration » of economic power. 4. ensuring dispersal of industries to bring about balanced regional development, and ° 2 . increased dependence on indigenous sources and le’s dependence on foreign sources to achieve self reliance. Instruments of Implementation: To implement the industrial policy, Government used © . industal_ licensing, 2. import licensing, i 3, regulation of foreign investment, 4. .price controls, =” 5. . ingentives and disincentives through ‘taxes and supply of inputs, 6. use of monetary policy through selective credit, 7. investments by Government in infrastructure, and . 8. setting up Public Government Enterprises. INDUSTRIAL POLICY RESOLUTION 1948 The main features of the 1948 industrial policy were the following: 1. Due importance was given to both public and private sectors although a progressively active role was given to‘the public sector. It was felt that the mechanism and the resources were not adequate enough for the state sector to play a big role expected of it, Hence, it was decided to allow the stale to function in the areas where it was already functioning and take up certain new areas and to allow the private sector to expand under proper direction and regulation, 2. The Industries were divided into four catego- ries’ as follows [ i) State Monopely: Arms and ammunition, atomic energy, and rail transport were under the exclusive sphere, of the state. ii) Mixed Sector : Six industries Viz. coal, iron and steel, alr craft manufacture, ship building, manufac- lure of telephone, telegraph and wireless apparatus (excluding radio set) and mineral oilS, were reserved for this sector..The state had exclusive right (except where state found it necessary to seek private seclor’s participation in any of these industries, in the national interest) to setup new Industries in this sector. However the existing private sector units in any of these fields were allowed to continue subject to review after ten years. ill) The Sector Under Government Control : The government had identified eighteen industries re- quiring its control and direction, although it did not undertake the responsibilty of the development of these industries. The examples of such industries were : Automobiles, Heavy Chemicals, Heavy Ma- chinery, Fertilisers, Sugar, Paper, Cement, Cotton and Woolen Textiles. . iv) Private Sector : All other industries-riot figuring in any of the above three lists were under the private sector. However, the govemment had freedom to enter into any of the Industries under this sector If its progress was not salisfactory. 3. Small and Cottage Industry Small and cottage industries, owing to their employment potential, were given importance. Hence, solving problems faced by these industries, such as raw material, Fo(cavital, skilled labour, marketing etc., by the central government with the’ cooperation of the state gov- ernment was emphasised. 4, Role of Foreign Capital Although the need of foreign capital for the industrial development was recognised, equal importance was given to its regulation and control. It was therefore envisaged thal ‘Yhe Indians should have major say in the investment and management of the companies which were allowed to have foreign equily. INDUSTRIAL POLICY RESOLUTION 1956 (IPR 1966) By 1956 the country had completed one plan period (1961-56). The Industrial Development and Regu- lation Act (IDRA) 1951 gave necessary experience to the Government in regulating and controlling the industry and the government had declared social- istic pattem of society as its’ goal. All these developments necessitated the revamping of indus- trial policy. Consequently the second Industrial policy Resolution was announced in the year 1956. SALIENT FEATURES 1. The industries were reclassified Into three sectors as follows. 4) Monopoly of the State : Seventeen industries were listed in the schedule A (of the IPR 56). The futute development of these industries was the exclusive responsibilty of the state. These” 17 industries fall under five broad categories. viz. (1) defence (2) heavy: industry (3) minerals (4) transport & communication and (5) power. Of these industries, four industries viz: arms & ammunition, atomic energy, railways & air transport were the government monopolies, while in “the | remaining thirleen; ail the new units were to be set up by the-state aldne, b) Mixed Sector : Twelve industries listed in the Schedule B (of IPR '56) fall under this category, which would be progressively owned by Stale. It would increasingly establish units in this sector but it Would not object to the private sector's participa- ‘lion. The industries included in this schedule B are: machine tools; ferro-alloys and steels; basic chemi- cal and intermediates; antibiotics and. other essen- tial drugs; fertiliser,’ synthetic rubber; coal carbon- isation, chemical. pulp; road and sea transport; ©) Private Sector : 1) All the other industries which. did -not figure In schedule A or B x private sector. Although these industries were left to the private sector, the state could start any industry of its interest in this sector. The private & public sectors were expected to be mutually dependent. Only. four industries were left under the exclusive monopoly of the state. Private paiticipation was allowed in rest of the industries, Similarly state was free to start any industry it liked even in those areas left to the private sector 3) The private sector could be given necessary assistance like providing fiscal incentives & equity participation. Also it could be subjected to regulations and controls to ensure the devetop- ment of the private sector in conformity with the plan objectives of the state. The IPR 1956 has stressed the importance of small scale industries, reduction of regional inequalities and industrial peace. 