UNIT I: STRUCTURE OF THE INDIAN ECONOMY

Indian Economy
The Indian economy is the world's twelfth largest according to market exchange rates. It is also the
fourth largest economy by purchasing power parity (PPP) basis. From 1947 to 1991, the India
Economic System was based on social democratic-based policies. The policies feature protectionism,
extensive regulation and public ownership which led to slow growth and corruption. 

Present Economic Scenario

With the New Year bells ringing, good news is underway for India as its economy is poised to win
back its tag of the fastest growing economy in the world. The recent upgrade of India’s rating by the
US based credit rating agency Moody’s (Baa2 from Baa3) in recognition of the reforms agenda
pursued by the Government is a major boost to investor confidence. Further, as the short term
disruptions caused by major reforms such as the Goods and Services Tax (GST) and demonetization
recede, the economy is on the rebound and is likely to achieve higher growth targets in the New Year.
GDP Growth
Gross Domestic Product (GDP) is on a recovery path after slowdown in the first quarter of 2017-18,
and real GDP growth for the second quarter (2QFY18) increased to 6.3% from 5.7% in the previous
quarter, a likely fallout of the introduction of GST. The second half of 2017-18 will witness a higher
growth rate, and this is further expected to consolidate in the coming New Year, as the benefits of
GST and other reforms gain traction.

Sectoral Growth
The agricultural sector registered moderate growth as erratic monsoon in several parts and
flooding in some states impacted performance.
Industrial growth accelerated sharply during the second quarter of FY 2018 and jumped to
6.9% from 1.5% in the previous quarter, on account of a sharp increase in manufacturing and
electricity, gas, water supply and utility services. Manufacturing registered an impressive growth at
7% in 2QFY18 as compared to 1.2% posted in the first quarter.
Services sector grew only marginally at 6.6% in the second quarter as compared to 7.8% in
the previous quarter.

Inflation
The economy saw high inflation during October 2017 owing to elevated food prices. Going
forward, this is likely to be contained on account of a good harvest and favourable monsoons.
The impact of GST on prices is likely to become clearer in the coming year as the teething
problems related to its implementation ease out. Further, the GST Council’s decision to cut tax rates
on 177 items is also expected to partially ease the inflationary pressure, as the companies start passing
the benefits of lower prices to consumers.
External Sector
Healthy foreign fund inflows caused the rupee to strengthen during the latter half of the year.
The recent Moody’s upgrade is likely to encourage further inflows and the rupee could appreciate
further. On the other hand, the impact of the decision in the US to raise interest rates and introduce tax
cuts may work the other way. In any case, India’s consumer markets are expected to remain a strong
incentive to FDI.
A contraction in export growth pushed the merchandise trade deficit to a near 3-year high in
October 2017, which was forcefully reversed in November with a positive growth rate of over 30%.
With the streamlining of GST related issues and some changes in GST rules by the Government as
well as firming of global recovery, export growth will emerge as a powerful growth driver in 2018.
Monetary Policy
The Reserve Bank of India (RBI) kept policy rates unchanged in its fifth bi-monthly monetary
policy meeting on 6th December, 2017. However, industry is hopeful that going forward, RBI would
lower interest rates to boost broad-based investment and consumption activity which in turn would
promote economic growth.
Credit Growth
Credit growth to the non-food sector shows encouraging signs of pick-up in the last few months.
Recapitalization of Public Sector Banks may bolster credit flows further and ease their stressed assets
situation.
CII Business Confidence Index
The Business Confidence Index (BCI) by Confederation of Indian Industry (CII), climbed up
to 59.7 during October-December 2017 as against 58.3 in the previous quarter. This increase was a
result of improvement in the perception regarding overall economic conditions and expectations of
improved business situation post the recent disruptions which prompted companies to be optimistic
about favourable economic growth in the future. The findings are part of CII’s 101 stedition of
quarterly Business Outlook Survey, based on around 200 responses from large, medium, small and
micro firms, covering all regions of the country.
The recovery recorded in the index coupled with India’s sharp improvement in the Ease of
Doing Business rankings (India jumped 30 places to 100) this year reinforces company perception
that demand pick up is underway. Most of the respondents in the survey also believe that GST
payments would become hassle-free by Q1 2018-19.
Challenges
Firms rated low domestic demand followed by high commodity prices as main concerns in
CII’s Business Outlook Survey. Stepping up private investment remains a major macroeconomic
challenge in the next year.
Inflationary pressures also remain a concern. Though food prices are likely to be contained on
account of favourable monsoons, caution must be exercised as upside risks still remain in the form of
implementation of farm loan waiver and 7th Pay Commission hand-outs.
India’s share in world exports is currently at 1.8%. Efforts to increase this figure by way of
providing export credit to manufacturers, increasing the capital base of Export Credit Guarantee
Scheme (ECGC), increasing subvention to 4% etc. must be undertaken.
The economy benefitted from increased foreign inflows during the latter half of 2017. While
this is good news, efforts to contain further appreciation of the rupee should be in place as further
strengthening may affect exports and job creation.
Bank credit growth hit a 20 year low in 2016-17 with Non-Performing Assets (NPAs)
at 9.9%. India has been ranked fifth on the list of countries with highest NPAs. Though bank
recapitalization efforts are underway, the economy needs to recover from the bad loan problem
quickly for favourable economic growth in the future.
The infrastructure deficit is a major concern and infrastructure investment needs to be stepped
up as currently it is not in par with the needs of the economy.
Other challenges for the economy include addressing infrastructural bottlenecks in the
agricultural sector, investment in human resources to leverage the demographic dividend, increasing
expenditure on education and healthcare sectors, and social security provision for the unorganized
sector.
With on-going reforms that are beginning to positively impact the economy, CII is optimistic
about Indian growth prospects in 2018. At the same time, policymakers need to be watchful and
address the current macroeconomic challenges for a sustainable and fruitful recovery.
GROSS DOMESTIC PRODUCT (GDP)
The gross domestic product, or GDP, is one of the most common measures on the state of the
economy for any nation. Unfortunately, unless you took an Economics 101 class in college and
managed to not fall asleep, you may not know exactly what the GDP is – or why it is important.
Simply stated, GDP is the total market value of all goods and services produced in a country
for a given time period. The time period most often used is one year, which is then compared to past
years as a way to measure the improvement or decline of a country’s economic situation. Some of the
measurable items utilized in GDP calculations include the sales of automobiles, food, salon services,
financial services, and movie tickets. Generally, the higher the number, the better the economy is
doing.
If the GDP number drops below the point where it stood during the prior year, then it is
assumed that the economy is lagging. If the GDP numbers decline for two or more quarters,
economists believe the country is in a recession.

