Government Influence on Trade

SUBMITTED BY PRACHI YASH

International Business | 18.10.20

Table of Contents
Why Government intervene in Trade? .................................................................................... 2
➢ Economic Rationales: .................................................................................................... 2
➢ Non-Economic Rationales............................................................................................. 3
General Agreement on Tariffs and Trades ...............................................................................4
World Trade Organisation ....................................................................................................... 7
North American Free Trade Agreement (NAFTA) ..................................................................8
Background ...........................................................................................................................8
Provisions ..............................................................................................................................8
Criticisms ...............................................................................................................................9
Effects ....................................................................................................................................9
Expansion of the agreement ............................................................................................... 10
Renegotiation ...................................................................................................................... 10
Multi Fiber Agreement ............................................................................................................ 11
History .................................................................................................................................. 11
Tariff Barriers ...........................................................................................................................12
Non-Tariff Barriers ...................................................................................................................12
Classification of MSME ........................................................................................................... 14
Incentives by government for MSME..................................................................................... 16
Reference ................................................................................................................................. 18

PAGE 1
Why Government intervene in Trade?
The government restrictions and incentives to trade are known as protectionism.
Governments want to protect their own industries and to promote exports at the same time.
After 70s, India changed from Import Substitution to export oriented. Governmental
measures may limit your ability to sell abroad, such as by prohibiting the export of certain
products to certain countries, or by making it difficult for you to buy what you need from
foreign suppliers. Governments routinely influence the flow of imports and exports. Also,
governments directly or indirectly subsidize domestic industries to help them engage
foreign producers at home or challenge them abroad.

All nations interfere with international trade to varying degrees. Governments in trade to
attain economic, social or political objectives. Governments pursue political rationality
when trying to regulate trade. Governmental officials apply trade policies that they reason
have the best chance to benefit the nation and its citizen and, in some case, their personal
political longevity.

Some of the major reasons for why government intervene in trade are as follows:

➢ ECONOMIC RATIONALES:

a. Import restrictions to create Domestic Employment

i. May lead to retaliation by other countries.
ii. Are less likely retaliated against effectively by small economies.
iii. Are less likely to be met with retaliation if implemented by small
economies.
iv. May decrease export jobs because of price increases for components.
v. May decrease export jobs because of lower incomes abroad.

b. Protecting “Infant-Industries”

The infant-industry argument for protection holds that governmental

prevention of import competition is necessary to help certain industries
move from high-cost to low-cost production

c. Developing an Industrial Base

Countries seek protection to promote industrialization because that type of

production:

i. Brings faster growth than agriculture

ii. Brings in investment funds

PAGE 2
 iii. Diversifies the economy
iv. Brings more income than primary products do
v. Reduces imports and promotes exports
vi. Helps the nation-building process

d. Economic Relationships with other countries

i. Trade controls are used to improve economic relations with other
countries
ii. Their objectives include improving the balance of:
1. Payments
2. Raising prices to foreign consumers
3. Gaining fair access to foreign markets
4. Preventing foreign monopoly prices
5. Assuring that domestic consumers get low prices
6. Lowering profit margins for foreign producers

➢ NON-ECONOMIC RATIONALES

e. Maintaining Essential Industries

i. In protecting essential industries, countries must:
1. Determine which ones are essential
2. Consider costs and alternatives
3. Consider political consequences

f. Preventing Shipments to “Unfriendly” Countries

i. Considerable governmental interference in international trade is
motivated by:
1. political rather than economic concerns
2. maintaining domestic supplies of essential goods
3. preventing potential enemies from gaining goods that would
help them achieve their objectives

g. Maintaining or Extending Spheres of Influence

i. Governments give aid and credits to, and encourage imports from,
countries that join a political alliance or vote a preferred way within
international bodies.
ii. A country’s trade restrictions may coerce governments to follow
certain political actions or punish companies whose governments do
not.

PAGE 3
 h. Preserving National Identity

To sustain this collective identity that sets their citizens apart from those
in other nations, countries limit foreign products and services in certain
sectors.

