BUSINESS ENVIORNMENT

WORKSHEET 4

Q1) “Government plays a very powerful role to develop Industrial policy and other
economic environment.” Discuss this statement.

A .1 This statement as :
1. Direct Role:
The government is a social-welfare organisation. It works for the benefits of
the common people without making any motive to maximise profit.
(a) Agricultural Growth:
India is an agro-based country. The main occupation of the Indians is
agriculture and its allied activities like farming, poultry, cattle rearing, fishing,
animal husbandry etc.
(b) Industrial Growth:
Government of India had given huge emphasis on the development of basic
and heavy industries like steel, iron, cement, power etc. By the policy of
privatisation, the government gives enough licence to the private sectors for
developing consumer goods industries along with few heavy engineering
goods. However, the core basic industries like defence, railway, power and
energy etc. are still under the government hand. Proper credit facilities and
adequate subsidies are also provided to the industrialists to increase their
scale of production.
(c) Development of Socio-Economic Infrastructures:
government is investing huge amount money of for the development of
overhead capitals like energy, power, transport, communications, education,
health, housing etc. Moreover, the government is also giving stress on the
development of other tertiary sectors like banking finance, insurance etc.
(f) Social Distributive Justice:
(i) Progressive Taxation
(ii) Economic Subsidy
(iii)Control of Monopoly
These indirect measures or roles are briefly given below:
 (a) Fiscal Policy: To control inflation, To increase capital formation, To maintain
equalities of income and wealth, To stabilize market.
(b) Monetary Policy:
The government along with the Central Bank with the help of this policy
controls the money market. In India, Reserve Bank of India (RBI) along with all
the commercial banks tries to control and regulate the money supply. During
the time of inflation, i.e., excessive rise in price level, the government with the
help of RBI checks the money supply and credit creation. On the other hand,
during deflationary situation money supply increases .
(c) Price Measures:
The main objective of the state is to safeguard the common mass from the
exploitation of private entrepreneurs. In this connection, the state sometimes
adopts the price measures of essential commodities and services through the
policies of price ceiling and price flooring.

Q.2 Critically examine India's industrial policies emphasizing New Industrial

Policy (NIP).

A.2 New Industrial Policy During Economic Reforms of 1991

The long-awaited liberalised industrial policy was announced by the

Government of India in 1991 in the midst of severe economic instability in the
country. The objective of the policy was to raise efficiency and accelerate
economic growth.

Features of New Industrial Policy

 De-reservation of Public sector: Sectors that were earlier exclusively

reserved for public sector were reduced. However, pre-eminent place of
public sector in 5 core areas like arms and ammunition, atomic energy,
mineral oils, rail transport and mining was continued.

o Presently, only two sectors- Atomic Energy and Railway

operations- are reserved exclusively for the public sector.
 De-licensing: Abolition of Industrial Licensing for all projects except for a
short list of industries.
 o There are only 4 industries at present related to security, strategic
and environmental concerns, where an industrial license is currently
required-

 Electronic aerospace and defence equipment

 Specified hazardous chemicals
 Industrial explosives
 Cigars and cigarettes of tobacco and manufactured tobacco
substitutes
 Disinvestment of Public Sector: Government stakes in Public Sector
Enterprises were reduced to enhance their efficiency and competitiveness.
 Liberalisation of Foreign Investment: This was the first Industrial policy
in which foreign companies were allowed to have majority stake in India. In
47 high priority industries, upto 51% FDI was allowed. For export trading
houses, FDI up to 74% was allowed.

o Today, there are numerous sectors in the economy where

government allows 100% FDI.
 Foreign Technology Agreement: Automatic approvals for technology
related agreements.
 MRTP Act was amended to remove the threshold limits of assets in
respect of MRTP companies and dominant undertakings. MRTP Act was
replaced by the Competition Act 2002.

Outcomes of New Industrial Policies

 The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the
past. It attempted to liberalise the economy by removing bureaucratic
hurdles in industrial growth.
 Limited role of Public sector reduced the burden of the Government.
 The policy provided easier entry of multinational
companies, privatisation, removal of asset limit on MRTP companies, liberal
licensing.

o All this resulted in increased competition, that led to lower prices

in many goods such as electronics prices. This brought domestic as well as
 foreign investment in almost every sector opened to private sector.
 The policy was followed by special efforts to increase exports. Concepts
like Export Oriented Units, Export Processing Zones, Agri-Export Zones,
Special Economic Zones and lately National Investment and Manufacturing
Zones emerged. All these have benefitted the export sector of the country.