CHARACTERISTICS OF INDIAN ECONOMY

The important features of Indian economic:
1. Low per capita income: Under developed economy is characterized by low per capital
income. India per capital income is very low as compared to the advanced countries. For
example the capital income of India was 460 dollar, in 2000. Whereas their capita income of
U.S.A in 2000 was 83 times than India. This trend of difference of per capita income between
under developed and advanced countries is gradually increasing in present times. India not
only the per capita income is low but also the income is unequally distributed. This mal-
distribution of income and wealth makes the problem of poverty in ore critical and acute and
stands an obstacle in the process of economic progress
2. Heavy Population Pressure: The Indian economy is facing the problem population
explosion. It is clearly evident from the total population of India which was 102.67 cores in
2001 census. It is the second highest populated country China being the first. India’s
population has reached 110 cores. All the under developed countries are characterized by high
birth rate which stimulates the growth of population; the fast rate of growth of population
necessitates a higher rate of economic growth to maintain the same standard of living. The
failure to sustain the living standard makes the poor and under developed countries poor and
under developed.
 3. Pre-dominance of Agriculture: Occupational distribution of population in India clearly
reflects the backwardness of the economy. One of the basis characteristics of an under
developed economy is that agriculture contributes a very large portion in the national income
and a very high proportion of working population is engaged in agriculture
4. Unemployment: There is larger unemployed and under employment is another important
feature of Indian economy. In under developed countries labour is an abundant factor. It is not
possible to provide gainful employment the entire population. Lack of job opportunities
disguised unemployed is created’ in the agriculture fields. There deficiency of capital
formation.
5. Low Rate of Capital Formation: In backward economics like India, the rate of capital
formation is also low. capital formation mainly depends on the ability and willingness of the
people save since the per capita income is low and there is mal-distribution of income and
wealth the ability of the people to save is very low in under developed countries for which
capital formation is very low .
6. Poor Technology: The lever of technology is a common factor in under developed economy.
India economy also suffers from this typical feature of technological backwardness. The
techniques applied in agriculture industries milling and other economic fields are primitive in
nature.
7. Back ward Institutional and social frame work: The social and institutional frame work in
under developed countries like India is hopelessly backward, which is a strong obstacle to any
change in the form of production. Moreover religious institutions such as caste system, joint
family universal marriage affects the economic life of the people.
8. Under utilization of Resources: India is a poor land. So our people remain economically
backwards for the lack of utilization of resources of the country.
9. Price instability: Price instability is also a basis feature of Indian economy. In almost all the
underdeveloped countries like India there is continuous price instability. Shortage of essential
commodities and gap between consumption aid productions increase the price persistently.
Rising trend of price creates a problem to maintain standard of living of the common people.
10. POVERTY: Majority of people in India have low levels of income and poverty is mostly
reflected in low level income people. Lack of educational and health facilities, poor hygienic
living conditions, criminal environment, lack of infrastructural facilities affect on poverty.
More ever rural as well as urban area relates poverty. According to the Indian Planning
Commission, there were 29 % people below poverty line in 2009-10. Thus it is a huge
challenge to reduce poverty.
MAJOR PROBLEMS FACED BY THE INDIAN ECONOMY
Since 1991, the Indian economy has pursued free market liberalisation, greater openness in
trade and increase investment in infrastructure. This helped the Indian economy to achieve a rapid rate
of economic growth and economic development. However, the economy still faces various problems
and challenges.
1. Unemployment : Despite rapid economic growth, unemployment is still an issue in both rural
and urban areas. The fast rate of economic growth has left unskilled workers behind, and they
have struggled to find work in growing industries. In 2017, the official unemployment rate was
just below 5%. However, a report by the OECD found over 30% of people aged 15-29 in India
are not in employment, education or training (NEETs). Livemint reported on March 6, 2017.
With, little if any government welfare support for the unemployed, it leads to dire poverty.
2. Poor educational standards : Although India has benefited from a high % of English
speakers, (important for call centre industry) there is still high levels of illiteracy amongst the
population. It is worse in rural areas and amongst women. Over 50% of Indian women are
illiterate. This limits economic development and a more skilled workforce.
3. Poor Infrastructure : Many Indians lack basic amenities lack access to running water. Indian
public services are creaking under the strain of bureaucracy and inefficiency. Over 40% of
Indian fruit rots before it reaches the market; this is one example of the supply constraints and
inefficiency’s facing the Indian economy.
4. Balance of Payments deterioration : Although India has built up large amounts of foreign
currency reserves, the high rates of economic growth have been at the cost of a persistent
current account deficit. In late 2012, the current account reached a peak of 6% of GDP. Since
then there has been an improvement in the current account. But, the Indian economy has seen
imports growth faster than exports. This means India needs to attract capital flows to finance
the deficit. Also, the large deficit caused the depreciation in the Rupee between 2012 and 2014.
Whilst the deficit remains, there is always the fear of a further devaluation in the Rupee. There
is a need to rebalance the economy and improve the competitiveness of exports.
5. High levels of private debt : Buoyed by a property boom the amount of lending in India has
grown by 30% in the past year. However, there are concerns about the risk of such loans. If
they are dependent on rising property prices it could be problematic. Furthermore, if inflation
increases further it may force the RBI to increase interest rates. If interest rates rise
substantially it will leave those indebted facing rising interest payments and potentially
reducing consumer spending in the future
6. Inequality has risen rather than decreased : It is hoped that economic growth would help
drag the Indian poor above the poverty line. However, so far economic growth has been highly
uneven benefiting the skilled and wealthy disproportionately. Many of India’s rural poor are yet
to receive any tangible benefit from the India’s economic growth. More than 78 million homes
do not have electricity. 33% (268million) of the population live on less than $1 per day.
Furthermore with the spread of television in Indian villages the poor are increasingly aware of
the disparity between rich and poor. (3)
7. Large Budget Deficit : India has one of the largest budget deficits in the developing world.
Excluding subsidies, it amounts to nearly 8% of GDP. Although it is fallen a little in the past
year. It still allows little scope for increasing investment in public services like health and
education.
8. Rigid labour Laws : As an example Firms employing more than 100 people cannot fire
workers without government permission. The effect of this is to discourage firms from
expanding to over 100 people. It also discourages foreign investment. Trades Unions have an
important political power base and governments often shy away from tackling potentially
politically sensitive labour laws.
9. Inefficient agriculture : Agriculture produces 17.4% of economic output but, over 51% of the
work force are employed in agriculture. This is the most inefficient sector of the economy and
reform has proved slow.
10. Poor tax collection rates : According to the Economist, India has one of the poorest tax to
GDP rates in the whole world. India’s tax revenue as a % of GDP is just 12%, compared to an
EU average of 45%. This poor tax collection rate reflects widespread corruption, tax avoidance
and complicated tax rates. In 2017, Narendra Modi has sought to improve tax collection rates
and reduce complications through the introduction of a general sales tax (GST) which involves
a single tax rate – rather than tax rates applied multiple times at different stages of production.
(Modi’s tax gamble at Economist)
11. Business difficulties : According to the World Bank, the ease of doing business in India is
poor. India ranks 130/190. Big issues for companies include
 Ease of enforcing contracts
 Dealing with construction contracts
 Paying taxes
 Trading across border
12. Inequality within regions : India’s economic growth has benefitted some regions more than
others. Technological hubs, such as Delhi and Mumbai have attracted higher paying jobs. This
has attracted an inflow of most mobile and skilled workers; this has created congestion in these
super-cities but failed to address the poverty of rural areas, especially in the north east.
DEVELOPMENTAL ISSUES
For over a century, the United States has been the largest economy in the world but major
developments have taken place in the world economy since then, leading to the shift of focus from the
United States (US) and the rich countries of Europe to the two Asian giants, India and China.
The rich countries of Europe have seen the greatest decline in global GDP share by 4.9
percentage points, followed by the US and Japan with a decline of about 1 percentage points each.
Within Asia, the rising share of China and India has more than made up the declining global share of
Japan since 1990. During the seventies and the eighties, ASEAN countries and during the eighties
South Korea, along with China and India, contributed to the rising share of Asia in world GDP.
According to some experts, the share of the US in world GDP is expected to fall (from 21
percent to 18 percent) and that of India to rise (from 6 percent to 11 percent in 2025), and hence the
latter will emerge as the third pole in the global economy after the US and China.
By 2025 the Indian economy is projected to be about 60 percent the size of the US economy.
The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only
a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely
to be a larger growth driver than the six largest countries in the European Union (EU), though its
impact will be a little over half that of the US.
India, which is now the fourth largest economy in terms of purchasing power parity, will
overtake Japan and become third major economic power within 10 years.
As India prepares herself for becoming an economic superpower, it must expedite socio-
economic reforms and take steps for overcoming institutional and infrastructure bottlenecks inherent
in the system. Availability of both physical and social infrastructure is central to sustainable economic
growth.
Since independence Indian economy has thrived hard for improving its pace of development.
Notably in the past few years the cities in India have undergone tremendous infrastructure up
gradation but the situation in not similar in most part of rural India.
Similarly, in the realm of health and education and other human development indicators
India’s performance has been far from satisfactory, showing a wide range of regional inequalities with
urban areas getting most of the benefits.
In order to attain the status that currently only a few countries in the world enjoy and provide
a more egalitarian society to its mounting population, appropriate measures need to be taken.
Currently Indian economy is facing these challenges:
1. Sustaining the growth momentum and achieving an annual average growth of 7-8% in the next
five years.
2. Simplifying procedures and relaxing entry barriers for business activities.
3. Checking the growth of population; India is the second highest populated country in the world
after China. However, in terms of density India exceeds China as India’s land area is almost
half of China’s total land. Due to a high population growth, per capita remains very poor. It was
only $ 2880 in 2003 (World Bank figures).
4. Boosting agricultural growth through diversification and development of agro processing.
5. Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in
agriculture but also the unprecedented number of women and teenagers joining the labour force
every year.
6. Developing world-class infrastructure for sustaining growth in all the sectors of the economy.
7. Allowing foreign investment in more areas.
8. Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement
and expenditure management.
9. Empowering the population through universal education and health care, India needs to
improve its Human Development Index (HDI) rank, as at 134 it is way below many other
developing countries’ performance. The Central government is committed to furthering
economic reforms and developing basic infrastructure to improve lives of the rural poor and
boost economic performance. Government had reduced its controls on foreign trade and
investment in some areas and has indicated more liberalization in civil aviation, telecom and
insurance sector in the future.
SECTOR-WISE CONTRIBUTION OF GDP IN INDIA
India is the 7th largest economy of the world as per latest news published by the World
Economic Forum. The International Monetary Fund (IMF) has predicted that the Indian
economy will be the fastest growing economy in the world and expected to grow at the rate of 7.4%
in the FY 2018.

Indian Economy is classified in three major sectors;

1. Agriculture & Allied Sector: This sector includes forestry and fishing also. This sector is also
known as the primary sector of the economy. At the time of Indian independence this sector
had biggest share in the Gross Domestic Product of India. But year by year its contribution goes
on declining and currently it contributes only 17% of Indian GDP at current prices. It is worth
to mention that agriculture sector provides jobs to around 53% population of India.
2. Industry Sector: This sector includes 'Mining & quarrying', Manufacturing (Registered &
Unregistered), Gas, Electricity, Construction and Water supply. This is also known as
the secondary sectors of the economy. Currently it is contributing around 31% of the Indian
GDP (at current prices).
3. Services Sector: Services sector includes 'Financial, real estate & professional services, Public
Administration, defence and other services, trade, hotels, transport, communication and
services related to broadcasting. This sector is also known as tertiary sector of the economy.
Currently this sector is the backbone of the Indian economy and contributing around 53%
of the Indian GDP.
Services sector is the largest sector of India. Gross Value Added (GVA) at current prices
for Services sector is estimated at 73.79 lakh crore INR in 2016-17. Services sector accounts
for 53.66% of total India's GVA of 137.51 lakh crore Indian rupees.
Industrial sector contributes 29.02% with GVA of Rs. 39.90 lakh crore. While, Primary Sector of the
economy i.e. Agriculture and allied sector contributes 17.32% and its GVA is around Rs. 23.82 lakh
crore at the current prices in the FY 2016-17.
Three sectors of the Indian economy in the FY 2016-17 at the current price.
        Sector    GVA (Rupees in Crore) at       Percentage share
current prices (2016-17)
 1.0 Agriculture Sector  2,382,289   17.32 %
 1.1 Agriculture, forestry &  2,382,289               17.32 %
fishing
 2.0  Industry Sector  3,989,791   29.02 %
 2.1 Mining & quarrying  309,178   2.25 %
 2.2 Manufacturing  2,278,149               16.57 %
 2.3 Electricity, gas, water supply  338,396   2.46 %
& other utility services
 2.4 Construction  1,064,068               7.74 %
 3.0 Services Sector  7,378,705               53.66 %
 3.1 Trade, hotels, transport,   2,538,162               18.46 %
communication and services
related to broadcasting
 3.2 Financial, real estate & prof  2,896,300               21.06 %
servs
 3.3 Public Administration,  1,944,243               14.14 %
defence and other services
 GVA at Current Prices   13,750,786             100.00 %

