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Before independence, policy of the government was charaterised by laissez-faire i.e. noninterference policy in the affairs of industries. Industrial development was left to the exclusive care of private sector. However, in the post independence era, government has been taking an active interest in the development of industries in India. So far, government has formulated five industrial policies i.e. Industrial Policy 1948, 1956, 1977, 1980 and 1991 respectively.
Industrial Policy Resolution, 1948
The first industrial policy was announced in April 1948 by the then Industrial Minister, Late Mr. S.P. Mukherjee. Its historic importance lies in the fact that it ushered in the system of 'Mixed Economy' in the country i.e. it entrusted the task of industrial development on both private and public sectors.
1. Development of mixed economy 2. State programmes for the development of industries. 3. Promotion of small scale and cottage industries, 4. Foreign investment was allowed but effective control should be with Indians. 5. Classified industries into four categories : (a) Public Sector (b) Mixed Sector (c) Controlled Private Sector (d) Private and cooperative sector. Industrial Policy Resolution, 1956 IPR, 1956 was the most comprehensive industrial policy which was formulated in the backdrop of the adoption of the constitution and the socio-economic goals. The policy may be described as the 'economic constitution' of India as it not only outlined the basic framework of the future industrial policies (especially upto 1991) but also of the general economic policies. Its main objectives were to accelerate the rate of economic growth and to speed up industrialization for achieving a 'socialistic pattern of society/
(1) The policy divided the industries into three categories • (a) Schedule A (Public Sector) ' Seventeen industries were exclusively reserved for the public sector. These include arms and ammunition, atomic energy, iron and steel, heavy machinery, heavy electrical parts, mineral oil, coal, air transport, railways, shipping, telephones, wireless apparatuses, copper, lead, zinc mines and electricity. (b) Schedule B (Mixed Sector) : Twelve industries were placed in the mixed sector of public and private enterprise. These were to be progressively state-owned and in which state would generally set up new units. These include • machine tools, aluminium, drugs, chemical fertilizers etc. (c) Schedule C (Private Sector) ; All the remaining industries and their future developrtient would, in general be left to the initiative and enterprise of the private sector. (2) The policy laid emphasis on the state assuming a predominant role for setting up new industrial undertakings. (3) The state was to facilitate and encourage the development of industries in the private sector by ensuring the development of transport, power etc. and by appropriate fiscal and other measures. (4) The state would support small-scale and, cottage industries through positive discriminatory measures like reservation of items for SSI, differential taxation, subsidies etc.
(5) The policy stressed the necessity of reducing regional disparities. Industrially backward regions will receive priority in the establishment of new industries. (6) The policy welcomed the foreign capital but the effective control should remain in Indian hands.
The industries (Development and Regulation) Act, 1951, empowered the government to issue licences for the setting up of new industries, expansion of existing ones and for diversification of products. The main aims of the industrial licensing policy were the development and control of industrial investment and production as per national priorities, checking the concentration of industries and ensure balanced regional development. However, from time to time, many deficiencies in the licensing system came to light. The government set up several committees for the study of the licensing system and giving suggestions for its improvement. Such committees included R.K Hazari Committee,1964 and Dr. Subimal Dutt Committee-1967. These committees revealed that the system of licensing had resulted in increased concentration of economic power in the hands of few business houses , Dr Subimal Dutt Committee (viz. Industrial Licensing Policy Enquiry Committee) was the most important, which submitted its report in 1969. On the basis of its recommendation, government enacted the Monopolies and Restrictive Trade Practices (MRTP)Act, 1969.
Industrial Policy Statement, 1977
The thrust of the policy was on decentralization of the industries and the promotion of small scale and cottage industries. It introduced the concept of tiny sector within the small-scale sector.
Industrial Policy Statement, 1980
• The policy emphasized the optimum utilization of installed capacity, technological up gradation and modernization. • The policy selectively liberalized the industrial sector i.e. MRTP Act was liberalised, scope of licensing was reduced, simplified the procedure for regularization of unauthorized excess capacity etc.
New Industrial Policy, (NIP) 1991
The Government of India announced the New Industrial Policy on July 24, 1991. The main objective of this policy is to unshackle the Indian industrial economy from administrative and legal controls. Its main aim is to raise industrial efficiency to the international level through substantial deregulation of the industrial sector of the country.
Delicensing: The industrial licensing was abolished irrespective of the level of investment, except for 18 specified industries like defence, atomic energy, etc. Since then, most of these industries were delicensed and now only 4 industries fall under the purview of industrial licensing. Foreign investement: foreign capital investement limit was raised from 40% to 51% in high technology and high investement priority industries. Foreign Technology : Automatic approval was granted for foreign technology
agreements upto the limit of 200 crore subject to 5% royalty oh domestic sales and 8% on exports.