Limitations of Industrial Policies in India

 Stagnation of Manufacturing Sector: Industrial policies in India have

failed to push manufacturing sector whose contribution to GDP is stagnated
at about 16% since 1991.
 Distortions in industrial pattern owing to selective inflow of
investments: In the current phase of investment following liberalisation,
while substantial investments have been flowing into a few industries, there
is concern over the slow pace of investments in many basic and strategic
industries such as engineering, power, machine tools, etc.
 Displacement of labour: Restructuring and modernisation of industries
as a sequel to the new industrial policy led to displacement of labour.
 Absence of incentives for raising efficiency: Focussing attention on
internal liberalisation without adequate emphasis on trade policy reforms
resulted in ‘consumption-led growth’ rather than ‘investment’ or ‘export-
led growth’.
 Vaguely defined industrial location policy: The New Industrial Policy,
while emphasised the detrimental effects of damage to the environment,
failed to define a proper industrial location policy, which could ensure a
pollution free development of industrial climate.

Q.3 Critically discuss the role of government in promoting economic

development in recent times
A.3 Role of Government in Economic Development of a Country
Comprehensive Planning:
In an under-developed economy, there is a circular constellation of forces
tending to act and react upon one another in such a way as to keep a poor
country in a stationary state of under-development equilibrium. The vicious
circle of under-developed equilibrium can be broken only by a comprehensive
government planning of the process of economic development. Planning
Commissions have been set up and institutional framework built up.
. Institution of Controls:
A high rate of investment and growth of output cannot be attained, in an
under-developed country, simply as a result of the functioning of the
market forces. The operation of these forces is hindered by the existence of
economic rigidities and structural disequilibria. Economic development is
not a spontaneous or automatic affair. That is why various controls have
been instituted, e.g., price control, exchange control, control of capital
issues, industrial licensing.

Social and Economic Overheads:

In the initial phase, the process of development, in an under-developed
country, is held up primarily by the lack of basic social and economic
overheads such as schools, technical institutions and research institutes,
hospitals and railways, roads, ports, harbours and bridges, etc. To provide
them requires very large investments.

Such investments will lead to the creation of external economies, which in

their turn will provide incentives to the development of private enterprise
in the field of industry as well as of agriculture. The Governments,
therefore, go all out inbuilding up the infrastructure of the economy for
initiating the process of economic growth.

Institutional and Organisational Reforms:

It is felt that outmoded social institutions and defective organisation stand
in the way of economic progress. The Government, therefore, sets out to
introduce institutional and organisational reforms. We may mention here
abolition of zamindari, imposition of ceiling on land holdings, tenancy
reforms, introduction of co-operative farming, nationalisation of insurance
and banks reform of managing agency system and other reforms
introduced in India since planning was started.
Setting up Financial Institutions:
In order to cope with the growing requirements for finance, special
institutions are set up for providing agricultural, industrial and export
finance. For instance, Industrial Finance Corporation, Industrial
Development Bank and Agricultural Refinance and Development
Corporation have been set up in India in recent years to provide the
necessary financial- resources.

Public Undertakings:

In order to fill up important gaps in the industrial structure of the country

and to start industries of strategic importance, Government actively enters
business and launches big enterprises, e.g., huge steel plants, machine-
making plants, heavy electrical work and heavy engineering works have
been set up in India.

Economic Planning:
The role of government in development is further highlighted by the fact
that under-developed countries suffer from a serious deficiency of all types
of resources and skills, while the need for them is so great. Under such
circumstances, what is needed is a wise and efficient allocation of limited
resources. This can only be done by the State. It can be done through
central planning according to a scheme of priorities well suited to the
country’s conditions and need.

Q.4 Discuss the small scale sector policy of Government of India ?

A.4 The small sector policy of government of India are :

(i) Increase in investment ceilings from Rs. 1 lakh to Rs. 2 lakhs in case of tiny
units, from Rs. 10 lakhs to Rs. 20 lakhs in case of small-scale units and from Rs.
15 lakhs to Rs. 25 lakhs in case of ancillaries.

(ii) Introduction of the concept of nucleus plants to replace the earlier scheme
of the District Industry Centres in each industrially backward district to
promote the maximum small-scale industries there.

(iii) Promotion of village and rural industries to generate economic viability in

the villages well compatible with the environment.

Thus, the IPR 1980 reimphasised the spirit of the IPR 1956. The small-scale
sector still remained the best sector for generating wage and self-employment
based opportunities in the country.