The above table shows that the service sector is the backbone of the Indian economy;
contributing the most in Indian GDP followed by the industrial sector. But the declining percentage of
the agriculture and allied sector in the Indian GDP is the cause of concern for the policy makers
because this sector still provides livelihood to around 53% population of the country but its
contribution in the economy is declining year by year.
STRUCTURAL CHANGES IN THE INDIAN ECONOMY
 The process of development requires structural change. The structural change of an economy
takes place mainly along two dimensions: one is the changing sector-wise shares in GDP and the
second is the changing share of the labour force, engaged in each sector. In case of developed
countries, it is seen that as a first step, the agriculture sector loses its importance with a simultaneous
growth of the manufacturing sector and/or tertiary sector. Most of the developed countries and some
of the newly industrialized countries have crossed this threshold and are now experiencing a shift
from manufacturing sector to the services sector. But, the experience of Indian economy is unique. In
India, the service sector has grown by bye-passing the secondary sector. In this context, this chapter is
an attempt to trace the structural change in terms of input structure, production structure and
employment structure.
The process of development requires structural change. The structural change of an economy
takes place mainly along two dimensions: one is the changing sectoral share in GDP and the second is
the changing share of the labour force engaged in each sector. In case of developed countries, it is
seen that as a first step the agricultural sector loses its importance with a simultaneous growth of the
manufacturing sector or tertiary sector. Most of the developed countries and some of the newly
industrialized countries have crossed this threshold and are now experiencing a shift from
manufacturing sector to the services sector. For economists like Lewis, economic growth requires
structural change in the economy, for example, a movement of workers from low value added
agriculture sector to higher value added manufacturing and service sectors. Modern economic
development cannot be explained satisfactorily in terms of labour and capital alone. A large number
of theories of economic development have been propounded in the recent past. Different factors have
been identified as determinants of growth in different growth models. The modern economists
emphasize the catalytic role that technological changes play in the growth of an economy (Joshi,
2004). The technological changes bring about an increase in per capita income, either by reducing the
amount of inputs per unit of output or by yielding more output for a given amount of input.
Technological change of an economy, therefore, refers to changes in the input-output relations of
production activities. Consequently, as an economy moves from lower to higher stages of
development, there occurs a shift from simpler to more modern and complicated techniques of
production, on the one hand, and from primary to secondary and/or to tertiary sectors, on the other.
The excess growth of tertiary sector coupled with state-of-the-art technology has got its own
implication for the future development patterns of the system.
1. Changing Sectoral Distribution of Domestic Product: Change in composition of domestic
product or change in national income by industry of origin refers to change in relative
significance (share) of different sectors of the economy. Generally, an economy is divided
into three major sectors viz. primary, secondary and tertiary sectors.
a. Primary sector includes agricultural and allied activities, secondary sector includes
manufacturing industries and tertiary sector includes services. With the development
 process, significance of primary sector declines while that of secondary and tertiary
sectors increases. After independence, Indian economy has also experienced such
changes.
b. The share of primary sector in GDP at factor cost (at 1999-2000 prices) which was
56.5 per cent in 1950-51 declined to 34.6 per cent in 1990 91 and then to 19.7 per
cent in 2007-08.
c. The secondary sector’s share in GDP was 13.6 per cent in 1950-51 increased to 23.2
per cent in 1990-91 and further to 24.7 per cent in 2007-08. Tertiary sector’s share in
GDP increased from 29.9 per cent in 1950-51 to 55.6 per cent in 2007-08, and in
2009-10 it was over 7 per cent.
2. Growth of Basic Capital Goods Industries: When country attained independence, the share
of basic and capital goods industries in the total industrial production was roughly one-fourth.
Under the second plan, a high priority was accorded to capital goods industries, as their
development was considered a pre-requisite to the overall growth of the economy.
Consequently, a large number of basic industries which produce capital equipment and useful
raw materials have been set up making the country’s industrial structure pretty strong.
3. Expansion in Social Overhead Capital: Social overhead capital broadly includes transport
facilities, irrigation systems, energy production, educational system and organisation and
health facilities. Their development creates favourable conditions for growth and also for
better human living. The transport system in India has grown both in terms of capacity and
modernisation. The railways route length increased by more than 9 thousand kms and the
operation fleet practically doubled. The Indian road network is now one of the largest in the
world as a result of spectacular development of roads under various plans. India has also seen
growth in Life- expectancy and Literacy Rate but education has not expanded at a desired
rate.
4. Progress in the Banking and Financial Sector: Since independence, significant progressive
changes have taken place in the banking and financial structure of India. The growth of
commercial banks and cooperative credit societies has been really spectacular and as a result
of it the importance of indigenous bankers and money-lenders has declined. Since
nationalisation, these banks have radically changed their credit policy. Now more funds are
made available to priority sectors such as agriculture, small-scale industries, transportation,
etc. Indian economy has progressed structurally when we consider the growth of capital
goods industries, expansion of the infrastructure, performance of the public sector, etc. These
factors over the years are believed to have created an element of dynamism in the country’s
economy and one can now hopefully say that it would sustain development in the future.

GROWTH OF INDIAN ECONOMY

 The economy of India is the 12th largest in the world in terms of the rates of market exchange while
in terms of the purchasing power parity (PPP), it is the 4th largest in the world. Since its independence
in the year 1947, the economy of India has gradually grown and today it is one of the most developing
economies in the global scenario. 
The early years of Indian economy
After independence, for a period of around one and a half decades, India followed the social
democratic economic policies. From the year 1991, to keep pace with the changing trends in the
market, a new liberalization policy was formulated. The chief architect of this policy was Dr.
Manmohan Singh, the then Finance Minister of India. Due to the economic liberalization policies in
the 1990s and the 2000s, the country steadily climbed up the economic ladder and by the year 2008, it
became the second fastest growing economy in the globe.
The socio economic development 
According to economists and researchers, there has been a direct link between the economic
growth of India and social development. In fact the favorable socio economic scenario of the country
has contributed a lot towards its development. Due to the improvement of the civic amenities such as
education, health care and lots more, the standard of living has also risen which has put a significant
positive impact on the Indian economy. 
The growth of various sectors 
The share of the service industry accounts to around 54% of the annual Gross Domestic
Product (GDP) of the country. Next are the industrial and agricultural sectors which contribute around
29% and 17% respectively. Some of the major agricultural export items consist of wheat, rice, tea,
cotton, jute, sugarcane and so on. Some of the other allied exports consist of steel, chemical, textiles,
cement, machinery, IT services and so on. Due to the development of science and technology, the
number and quality of exports have also grown to a great extent which has led to favorable Indian
economic growth.
Since the year 2007, the economy of India has developed by more than 9%. The growth rate
of the decade has been around 7%. This growth rate has improved the per capita income and the
standard of living and poverty has reduced by around 10%.
To complement this growing trend, the Indian service sector has also performed well. Since
the year 2007, the growth rate in this sector has been around 11.18% on an average with around 53%
contribution to the GDP. During the same time, the industrial sector grew by around 10.63 % and
contributed around 29% to the GDP. The manufacturing sector experienced a growth of around 12%
which was a significant leap from the 8.98% in the year 2005. In the communication and storage
sector, the growth rate was around 16.64%. The 10 leading Indian companies listed by Forbes Global
2000 in the year 2009 are:
 Reliance Industries Limited (RIL)
 State Bank of India (SBI)
 Oil and Natural Gas Corporation (ONGC)
 Steel Authority of India (SAIL)
 Reliance Communications
 Larsen & Toubro Limited (L&T)
 Bharat Petroleum Corporation Limited (BPCL)
 Bharat Heavy Electrical Limited (BHEL)
 Housing Development Finance Corporation Ltd. (HDFC)
 Tata Consultancy Services (TCS)
Effect of the economic downturn 
Like all other economies of the world, the Indian economic growth has also been affected by
the global meltdown. However, compared to other countries, the effect of the recession was not huge
here. This was partly due to the fact that the economy in India is still a balance between open market
and social economic policies. 
To cope with the economic meltdown and also to make the economy grow, the government
has decided to take certain steps. Around $559 billion has been ear-marked to develop investment in
infrastructure. Similarly, the rural and the service sectors will also be developed significantly. 
The favourable investment atmosphere and the market trends have paved a good path for
Indian economy growth. 

HUMAN DEVELOPMENT
The term ‘human development’ may be defined as an expansion of human capabilities, a
widening of choices, ‘an enhancement of freedom, and a fulfilment of human rights.
At the beginning, the notion of human development incorporates the need for income expansion.
However, income growth should consider expansion of human capabilities. Hence development
cannot be equated solely to income expansion.
The first UNDP Human Development Report published in 1990 stated that: “The basic
objective of development is to create an enabling environment for people to enjoy long, healthy
and creative lives.” It also defined human development as “a process of enlarging people’s choices”,
“and strengthen human capabilities” in a way which enables them to lead longer, healthier and fuller
lives.