General Agreement on Tariffs and Trades

The General Agreement on Tariffs and Trade (GATT), signed on Oct. 30, 1947, by 23
countries, was a legal agreement minimizing barriers to international trade by eliminating
or reducing quotas, tariffs, and subsidies while preserving significant regulations. The
GATT was intended to boost economic recovery after World War II through reconstructing
and liberalizing global trade.

In fulfillment of its objectives, GATT adopted certain measures. These may be discussed
under the following headings.

1. Most favored nation clause:

The “Most favored Nation clause is one of the significant provisions adopted by
GATT. Under the concept of Most Favored Nation, all contracting parties of the
agreement would be treated as most favored nations. The principal objective is that
the benefits extended to one should also be extended to all contracting parties.
There should be no discrimination among nations. Trading should be carried on the
principle of non-discrimination and reciprocity. This clause discouraged the
member countries from granting any new trade concessions unless those were
mutually agreed upon. However, many escape clauses were found. Under specific
circumstances, less developed countries were allowed to exercise the right to
discriminate. For example, dumping and export subsidy might be countered by
trade measures only against the offending country. Moreover, special concessions
were allowed for trade with former colonies of less developed western countries.

2. Trade Negotiations under GATT:

From 1947 to 2001, GATT has organized 12 trade negotiations. The following table
shows various negotiations of GATT and WTO since 1947.

Year Round Outcome of Negotiations

1947 Geneva Round Several thousands of tariff
concessions covering nearly 50
per cent of world trade.
1949 Annecy Round (France) Announcement of modest tariff
reductions.
1950-51 Torquay, England Over 1948 level, 25 per cent tariff
Round reductions were made.

PAGE 4
 1955-56 Geneva Round Modest tariff reductions
1961-62 Geneva, Dillion Round Modest tariff reductions
1964-67 Geneva, Kennedy 35 per cent tariff reduction on
Round industrial products and modest
reduction in agricultural
products. Also, antidumping
code was announced
1973-79 Geneva, Tokyo Round Negotiation of additional tariff
cuts developed series of
agreements governing the use of
non-tariff measures
1986-94 Uruguay Round Tariff Non-Tariff barriers, rules,
services, intellectual property,
dispute settlement, creation of
WTO etc.
1996 (9 to 13 Dec) Singapore Ministerial Two separate working parties
were setup on investment and
commercial law. Working group
was also formed on Government
procurement, Trade facilitation
added to WTO agenda.
1998(18 to 20 Geneva Ministerial Programme on E-commerce
May) launched.
1999 (30 Nov to 3 Seattle Ministerial Market access, agriculture,
Dec) services, E-commerce
2001 (9 to 13 Dec) Doha Ministerial New Round

3. Tariff and Non-Tariff Measures:

• Tariff Measures- Tariffs were the important obstacle to international trade.
Therefore, GATT encouraged negotiations for the reduction of hig4 tariffs,
the participating countries agreed to cut tariff of thousands of industrial
products. Reduction of tariff was on reciprocal and mutually advantageous
basis. Article 11 of the GATT provided that all concessions granted by
contracting parties must be entered in a schedule of concessions. Once a
concession was included in the schedule of concessions, it could not be
withdrawn except under specified circumstances.
• Non-Tariff Measures- Post-World War II witnessed reduced distorting
effects of non-trade barriers world trade. The Tokyo Round held during 1973
— 1979 tackled the problems of non-tariff barriers under more effective
international discipline. All the agreements provide for special and more
favourable treatment for developing countries. The negotiations led to the
following non-tariff measures:

o restriction on use of subsidies,

o technical barriers,

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 o import licensing procedures,

o government procurement,

o custom valuation,

o permission of anti-dumping code.