Foreign Investment Promotion Board (FIPB) :- FIPB was established to expeditiously clear foreign investment proposals. It serves as a single window clearing agency for the FBI proposals. Industrial Location Policy : Excepting the big cities with population of one million, in other cities industrial licensing will not be required but for those industries where licensing is compulsory. In case of cities with population of one million or above, excepting"non-pollutant industries, all other units will be set up at a distance of 25 kms from the city limits. MRTP limit scrapped '• The threshold limit of Rs. 100 crore .worth of assets for classification of a company as MRTP company was removed, such companies were to be recognized on case-by-case evaluation basis. Phased Manufacturing Programme was abolished Under this programme, government use to impose a condition on foreign firms to gradually reduce and finally eliminate the use of imported inputs. Mandatory Convertibilitv Clause was abolished • It is the condition imposed by the financial institutions on private companies that a part of their lending would be converted into equity at some future date. New small enterprise policy : A separate policy was announced by the government in August 1991 for the promotion of small-scale industries. Public Sector's role diluted :. The following measures were undertaken to reform the public sector enterprises. 1. The number of industries reserved exclusively for the public sector were reduced from 17 to 8 under NIP, 1991. Now, it has been reduced to just three viz. atomic energy, minerals specified under the schedule of atomic energy and rail transport. 2. Like the private enterprises, sick PSUs were also placed under the perview of the Board for Industrial and Financial Reconstruction(BIFR). 3. Professionalisation of management by inducting non-official members in the boards of PSUs. 4. Disinvestment of the share of PSUs was initiated.
Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 MRTP Act was enacted in 1969 and MFITP commission was constituted in 1970 to prevent the concentration of economic power and to prohibit restrictive or unfair trade practices. Under the act companies having assets beyond the threshold limit (i e. 20 crores in1985) were placed under the purview of the act. Certain restrictions are imposed on such companies like prior approval of the MRTP commission for establishment of new undertakings, expansion of undertakings merges and amalgamations. Competition Act, 2002 The competition act was enacted by the government in 2002 on the recommendation of the S V S Raghavan Committee. It repealed the MRTP Act and the MRTP commission was replaced by the Competition Commission of India (CCI) The objectives of the act are to encourage competition, prevent abuse of dominance (rather than dominance as such) and to ensure a level playing field for all the enterprises in the Indian economy.
At the time of independence, the country was predominantly agrarian and lacked basic industries and infrastructure facilities. The economy needed a big push. The push could not come from the Indian private sector which was starved of funds and lacked technical and managerial abilities. Further, it was incapable of taking risk involved in long gestation investments. So, the development in the public sector became imperative. At the time of independence, the public sector was confined only to areas like Railways, posts, telegraphs, ports etc. The growth of the public sector as a part of development strategy, however, started since the beginning of planning in 1951. The expansion of public sector in the field of industries took place in a big way with the launching of the second plan (195661), which gave top priority to the industrial growth of the country.
Objectives of the public sector • To capture commanding heights of the economy i.e. to take up strategic role in the industrialization of the country. • To accelerate rate of economic growth through creation of basic infrastructure. • To generate employment, • To promote balanced regional development. • To generate surplus resources for development. • To promote exports and to develop import^ substitution industries. , • To check concentration of economic power. Expansion of public sector There were only five Central Public Sector Enterprises (CPSEs) in 1951 with investment of Rs.29 crore. The number of CPSEs (excluding financial institutions) has increased to 244 and the investment Rs 4,21,089 crore by March 31, 2007. There were over 800 state level public enterprises with investment of Rs 1,80,000 crore on March 2007. Besides them departmental undertakings like Railways, Posts, Telegraphs etc. counted for an investment of Rs 20,000 crore. So, total investment in public sector in the entire country (i.e. centre + states) stood at over 6 lakh crore. Contribution of Public Sector The public sector was instrumental in the creation of infrastructure and the development of basic industrial structure of the country. PSUs did a commendable job in the promotion of strategic and key industries like atomic energy, armaments and ammunition, aircrafts, heavy machinery, iron and steel, coal, drugs, fertilizers etc. Besides providing direct employment to about 16.14 lakh people as on 31 March 2007, the PSUs incurred gross expenditure of over Rs.3,000 crore on township maintenance, administration and social overheads. The public sector provided employment to about 70% of the workers employed in the organised sector. Presently, public sector contributes about 24% to the GDP and accounts for over 20% of the gross domestic capital formation (investment). The contribution of PSUs has been significant in achieving self-reliance in foreign exchange. On one hand, several PSUs like State Trading Corporation (STC) and Metals and Minerals Trading Corporation (MMTC) played an important role in export promotion and in the other, some PSUs like Bharat Heavy Electricals Limited (BHEL), Hindustan Antibiotics Ltd (HAL), ONGC etc., played a crucial role in import substitution.
The public sector also contributed significantly in reducing regional economic imbalances. For instance, over 35% of the cumulative investment of the PSU till 1990-91, were made in four backward states of Bihar, U.P., M.P, and Orissa.