Measures of Human Development

Occupational distribution and economic development

Natural Resource

Land, Forest, Water & Minerals

Environmental degradation

Infrastructure

Energy, Power, Transport-Social infrastructure

UNIT II: POLICY ASPECTS OF INDIAN ECONOMY:

Liberalization - Privatization-Globalization-

Privatisation
• Globalisation
Balance of Payment It is a system of recording country’s economic transactions with the rest of the
world over a period of one year. Inflation It is a situation in which general price level of goods and
services increases in an economy over a period of time.
Liberalisation, Privatisation and Globalisation
By introducing concept of liberalisation, privatisation and globalization, government have revived the
condition of Indian Economy.
Liberalisation
Libralisation was introduced with an aim to put an end to those restrictions which became major
hindrances in growth and development of various sectors. It is generally defined as the lossening of
government regulations in a country to allow for private sector companies to operate business
transactions with fewer ristrictions. In relation to developing countries, this term refers to opening of
economic border for multinationals and foreign investment.
Objectives of Liberalisation
The main objectives of liberalisation policy are
(i) To increase competition among domestic industries.
(ii) To increase foreign capital formation and technology.
(iii) To decrease the debt burden of the country.
(iv) To encourage export and import of goods and services.
(v) To expand the size of the market.
Economic Reforms Under Liberalisation
Reforms under liberalisation were introduced in many areas. Let us discuss these now
Industrial Sector Reforms
The following steps were taken to deregulate the industrial sector
(i) Abolition of Industrial Licensing Government abolished the licensing requirement of all
industries, except for the five industries, which are
• Liquor
• Cigarettes
• Defence equipment
• Industrial explosives
• Dangerous chemicals, chugs and pharmaceuticals.
(ii) Contraction of Public Sector The number of industries reserved for the public sector was
reduced from 17 to 8.. Presendy, only three industries are ’ reserved for public sector. They are
• Railways
• Atomic energy
• Defence
(iii) De-reservation of Production Areas
The production areas which were earlier reserved for SSI were de-reserved.
(iv) Expansion of Production Capacity The producer’s were allowed to expand their production
capacity according to market demand. The need for licensing was abolished.
(v) Freedom to Import Capital Goods The business and production units were given freedom to
import capital goods to upgrade their technology.
2. Financial Sector Reforms
Financial sector includes financial institutions such as commercial banks, investment banks, stock
exchange operations and foreign exchange market.
The following reforms were initiated in this sector
(i) Reducing Various Ratio Statutory Liquidity Ratio (SLR) was lowered from 38.5% to 25%.
Cash Reserve Ratio (CRR) was lowered from 15% to 4.1%.
(ii) Competition from New Private Sector Banks The banking sector was opened for the private
sector. This led to an increase in competition and expansion of services for consumers.
(iii) Change in the Role of RBI RBI’s role underwent a change from a ‘regulator’ to a ‘facilitator’.
(iv) De-regulation of Interest Rates Except for savings accounts, banks were able to decide their own
interest rates
3. Tax Reforms/Fiscal Reforms
Tax reforms are concerned with the reforms in government’s taxation and public expenditure policies
which are collectively known as its fiscal policy.
Moderate and Simplified Tax Structure Prior to 1991, the tax rates in the country were quite high,
which led to tax evasion. The fiscal reforms simplified the tax structure and lowered the rates of
taxation. This reduced tax-evasion and increased government’s revenues.
4. Foreign Exchange Reforms/External Sector Reforms
External sector reforms include reforms relating to foreign exchange and foreign trade. The following
reforms were initiated in this sector
(i) Devaluation of Rupee Devaluation implies a fall in the value of rupee against some foreign
currency. In 1991, the rupee was devalued to increase our country’s exports and to discourage
imports.
(ii) Other Measures
• Import quotas were abolished.
• Policy of import licensing was almost scrapped.
• Import duty was reduced.
• Export duty was completely withdrawn.
Privatisation
It refers to giving greater role to private sector thereby reducing the role of public sector. In other
words, it means shedding of the ownership or management of a government owned enterprise.
It may also mean de-reservation of industries previously reserved for public sector.
Government companies (public companies) are converted into private companies in two ways
(i) By withdrawal of the government from ownership and management of the public sector
companies.
(ii) By the method of disinvestment.
Forms of Privatisation
Different forms of privatisation are
(i) Denationalisation When 100% govermffdht ownership of productive assets is transferred to the
private sector, it is called denationalisation. It is also known as strategic sale.
(ii) Partial Privatisation When less than 100% or more than 50% ownership is transferred, it is a case
of partial privatisation with private sector owning majority of shares. In this situation, the private
sector can claim to possess substantial autonomy in its functioning. It is also known as partial sale.
(iii) Deficit Privatikation/Token Privatisation When the government disinvests its shares to the extent
of 5 to 10% to meet the deficit in the budget, this is termed as deficit privatisation or token
privatisation.
Objectives of Privatisation
The most common and important objectives of privatisation are
(i) Improving the financial condition of the government.
(ii) Raising funds through disinvestment.
(iii) Reducing the workload of public sector.
(iv) Increasing the efficiency of the government undertakings.
(v) Providing better goods and services to consumers.
(vi) Bringing healthy competition within an economy.
(vii) Making way for Foreign Direct Investment (FDI).
Navratnas and Public Enterprise Policies
In order to improve efficiency, infuse professionalism and enable them to compete more effectively in
the liberalized global environment, the government identifies PSUs and declare them as maharatnas,
navratnas and mininavratnas. They were given greater managerial and operational autonomy, in
taking various decisions to run the company efficiently and thus increase their profits. Greater
operational, financial and managerial autonomy has also been granted to profit-making enterprises
referred to as mininavratnas.
In 2011, about 90 public enterprises were designated with different status.
A few examples of public enterprises with their status are as follows
(i) Maharatnas
(a) Indian Oil Corporation Limited
(b) Steel Authority of India Limited
(ii) Navratnas
(a) Bharat Heavy Electricals Limited
(b) Mahanagar Telephone Nigam Limited
(iii) Mininavratnas
(a) Bharat Sanchar Nigam Limited
(b) Airport Authority of India
Globalization
It means integration of the economy of the'”country with the world economy. Globalization
encourages foreign trade and private and institutional foreign investment.
Globalization is a complex phenomenon and an outcome of the set of various policies that are aimed
at transforming the world towards greater interdependence and integration. Globalization attempts to
establish links in such a way that the happenings in India can be in need by events happening miles
away. It is turning the into one whole or creating a borderless world.
Measures of Globalization
1. Devaluation: The first initiative towards globalization had been taken the moment there was an
announcement of devaluating the Indian currency by a hoping 18-19% against all the major global
currencies. This was a major initiative in the international foreign exchange arena. The Balance of
payment crisis could also be resolved by this measure.
2. Disinvestment: The core elements of globalization are privatization and liberalization. Under the
privatization scheme, bulk of the public sector undertakings have been/ and are still being sold to the
private sector. Thus the concept of PPP (public private partnership) came up.
3. Allowing Foreign Direct Investment (FDI): Allowing FDI inflows is a major step of
globalization. The foreign investment regime has been quite transparent and thus the economy is
getting boosted up. Various sectors were opened up for liberalizing the FDI regime.

Outsourcing
An Outcome of Globalization
This is one of the important outcome of the globalization process. In outsourcing, a company hires
regular service from external sources, mostly from other countries, which were previously provided
internally or from within the country like legal advice, computer service, advertisement, etc. In other
words outsourcing means getting a work done on contract from Someone outside.
As a form of economic activity, outsourcing has intensified, in recent times, because of the growth of
fast modes of communication particularly the growth of Information Technology (IT).
Many of the services such as voice-based business processes (popularly known as BPO or call
centres), record keeping, accountancy, banking services, music recording, film editing, book
transcription, clinical advice or even teaching are being outsourced by companies in developed
countries to India.
Most multinational corporations and even small companies are outsourcing their services to India
where they can be availed at a cheaper cost with reasonable degree of skill and accuracy. The low
wage rates and availability of skilled manpower in India have made it a destination for global
outsourcing in the post reform period.
Economic Growth during Reforms
Growth of an economy is measured by the Gross Domestic Product (GDP). The growth of GDP
increased from 5.6% during 1980-91 to 8.2% during 2007-2012.
Main highlights of economic growth during reforms are given below
(i) During the reform period, the growth of agriculture has declined. While the industrial sector
reported fluctuation, the growth of service sector has gone up. This indicates that the growth is mainly
driven by the growth in the service sector.
(ii) The opening up of the economy has led to rapid increase in foreign direct investment and foreign
exchange reserves.
The foreign investment, which includes Foreign
– Direct Investment (FDI) and Foreign Institutional Investment(FII), has increased from about US $
100 million in 1990-91 to US $ 400 billion in 2010-11.
(iii) There has been an increase in the foreign exchange Reserves from about US $ 6 billion in 1990-
91 to US $ 300 billion in 2011-12. In 2011, India is the seventh largest foreign exchange reserve
holder in the world.
(iv) India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in
the reform period. Rising prices have also been kept under control.
Failures of Economic Reforms
I- Neglect of Agriculture
There has been deterioration in agricultural growth rate. This deterioration is the root cause of the
problem of rural distress that reached crisis in some parts of the country. Economic reforms have not
been able to benefit the agricultural sector because
(i) Public investment in agriculture sector especially in infrastructure which includes irrigation,
power, roads, market linkages and research and extension has been reduced in the reform period.
(ii) The removal of fertiliser subsidy has led to increase in the cost of production which has severely
affected the small and marginal formers.
(iii) Various policy changes like reduction in import duties on agricultural products, removal of
minimum support price and lifting of quantitative restrictions have increased the threat of*
international competition to the Indian formers.
(iv) Export-oriented policy strategies in agriculture has been a shift from production for the domestic
market towards production for the export market focusing on cash crops in lieu of production of food
grains.
II- Uneven Growth in Industrial Sector
Industrial sector registered uneven growth during this period.
This is because of decreasing demand of industrial products due to various reasons
(i) Cheaper imports have decreased the demand for domestic industrial goods.
(ii) Globalisation created conditions for the free movement of goods and services from foreign
countries that adversely affected the local industries and employment opportunities in developing
countries.
(iii) There was inadequate investment in infrastructural facilities such as power supply.
(iv) A developing country like India still does not have the access to developed countries markets
because of high non-tariff barriers.
Sirdlla Tragedy
Privatisation of power supply in Andhra Pradesh resulted in substantial increase in power-rates,
causing many powerlooms to shut down in a small town, Sirdlla.
50 workers committed suicide because of loss in means of livelihood.
II- Other Failures
In addition to the above mentioned failures, the other drawbacks of LPG policy were:
• It led to urban concentration of growth process.
• It encouraged economic colonialism.
• It resulted in the spread of consumerism.
• It led to cultural erosion.
 