4) Industrial Licensing : This industrial (Development and Regulation) Act, 1951 ‘was. enacted to empower Government to regulate the. establishment and development of industries. particularly-in private-sector by means of ‘icensing. While licensing Government can lay down conditions regarding location, size, etc. Industrial ‘icensing is the mechanism by which Industrial policy is implemented, and hence the objectives of industrial licensing are same as ‘that of Industrial Policy. Review of the working of the Industrial licensing: However, the licensing system did nat work properly as brought out by the Hazari Committee Report of 1967 and the Dutt Committee Report of 1969. These two ‘committees found that, there was ttle impact of the industial feensing on the dispersal of industries. Move licenses were issued to estabilish industries in industrially advanced states such is Maharashtra, West Bengal, Gujarat, and Tamil Nadu, and met- topolitan cities and big towns at the cost. of backward states and small: towns, The licensing } system.and the credit institutions favoured the big industrial houses leading { the concentration of industries in a few hands, . THE-Dutt Conimittee identified 73 large industrial | houses with assels ranging from Rs. 20 10 36 crores. The Dutt Committee also found that the big industrial houses in the private sector usurped the industries reserved for the public sector by ullising the loopholes.CORRECTIVE MEASURES Monopolies and Restrictive Trade Practices Act + 1969 This Act was enacted to regulate the activities of the big industrial houses so as to avoid the concentration of economic powers in‘a few hands. All industrial and business houses with assets exceeding Rs, 20 crores (raised to Rs. 100 crores) were subject to a number of regulations. They are banned from entering into certain areas for estab- fishing certain industrial units. The Industrial Licensing Policy of 1970 ‘A comprehensive industrial ficensing policy was formulated in 1970 basing on the. reports of the Hazari and the Dutt committee Reports. Accord- ingly, large industrial houses and the foreign com- panies were allowed to invest in units of the core sector other than those reserved for the public sector. The middle investment sector (between Rs. 1 crore and § crore) was largely reserved for the middle entrepreneurs. Other areas including con- ‘sumer goods industries were left to the small class entrepreneurs. The ‘pririciple of joint sector where the public and private sectors jointly establish industrial units was accepted in principle. The. policy of reserving certain items of production to the small Scale sector was continued. The co- operative sector is to be preferred in licensing-for the establishment of agro-based_ industries. ‘The scope of the public sector was to be increased substantially beyorid whal was envisaged in the industrial policy’ statement 1966 particularly by taking up short. gestation ‘projects. “This was in- tended to enable public sector to earn profits. Liberalisation of Industrial Policy : The need for the liberalisation of Industrial policy-was felt after the Indo-Pak war of 1971. Restrictions on Produc- tion with respect to 72 priority industries were relaxed. To implement the approved development strategy of the Sth Five Year -Plan, industrial licensing policy was further relaxed in 1973. The relaxation includes opening of some of" the basic and critical industries to the large industrial houses and promotion of central and stite joint ventures in priority areas. In 1975, 21 industries were delicensed and 30 other’ industies were opened to big business houses and foreign com- panies, The. Industrial Policy Statement of 1980 fufther ‘opment of other industries. eee nee eee nL Opt istries. liberalised licensing procedure. 1! raised the invest- ‘ment limits prescribed for small scale and ancillary | Units. Extension of provision for automatic expan- sion, streamlining of licensing procedures to cut delays, etc. are the other liberalisation measures initiated in the statement to achieve rapid industrial growth. A scheme of broad-banding was introduced in 1985, to allow flexibility for better capacity utilisation and 'o reap economies of scale by adjusting the capaci- lies of their prodiict mix according to the market demand. Thirty two groups. of industries were delicensed subject to the rez alions under MRTP, FERA etc. A new textile policy and a new: drug policy were announced in 1985 and 1986-87 respectively. The two policies liberalised the licensing and investment brocedures besides a number of incentives for their growth. Liberalisation of indusirial licensing is a continuous process and telaxations were made every year depending on the prevailing circumstances. Working of the Industrial and licensing policies: ‘There is a large gap between what was professed in the industrial policy and what was done during actual implementation. Though the policy sought 1o festrain concentration’ “of economic power, large scale private enterprises were fevoured in licensing, Jeading to concentration of economic power. it seems that the policy professings have been motivated by the political exigencies to project a socialistic image while its implementation has been governed by economic necessity of faster industrial growth in whatever way it came out. The objective of dispersing the industries to backward areas was, also not achieved to the: desirable extent. Small scale industrios were neglected. The policy | also led to the emergence of a high cost economy | making the Indian products non-competitive in the interhational market. Large scale industrial sickness § another feature of the Indian industry to which ‘the industrial Policy is partly responsible. Nevertheless, the policy contributed to: industial | growth. Industrial growth rate has been- over 5,).: Percent over the’ years. The policy of promoting Public sector helped in establishment of basic and, rtical industries which are essential for the devel-INDUSTRIAL POLICY 1991 Foreign Investment : Highlights : = Delicensing of all industries excepting 18 indus- tries, permission for 51% of Foreign investment in high-priority areas, liberal procedure for foreign technology ccllabo- ration, - removal of asset limit for MRTP comp: permission for private sector to enter even areas reserved for public sector with the approval of the govemment, and = sale of 20% public sector equity shares to public financia institutions, workers and general public are the highlights of the Industrial policy of 1991, which ‘alms et making Indian Industry efficient and competitive in world market by removing unhealthy controls. Industrial Licensing Policy : 1. Compulsory licensing has’ been abolished for all. * Industries inespective of the levels. of invest- ment, except for 18 specified industries like coal, sugar, motor'cars, hazardous chemicals, enter- tainment electronics (TV, VCR, etc.) and those telated to ‘security, strategic, environmental and -_sosial concems. Later in 1993, licensing was abolished for 3 of these 18-indusiries - motor cars, leather and white goods like air-concition- ers, refrigerators end washing: machines. . Exemptiori from. licensing will apply to all future expansions of existing units. y S All existing registration schemes (Delicenced istration, Exempted Industries. Registration, GDTD Registration) will be ‘abolished. Entrépreneurs will hencefcrlh dnly be required 16 file an information’ memorandum .on new. projects “and substantial expansions. No Industrial: approval is: required .from the central Govt, to locate any. industry (other than those requiring compulsoty license} in any place of less than 10'lakh population. However, Zoning and Land usé Regulation and -Environmental > 2 legislation’ will-contiriue.to regulate locations of ‘ndusiites. 