There were altogether 246 CPSEs under the administrative control of various ministries/ departments as on March 31, 2009. The cumulative investment (paid-up capital plus long-term loans) in all the CPSEs together stood at Rs 5,28,951 crore as in end-March 2009 (Table 9.16). The largest share in this investment belonged to the service sector (46.1 per cent) followed by electricity (26.2 per cent), manufacturing (18.1 per cent) and mining (8.8 per cent). A great deal of investment in CPSEs is being made through internal resources rather than through investment from outside. Of the total, 158 CPSEs made net profit and 54 net loss in 2008-09. The year witnessed severe financial under-recoveries by public-sector Oil Marketing Companies (OMCs) as they had to keep the prices low on sale ofpetroleum products in the domestic market. The foreign exchange outgo exceeded the foreign exchange earnings of CPSEs during 2008-09.
The success story of CPSEs: 1990-2008: CPSE turnover rose 9 times and cumulative net profit 35 times Five of the top 10 listed BSE companies are CPSEs CPSEs account for 24 percent of the BSE's total market capitalization Number of Profit-making CPSEs rising, number of loss-making CPSEs decreasing
Problems of the public sector • The return on capital invested in PSU has been deplorably low due to low profitability and losses of some PSUs. • Problems related with the Price Policy i.e. Administered Prices of the products of PSUs were deliberately kept lower than the market prices.
• Lack of autonomy to the management of the PSUs due to excessive political interference. • Low efficiency due to lack of incentives for better performance. • Excessive overheads especially in providing housing and other amenities to the employees eg. townships. • Over staffing inflated the wage bills. • Inappropriate investment decisions like inappropriate location, technology, product mix etc. • Indiscriminate expansion of the public sector in almost all areas.
Public Sector Reforms To improve the performance of the PSUs, the governments has adopted the following measures, especially in the post reform (1991 onwards) era.
Memorandum of Understanding :—The concept of memorandum of understanding (MoU) was introduced in 1987 on the recommendation of the "Committee to Review the Policy for the Public Enterprises" headed by Mr. Arjun Sengupta. MoU refers to the agreement between the concerned ministry and the management of a PSU, in which the latter is provided a reasonable degree of autonomy and simultaneously held accountable for the performance of the PSU. During 2002-03, out of the 97 PSUs which signed MoU, 45 PSUs were rated as excellent, 19 PSUs were rated as very good, 14 PSUs as good, 17 PSUs as fair and only 2 PSUs as poor. New Industrial Policy, 1991: The policy contained the following reformative measures for PSUs; dereservation, disinvestment, profession-alisation^fjnanagement, Reference of sick PSUs to the BIFR and expanding the scope of Molls. (For details refer to the NIP, 1991} Voluntary Retirement Scheme (VRS) : The VRS (or Golden Handshake scheme) was launched in 1988 for the rationalization of manpower in the central PSUs. The scheme enabled the PSUs to shed their excess staff by offering attractive compensation package to the workers who seek voluntary retirement. Cumulatively around 4.23 lakh employees have opted for VRS from the central PSUs since October 1988 till March 2002. Dismantling of Administered Rrice Mechanism (APM) •—The Government has initiated steps for dismantling of price controls in respect of a number of products of PSUs. For example, it removed the price and distribution controls on iron, steel and cement. The government also decontrolled the prices of most of the fertilizers and petro-products. Policy of Navratnas- Navratna was the title given originally to nine Public Sector Enterprises (PSEs), identified by the Government of India in 1997 as its most prestigious, which allowed them greater autonomy to compete in the global market. The Navratna status is offered to PSEs, which gives a company enhanced financial and operational autonomy and empowers it to invest up to Rs. 1000 crore or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr.
They will also have the freedom to enter joint ventures, form alliances and float subsidiaries abroad. Navratna status is conferred by Department of Public Enterprises. To be qualified as a Navratna, the company must obtain a score of 60 (out of 100). The score is based on six parameters which include net profit to net worth, total manpower cost to total cost of production or cost of services, PBDIT (Profit Before Depreciation, Interest and Taxes) to capital employed, PBDIT to turnover, EPS (Earning Per Share) and intersectoral performance. Additionally, a company must first be a Miniratna and have four independent directors on its board before it can be made a Navratna Policy of Mini-Ratnas:The Government has also accorded the status of mini-ratnas to some profit making enterprises. The PSUs which have made profits continuously for the last three years and have earned a net profit of Rs. 30 crore or more in one of the three years are categorised as miniratnas. Category II Miniratnas should have made profits for the last three years continuously and should have a positive net worth. Both these categories were granted certain degree of autonomy. As on 30th November, 2010, 62 enterprises have been categorised as miniratnas.
The Maharatnas: Maharatna Scheme was introduced for Central Public Sector Enterprises (CPSEs), with effect from 19th May, 2010, in order to empower mega CPSEs to expand their operations and emerge as global giants. The objective of the scheme is to delegate enhanced powers to the Boards of identified large-sized Navratna CPSEs so as to facilitate expansion of their operations, both in domestic as well as global markets.