Poverty

In our daily life we come across many poor people such as land less labourers in villages, people
living in jhuggis, daily wage workers at construction sites, child labourers in dhabas, rickshaw-
pullers, domestic servants, cobblers, beggars, etc.
About 30 crore people live in poverty.
Poverty : Usually the levels of income and consumption are used to define poverty. In India, poverty
can be defined as the lack of common things like food, clothing and shelter , safe drinking water,
medical care  and education, which determine quality of life.
Poverty has both dimensions economical and social.
Other Indicators of Poverty: Now poverty is looked through other social indicators like illiteracy
level, lack of access to health care, lack of job opportunities, lack of access to safe drinking water,
sanitation, etc. Nowadays, the concept of social exclusion is becoming very common in the analysis
of poverty.
Social exclusion means , generally poor are excluded in the community of better off people.
Vulnerability
Vulnerability describes the greater probability of certain communities  or individuals of becoming, or
remaining, poor in the coming years.
The people from backward cast, individuals like widows, physically handicapped are  more
vulnerable.
They possess greater risks at the time of natural disasters.
Poverty Line 
It is based on the income or consumption level.
A person is considered poor if his or her income or consumption level falls below a given ‘minimum
level’ necessary to satisfy basic needs.
Poverty line varies with time place.
For the year 2009-10, the poverty line for a person was fixed at  Rs.673 per month for rural area and
Rs. 860 for the urban areas.
The poverty line is estimated periodically by conducting sample surveys by National Sample Survey
Organisation. ( NSSO)
Estimates of Poverty: The incidence of poverty in India was around 55 per cent in 1973 which
declined to 36 per cent in 1993 and further to 26 per cent in 2000.
The poverty in India is reduced percent wise but number wise it is huge.
Social groups which are most vulnerable to poverty are Scheduled Caste and Scheduled Tribe
households.
Inequality of Incomes within a Family: In poor families, old people, women and female children are
denied equal access to family’s available resources. They are the poorest of the poor.
Inter-State Disparities : The proportion of poor people is not the same in every state. In 20 states and
union territories the poverty ratio is less than the national average. Orissa and Bihar are the poorest
states of India with poverty ratios of 47 per cent and 43 per cent respectively. Lowest incidence of
poverty is found in Jammu and Kashmir with poverty ratio of just 3.5 per cent.
Global Poverty Scenario: There has been substantial decline in global poverty. However, it is
marked with great regional differences. Poverty has declined more in China and South-East Asian
countries.
World bank has defined poverty as the people earning less than 1.25 $ per day.
The Millennium Development Goals of the United Nations call for reducing the proportion of people
below poverty line to half the 1990 level by 2015.
Causes of Poverty : There are a number of causes for the widespread poverty in India.
One historical reason is the low level of economic development under the British colonial
administration.
There are some other reasons.
These are :
1. Rapid growth of population, particularly among the poor is considered a major cause of Indian
poverty.
2. Our agricultural sector has failed to generate much employment opportunities for the farm
labourers. Similarly, our industries could not provide much job for the job seekers.
3. One of the major causes of poverty is the unequal distribution of land and other resources.
Various land reform measures introduced after Independence could not improve the life of millions of
rural poor because of their poor implementation.
4. Social factors: People in India, including the very poor, spend a lot of money on social occasions
like marriages, festivals, etc. Poor people hardly have any savings; they are, thus forced to borrow.
Unable to pay because of poverty, they became victims of indebtedness.
Joint family system has prevented people from doing hard work.
 Steps taken by the Government for Poverty Alleviation
Our government’s strategy to poverty reduction has been twofold. One, promotion of economic
growth and, two, targeted poverty alleviation programmes.
Poverty Alleviation Programmes: To address the poor, a need for targeted anti-poverty programmes
was strongly felt.
Some of them are given below :
1. Prime Minister Rojgar Yojana (PMRY): The aim of this programme (which was started in 1993)
was to create self-employment opportunities for educated unemployed youth in rural areas and small
towns.
2. Rural Employment Generation Programme (REGP): REGP was launched in 1995 to create
self-employment opportunities in rural areas.
3. Swarna Jayanti Gram Swarojgar Yojana (SGSY): SGSY was started in 1999. The programme
aims at bringing the assisted poor families above the poverty line.
4. Pradhan Mantri Gramodaya Yojana (PMGY) was launched in 2000.
5. Antyodaya Anna Yojana (AAY) for ‘the poorest of poor’s and elders.
6. National Food for Work Programme (NFWP) was launched in 2004.
7. National Rural Employment Guarantee Act (NREGA) was passed in September 2005. The Act
provides 100-days assured employment every year to every rural household in 200 districts.
 The Challenges Ahead : Though poverty has declined in India, poverty reduction remains
India’s most compelling challenge. We will have to do something special to fight against wide
regional disparities. We must broaden the definition of poverty from ‘a minimum subsistence
level of living to a reasonable level of living’. Bigger challenges before us are: providing health
care, education and job security for all the achieving gender equality.

Unemployment: nature and problems

Unemployment is a situation when a capable and willing to do job workforce does not get work.
Causes of Unemployment
The following are the main causes of unemployment:
(i) Caste System:
In India caste system is prevalent. The work is prohibited for specific castes in some areas.
In many cases, the work is not given to the deserving candidates but given to the person belonging to
a particular community. So this gives rise to unemployment.
(ii) Slow Economic Growth:
Indian economy is underdeveloped and role of economic growth is very slow. This slow growth fails
to provide enough unemployment opportunities to the increasing population.
(iii) Increase in Population:
Constant increase in population has been a big problem in India. It is one of the main causes of
unemployment. The rate of unemployment is 11.1% in 10th Plan.
(iv) Agriculture is a Seasonal Occupation:
Agriculture is underdeveloped in India. It provides seasonal employment. Large part of population is
dependent on agriculture. But agriculture being seasonal provides work for a few months. So this
gives rise to unemployment.
(v) Joint Family System:
In big families having big business, many such persons will be available who do not do any work and
depend on the joint income of the family.
Many of them seem to be working but they do not add anything to production. So they encourage
disguised unemployment.
(vi) Fall of Cottage and Small industries:
The industrial development had adverse effect on cottage and small industries. The production of
cottage industries began to fall and many artisans became unemployed.
(vii) Slow Growth of Industrialisation:
The rate of industrial growth is slow. Though emphasis is laid on industrialisation yet the avenues of
employment created by industrialisation are very few.
(viii) Less Savings and Investment:
There is inadequate capital in India. Above all, this capital has been judiciously invested. Investment
depends on savings. Savings are inadequate. Due to shortage of savings and investment, opportunities
of employment have not been created.
(ix) Causes of Under Employment:
Inadequate availability of means of production is the main cause of under employment. People do not
get employment for the whole year due to shortage of electricity, coal and raw materials.
(x) Defective Planning:
Defective planning is the one of the cause of unemployment. There is wide gap between supply and
demand for labour. No Plan had formulated any long term scheme for removal of unemployment.
(xi) Expansion of Universities:
The number of universities has increased manifold. There are 385 universities. As a result of this
educated unemployment or white collar unemployment has increased.
(xii) Inadequate Irrigation Facilities:
Even after the completion of 9th five plans, 39% of total cultivable area could get irrigation facilities.
Due to lack of irrigation, large area of land can grow only one crop in a year. Farmers remain
unemployed for most time of the year.
(xiii) Immobility of labour:
Mobility of labour in India is low. Due to attachment to the family, people do not go to far off areas
for jobs. Factors like language, religion, and climate are also responsible for low mobility. Immobility
of labour adds to unemployment.
All these factors add to unemployment.

The parallel economy

Meaning of the Parallel Economy?
Parallel economy, based on the black money or unaccounted money, is a big menace to the Indian
economy. It is also a cause of big loss in the tax-revenues for the government. As such, it needs to be
curbed. Its elimination will benefit the economy in more than one way.