4. Complaints and Waivers:

Article XXII of the GATT entertains complaints from contacting party relating to
the operation of the agreement. The contracting party who is likely to be deprived
of the benefits under GATT agreement can request the other party for consultation.
The basic principle of GATT is that member countries should consult one another
on trade matters and problems. Article XXV of the GATT provides the procedure
for granting waiver to some contracting party from the application of the provisions
of the GATT. Waivers are granted on the approval by two thirds of voting
contracting parties

5. Settlement of Disputes:

GATT aimed at the smooth settlement of disputes among the contracting parties.
GATT allows the member countries to settle problems among them by consulting
one another on matters of trade. Initially, the contracting parties should resolve the
disputes by holding talks on bilateral basis. In case of failure, the dispute may be
referred to panels of independent experts formed under GATT council. The panel
members are drawn from countries which have no direct interest in the disputes. If
the offending parties does not act upon the panel’s decision, the aggrieved party is
authorized to withdraw all concessions offered to the offending party. Since the
panel procedure ensures mutually satisfactory settlement, members make increased
use of the panel.

PAGE 6
World Trade Organisation
The World Trade Organization (WTO) was established on January 1, 1995 as a result of the
conclusion of the Uruguay Round negotiations in 1994. The WTO is based in Geneva and
headed by a Director-General, who is now Roberto Azevêdo from Brazil.

The predecessor of the WTO is the General Agreement on Tariffs and Trade (GATT). Both
the GATT and WTO aim at reducing tariff and eliminating other trade barriers among
Members. The GATT was founded in 1947 with 23 Members and now, the WTO has 164
Members, contributing to 98% of global trade.

The WTO draws up globally binding trade rules to augment the transparency and
predictability of international trade.

The main functions of WTO are discussed below:

1. To implement rules and provisions related to trade policy review mechanism.

2. To provide a platform to member countries to decide future strategies related to

trade and tariff.

3. To provide facilities for implementation, administration and operation of

multilateral and bilateral agreements of the world trade.

4. To administer the rules and processes related to dispute settlement.

5. To ensure the optimum use of world resources.

6. To assist international organizations such as, IMF and IBRD for establishing
coherence in Universal Economic Policy determination.

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North American Free Trade Agreement (NAFTA)
NAFTA, a controversial trade pact signed in 1992 that gradually eliminated most tariffs and
other trade barriers on products and services passing between the United States, Canada,
and Mexico. The pact effectively created a free-trade bloc among the three largest countries
of North America.

Background
The North American Free Trade Agreement (NAFTA) was inspired by the success of
the European Economic Community (1957–93) in eliminating tariffs in order to stimulate
trade among its members. Proponents argued that establishing a free-trade area in North
America would bring prosperity through increased trade and production, resulting in the
creation of millions of well-paying jobs in all participating countries.

A Canadian-U.S. free-trade agreement was concluded in 1988, and NAFTA basically

extended that agreement’s provisions to Mexico. NAFTA was negotiated by the
administrations of U.S. Pres. George H.W. Bush, Canadian Prime Minister Brian Mulroney,
and Mexican Pres. Carlos Salinas de Gortari. Preliminary agreement on the pact was reached
in August 1992, and it was signed by the three leaders on December 17. NAFTA was ratified
by the three countries’ national legislatures in 1993 and went into effect on January 1, 1994.

Provisions
NAFTA’s main provisions called for the gradual reduction of tariffs, customs duties, and
other trade barriers between the three members, with some tariffs being removed
immediately and others over periods of as long as 15 years. The agreement ensured eventual
duty-free access for a vast range of manufactured goods and commodities traded between
the signatories. “National goods” status was provided to products imported from other
NAFTA countries, banning any state, local, or provincial government from imposing taxes
or tariffs on such goods.

NAFTA also contained provisions aimed at securing intellectual-property rights.

Participating countries would adhere to rules protecting intellectual property and would
adopt strict measures against industrial theft.

Other provisions instituted formal rules for resolving disputes between investors and
participating countries. Among other things, such rules permitted corporations or
individual investors to sue for compensation any signatory country that violated the rules
of the treaty.

Additional side agreements were adopted to address concerns over the potential labour-
market and environmental impacts of the treaty. Critics worried that generally low wages
in Mexico would attract U.S. and Canadian companies, resulting in a production shift to
Mexico and a rapid decline in manufacturing jobs in the United States and Canada.
Environmentalists, meanwhile, were concerned about the potentially disastrous effects of

PAGE 8
rapid industrialization in Mexico, given that country’s lack of experience
in implementing and enforcing environmental regulations. Potential environmental
problems were addressed in the North American Agreement on Environmental
Cooperation (NAAEC), which created the Commission for Environmental Cooperation
(CEC) in 1994.