CPSEs fulfilling the following criteria are eligible to be considered for grant of Maharatna status: i) Having Navratna status ii) Listed on the Indian stock exchange, with a minimum prescribed public shareholding under SEBI regulations iii) An average annual turnover of more than Rs. 25,000 crore during the last three years iv) An average annual net worth of more than Rs.15,000 crore during the last three years v) An average annual net profit after tax of more than Rs. 5,000 crore during the last three years vi) Significant global presence or international operations The coveted status empowers the boards of these firms to take investment decisions up to Rs 5,000 crore as against the present Rs 1,000 crore limit for navratnas without seeking government approval. The Maharatna firms would now be free to decide on investments up to 15% of their net worth in a project, limited to an absolute ceiling of Rs 5,000 crore.
List of Maharatna and Navratna CPSEs
(as on 30th November, 2010)
Maharatna CPSEs 1. Oil & Natural Gas Corporation Limited 2. Indian Oil Corporation Limited
3. Steel Authority of India Limited 4. NTPC Limited Navratna CPSEs 1. Bharat Electronics Limited 2. Bharat Heavy Electricals Limited 3. Bharat Petroleum Corporation Limited 4. Coal India Limited 5. GAIL (India) Limited 6. Hindustan Aeronautics Limited 7. Hindustan Petroleum Corporation Limited 8. Mahanagar Telephone Nigam Limited 9. National Aluminium Company Limited 10. NMDC Limited 11. Oil India Limited 12. Power Finance Corporation Limited 13. Power Grid Corporation of India Limited 14. Rashtriya Ispat Nigam Limited 15. Rural Electrification Corporation Limited 16. Shipping Corporation of India Limited
The New Industrial Policy, 1991 envisaged divestment of a part of government share holdings in selected PSUs as an important element of public sector reforms. In pursuit of this, the process of disinvestment began in 1991-92 with the sale of minority stakes in some PSUs. The primary aim disinvestment in this phase was to raise non-inflationary finance to plug budgetary deficit. But the focus of disinvestment shifted to strategic sale since 1999, in which substantial chunk of government equity is sold to a private sector enterprise with an objective to improve the performance of the PSU and to reorient public investment.
Disinvestment versus Privatisation Disinvestment refers to selling of equity of a PSU to a private organization or to general public. Privatisation refers to providing for larger role for private capital and enterprise in the functioning of an economy. Privatisation is a wider term than disinvestment. Disinvestment is one of the means for achieving privatization . Privatisation may result from any of the following : (a) Disinvestment; (b) Denationalisation (i.e, complete sell off of a PSU); (c) Transfer of management and control of a PSU to the private sector (d) Dereservation of areas reserved for the public Sector etc.
Objectives of disinvestment
To transfer the resources from non-strategic sector to the strategic sector, which is much higher on social priority such as basic health, family welfare, primary education etc. To raise funds to cover up the fiscal deficit of the government. To improve efficiency of the public sector by inducing private initiative and competition. To enhance accountability of the PSUs by exposing them to the capital market. To reduce political interference by imparting market orientation to the enterprise. Bring down Government equity in all non-strategic PSUs to 26 % or lower, if necessary. Restructure and revive potentially- viable PSUs Close down PSUs which can not be revived Fully protect the interest of workers.
Strategic sale/disinvestement: it refers to the sale of majority stake of government along with transfer of control and management of PSU to a well establish private sector enterprise. It’s objective is to induct technical and managerial acumen of the private enterprise in the functioning of the PSU.
The Disinvestment Process
In 1992, Government constituted a committee on the Disinvestment of shares in PSE’s headed by Dr. C. Rangarajan to recommend over the policy of disinvestment. The committee recommended that upto 49% equity of the PSUs under the exclusive participation of the state could be disinvested but for rest of the industries disinvestment can be allowed upto 74%. Further, the government constituted a five member Disinvestment Commission under the chairmanship of Shri G.V. Ramakrishnan in August 1996 to draw up a comprehensive policy for the long term disinvestment programme. The commission was mandated to advise the government on the extent, methodology, strategy and timing of disinvestment. In May 2004, the Government adopted National Common Minimum Programme, which outlined the policy of the Government with respect to the Public Sector.