In a general way, we can define black economy as the money that is generated by activities that are
kept secret, in the sense that these are not reported to the authorities. As such, this money is also not
accounted to (he fiscal authorities i.e., taxes are not paid on this money.
An estimate by Suraj B. Gupta had put the size of black money at over 50 per cent of GDP (at factor
cost) in 1987-88. It is also stated that annual rate of growth of black economy is higher than the
annual growth rate of GDP.
According to Global Financial Integrity Study of 2009, $ 1.4 trillion belongs to Indians were parked
in safe havens abroad. $ 1.4 trillion is equivalent to Rs. 70 lakh crore, more than India’s national
income of around Rs. 50 lakh crore.
A statement from the Swiss Central Bank declared that Indians have $2.5 billion deposits in various
Swiss Banks. It is suspected that the deposits of Indians in tax havens are mostly being withdrawn and
shifted to a third country; making it difficult for the government to gather any further details once the
accounts are closed.
Harmful Effects of Parallel Economy:
The circulation of black money has adversely affected the economy in several ways. First, is the
misdirection of precious national resources? A part of black money is kept in a form that contributes
nothing/little to productive activities. Again, much around half to two third is squandered away on
ostentatious consumption of goods and services.
Second, it has enormously worsened the income distribution, and has thereby undermined the fabric
of the society.
Third, the existence of a big-sized unreported segment of the economy is a big handicap in making a
correct analysis and formulation of right policies for it. Nor. it is possible to monitor the development
in the economy with precision.
Fourth, the black money has eroded the social values of the society. The undeclared income is
‘earned’ by illegitimate ways. This is spent in undesirable and vulgar manner.
Controlling Parallel Economy in India: Top 7 Measures
Here we detail about the seven important measures to control parallel economy in India, i.e., (1)
Checking Tax Evasion, (2) Demonetization, (3) Voluntary Disclosure Scheme, (4) Special Bearer
Bond Scheme, (5)Reduction of Tax Rates, (6) Economic Liberalization, and (7) Other Measures.
1. Checking Tax Evasion:
As evasion of taxes has been considered as the major root of the generation of black income. Thus,
the government has undertaken various administrative and legal measures to check evasion of both
direct and indirect taxes. These measures were undertaken as per the recommendations of various
commissions and committees such as Taxation Enquiry Commission (1953), Kaldor’s
recommendation for Indian Tax Reform (1956), Direct Taxes Administrative Enquiry Committee
(1958) and Direct Tax Enquiry Committee (1991). The Commissions and Committees pointed out
various loopholes and weaknesses in tax laws and suggested various measures to check evasion of
taxes.
2. Demonetization:
Demonetization of high denomination currency has also been suggested from different levels. In India
demonetization was done for the first time in 1946 and the value of demonetized notes was about Rs.
144 crore. Demonetization of high denomination currency worth Rs. 1,000 and Rs. 5,000 and Rs.
10,000 was again attempted in 1978. Till August 1981, notes worth Rs. 125 crore was demonetized.
Thus demonetization as a measure of checking black money is not at all successful and it is also very
much unpopular.
3. Voluntary Disclosure Scheme:
The government introduced voluntary discloser schemes in different times to unearth black money.
This scheme was first introduced in 1951 which resulted disclosures amounting to Rs. 71 crore and
tax collection of Rs. 11 crore. Again the scheme (VDS) was introduced in 1965 with a provision of 60
per cent tax on disclosed income which resulted disclosures worth Rs. 146 crore and tax collection of
Rs. 68 crore.
Again as per the recommendation of the Direct Tax Enquiry Committee, the Government again
utilized this scheme (VDS) for both income and wealth. Accordingly, this scheme disclosed Rs. 1,578
crore and tax collection of Rs. 248.7 crore as income tax and wealth tax. The 1997-98 Budget again
introduced the Voluntary Disclosure Scheme to unearth black money.
4. Special Bearer Bond Scheme:
Government introduced special bearer bond scheme in 1981 in order to canalize unreported money.
Accordingly, the Special Bearer Bonds, 1981 of the face value of Rs. 10,000 each were issued for a
period of 10 years at 2 per cent rate of interest per annum. As per 1982-83 budget, a total to Rs. 875
crore was subscribed under the Special Bearer Bond Scheme.
5. Reduction of Tax Rates:
In order to make the taxes more productive, the government has been reducing the peak rate of
personal income tax from 61.9 per cent to 54 per cent in 1990-91 and then to 40 per cent in 1992-93
budget and then finally to 30 per cent in 1997-98 Budget. Thus reduction of personal income and
corporation tax are expected to increase tax revenue by more than 25 per cent in 1994-95. The share
of direct taxes in GDP has also increased from 2.1 per cent in 1990-91 to 2.8 per cent in 1994-95 as a
result of reduction in tax rates.
6. Economic Liberalization:
Introduction of economic liberalization has removed the regime of controls and regulations and
thereby the extent of black economy would be reduced gradually.
7. Other Measures:
The Government has also introduced some other measures to contain the growth of black income in
the country which includes—Deposit in the National Housing Bank in 1991. NRI-foreign exchanges
remittance, issuing National Development Bonds in US dollars, controlling the election expenses
incurred by the candidates, conducting searches, seizures, raids and other steps to plug loopholes in
the tax-administration etc.
The 1995-96 Budget has also introduced a new scheme where undisclosed income detected as a result
of search shall be assessed separately at a flat rate of 60 per cent. But unfortunately, all these
measures are introduced in India half-heartedly, and thus the grip of parallel economy is gradually
being strengthened.
Had there been a sincere attempt to control the generation of black income in the country by the
government, bureaucrats, tax administrators etc., the network of parallel economy might have been
checked and the country might have experienced a better economic situation characterized by better
level of living for the common people, moderate inflation and rational economic decisions.
Industrial Policy
   The industrial policy means the procedures, principles, policies rules and regulations which control
the industrial undertaking of the country and pattern of industrialization. It explains the approach of
Government in context to the development of industrial sector. In India the key objective of the
economic policy is to achieve self-reliance in all sectors of the economy and to develop socialistic
pattern of society. The industrial policy in the pre-reform period i.e. before1991 put greater emphasis
on the state intervention in the field of industrial development.  These policies no doubt have resulted
into the creation of diversified industrial structure but caused a number of inefficiencies, distortions
and rigidities in the system. Thus during late 70’s and 80’s, Government initiated liberalization
measures in the industrial policy framework. The drastic liberalization measures were however,
carried out in 1991.
 Industrial Policies Prior to 1991
 Industrial Policy Resolution, 1948
           The first important industrial policy statement was made in the Industrial policy Resolution
(IPR), 1948. The main thrust of IPR, 1948 was to lay down the foundation of mixed economy
whereby the private and public sector was accepted as important components in the development of
industrial economy of India. The policy divided the industries into four broad categories:
 (i) Industries with Exclusive State Monopoly: It included industries engaged in the activity of
atomic energy, railways and arms and ammunition. 
(ii) Industries with Government Control: It included the industries of national importance and so
needs to be registered. 18 such industries were put under this category eg. fertilizers, heavy chemical,
heavy machinery etc.
 (iii) Industries in the Mixed Sector: It included the industries where private and public sector were
allowed to operate. Government was allowed to review the situation to acquire any existing private
undertaking. 
 (iv)Industries under Private Sector: Industries not covered by above categories fell in this
category.             
            IPR, 1948 gave public sector vast area to operate. Government took the role of catalytic agent
of industrial development. The resolution assigned complementary role to small-scale and cottage
industries. The foreign capital which was seen with suspect in the pre-independent era was recognized
as an important tool to speedup up industrial development.
 Industries (Development and Regulation) Act (IDRA), 1951
           IDRA, 1951 is the key legislation in the industrial regulatory framework. IDRA, 1951 gave
powers to the government to regulate industry in a number of ways. The main instruments were the
regulation of capacity (and hence output) and power to control prices. It specified a schedule of
industries that were subject to licensing. Even the expansion of these industries required prior
permission of the government which means the output capacity was highly regulated. The
Government was also empowered to control the distribution and prices of output produced by
industries listed in the schedule. The IDR Act gave very wide powers to the Government. This
resulted in more or less complete control by the bureaucracy on the industrial development of the
country.
 The main provisions of the IDRA, 1951 were
 a)  All existing undertakings at the commencement of the Act, except those owned by the Central
Government were compulsorily required to register with the designated authority.
 b)  No one except the central Government would be permitted to set up any new industrial
undertaking “except under and in accordance with a licence issued in that behalf by the Central
Government.”
 c)  Such a license or permission prescribed a variety of conditions, such as, location, minimum
standards in respect of size and techniques to be used, which the Central Government may approve.
 d)  Such licenses and clearances were also required in cases of ‘substantial expansion’ of an existing
industrial undertaking.
 Industrial Policy Resolution, 1956
           IPR, 1956 is the next important policy statement. The important provisions are as follows:
 (1) New classification of Industries: IPR, 1956 divided the industries into the following three
categories:
 (a) Schedule A industries: The industries that were the monopoly of state or Government. It
included 17 industries. The private sector was allowed to operate in these industries if national interest
so required.
 (b) Schedule B industries: In this category of industries state was allowed to establish new units but
the private sector was not denied to set up or expand existing units e.g. chemical industries, fertilizer,
synthetic, rubber, aluminum etc.
 (c) Schedule C industries: The industries not mentioned in the above category formed pat of
Schedule C. Thus the IPR, 1956 emphasized the mutual existence of public and private sector
industries.
  (2) Encouragement to Small-scale and Cottage Industries: In order to strengthen the small-scale
sector supportive measures were suggested in terms of cheap credit, subsidies, reservation etc.
 (3) Emphasized on Reduction of Regional Disparities: Fiscal concessions were granted to open
industries in backward regions. Public sector enterprises were given greater role to develop these
areas.
           The basic rationale of IPR, 1956 was that the state had to be given primary role for industrial
development as capital was scarce and entrepreneurship was not strong.  The public sector was
enlarged dramatically so as to allow it to hold commanding heights of the economy.
 Monopolies Commission
          In April 1964, the Government of India appointed a Monopolies Inquiry Commission “to
inquire into the existence and effect of concentration of economic power in private hands.” The
Commission looked at concentration of economic power in the area of industry. On the basis of
recommendation of the commission, Monopolistic and Restrictive Trade Practices Act (MRTP Act),
1969 was enacted. The act sought to control the establishment and expansion of all industrial units
that have asset size over a particular limit.
 Industrial Policy Statement, 1973
          The Policy Statement of 1973 drew up a list of industries to be started by large business houses
so that the competitive effort of small industries was not affected. The entry of competent small and
medium entrepreneurs was encouraged in all industries. Large industries were permitted to start
operations in rural and backward areas with a view to developing those areas and enabling the growth
of small industries around.
 Industrial Policy Statement, 1977: The main elements of the new policy were:
 1. Development of Small-Scale Sector: The main thrust of the new industrial policy was an
effective promotion of cottage and small industries. Government initiated wide-spread promotional
and supportive measures to encourage small sector. The small sector was classified into 3 categories
viz. Cottage and household industries which provide self-employment; tiny sector and small-scale
industries. The purpose of the classification was to specifically design policy measures for each
category. The policy statement considerably expanded the list of reserved items for exclusive
manufacture in the small-scale sector.
 2. Restrictive Approach towards Large Business Houses: The large scale sector was allowed in
basic, capital goods and high-tech industries. The policy emphasized that the funds from financial
institutions should be made available largely for the development of small sector. The large sector
should generate internal finance for financing new projects or expansion of existing business.
 3. Expanding Role of Public sector: The industrial policy stated that the public sector would be
used not only in the strategic areas but also as a stabilizing force for maintaining essential supplier for
the consumer.
 