Further provisions of NAFTA were designed to give U.S. and Canadian companies greater
access to Mexican markets in banking, insurance, advertising, telecommunications, and
trucking.

Criticisms
Many critics of NAFTA viewed the agreement as a radical experiment engineered by
influential multinational corporations seeking to increase their profits at the expense of
the ordinary citizens of the countries involved. Opposition groups argued that overarching
rules imposed by NAFTA could undermine local governments by preventing them from
issuing laws or regulations designed to protect the public interest. Critics also argued that
the treaty would bring about a major degradation in environmental and health standards,
promote the privatization and deregulation of key public services, and displace family
farmers in signatory countries.

Effects
NAFTA produced mixed results. It turned out to be neither the magic bullet that its
proponents had envisioned nor the devastating blow that its critics had predicted. Mexico
did experience a dramatic increase in its exports, from about $60 billion in 1994 to nearly
$400 billion by 2013. The surge in exports was accompanied by an explosion in imports as
well, resulting in an influx of better-quality and lower-priced goods for Mexican consumers.

Economic growth during the post-NAFTA period was not impressive in any of the countries
involved. The United States and Canada suffered greatly from several economic recessions,
including the Great Recession of 2007–09, overshadowing any beneficial effects that
NAFTA could have brought about. Mexico’s gross domestic product (GDP) grew at a lower
rate compared with that of other Latin American countries such as Brazil and Chile, and its
growth in income per person also was not significant, though there was an expansion of the
middle class in the post-NAFTA years.

Little happened in the labour market that dramatically changed the outcomes in any
country involved in the treaty. Because of immigration restrictions, the wage gap between
Mexico on the one hand and the United States and Canada on the other did not shrink. The
lack of infrastructure in Mexico caused many U.S. and Canadian firms to choose not to
invest directly in that country. As a result, there were no significant job losses in the U.S.
and Canada and no environmental disaster caused by industrialization in Mexico.

PAGE 9
Expansion of the agreement
Although NAFTA failed to deliver all that its proponents had promised, it continued to
remain in effect. Indeed, in 2004 the Central America Free Trade Agreement (CAFTA)
expanded NAFTA to include five Central American countries (El Salvador, Guatemala,
Honduras, Costa Rica, and Nicaragua). In the same year, the Dominican Republic joined the
group by signing a free trade agreement with the United States, followed by Colombia in
2006, Peru in 2007, and Panama in 2011. According to many experts, the Trans-Pacific
Partnership (TPP) that was signed on October 5, 2015, constituted an expansion of NAFTA
on a much-larger scale.

Renegotiation
U.S. Pres. Donald Trump came into office in January 2017 determined to scrap U.S.
involvement in the TPP and to renegotiate NAFTA, which he frequently characterized as
the worst trade deal ever made. In his first week in office he issued an executive
order pulling the United States out of the TPP (though Congress had yet to approve the
agreement). Trump then set his sights on NAFTA, from which he threatened to remove the
United States if the agreement was not renegotiated to his liking. At the center of his
approach was a promise to bring back more manufacturing jobs to the United States.
Representatives from Canada, Mexico, and the United States began renegotiating the
agreement in August 2017. However, months of negotiations brought little progress.
Tensions mounted between Canada and the United States after Trump, in April 2018,
announced the imposition of import tariffs on Canadian steel and aluminum, an action that
threatened to start a trade war and prompted forceful condemnation from Canadian Prime
Minister Justin Trudeau.

At the end of August 2018 Mexico and the United States announced that they had come to
terms on a new trade agreement that preserved much of NAFTA but introduced a number
of significant changes. Under the pressure of being the odd country out, Canada, in the
waning hours of September 30, also agreed to join the new trade accord, which was branded
the United States-Mexico-Canada Agreement (USMCA). Most of the agreement, which still
required approval from the countries’ legislatures, was not set to go into effect until 2020.