Generall, profit making PSU’s will not be privatized. In case of privatization of profitable PSU’s government will retain atleast 51% of the equity and the management control of the enterprise. Navratna PSU will be retained under the public sector. Chronically loss-making companies will be either sold-off or closed, after all workers get their legitimate dues and compensation. All privatisations will be considered on a transparent and consultative case-by-case, basis. A board for Reconstruction of Public Sector Enterprises (BRPSE) to be constituted. A National Investement Fund will be established. On 25 November 2005, the Government decided, in principle, to list large, profitable CPSEs on domestic stock exchanges and to selectively sell small portions of equity in listed, profitable CPSEs (other than the Navratnas). National Investment Fund In pursuance of the policy laid down in NCMP, the Central Government set up National Investment Fund in November, 2005. The proceeds from disinvestment of CPSUs will be channelised into NIF, which is to be maintained outside the Consolidated Fund of India. NIF will be professionally managed to provide sustainable returns to the Government, without depleting the corpus. Selected Public Sector Mutual Funds will be entrusted with the management of the corpus of NIF. 75% of the annual income of NIF will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25% of the annual
income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification. The following Public Sector Mutual Funds have been appointed initially as Fund Managers, to manage the funds of NIF. (i) UTI Assets Management Company Limited (ii) SBI Funds Management Company (Private) Limited (iii) Life Insurance Corporation, Asset Management Company Limited However, in view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought that was likely to adversely affect the 11th Plan growth performance, the Government, in November 2009, decided to give a one-time exemption to utilization of proceeds from disinvestment of CPSEs for a period of three years – from April 2009 to March 2012 – i.e. disinvestment proceeds during this period would be available in full for meeting the capital expenditure requirements of selected social sector programmes decided by the Planning Commission/Department of Expenditure. The status quo ante will be restored from April 2012
Board for Reconstruction of Public Sector Enterprises On December 6, 2004, the Union Government notified the Board for Reconstruction of Public Sector Enterprises (BRPSE). The Board will function under the Department of Public Enterprise (DPE) which is the nodal department for Central Public Sector Enterprises. The functions of the Board include : • studying the proposals of all those units that are referred as sick industries, and considering other loss-making Central PSUs either suo moto or upon reference by the administrative ministry • Advise the government on ways and means for strengthening PSUs in general and to make them more autonomous and professional. • Advice the government on disinvestment / closure/ sale in respect of chronically sick / loss making companies, which can not be revived. Current Disinvestment Policy On 5th November 2009, Government approved the following action plan for disinvestment in profit making government companies: (i) Already listed profitable CPSEs (not meeting mandatory shareholding of 10%) are to be made compliant by ‘Offer for Sale’ by Government or by the CPSEs through issue of fresh shares or a combination of both (ii) Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding consecutive years are to be listed (iii) Follow-on public offers would be considered taking into consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding. (iv) In all cases of disinvestment, the Government would retain at least 51% equity and the management control (v) All cases of disinvestment are to be decided on a case by case basis (vi) The Department of Disinvestment is to identify CPSEs in consultation with respective administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of Government equity
The Micro, Small and Medium Enterprises (MSME) Sector
Over the last five decades, the small-scale industries (SSIs) sector has acquired place of prominence in the economy the country. It has contributed significantly to the growth of the GDP, employment generation and exports. The sector now includes not only SSI units but also small-scale service and business enterprises (SSSBEs) and is thus referred to as the small enterprises sector. In India, small-scale industries (SSIs) can be differentiated from the large-scale industries on the basis of three criteria viz. volume of investment in the unit, annual turnover and number of workers employed. As per the Industries (Development and Regulation) Act, 1951, SSIs are defined as the units employing less then 50 workers with power or 100 workers without power. Such industries are exempted from compulsory registration. As per fiscal criterion, SSIs are those units whose annual turnover is not more than one crore. Such units are fully exempted from the excise taxes. However, investment criterion is used for general policy formulation and analysis. According to this criterion, SSI include all those units having a fixed investment of not more than one crore.
New Definitions of Micro, Small & Medium Enterprises
In accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified in two Classes: (a) Manufacturing Enterprises- The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and regulation) Act, 1951). The Manufacturing Enterprise are defined in terms of investment in Plant & Machinery. (b) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment:
Micro Enterprises Small Enterprises
Investment in plant & machinery Does not exceed twenty five lakh rupees More than twenty five lakh rupees but does not exceed five crore rupees More than five crore rupees but does not exceed ten crore rupees
Small Enterprises Medium Enterprises
Investment in equipments Does not exceed ten lakh rupees: More than ten lakh rupees but does not exceed two crore rupees More than two crore rupees but does not exceed five core rupees
Contribution of Small Scale Industries Small enterprise sector provided employment to about 225 lack people during 200809. The small scale sector accounts for over 80% of the manufacturing sector's employment.
It contributed significantly towards the economic growth of the nation, with over 39% of the industrial_production. The small-scale accounts for over 34% of the total exports and about 45% of the manufacturing exports. Further over 90% of exports of the SSIs consists of nontraditional items like sports goods, readymade garments, processed foods, chemicals etc. SSIs are conducive for the economic development of underdeveloped countries like India. Such industries are relatively labour intensive so they make economical use of the scarce capital. Small scale industries are instrumental in reducing the inequalities in wealth. In these industries capital is widely distributed in small quantities and the surplus of these industries is distributed among large number of people. Small scale industries brings about regional dispersal of industries and alleviates regional imbalances. Small-scale industries make use of local resources including the capital and entrepreneurial skills which would have remained unused for want of such industries. Small industry sector has performed exceedingly well and enabled the country to achieve a wide measure of industrial growth and diversification. In these industries relations between employers and employees are direct and cordial. There is hardly any scope of exploitation of labour and industrial disputes.