8. New or existing units have been provided with new broad banding facility to produce any article \ provided no additional investment is needed, 1 Forelgn Technology : . 1. ,Automatic permission for foreign technology Public Sector : 1. » 2. Foreign equity proposals need not necessarily - Torelgn exchange’ is required for any payments 2 . Public sector investments are to be reviewed to Direct foreign investrnent in 34 high-priority industries is allowed automatically upto 51% provided the foreign equity covers the foreign exchange requirements for import of necessary capital goods. Otherwise, prior clearance is needed. The “high-priority industries include sommersiai vehiclcs and two wheelers, inorganic fertilisers, cheraicals, drugs and pharmaceutt cals, paper, tyres, hotels, food processing indus- tries, industrial and- agricultural machinery etc. be accompanied by foreign technology agree- ments. Dividend expatriations have to be balanced by export earnings over a period of time by the foreign equity based units. 51% foreign equity participation has been ex- tended to trading companies primarily engaged in export business. ‘A special empowered Board will be constituted to negotiate’with a no. of multinational firms and approve direct fore investment in select ar- eas. agreements in 34 high priority industries upto a lumpsum payment of Re. 1 crore. 5% royalty of domestic sales and 8% of exports subject to total payments of 8% of total sales over a 10 year period from the date of agreement for 7 years from dale ‘of production. For’ industries other than 'the specified 34, Permission wil be given, “subject to above guidelines of liripsum payment, etc, if no free No permission is needed to hire foreign tech- nicians and for foreign testing of indigenously developed technologies. 8 core sectors have been ‘reserved. for public séctor ‘for secuiity and strategic concems like ams and other defence: equipment, atomic ‘energy, coal and lignite, mineral oils, mining of res, like iron and manganese, mining of copper, tsad, and zinc, minerals related to atomic en- ergy, and railway transport. focus on strategic, high-tech and essential in,frastructure. Private sector can be allowed entry into reserved sectors of public sector. Similarly, public sector can enter in any area. 3. A part of government's shareholding in the public sector will be offered to mutual funds, financial institutions, general public, and workers to raise funds and encourage wider public participation. 4. Chronically sick PSUs will be referred to the Board for Industrial and Financial Reconstruction (BIFR) for its revivai/rehabilitation schemes. 1) Atomic Energy 1) Distillation and brewing of alocoholic drinks 5) Hazardous chemicals. and ‘strategic considerations, eriterpreneur intending to set up an industry MRTP Act : and its replacement with market share. and takeovers. List of Industries Reserved for the Public Sector: 2) Substances specified by the Department of Atomic Energy Except the above, all other industries are open to entry by private sector. List of industries for which Industrial Licensing is Compulsory: 2) Cigars and cigarettes of tobacco and manufactured. tobacco substitutes. 3) Electronic Aerospace and Defence Equipment. 4) industrial explosives including detonating fuses, gun powder, nitrocellulose and matches. Drugs and Pharmaceuticals is the last item removed from the list requiring compulsory licensing in ‘September 2005, resulting in only the above five industries, mainly on account of environmental safety All other industries are exempted from taking approval / license from the Government.’ Any not covered by the above five categories has to just file an Industrial Entrepreneur's Memorandum (IEM) with the Department of industry. 1. MRTP Act was ainended providing for removal of asset limit for defining a company a monopoly 2. MRTP-companies will be free to implement expansion and other new schemes, apart from mergers }. However MRTP commission will investigate monopdlistic, restrictive and unfair trade practices. Workers likely to be affected by such schemes will be protected by a social security mechanism that is proposed to be created. Emphasis will be laid on MOU (Memoranda of Understanding) system for improving the pertor- mance of the PSUs (Public Sector Undertak- ings). MOU provides greater autonomy to the management of PSUs and makes it accountable al the same time. The MOUs will be placed in Parliament to facilitate deeper analysis of the performance, o industrial Polity Reforms and Major Initiatives are: % reducing the number of indtistries requiring industrial licenses to 5. % reserving only 2 industries for Public sector. liberalising foreign direct investment policy. constiluting Disinvestment Commission for pre- paring an overall long term disinvestment Programme for PSEs referred to it and the * modalities for disinvestment. ‘amending Sick industrial Companies Act (SICA), + + * 1985 to bring PSEs within the ambit of SICA, 1985 and BIFR. % setting up of National Renewal Fund to protect the interests of workers likely to be, affected due to restructuring oF closure of industrial unit. %* Growth-Centres ‘Scheme to develop infrastruc- ture in backward areas to promote industrialisation. | * amending. Drugs Price Control Order to give freedom to private sector including fixation of drug prices: Reducing the number of drigs under price control from, 143-to 72.