Some of the most prominent terms of the new agreement related to automobile
manufacture. Under the USMCA, in order for a car or truck to be exempt from tariffs, 75
percent of its components would have to be manufactured in North America. Under
NAFTA, the corresponding requirement had been only 62.5 percent. The agreement also
required that at least 30 percent of work on tariff-exempt vehicles must have been done by
workers earning at least $16 per hour (significantly more than Mexican laborers received).
Canada reluctantly made concessions that opened access to its market for dairy products,
but it won the preservation of a special dispute process (Chapter 19) that U.S. negotiators
had sought to remove.

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Multi Fiber Agreement
The Multifiber Arrangement (MFA) was an international trade agreement on textiles and
clothing in place from 1974 till 2004. It imposed quotas on the amount of clothing and
textile exports from developing countries to developed countries.

Under the Multifiber Arrangement (MFA), the United States and the European Union (EU)
restricted imports from developing countries in an effort to protect their domestic textile
industries. Under the agreement, each developing country signatory was assigned quotas
(numerically limited quantities) of specified items which could be exported to the U.S. and
EU. (Note that at the start of the agreement the EU did not exist in its current form; the
agreement included what was then the European Community (EC) and the European Free
Trade Association (EFTA).)

History

The agreement was first established under the auspices of the then-existing General
Agreement on Tariffs and Trade (GATT). The origins acknowledged both

(1) the threat to developed markets from cheap clothing and textile imports in terms of
market disruption and the impact on their own producers, and
(2) the importance of these exports to developing countries in terms of their own
economic development and as a means to diversify export earnings.

At that stage, developing countries were often still heavily reliant on primary commodity
exports. The agreement attempted to mitigate this potential conflict to ensure continued
cooperation in international trade. In this context, the quotas were described as an orderly
means in which to manage the global clothing and textiles trade in the shorter term to
prevent market disruptions. The ultimate aim remained one of reduction of barriers
and liberalization of trade, with developing countries expected to take an increasing role
over time in this trade.

The number of signatories to the agreement changed slightly over time but was generally
in excess of 40, with the EC counting as one signatory. Trade between these countries
dominated the global clothing and textile trade, accounting for as much as 80%.

GATT has since been supplanted by the World Trade Organization (WTO), and at the
Uruguay Round of GATT the decision was taken to transfer oversight of the global textile
trade to the WTO. Also, as a result of that round of negotiations, dismantling of quotas on
the global clothing and textile trade began. The process was completed on 1 January 2005,
effectively marking the end of the MFA. The agreement had helped protect industries of the
developed economies as it was designed to, but also helped spur textile production in
certain countries where the quotas actually gave them access, they had not previously had.

PAGE 11
Tariff Barriers
Tariff is a custom, duty or a tax imposed on products that move across borders. The words
tariff/custom/duty are interchangeable. It is the most common instrument used for
controlling imports and exports.

I. Import tariff duty – It is the custom duty imposed by the importing country i.e.
the tax imposed on goods imported. It is levied to raise revenue and protect
domestic industries.
II. Export tariff – It is the duty imposed on goods by the exporting country on its
exports Generally certain mineral and agricultural products are taxed.
III. Transit duties - It is levied on commodities that originate in one country, cross
another and are consigned to another. Transit duties are levied by the country
through which the goods pass. It results in increased cost of products and reduction
in number of commodities traded.

Other tariff barriers

IV. Specific duty - It is based on (specific attribute) physical characteristics of goods.
It is a fixed or specific amount of money that is levied as tax keeping in view the
weight (quantity)/ measurement (volume) of the commodity
V. Ad valorem duty – These are duties that are imposed according to the value of
commodities traded between countries. It is generally a fixed percentage of the
invoice value of the goods traded.
VI. Compound duty - It is a combination of specific duty and ad valorem duty on a
single product. It is partly based on quantity and partly on the value of goods.