MSME Sector in India Old Definition No. of MSME enterprises 13.2 million Employment 32.2 million Production (at current prices) $174 billion Exports $ 31 billion Share in GDP 6% Share in manufacturing output 39% Share in exports 33%
Source: Ministry of Micro, Small & Medium Enterprises
New Definition 13.2 Million 42.2 Million N.A. N.A 8% 45% 40%
Performance of Small-scale industries vis-à-vis large scale industries
In order to examine the performance and efficiency of the small scale industries in comparison the large scale industries, a study was conducted jointly by the Small Industries Development Bank India (SIDBI) and the National Council of Applied economic Research (NCAER) in 1999. The analysis asses the data of Annual Survey of Industries (ASI) for a period from 1980 to 1994. The important findings of the study are as follows The small scale industries contribute to nearly 20% of the total industrial output, by investing just 7% to 15% of the total manufacturing sector's capital. They contributed to about 35%-40% to the total industrial employment. Small-scale industries were relatively more labour intensive i.e. less capital intensive they employ more labourers per unit of capital as compared to the large-scale industries. Labour productivity (ouput per worker) was relatively low in small scale industries. Capital productivity (output per unit of capital) was relatively higher in small-scale industries.
The total factor productivity (ratio of output to inputs) was relatively high in smallscale industries i.e. the small scale industries are more efficient than the large-scale industries. Small-scale industries were relatively more profitable i.e. the profit per unit of capital invested was higher in small scale industries as compared to the large scale industries. Problems of Cottage and Small-Scale Industries Non-availability of timely and adequate credit. Inefficient management Lack of infrastructure Technological obsolescence Limited availability of raw materials Marketing problems Competition with large-scale industries and imports. Excessive burden of local taxes, Widespread sickness.
Opportunity for Cottage and Small-Scale Industries The opportunities in the small-scale sector are enormous due to the following factors:
Less Capital Intensive Extensive Promotion & Support by Government Reservation for Exclusive Manufacture by small scale sector Funding - Finance & Subsidies Machinery Procurement Raw Material Procurement Manpower Training Technical & Managerial skills Reservation for Exclusive Purchase by Government Export Promotion Growth in demand in the domestic market size due to overall economic growth Increasing Export Potential for Indian products Growth in Requirements for ancillary units due to the increase in number of green field units coming up in the large scale sector
Government measures to promote small scale industries. Government initiated several measures for the promotion of small scale and cottage industries immediately after independence. The importance of these industries was recognized in the very first Industrial Policy Resolution of 1948 and reiterated in all future industrial policy statements. Steps taken by the government for the development of these industries can be categorised as follows, i.e. organisational, financial, fiscal, technical etc. (a) Organisational measures Establishment of Boards : —Government constituted several boards at all Indial level to provide an organizational structure through which the promotional efforts were to be carried out. These boards include Cottage Industries Board, Handloom Board, Handicraft Board, Khadi and Village Industries Board etc. National Small Industries Corporation (NSIC):—It was established in 1955 to provide machines on instalments, marketing facilities and to offer advice on various problems of SSI.
Industrial Estates :—-The policy of setting up Industrial Estates was initiated in 1955, for the construction of factory premises and to provide basic facilities like power, water, roads etc. District Industries Centre (DIC):—The concept of DIG was introduced in the Industrial Policy Statement of 1977. This programme was initiated in 1979 to cater to all the requirements of small scale" and village industries, under one roof.
(b) Financial measures Small Industries Development Fund (SIDF):—It was set up in 1986 to provide refinance (i.e. finance to the financial institutions in lieu of their lending to SSIs) assistance for development, expansion, modernization, rehabilitation of SSIs. National Equity Fund (NEF) :—it was set up in 1987 to provide initial capital^ for setting up of newjDrojects in small-scale sector in the form of equity (i.e. shares). Single Window Scheme (SWS) :—It was introduced in 1988 to provide short-term as well as long terrrTfinancial assistance to SSIs. Small Industries Development Bank of India (SIDBI):—lt was established in October, 1989 by amalgamation of small Industries Development Fund (SIDF) and Natural Equity Fund (NEF). SIDBI is the apex financial institution for small enterprises sector. It provides finance to SSI, refinance assistance and coordinates the activities of other financial institutions for the provision of credit to SSIs. (c) Fiscal Measures Small-scale enterprises having turnover, upto 1 crore are fully exempted from the excise duty. Concessional rate of custom duties are levied on import of certain kind of raw materials and components used by SSIs. Price and purchase preference is granted to products manufactured in the small-scale sector in government purchase programme. (d) Technical assistance
Small-scale Industries Development Organisation (SIDO) :—It was established in 1954. SIDO provides technical, managerial, economic and marketing assistance to SSIs through its network of extension centres and service institutes. Council for Advancement of Rural Technology (CART) :—It was established in 1982 to provide technical assistance to rural industries. Technology Development and Modernisation Fund (TDMF) :—It was set up for the technological upgradation and modernization of the export oriented units.