% New National Minerals Policy which opens min- ing industy to private sector including 50 per- cent foreign equity in 13. minerals. * setting up Technology Development Board to faciitate development of new technologies and assimilation of imported technologies. This was provided by the Competition Act, 2002 with the following objectives lo prevent practices having adverse effect on Competition . to promote and sustain competition in markets 10 protect the interes's of consumers and - {0 ensure freedom of trade carried on by other participants in markets. . SUGAR INDUSTR On August 20, '98, the Central government delicensed the Sugar industry as part of its oversil liberalisation policy. This means that new sugar units do not require government clearance on a minimum stipulated plant size of 2,500 tonnes of cane crushed per day: Also, the mandatory distance between two mills has been reduced to 15 km from the existing 25 km so as to ensure an assured price to millers who are to pay a minimum statutory price to cane growers. (However, this is not in line with ‘distance of 25 km’ recommended by the Mahajan ‘Committee on sugar industry). Following delicensing, fiscal incentives are withdrawn to new industries as they ate freed from the obligation of supplying levy sugar to Government. Report of Mahajan Committee : The Mahajan Committee; appointed to recommend a long-term policy for sugar indusity, has submitted its report on April 15, 1998. ‘The major recommendations of the committee are, NEW MINERAL ‘On March 13, 2008, the Union Cabinet gave its in- principle approval to the new National Mineral Policy, 2008. It also gave its approval for setting up an independent dispute resolution mechanism, namely Mining Administrative Appellate Tribunal (MAT). The implementation of the new National Mineral Policy, 2008 is expected fo attract FD! to the valae of USS 250 milion per annum in the mining sector by the end \ COMPETITION COMMISSION OF INDIA : | The Act was based on Raghavan Committee on’ Competition Policy, which gave its report in 2000. The Act also seeks to repeal the MRTP Act and to dissolve the MRTP Commission from the date it is notified as such by the Central Government. Such a notification is not yet issued by the Gov- ernment, ‘The Commission ws set up in October 2003. Due to orders of the Supreme Court in 2005 staying the judicial functioning of the Commission and operation of the rules framed for selection of members of the Commission, the Commission is at present function- ing only with one member, undertaking only admin- istrative and advocacy functions. Its quasi-judicial activities are not started. The Act is proposed to be amended to overcome these legal restraints. - DELICENSED - complete decontro! of sugar prices and discontinuing supply of sugar through the Public Distributfon* System (PDS). The commitice found that a large percentage of subsidy on Sugar is availgti of by the non-poor. = announcement’ of statutory minimum price for sugarcane even after decontrol of sugar prices as it would guarantee a minimum price to cane growers, - continuance of the present policy of licensing of ‘new sugar mills and the system of cane area reservation, Analysis: The government move to delicense sugar industry is a step towards ensuring enhanced availability of sugar and also increasing the installad capacity by attracting investors. However, critics maintain that withdrawal of tax incentives will affect investment thereby production. POLICY 2008 An amendment Bill will be introduced during Budget Session for bringing about suitable amendments in the Mines and Minerals (Development and Regulation) Act, 1957,.the MCR Rules, 1960 and MCDR, 1988 to give effect to the new National Mineral Policy, 2008. Highlights of the Policy : ~ Prospecting would be unbundled from. mining, whereby prospector may invest, find and sell data. - Competition and level playing field would be of five years{introduced by ensuring an arms length between the Government as a regulator and Goverment esa miner + Ore bodies fully prospected at public expense would be auctioned to promote transparency in allotvent, recovery of cost of exploration bome by ‘he Goverment & generate additional resoutces “or the States. - State Governmenis would be allowed to’ give preference to a "value adder” in case of multiple applicants for 2 concession subject to other ligiblity requirements. At the same time State Governments cannot hold back grant of mineral concession if 9 “value adde:” is available. slays would be réduced in ane grant of mineva! concessions, Promotion of welfare of the local community and } mainstreaming of the people in mining areas situated in backward and tribal areas would be teken up by 2}: allowing funds from mining companies to be routed te projets wit local partlpatin and NGO support 9) making Mining companies to spend a percentage of turnover on social infrastructure as Corporate Socie! Responsibility stakeholder rights to project isrhd persons in project companies. a - _ Fair compeneation to the State Goverment would ‘be ensured by: 2) mateo an ac velorem basis royaly system, b) propound Increase in dead rent on escalating scale on unused areas, to dissuade idle holding of resources, ¢) allowing levy of fees on transfer of concessiahs, d) propound several fold increase in penalties on ilegal mining, and | @) promoting growth of Infrastructure it in mn - ° areas. ~ Anempowered-cur-coordination committee would be created at Central & State levels to work as pressure point to reduce delay in grant of mineral concessions. trative & Appellate Tribunalwould ¢) encouféging mining companies, to grant | be set up, which can be approached by an applicant in aso cf feiluro of the Centre and State Govern to adhors te time limits, Role of existing State Level Mineral Development Corporations would be enlarged as Mineral, Infrastructure Develonment and Finance Corporations (MIDFIC*; jor finencing/promoting mining infrastructure projects thrcugh Joint ventures and special «urpcse vehicles. + AMineral Developmetiund (MDF) to be created 1 every State by the State Government by eermarking a postion of the annuel royalty. Governmert of Incia would make matching aentribatios: (© MDE: Royalty Kate Revise ‘The Royalty Rates nave iso heen revised for most of |, graphite, iron ore, quartz, sand and quartzite and to be shiflo: from tcnnage basis system 3 minerals, Chrysotile asbestos, , lime kankar, lime shell, slate and tungstén, would ue toattract units of production based royalty 3eca11s9 itwwas held that shifting over to ad valorem. ig net administratively {ceppes, zinc, Jead etc.) and fo & laterite dispatched for extraction of elumine cnc atuminiu=n, the rates of royalty would :continue to 3e linked to the international benchmark meta! prices. This would ensure higher royalty payment for high grads ore and lower royalty payment for low grade ore. However, in case of bauxite and laterite dispatched for non metallurgical uses royalty would a a teen ba orn mane benchmark price. ~ For fixation of dead rent, the existing grouping of “minetals info precious metals and stones, high ‘value, medium value and low value minerals would Continus, but steep increase in the ratés of dead rents from second year of lease is proposed in-| order to discourage dormant holdings.