Further, the policy statement reiterated restrictive policy towards foreign capital whereby the majority
interest in ownership and effective control should rest in Indian hands.
 
Industrial Policy, 1980
                            The industrial policy 1980 emphasized that the public sector is the pillar of
economic infrastructure for reasons of its greater reliability, for the large investments required and the
longer gestation periods of the projects crucial for economic development. The IPR1956 forms the
basis of this statement. The important features of the policy were:
 1. Effective Management of Public Sector:
          The policy emphasized the revival of efficiency of public sector undertaking.
 2. Liberalization of Industrial licensing:
          The policy statement provided liberalized measures in the licensing in terms of automatic
approval to increase capacity of existing units under MRTP and FERA. The asset limit under MRTP
was increased. The relaxation from licensing was provided for large number of industries. The broad-
banding concept was introduced so that flexibility is granted to the industries to decide the product
mix without applying for a new license.
 3. Redifining Small-Scale Industries:
           The investment limit to define SSI was increased to boost the development of this sector. In
case of tiny sector the investment limit was raised to Rs.1 lakh;   for small scale unit the investment
limit was raised from Rs.10 lakh to Rs.20 lakh and for ancillaries from Rs.15 lakh to Rs. 25 lakh.
            Industrial policy, 1980 focused attention on the need for promoting competition in the
domestic market, technological up gradation and modernization. The policy laid the foundation for an
increasingly competitive export based industries and for encouraging foreign investment in high-
technology areas.
 Era of Liberalization after 80’s:
          After 1980, an era of liberalization started, and the trend was gradually to dilute the strict
licensing system and allow more freedom to the entrepreneurs. The steps that were taken in
accordance with the policy included:
 (i) Re-endorsement of licenses: The capacity indicated in the licenses could be re-endorsed,
provided it was 25 percent more than the licensed capacity (1984).
 (ii) Liberalization of 1990: The measures were as follows:
a)  Exemption from licensing for specific new units.
b)  Investment of foreign equity up to 40 percent was freely allowed.
c)  Location restrictions were removed.
 Major Features of Pre-1991 Industrial Policy:
 1. Protection to Indian Industries: Local industries were given shelter from international
competition by introducing partial physical ban on the imports of products and high imports tariffs.
Protection from imports encouraged Indian industry to undertake the manufacture of a variety of
products. There was a ready market for all these products.
 2. Import-Substitution Policy: Government used its import policy for the healthy development of
local industries. Barring the first few years after Independence, the country was facing a shortage of
foreign exchange, and so save scarce foreign exchange imports-substitution policy was initiated i.e.  
Government encouraged the production of imported goods indigenously.
 3. Financial Infrastructure:  In order to provide the financial infrastructure necessary for industry,
the Government set up a number of development banks. The principal function of a development bank
is to provide medium and long-term investments. They have to also play a major role in promoting the
growth of enterprise. With this objective, Government established the Industrial Finance Corporation
of India (IFCI) (1948), Industrial Credit and Investment Corporation of India (ICICI) (1955),
Industrial Development Bank of India (IDBI) (1964), Industrial Reconstruction Corporation of India
(1971), Unit Trust of India (UTI) (1963), and the Life Insurance Corporation of India (LIC).
 4. Control over Indian Industries: Indian industries were highly regulated through legislations such
as Industrial licensing, MRTP Act, 1969 etc. These legislations restricted the production, expansion
and pricing of output of almost all kinds of industries in the country.
  5. Regulations on Foreign Capital under the Foreign Exchange and Regulation Act
(FERA): FERA restricted foreign investment in a company to 40percent. This ensured that the
control in companies with foreign collaboration remained in the hands of Indians. The restrictions
were also imposed on technical collaborations and repatriations of foreign exchange by foreign
investors.
 6.  Encouragement to Small Industries: Government encouraged small-scale industries (SSIs) by
providing a number of support measures for its growth.  Policy measures addressed the basic
requirements of the SSI like credit, marketing, technology,entrepreneurship development, and fiscal,
financial and infrastructural support.
 7.  Emphasis on Public Sector: The Government made huge investments in providing infrastructure
and basic facilities to industries. This was achieved by establishing public sector enterprises in the key
sectors such as power generation, capital goods, heavy machineries, banking, tele- communication,
etc.
 Review of Pre-1991 Industrial Policy
           The pre1991 industrial policies created a climate for rapid industrial growth in the country. It
has helped to create a broad-base infrastructure and basic industries.   A diverse industrial structure
with self-reliance on a large number of items had been achieved. At the time of independence the
consumer goods industry accounted for almost half of the industrial production. In 1991 such
industries accounted for only about 20 percent. In contrast capital goods production was less than 4
percent of the total industrial production. In 1991 it had gone up to 24 percent. Industrial investment
took place in a large variety of new industries. Modern management techniques were introduced. An
entirely new class of entrepreneurs has come up with the support system from the Government, and a
large number of new industrial centers have developed in almost all parts of the country. Over the
years, the Government has built the infrastructure required by the industry and made massive
investments to provide the much-needed facilities of power, communications, roads etc. A good
number of institutions were promoted to help entrepreneurship development, provide finance for
industry and to facilitate development of a variety of skills required by the industry.
            However, the implementation of industrial policy suffered from shortcomings. It is argued that
the industrial licensing system has promoted inefficiency and resulted in the high-cost economy.
Licensing was supposed to ensure creation of capacities according to plan priorities and targets.
However, due to considerable discretionary powers vested in the licensing authorities the system
tended to promote corruption and rent-seeking. It resulted into pre-emption of entry of new enterprises
and adversely affected the competition. The system opposite to its rationale favored large enterprises
and discriminate against backward regions. Government announced a number of liberalization
measures in the industrial policy of 1970, 1973 and 1980. However, the dramatic liberalization efforts
were made in the industrial policy, 1991.
 New Industrial Policy, 1991
          India’s New Industrial Policy announced in July 1991 (hereafter NIP) was radical compared to
its earlier industrial policies in terms of objectives and major features. It emphasized on the need to
promote further industrial development based on consolidating the gains already made and correct the
distortion or weaknesses that might have crept in, and attain international competitiveness. (Ministry
of Industry, 1991).  The liberalized Industrial Policy aims at rapid and substantial economic
growth, and integration with the global economy in a harmonized manner. The Industrial
Policy reforms have reduced the industrial licensing requirements, removed restrictions on
investment and expansion, and facilitated easy access to foreign technology and foreign direct
investment.
 
Pre vs. Post 1991 Policy
 
1. Distinctive Objectives of New Industrial Policy (NIP), 1991: NIP had two distinctive objectives
compared to the earlier industrial policies:
 
i) Redefinition of Concept of Self-Reliance: NIP redefined the concept of economic self-reliance.
Since 1956 till 1991, India had always emphasized on Import Substitution Industrialization (ISI)
strategy to achieve economic-self reliance. Economic self-reliance meant indigenous development of
production capabilities and producing indigenously all industrial goods, which the country would
demand rather than importing from outside. The goal of economic self-reliance necessitated the
promotion of ISI strategy. It helped to built up the vast base of capital goods, intermediate goods and
basic goods industries over a period of time. NIP redefined economic self-reliance to mean the ability
to pay for imports through foreign exchange earnings through exports and not necessarily depending
upon the domestic industries.
 
ii) International Competitiveness: NIP emphasized the need to develop indigenous capabilities in
technology and manufacturing to world standards. None of the earlier industrial policies, either
explicitly or implicitly, had made reference to international technology and manufacturing capabilities
in the context of domestic industrial development (Ministry of Commerce and Industry, 2001). For
the first time, NIP explicitly underlined the need for domestic industry to achieve international
competitiveness.
 
          To achieve these objectives, among others, NIP initiated changes in India’s industrial policy
environment, which gained momentum gradually over the decade. The important elements of
NIP can be classified as follows:
 
1. Public sector de-reservation and privatization of public sector through dis-investment;
2. Industrial Delicensing;
3. Amendments of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969;
4. Liberalised Foreign Investment Policy;
5. Foreign Technology Agreements (FTA);
6. Dilution of protection to SSI and emphasis on competitiveness enhancement.
 
1. Public Sector De-Reservation and Privatization through Dis-Investment:
           Till 1991, Public Sector was assigned a pre-eminent position in Indian Industry to enable it to
achieve “commanding heights of the economy” under the Industrial Policy Resolution (IPR),
1956.  Accordingly, areas of strategic importance and core sectors were exclusively reserved for
public sector enterprises. Public enterprises were accorded preference even in areas where private
investments were possible.
 