(e) Reservation of items for SSIs The policy to reserve certain items for the small-scale sector was introduced in 1967.It aims to promote the SSIs by protecting them from competition with the large-scale units. In Apri l967 there were only items in the reserved category which were increased in several phases to 873 in 1984. The policy of reservation was widely criticized by a number of economists because it adversely affected the production and productivity of the reserved items. So, government appointed the Abid Hussain Committee to review the policy of reservation of items for the SSIs. The committee gave its report in 1997 with the observation that the policy of reservation has actually reduced the competitiveness of the SSIs engaged in the production of such items. Only a few SSIs were involved in the production of the reserved items and their output was almost negligible in comparison of the
total output of the SSIs. Thus, the committee recommended that the policy of reservation of items for SSIs should be abandoned. Government did not abandoned the policy of reservation altogether, however government has dereserved few items in the recent past. Government dereserved 79 items in February, 2008. The total number of reserved items now stands at 35.
New Small Enterprise Policy, 1991 Government announced a separate industrial policy for the small enterprise sector on 6th August, 1991. It was titled as, "Policy Measures for Promoting and Strengthening Small, Tiny and Village Enterprises".
• The ceiling of investment for the 'tiny sector' was raised from Rs. 2 lakh to 5 lakh. • Large units including foreign firms were allowed to purchase upto 24% equity (shares) of the small scale industries. • Scope of tiny sector was enlarged to include all industry related servicerand business enterprises. • Introduction of a new legal form of business organization, "limited partnership'. In this form, the liability on of atleast one partner is unlimited whereas other partners have their liability limited to the invested capital.
The government defined the industrial sickness for the first time in the Sick Industrial Companies (Special Provisions) Act, 1985. According to this Act, a medium or large (i.e. non-SSI) company was defined as sick if : (1) it was registered for atleast 7 years (later reduced to 5 years) (2) it incurred cash losses in the current year and the proceeding year. (3) its entire net worth (i.e. paid-up capital and reserves) was eroded. A company is regarded, as weak or incipiently sick on the erosion of 50% of its peak net worth during any of preceeding five financial years. The industrial sickness has been redefined in the Companies (Second Amendment) Act, 2002.
New Definition of ‘Sick Company’ Under S.2 (46AA) of the amended companies act, a ‘Sick Company’ is defined as one whose accumulated losses in any financial year are equal to or more than fifty percent of its average net worth during four financial year immediately preceding such financial year or a company which has failed to repay its creditors for three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company. The term "net worth" means the sum total of the paid-up capital and free reserves after deducting the provisions or expenses as may be prescribed.
The Government redefined the concept of industrial sickness for small enterprise sector in 1989 as follows: (a) erosion of over 50% of the peak net worth in the immediately preceding five years. (b) default in payment of interest or installments of principal and there are persistent irregularities in the operation of its credit limit with the bank. A large SSI is considered as sick if it satisfies the above mentioned ‘a’ condition, while in case of tiny and decentralized sector either of the two conditions (a or b) needs to be satisfied.
Trend of industrial sickness As per the information compiled by the RBI from scheduled Commercial banks, as on 31 March 2001 these were 2,52,947 sick / weak units with outstanding bank credit of Rs 25,775, Out of these about 99% of the units belonged to the small-scale sector but their share in the total outstanding bank credit was merely 17.5%. However over 90% of the sick SSI units and about 45% of the SSI units were non-viable. The Board for Industrial and Financial Reconstruction has so far received 7,158 references under the Sick Industrial Companies (Special Provisions) Act (SICA), 1985. These references include 297 from Central and State public sector undertakings (CPSUs & SPSUs). Out of the total references received, 5,471 were registered under Section 15 of the SICA, 1,857 references were dismissed as non-maintainable under the Act, 825 rehabilitation schemes, including 13 by AAIFR/ Supreme Court, were sanctioned and 1,337 companies were recommended to be wound up. Of the 297 references for public sector undertakings, the references of 92 CPSUs and 122 SPSUs were registered up to December 31, 2007.
Causes of industrial sickness
The causes of industries sickness can be classified into two categories i.e. internal and external causes. 1. Internal cause originate within the unit so they can be controlled by the unit. These include (a) faults at planning and construction stage (b) Inappropriate plant and machinery (c) Management problems (d) Entrepreneurial problems (e) Labour problems (f) Financial problems etc. 2. The external causes are supposed to originate outside the unit so are not under the control of the unit. .Such factors include : (a) Erratic supply of inputs (b) Power cuts (c) Demand and credit constraints (d) Changes in government policies etc. According to the Report on Currency and Finance (1997-98) of the RBI, "the main reasons for industrial sickness in non-SSI sick/weak units, as reported by banks, were such internal factors as deficiencies in project management (44.8% of the cases) and shortcomings in project appraisal (7.2% of cases), as also such external factors, as non availability of raw materials, powers shortage, transport bottlenecks, financial bottlenecks, increase in overhead costs, change in government policy, market situation, and fall in demand.