( Dereservation of 46 minerals ‘ncluding silver and Tin and thelr opening up to the private and multinational investors, “emoval of all restrictions on foreign equity in an ‘ndian Mining company, fixing for ening leases are the main featurss > a new the mining sector rasscc: by th> Parlament in 1994 This law to amendsc ine Minaz and Minerals (Regulation and deve! ct, 4987, ed broadly followed the policy: 5. 1993. Changes I Mineral Policy‘: 8 fereign oquity RELEVANCE : Yidustial cfokness sading tc wastacs cf ore- g growth. !t!2s exposed lons_exist_ on “Industrial Sickness”, the definition of Sick Industrial Compa- nies Act (1985) is the most widely accepted one. According to this definition, Sick Industrial Unit is ‘amedium and large f.¢. non-SSI industry) company (being a company zegistered for not less than 7 years) which at the end of any financial year has ‘accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses in the financial year cnd: the financial year immediately preceding such financlal year. - However the Zollowing companies ara not covered under the act. 4, A financial ‘or leasing company which does not ‘own any industrial undertakings. 2. A trading company which does act c: industrial undertaking 3. A company which owns sn industrial under‘aking but which does not employ 50 or moré persons, if the, unit runs on power or 109 or mora perscns, if it runs mechanically in the preceding 12 months. MINERAL POLICY 1994 epme under ; YNDUSTRIAL | Act}, itis also important t2 re *) automatic approval of 50% of FDI through | Foreign Investment Promotior: Board (FIPB), : increasing the limits of area for prospecting inj sase of aerial prospecting, y ~ phased surrendering of arosoectin: aree to | avoid indefinite holding ar setting up cf committees to jrevent environment damages during mining operations are the main changes mzde in Mineral October 17, 1996 to faclli'ate greater orivate and j foreian investment ir: mining sector. SICKNESS | 4, A company whici cvins a small scale industrial | undertaking or en ancillary}: undertaking. ] Though small-scale industries do not come under ustriai Companies | ness in | unit: is { the purview of SICA (Sick i mise sic! lusici small industries. A small scale i considered to be sick when it has. 1. incurred cash ‘oss is the previous acc year and was likely to continue with losses in | the ‘current accounting year and which experi- 1 enced erosion on account of cumulative cash | tosses to the extent of 50% or more of its peak | net worth during the fast 5 years and which j 2. Continuously defauited'in meeting four consecu- tive installmenis: cf interest. cr two-half ysarly installments of principal on term loan ard there were persistent irregularities in ths operaticn cf its credit limits with the ban! PRESENT SCENARIO As the matter stands now, industrial sickness has emerged as a serious problem affecting national economy in general end industrial secter in particu- | lar. All types, of industries i.e. small, :nedium, and large aré afflicted by. sickness. As at ihe end of | March 2001, thé total number of sick units of all calegories stood at 2.62 Lakhs. However, between 31 March of 1999 arid 2001, the number of sick ‘SS! units decreased from 3,06 lakh units to 2.53 | lakh units, Jt further Cecreased to 1.18 lakhs in 2007. ‘The incidence of sickness in SSI which. was one in eight in 1988 has come down to one in fourteen ir 1. Though it was feared that dereservation, 3 feraeval of quantitative restrictions on imports could)‘ripple SSI sector, it is the large and medium industries that seem to be bearing the brunt of globalisation, Statewise analysis of sick units indicates that the largest number of these units are in the stale of Maharashtra followed by Vest Bengal, Gujarat, Tamil Nadu, Andhra Pradesh, Uttar Pradesh and Karnataka. Ironically these states happen to be industially most advanced states in our country. ‘The consequences of indusirial sickness are loss of production, loss of employment, loss of revenue to the Central and State Governments, and locking up of investible funds of banks and financial institutions. Further, industrial sickness dampens the industrial climate and arrests its growth resulting in the spread of sickness to other healthy units which have transactions with sick units. CAUSES OF INDUSTRIAL SICKNESS : Two sets of factors are responsible for industrial sickness, extemal and internal, The extemal factors relate to such factors as government policies per- taining to production, distribution and prices, change in the investment pattern following new priorities in the plans, shortage of power supply, raw materials etc. Internal factors are iaults at the planning and construction stage, mismanagement, diversion of funds, financial problems, labour problems and under utilisation of capacity, old and obselete technology, excess man power, etc. EXTERNAL FACTORS : 4. Government Policy: Sudden changes in the government policy relating to import, export, indus- trial licensing, price controls, etc. can make viable units sick overnight. For instance coal industry faced severe price controls before nationalisation and in consequence experienced arrested or nega- tive growth. Similarly a liberal import policy for a product which is cheap can infict serious damage on the domestic Units producing similar products. A liberal export policy serves as an incentive for export-oriented Industies. Granting of liberal licenses to big industrial houses in the production lines reserved exclusively for the .S, sector can adversely affect the progress of the latter. Easy approval given to S.S. units without pipper screening of project proposals can also result in sickness. ‘Some of the policies of the government like indus- ilal growth vis-a-vis balanced regional development are also responsible for the sad state of industrial progress in, our country. Till recently, before initiating liberalisation measures in full scale, the Govt considered its responsibilty to start several unprofitable but high budget ventures to develop the backward areas. The industries started in this connection failed to make a profitable proposition. 