Non-Tariff Barriers
These are non- tax restrictions such as (a) government regulation and policies (b)
government procedures which effect the overseas trade. It can be in form of quotas,
subsidies, embargo etc.

I. Quotas - It is a numerical limit on the quantity of goods that can be imported or

exported during a specified time period. The quantity may be stated in the license
of the firm. If the importer imports more than specified amount, he has to pay a
penalty or fine
II. VER (voluntary export restraint)- It is a quota on exports fixed by the exporting
country on the request of the importing country. The exporting country fixes a quota

PAGE 12
 regarding the maximum amount of quantity that will be exported to the concerned
nation.
III. Subsidies - It is the payment made by the government to the domestic producer so
that they can compete against foreign goods. It can be a cash grant, subsidized input
prices, tax holiday, government equity participation etc. It helps a local firm to
reduce costs and gain control over the market.

Other Non-Tariff Barriers

IV. Administration dealings - These are regulatory controls and bureaucratic rules
and regulations which affect the flow of imports. It can be a delay at custom office,
safety inspection, environment regulatory inspection etc.
V. Local content requirement - Legal content requirement is a legal regulation which
states that a specified amount of commodity must be supplied in the domestic
market by the producer. It is used to help local labour and domestic suppliers of
goods. Government may state a - (a) labour requirement (b) input requirement or
(C) component required at a local level.
VI. Currency Control - Government may impose restrictions on currency
convertibility. In order to import goods countries, have to make payment in foreign
currency which is acceptable worldwide i.e. US dollar, European Euro or Japanese
Yen The government can put a limit on the amount of money that can be converted
in foreign currency or ask a company to apply for a license to obtain such currency.
VII. Embargo - It means a complete ban on certain commodities. A country may ban
import and export of certain goods in order to achieve some political or religious
goals.
VIII. Product testing and standardization - Standards are set for health, welfare,
safety, quality, size and measurements which have to be complied with in order to
enter a foreign market. The products have to meet international quality standards.
All Products must meet the quality standards of the domestic county before they are
offered for trade Inspection is very extensive in case of electronic goods, vehicles
and machinery

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Classification of MSME
The classification of MSME for both goods and services organisation is done on the basis
of the turnover and is as follows: -

Classification Turnover
Micro Enterprise Up to Rs. 5 Crores
Small Enterprise Rs. 5 Crores to Rs. 75 Crores
Medium Enterprise Rs. 75 Crores to Rs. 250 Crores

Until recently, the classification of MSMEs was done on the basis of the investment put
in the business. It was calculated as a sum total of the money invested in the plant,
machinery and Equipments.

For a company manufacturing goods-

▪ Micro Enterprise- Up to Rs. 25 lakhs

▪ Small Enterprise- Rs. 25 lakhs – 5 crores

▪ Medium Enterprise- Rs. 5 crores – 10 crores

For a service organisation-

▪ Micro Enterprise- Up to Rs. 10 lakhs

▪ Small Enterprise- Up to Rs. 10 lakhs – 2 crores

▪ Medium Enterprise- Rs. 2 crores – 5 crores

Due to this classification, the government had to incur expenses to physically verify the
actual assets and chart up the actual investments made.

Now, the government has passed a new bill, which classifies the MSMEs based on its
annual turnover instead of investment.

The revised basis for classification of MSMEs based on turnover has made it easier for
both the government and the industries to recognize a business as an MSME.

PAGE 14
The Government can look up in the GST database to match the actual turnover cited by
an organisation and accordingly classify it into the MSME category.

Unlike the previous classification basis where the criteria were different for goods and
service sector, in the revised parameters there is just one basis of classification for goods
and service sector.