Revival and rehabilitation measures The government undertake the following measures to revive and rehabilitate the sick industrial units. Financial Assistance a. As per the directions. of the RBI, the commercial banks granted the following concessions to sick industrial units: (a) Rescheduling of loans and interest: (b) Grant of additional working capital: (c)Waiving off interest on loans: (d) Moratorium on payment of interest, etc. Organisational measures a. State-level inter-institutional committees • — These are set up by the RBI to ensure better coordination "between the banks, state governments and other concerned financial institutions. (b) Special Cell : It was set up by the Rehabilitation Finance Division of the IDBI to provide assistance to the banks for revival of sick units. . Fiscal Concessions a. The government amended the Income Tax Act in 1977 to provide tax benefit to those units which take over the_sick units for reviving them. b. The government announced a scheme for grant of excise loans to sick / weak units.
c. Under this scheme, selected sick units are eligible for excise loans not exceeding 50%
d. of the excise duty actually paid over the preceding 5 years. Industrial Investment Bank of India (IIBI) a. The government established the Industrial Reconstruction Corporation of India (IRCI) in 1971 as a company registered under the companies Act. Its objective was to revive and rehabilitate the sick units by providing financial, managerial and technical assistance. b. In 1985, IRCI was renamed as Industrial Reconstruction Bank of India (IRBI) and was converted into a statutory corporation. Further in 1997, the IRBI was transformed into a full-fledged development financial institution and rechristened as Industrial Investment Bank of India (IIBI). Board for Industrial and Financial Reconstruction (BIFR) a. The government set' up BIFR in 1987 under the Sick Industrial Companies (Special Provisions) Act (SICA), 1985. The BIFR is an autonomous quasi -judicial body to take final decision regarding revival and rehabilitation or winding up of the sick units. It is mandatory for a sick / weak unit to refer itself to the BIFR. On receipt of such reference, the board ascertains whether the company is indeed sick. It sickness is confirmed, the board may allow the company some time to make its net worth positive on its own, prepare revival and rehabilitation package or windup the unit. b. The functioning of the BIFR was severely criticized on two grounds. First; it has adopted time consuming procedures leading to undue delays in rehabilitation. Second, it has shown overwhelming bias in favour of revival and rehabilitation over the winding up option, even in case of non-viable units. So, the government constituted Onkar Goswami committee to review the functioning of the BIFR.
The Committee on Industrial Sickness and Corporate Restructuring The government set up this committee in 1993 under the chairmanship of Mr, Onkar Goswami The committee made several important recommendations like changing the definition of sickness, setting up five fast track recovery and winding up tribunals, making BIFR a fast track facilitator rather than an arbitrator etc.
The companies (Second Amendment) Act, 2002
This amendment was undertaken on the recommendation of Justice V. Balakrishana Eradi (Rt.) Committee on Insolvency Law. The act seeks to repeal SICA and dismantle BIFR created there under. The act envisages setting up of a National Company Law Tribunal (NCLT), which will take over the functions of the Company Law Board (CLB), BIFR and the High Court (regarding winding up of companies). The salient features of the Act are as follows: Sick Company is defined as one whose accumulated losses in any financial year are equal to or more than fifty percent of its average net worth during four financial year immediately preceding such financial year or a company which has failed to repay its creditors for three consecutive quarters on demand made in writing for its repayment by a creditor or creditors of such company. The Central Government shall, by notification in the Official Gazette, constitute with effect from such date as may be specified therein, the National Company Law Tribunal (NCLT) and an Appellate Tribunal to be called the “National Company Law Appellate Tribunal”, for hearing appeals against the orders of the Tribunal under this Act. The amendment seeks to establish Revival and Rehabilitation fund(RRF) to provide finance for the restructuring of sick units and for taking care of the workers of sick industrial companies and the investors as per the global standards. New Provisions specify time period for completion of enquiry, framing of scheme by the operating agency, etc. The winding up of a company shall, as far as may be, conclude within one year from the date of the order of winding up.
The government has not notified the Act because certain provisions of the Act were challenged in the Supreme Court. However, few provisions of the Act has been notified. NCLT and its appellate body have not been set up till date. The tribunal can be constituted only after the Supreme Court verdict. In the meantime, the current framework comprising the CLB and BIFR continues to function as before. The main drawback of the SICA scheme is that it seemed to be so heavily loaded in favour of the debtor company that it created an asymmetry and imbalance between the interests of the debtor company and that of its creditor. The Part VI A of the Companies Act, 1956, incorporated by the Companies (Second Amendment) Act, 2002 (the date of commencement of which is yet to be notified; so far only Sections 2 and 6 have been notified) aims to provide for a new, efficient and time bound mechanism for both revival/rehabilitation as well as winding up of sick industrial company within areasonable period of time as against the existing system which takes about 18 to 25 years. The creation of rehabilitation fund, inclusion of experts and specialists in operating agency, National Company law Tribunal to act as winding up authority in contrast to BIFR, doing away with Section 22 of SICA, etc, would make the new provisions more effective and rational and would provide better mechanism for handling industrial sickness in the country which is one of the biggest problems plaguing the Indian Economy. This new provisions under part VI A certainly appear to be a step in right direction and it is hoped that deficiencies noted in the operation of the SICA would be taken care of under this new mechanism.
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