2. Powercuts: Power cuts are imposed by the state governments as generation of power is considerably below its actual requirements. Drought situation during some years further aggravate the problem leading to industrial disruption. 3. Erratic Supply of inputs: The supply of raw materials is erratic to some units. This results in disturbing the production schedule causing losses to the unit. This offen happens in the case of units depending upon the supply of imported inputs. Insufficient availabilty of transpor facilities can also upset the supply schedule of inputs. INTERNAL FACTORS: 4. Faults at Planning and construction stage: Fundamentally wrong locations of an industrial unit can starve it from proper infrastructural facilities, steady availability of raw material and market. This would make the unit sick at its inception and ‘nip the progress in the bud. Industries also turn sick if correct machinery is not chosen or defective machinery is chosen or if obsolete and outdated technology is used in the production process. 2. Mismanagement : The most important external | Cause for industrial sickness is mismanagement. Lack of basic technical knowledge and basic busi- | hess-acumen, no wonder would lang up newly set | up units in sickness. In addition to the above faulty managerial decisions in the fields of production, marketing, finance, personnel management, it can ruin a business. Proper care has to be exercised | in avoiding wrong dividend policy, excessive overheads, over-estimation of demand, etc. Ab- | sence of quality contro! systems, inadequate atten- tion towards maintenance management, insufficient sales promotion activities, improper pricing policies are some of the other important examples of mismanagement which should be taken care of. 3. Diversion of funds : it is found that in some cases the management which is not. interested in running @ particular unit diverts its funds to some other business house owned by itself taking advan- tage of the legal loopholes and declares it sick. More often than not this misconduct of management is never punished and in majority of the cases, the management emerges successful in obtaining fabu- lous compensation from the government which enabled it fo Set up new units. 4. Financial problems : A number of units face acute financial problems from the stage of planning and construction to the stage of implementation and beyond, The. financial base of several industries‘especially in the smail sector is very weak and slight disturbances in the market put them under acute financial strain. Often small scale units default in their repayment schedules to banks and financial institutions resulting in accumulation of unpaid debt making them sick. Similesly small scale industries um sick if the banks refuse to support them insisting on proven performance for extension of credit. Non payment by the medium and large industries to the ancillaries for services is another couse of industrial sickness. §. Labour problems : These problems may eme- rate from differences with management’ over the issue of wages, bonus, suspensions, retrenchment, inter-union rivalry. If not tackled in time satisfactorily ‘such problems. can cause sickness. 6. Underutlisation of capacity leads to high per unit cost of production. Steps taken by the Government : - Government has taken over management of a number of.sick units like textile mills with a view: to reviving them by providing management and financial support. Government has offered to give tax benefits to _~healthy units when they take over the sick units by amalgamation with a view to reviving them. Industrial Reconstruction Corporation of india (RC!) was established by thé Government with a view to reviving and rehabilitating sick units, ‘The IRCI provides ’) financial assistance to sick industrial units fi) managerial and technical assistance ii) merchant banking ‘services for amalgam- ations, merger etc. 'v) consultancy services to banks in matters felating to sick industrial units, and W) Secures assistance of other financial institue fioris and goverment agencies for ensuring the revival and tehabilitation of sick industrial units. In 1985 the IRCI was converted into a statutory corporation and given the name of Industrial Reconstruction Bank of India (IRBI) by the Government. ~ Government had also ‘setup the Board for In- dustrial and, Financial Reconstruction (BIFR) in 1987, within the terms. of Sick Iridustrial Com- panies Act (SICA) 1985, for determining the preventive, ameliorative, remedial and other measures which are requited to be taken in fespect of sick industrial companies. Industrial companies whose net worth has been ‘eroded’ completely and those which have net worth eroded by 50%.or more (called as weak units) ate required to make a reference to the BIFR. In case where sickness is confirmed, BIFR will determine the course of action to be followed with regard to the company. The course of action may be i) Allowing the company time as per scheniés. already initiated by the banks and financial institutions to make its. networth positive within a reasonable period, il) Having a scheme prepared ‘through the ‘operating agency which is setup by itself, for reconstruction, revival of unit through change of: management, amalgamation measures, sale or lease of a part or whiole of the sick company, etc. iil) Deciding on the winding up of the company. (Once the BIFR feels that a sick industrial company is to wind up its operations, it may record arid forward its opinion to the con- .