PAGE 15
Incentives by government for MSME
The following are the incentives available to the small units:

a. Subsidy relating to investment: Government has initiated a different scheme of

investment subsidy for the benefits of entrepreneurs so that they may be encouraged to
establish more and more SSI units. These schemes are capital investment subsidy, transport
subsidy, power generations subsidy, special investment scheme for women entrepreneurs,
provision for seed capital, subsidy for technical/feasibility study etc. SIDBI, besides being
an apex bank for the SSI sector, is also arranging equity type assistance, venture capital
scheme etc. to accelerate the pace of investment in small scale sector.

b. Export/Import subsidies and Bounties: 100% export-oriented units (EOUs) and units
in the export processing zones (EPZs) enjoy a package of incentives and facilities, which
include duty free imports of all types of capital goods, raw materials, and consumables in
addition to tax holidays against exports.

c. Subsidy relating to Research and Development: To encourage continuous research

and development activities in the small-scale sector, government provides subsidy by
keeping aside certain amount of money toward research so that more encouragement is
given to small scale entrepreneurs.

d. Subsidy relating to taxes: The Central Government as well as the State Government is
trying to encourage entrepreneurs through tax subsidy schemes enabling them to accelerate
the pace of establishment of industrial units. These are exemption from estate duty, tax
relief to NRIs, rebate in income-tax, interest-free sales tax loan, sales tax subsidy, exemption
from sales tax etc.

e. Subsidy relating to resources: small industries are given a lot of subsidies relating to
resources such as purchase of testing tools, subsidy for industrial estates and parks,
allotment of land and buildings at concessional rates, supply of water at concessional rates,
arrangement of developed or constructed production sheds, arrangement of raw materials
at concessional / controlled rates etc.

f. Capital subsidy scheme for Technology Upgradation: This scheme facilitates

technology by induction of proven technologies in respect of specified products/sub-
sectors. This would apply to the introduction of the latest technology, improvement of
productivity, quality of production and environmental conditions and installation of
improved techniques as well as anti-pollution measures and energy conservation. However,
for availing this scheme, the entrepreneur has to fulfill certain conditions such as
replacement of the existing equipment/technology with a new one. The same equipment or
technology would not qualify for the scheme and it is also not applicable to units going for
the upgradation with second-hand machinery. An adequate infrastructural facility is very
important because it contributes to the economic development both by increasing
productivity and by providing amenities which will enhance the quality of life and the

PAGE 16
services which will lead to growth in production. Infrastructure adequacy helps determined
success in diversifying production, expanding trade, coping with supply of various inputs
and improving environmental conditions for the small-scale sector. In this context the
following infrastructural support schemes have been formulated.

• The Industrial Estate Programme was launched in India following the

recommendations of the International planning team (Ford Foundation Team)11 to
promote a rapid development of small industries and to promote the
decentralization and dispersal of industries in rural, semi-urban and backward
areas.
• The Integrated Infrastructural Development Scheme (IID) is meant for
augmenting infrastructural facilities in the rural and backward areas with a special
emphasis on the linkages between the agriculture and industry. The criteria to be
followed for the selection of a site for IID centres are preceded by a comprehensive
industrial potential survey, indicating the potentialities for SSIs and tiny units.
• The Small Industry cluster may be defined as a sectoral and geographical
concentration of enterprises. It may be a local agglomeration of enterprises, which
produce and sell a range of related and complementary products and services. These
clusters enable the SSIs to derive their strength through a unique state of
togetherness. The economy of agglomeration ensures a network of suppliers that
provide raw materials, equipment, machinery, repairs, and other services to units,
which would otherwise have been difficult.
• Industrial Growth Centre Scheme was launched in 1980 for the promotion of
industries in the backward areas. The main objective of this growth center is to
provide best possible infrastructural facilities, to avail institutional finance etc. for
their overall development.
• Export Processing Zones (EPZs) are industrial areas which form enclaves from the
nation’s customs territory of a country. Normally, they are developed in the nearby
area of seaports or airports. These zones are under obligation to export the entire
production of its units. Each zone is provided with the basic infrastructural facilities
at reduced rates and includes other incentives provided by the State Government as
well.
• Integrated Industrial Parks (IIPs) may be defined as self-contained islands providing
high quality infrastructural facilities. They include the specialized industrial clusters
both for the domestic and the export market. These parks are an ideal vehicle for
providing integrated infrastructural facilities and are an essential requirement for
industrialization in the developing countries. They are usually targeted at small and
medium scale industries with a focus on high value-added output.

PAGE 17
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