Since 1991, the public sector policy consists of:
(i)  Reduction in the number of industries reserved for public sector: Now only two industries
(atomic energy and railway transport) are reserved for the Public Sector. They are known as
“Annexure I” industries (Ministry of Commerce and Industry, 2001). The essence of
government’s Public Sector Undertakings (PSUs) policy since 1991 has been that government
should not operate any commercial enterprises. The policy emphasized to bring down government
equity in all non-strategic  PSUs to 26 percent or lower, restructure or revive potentially viable
PSUs, close down PSUs, which cannot be revived and fully protect the interests of workers.
Government’s withdrawal from non-core sectors is indicated on considerations of long-term
efficient use of capital, growing financial un-viability and the compulsions for these PSUs to
operate in an increasingly competitive and market oriented environment (Disinvestment
Commission, 1997).
 
(ii) Implementation of Memorandum of Understanding (MOU): As a part of the measures to
improve the performance of public enterprises, more and more of public sector units have been
brought under the purview of Memorandum of Understanding (MoU) system. A memorandum of
understanding is a performance contract, a freely negotiated document between the Government
and a specific public enterprise.
 
(iii)   Referral to BIFR: Many sick public sector units have been referred to the Board for Industrial
and Financial Reconstruction (BIFR) for rehabilitation or, where necessary, for winding up.
 
(iv)  Manpower Rationalization: In order to make manpower rationalization Voluntary Retirement
Scheme (VRS) has been introduced in a number of PSUs to shed the surplus manpower.
 
(v) Private Equity Participation: PSUs have been allowed to raise equity finance from the capital
market. This has provided market pressure on PSUs to improve their performance.
 
(vi)  Disinvestment and Privatization: Disinvestment and privatization of existing PSUs has been
adopted to improve corporate efficiency, financial performance and competition amongst PSUs.
It involves transfer of Government holding in PSUs to the private shareholders.
 
2. Industrial Delicensing:
          The removal of licensing requirements for industries, domestic as well as foreign, commonly
known as “de-licensing of industries” is another important feature of NIP. Till the 1990s, licensing
was compulsory for almost every industry, which was not reserved for the public sector. This
licensing system was applicable to all industrial enterprises having investment in fixed assets (which
include land, buildings, plant & machinery) above a certain limit. With progressive liberalization and
deregulation of the economy, industrial license is required in very few cases. Industrial licenses are
regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license
is required only for the following:
(i)   Industries retained under compulsory licensing (five industries are reserved under this
category).
(ii) Manufacture of items reserved for small scale sector by larger units: An industrial
undertaking is defined as small scale unit if the capital investment does not exceed Rs. 10 million
(approximately $ 222,222). The Government has reserved certain items for exclusive manufacture
in the small-scale sector. Non small-scale units can manufacture items reserved for the small-scale
sector if they undertake an obligation to export 50 percent of the production after obtaining an
industrial license.
(iii) When the proposed location attracts locational restriction: Industrial undertakings to be
located within 25 kms of the standard urban area limit of 23 cities having a population of 1
million as per 1991 census require an industrial license.
 
          Thus, excluding these, investors are free to set up a new industrial enterprise, expand an
industrial enterprise substantially, change the location of an existing industrial enterprise and
manufacture a new product through an already established industrial enterprise. The objective of
industrial delicencing would be to enable business enterprises to respond to the fast changing external
conditions. Entrepreneurs will be free to make investment decisions on the basis of their own
commercial judgment. This will facilitate the technological dynamism and international
competitiveness. Further industries will have freedom to take advantage of ‘economies of scale’ as
well as ‘economies of scope’ in the current industrial policy environment.
 
3. Amendment of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969: An important
objective of India’s earlier industrial policies was to prevent emergence of private monopolies and
concentration of economic power in a few individuals. Accordingly, Monopolies and Restrictive
Trade Practices (MRTP) Act, 1969 was enacted and MRTP Commission was set up as a permanent
body to periodically review industrial ownership, advice the government to prevent concentration of
economic power, investigate monopolistic trade practices and inquire into restrictive trade practices,
which are prejudicial to public interest. An MRTP firm was mainly defined in terms of asset size. An
MRTP company had to obtain prior approval of the government for setting up a new enterprise as
well as for expansion. However, MRTP Act was applicable only to private sector companies.
 
          Since 1991 MRTP Act has been restructured and pre-entry restrictions have been removed with
regard to prior approval of the government for the establishment of a new undertaking, expansion,
amalgamation, merger, take over, and appointment of directors of companies. The asset restriction
and market share for defining an MRTP firm has been done away with. MRTP Act is now applicable
to both private and public sector enterprises and financial institutions. Today only restrictive trade
practices of companies are monitored and controlled. The MRTP act has been replaced by the
Competition Act, 2002.  This law aims at upholding competition in the Indian market. The
competition commission has been established in 2003 which mainly control the practice that have an
adverse impact on competition.
 
4. Liberalized Foreign Investment Policy:
           India’s earlier industrial policies welcomed FDI but emphasized that ownership and control of
all enterprises involving foreign equity should be in Indian hands. The Balance of Payments (BoP)
difficulties in the mid 1960s forced the country to adopt a more restrictive approach towards FDI
through the setting up of a Foreign Investment Board, which classified industries into two
groups: banned and favored for foreign technical collaboration and FDI. The number of industries
for foreign investment was steadily narrowed down and by 1973 there were only 19 industries where
FDI was permitted (Kucchal, 1983).The enactment of FERA, 1973 marked the beginning of the most
restrictive phase of India’s foreign investment policy.  The NIP radically reformed foreign investment
policy to attract foreign investment. The important foreign investment policy measures are as follows:
 
i)  Repeal of FERA, 1973: FERA, 1973 has been repealed and Foreign Exchange Management Act
(FEMA) has come into force with effect from June 2000 (RBI, 2003). Investment and returns can
be freely repatriated except where the approval is subject to specific conditions such as lock-in
period on original investment, dividend cap, foreign exchange neutrality, etc. as specified in the
sector specific policies. The condition of ‘dividend balancing’ was withdrawn for dividends
declared. A foreign investor can freely enter, invest and operate industrial enterprises in India,
 
ii)  Dilution of Restrictions on Foreign Direct Investment (FDI): FDI is allowed in all sectors
including the services sector except atomic energy and railway transport. FDI in small scale
 industries is allowed up to 24 percent equity. Use of brand names/trade marks is allowed.  
Further, FDI up to 100 percent is allowed under the automatic route in all activities/sectors except
the following which require prior approval of the Government:-

- Sectors prohibited for FDI; 

- Activities/items that require an industrial license; 
- Proposals in which the foreign collaborator has an existing financial/technical
  collaboration in India in the same field;
- Proposals for acquisitions of shares in an existing Indian company in financial
  service sector and where Securities and Exchange Board of India (substantial
  acquisition of shares and takeovers) regulations, 1997 is attracted;
- All proposals falling outside notified sectoral policy/CAPS under sectors in
  which FDI is not permitted.
Thus most of the sectors fall under the automatic route for FDI.
 
5. Foreign Technology Agreement
           The automatic approvals for technology agreement are allowed to industries within specified
parameters. Indian companies are free to negotiate the terms of technology transfer with their foreign
counterparts according to their own commercial judgment.
 
6. Dilution of Protection to Small Scale Industries (SSI) and Emphasis on Competitiveness: SSIs
enjoyed a unique status in Indian economy due to its diversified presence across the country and
thereby utilizing resources and skills, which would have otherwise remained unutilized. Due to
their potential to generate large-scale employment, produce consumer goods of mass
consumption, alleviate regional disparities, etc., industrial policies protected the sector for its
growth. The principal protective measures for SSI comprised: (i) Demarcating SSI from the rest
of industry through a definition under the IDR Act, 1951, (ii) Concessional credit from the
banking system, (iii)Fiscal concessions, (iv) Exemption from industrial licensing and labor
legislations, (v) Preferential access to scarce raw materials, both domestic and
imported, (vi) Market support from the government through reservation of products for
government purchase and price preferences, and (vii) Reservation of products for exclusive
manufacturing in SSIs and restrictions on the growth of output and capacity in the large-scale
sector for products reserved for SSI manufacturing. These policy measures protected SSIs from
both internal and external competition.
 
           However, since 1991 the protective emphasis of SSI policy has undergone dilution. In August
1991, government of India brought out an exclusive policy for SSI. The policy marked: (i) the
beginning of an end to protective measures to small industry and (ii) promotion of competitiveness by
addressing the basic concerns of the sector namely technology, finance and marketing. Subsequently,
the number of items reserved exclusively for small industry manufacturing has been gradually brought
down.  This policy has lost its relevance to a large extent because though these products could not be
manufactured by large enterprises domestically, they can be imported from abroad due to the removal
quantitative and non-quantitative restrictions on most imports by April 1, 2001 (Ministry of Finance,
2002). Concession element in lending rates for small industry has been largely withdrawn during the
1990s (RBI, 2003). The number of products reserved exclusively for purchase from small industry by
the government has been reduced to 358 items from 409 items.  Measures have been adopted to
improve technology and export capabilities of SSIs. Thus the overall promotion orientation of SSI has
shifted from protection towards competitiveness.
 
Impact Of Industrial Policy, 1991
          The all-round changes introduced in the industrial policy framework have given a new direction
to the future industrialization of the country. There are encouraging trends on diverse fronts. Industrial
growth was 1.7 per cent in 1991-92 that has increased to 9.2 percent in 2007-08.The industrial
structure is much more balanced. The impact of industrial reforms is reflected in multiple increases in
investment envisaged, both domestic and foreign. This is due to encouraging response from the
private sector. There has been dramatic increase in FDI since 1991. The foreign investment as a
percentage of total GDP has increased from 0.5 percent in 1990-91 to 5.7 percent in 2006.Investments
in infrastructure sector such as power generation have surged from players of various sizes in different
states. The capital goods have grown at an accelerated pace, over a high base attained in the previous
years, which augurs well for the required industrial capacity addition.