-gemed high court, The decision of the BIFR is binding on all concemed. Even Public Sector enterprises were brought under’ its ‘purview from 1992. .The Act-has an over- riding effect over all other laws except FERA and Urban Land (ceiling and regulation) Act. The jurisdiction of civil courts is barred in respect of matters coming under its purview. - Setting’ up of textile modemisation and jute tmodemisation funds to Help the revival of sick units in cotton textites and jute industry as industrial sickness in these’ industries was due to tack of modemisation: ‘The major’ strategies for restructuring of CPSEs including sick units on long temp basis aie dis- cussed below : i) Financial restructuring ; Investinent is made in CPSEs by the Governnient in the form of. equity participation, providing loan or ‘pldn/non-plan assistance / grants or through the tevival pack- | ages which involve substantial outgo from the Government or ‘write-off of past losses and infusion of fresh capital,etc. ‘Generally the plan assistance is provided for expansion or .under- taking new projects by the CPSEs. Measures Such as waiver of joan / interest / penal interest, conversion of loan into equity, conversion of interest including penal interest into loan, mora- torium on payment of loan } interest, Govern- ment guarantee, etc. are also taken to improve. the financial strength of the company particularly in the case.of sick and loss making enterprises.ment, organizational restructuring, hiving off viable units from CPSEs for formation of separate company, closure of inviable units, formation of jeint ventures: by induction of partners capable of providing technical, financial and marketing ‘nou's, change in product mix, improving mar- keling strategy, etc. are the steps taken under the business restructuring process as per need on case to case basis. iy Manpower rationalization : In order to shed excess manpower, the Voluntary Retirement Scheme (VRS) is introduced by the CPSEs from time to time. in case of CPSEs found unviable and decided to be closed, the Voluntary Sepa- ration Scheme is introduced in such units. Retrenchment is adopted as the last resort in exceptional circumstances. = Out of 74 CPSEs registered during 1992-2006 with BIFR, 57 were in operation during 2005- 08, establishments of 16 were closed and one sompany namely ‘The Indian tron and Steel Company Limited’ was merged with the parent company SAIL, Out of these 57 CPSEs, the BIFR’ has already disposed off 4¢ cases of CPSEs either throuh sanctioning revival schemes (17 cases), or recommending winding up (13 cases) or declaring ‘no longer sick’ (4 cases) or dropping due to net worth becoming positive (3 cases) or dismissing the cases as non-maintain- able.(3. cases). Board for Reconstruction of Public Sector En- terprises (BRPSE} : ~ The Govemment set up.a Board for Reconstruc- tion cf Public: Sector Enterprises (BRPSE) in December, 2004 to, advise the Government inter alia on the measures lo be taken to restructure | revive CPSEs. For the purpose of making reference to BRPSE, @ company is considered ‘sick’ if it has accu- mulated losses in any financial year equal to 50% cr more of its average net worth during 4 years immediately preceding such. financial year and / or a company which is a sick company within the meaning of Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). The concemed administrative Ministries / Depart- ments are required to send proposals of their CPSEs Identified as ‘sick’ for consideration of the BRPSE. The Board is expected to make. its recommendations within 2 months of the date of making reference to it. ~ The BRPSE has made recommendations in 47 * cases including two for closure till October 31, Business restructuring : Change of manage- | 2007. The proposals for revival of 26 CPSEs and closure of two have been approved. The total assistance approved by the Government upto December 2007 in this regard Is Rs.8,285 crore. ‘ GOSWAMY REPORT : The Goswami Committee headed by Onkar Goswami examined in detail the malady of sickness and submitted its report in July 1$93. it laid the onus of responsibility mainly on the promoters and sug- gested steps to identify sick units at an early stage. In addition it addressed the rather difficult problem ‘of closure of sick units and disposal of its assets. In its view, the BIFR has turned out to be a toothless body because of its very quasi-judicial nature, whose accent is only on rehabilitation of the unit and not on speedily disposing the assets of the closed unit before the consequences of and effects of sickness affect the financial institutions, workers and creditors. It suggested five “fast-tracking! bodies based in the main industrial centers with powers to either rehabilitate or dispose all pending cases quickly through summary procedures. Further if called fer amendment of certain clausés in the Industrial Disputes Act, (IDA) since they Virtually rule out clasuré of winding up of a sick unit. In its view, the workers and financial institutions may be better served, in most cases, by winding up enly. In the effoit to identify sick units at an eaily stage it suggested suitably amending SICA by labeling all units which have defaulled payments to financial institutions for two consecutive quarters (or six months) as sick, At that stage they would bé Tequited to sit with the financial institutions to draw up rehabilitation plans or they can voluntarily approach BIFR. The basic emphasis of the Goswami report has been that the promoters’ mismanagement more than anything is responsible for industrial sickness. Its preamble clearly, stafes that there are sick companies, “sick financial institutions and unem- ployed workers but these ‘are no sick promoters”. Limitations of Goswaml-Report : ‘The emphasis of Goswami report has been mainly on the intemal causes which lead to sickness: The emphasis on promoters mismanagement shows that ‘units which become Sick dus to extemal factors are not properly dealt with. It mentioned nio safeguards to ensure responsible management by the promot+ ers of the unit.‘Steps to be taken: i. The government should also take a number of steps to improve the lot of sick S.S.1. units like a. making ‘professional management expertise readily available for the guidance of small enterprises, b. According top priority in allocation of scarce resources, c. Taking penal action on non-S.S.1. units for non-payment for delivered goods by small units, d. Proper screening of project proposals before giving approval to small units. ii, The SICA, 1985, leaves out small scale units and ciitical sectors of mining, shipping service, The term ‘exit! gives a meaning opposite to ‘entry’. The exit policy provides rules and guidelines allow- ing the sick industrial units to exit from the field, i.e. it allows the closure of terrhinally sick industries (meaning, such of the industrial units which could ‘not be revived and: economically made viable with all the rehabilitation measures.) Why Exit Polley? 1. The maintenance of sick units by providing extemal assistance and subsidy simply for sup- porting the workers is not a permanent solution. On the contrary, it amounts, to a wastage of seafce resources. 2. The amuunt of subsidy and the extemal assis- tance if used in new units, instead of sick units, will provide scope for fresh empldyment, and production which’ is beneficial to society. 3. Itis not worthwhile to invest just to maintain the labour where the retums are less than such investment (Relief Employment). Instead, it is good fo spend in new areas which bring more retums. than ‘invested (Normal Employment). 4, The lass of employment on account of withdraw- ing the support to relief employment in the short term is no loss at all, compared to the long term gains in the shape of increased employment that will be generated by diverting this support to the viable new units. So it will be a short term pain for a long term gain, 5. The Exit Policy will encourage foreign invest- ment by providing: assurance to the investors that they will be free to close the unit if it turns out to be an economically unviable unit. The tourism and marketing, finance and leasing ‘companies from the purview of its definition of sickness. Because of the increasingly important role of these sectors in the general economic development of the country and in terms of employment potential these are to be included under the definition the SICA 1985 along with small scale industries so that they get benefits on par with other big industries. Unscrupulous entrepreneurs whe divert funds and make the urits sick for their personel advantages should be subjected to severe pen- alties. -If convicted in such ‘cases, the govern- ment should recover all dues from them from their personal or their corporate assets. The government should extend concessions, exemp- tions and assistance only to genuinely sick units. ‘EXIT POLICY inoréased foreign investment will expand the employment opportunities. 6. The Jabour laws in the country, which were enacied to ‘protect the workeis interest have made the closure of industry very difficult. There has therefore been a demand for liberalising-the policies to make the exit easy, from the repre- sentatives of industry and commerce. - This demand became. moré intense with the decia- ration of New Economic Policy which made the Government work oul a suitable policy.” Why is it being opposed ? 4. The policy will add up to the already bad unemployment situation in the country. Accord- | ing to one estimate, four to eight inillion public and private sector workers (out of a total | organised work force of 26 milion) wil be thrown | cout of employment over the next three years if this policy is implemented. i 2: The foreign investment will bring with it foreign | technology which will in all likelihood be capital intensive. It is also feared that all the components and machinery will be imported together with the foreign investment. The expansion of employment ‘opportunity on this count (foreign Investment) will therefore be not tangible 3. Fears are also expressed that the exit policy will be misused by the unscrupulous industrialists. 4. It is further argued that the workers are not responsible for the industrial sickness; but the entrepreneurs, their bad management policies and certain other external conditions including(~ bureaucratic controls, delays and the govern- ment policies themselves are responsible for it. (This view was held to be true by the Board for Industrial and Financial Reconstruction (BIFR). The exit policy is therefore found to be unjust as it affects the workers for no fault of theirs. ‘The larye scale unemployment on account of the Exit Policy will lead to social tensions. What steps did the Government so far take In the areas related to the exit policy °? 4. The Government has established a National Renewal Fund (NRF) to help the workers that are likely to be affected by the new policies (details of NRF are discussed in a separate write up). . The Sick Industrial Companies Act (SICA) has been amended so as to enable the sick public sector units to be referred to the Board for Industial and Financial Reconstruction (BIFR). Before this amendment, only private sector units were required lo be referred to this agency. AS on October 2002, BIFR received 5,675 refer- ences under SICA including 273 from Central and State PSUs. It sanctioned rehabilitation schemes for 42 PSUs (22 Central and 20 State) and recommended winding up of 55 PSUs (22 Central, 33 State). Companies (Second. Amendment) Act 2002 was passed providing for National Company Law Tribunal (NCLT) which will handle the functions of following three agencies. a s - Companies Law Board (CLB) - (dispute reso- lution and compliance with certain provisions of the 1956 companies act). ~ Board of industrial Finance and Reconstruc- tion (BIFR) - (revival and rehabilitation of sick companies). ~ High Courts - (winding up of companies) 4. A.scheme like Voluntary Retirement and’ Golden Hand Shake (a scheme to remove employees by paying good compensation) by the public sector concems. The contentious issue of the policy is the retrenchment of the work force likely to result from the closure of sick units or the modemisation of some units to revive them. However, the Government has assured thal it would take al) the steps necessary to protect the interests of workers, What the Government should do? i. BIFR must be professionalised i. The definition of sickness should be changed in tune with Goswami Committee recommen- dations, fi, The National Renewal Fund must be made statutory . The Urban Land ceiling Act must be abolished . More autonomy should be given to manage- ments under the Industrial Disputes Act. i, The stake of promoters in projects must increase and incentives to declare a company sick must be abolished. = < s vii. Workers cooperatives must be given financial assistance to transform the industrial lanc- scape, improve productivity and give labour a better deal. NATIONAL RENEWAL FUND (NRF) NRF is a fund meant for helping the workers affected by closure or revival or modemisation of sick industries, This fund, first proposed in the budget 1991-92, was established by 1992-93 budget. How will It be used? The fund was used to rehabilitate the workers felrenched by retraining them and by redeploying them in other units or any alternative business or economic activity and by paying compensation for retrenchment. Present Status National Renewal Fund has been abolished in year 2000. However, the budgetory support for implementation of VRS in Central PSUs has been made available directly to the administrative minisiries by Finance Ministry from the financial year 2001-02 and funds required for retraining / rehabilitation of employees availing. VRS have been placed with Department of Public Enterprises. '