Unit-4

Indian Industries and Foreign Trade

Industries play an important role in the economic development of any nation .without industries,
economic development is impossible. Again, in a backward and developing economy
like INDIA , industries are indispensable.
            Development of industries is not only  indispensable  for India, but there is also good scope for
the development of industries in our country. India has many  favourable factors for the development of
industries. The various favourable  factors present in the country for the development of industries are:
 The country is rich in natural resources, such as minerals, forests, fisheries, etc. required for the
development of industries.
 The country  is rich in commercial crops, such as  sugar-cane, raw cotton, raw jute, tobacco, oil
seeds,  etc. required for the development of agro-based industries.
 The country is fairly rich in power resources, such as coal, hydro-electricity, atomic energy, etc.
required for turning the wheels of industries.
 India is rich in human resources. As such, cheap labour required for the development of
industries is also available in the country.
 As the country has vast population, wide market required for the development of industries is
also available in the country.

Classification / Types of Industries

There are various types of industries. These are mentioned as follows :-

1. Primary Industry

Primary industry is concerned with production of goods with the help of nature. It is a nature-
oriented industry, which requires very little human effort. E.g. Agriculture, farming, forestry,
fishing, horticulture, etc.

2. Genetic Industry

Genetic industries are engaged in re-production and multiplication of certain spices of plants and
animals with the object of sale. The main aim is to earn profit from such sale. E.g. plant nurseries,
cattle rearing, poultry, cattle breeding, etc.

3. Extractive Industry

Extractive industry is concerned with extraction or drawing out goods from the soil, air or water.
Generally products of extractive industries come in raw form and they are used by manufacturing
and construction industries for producing finished products. E.g. mining industry, coal mineral, oil
industry, iron ore, extraction of timber and rubber from forests, etc.

4. Manufacturing Industry

Manufacturing industries are engaged in transforming raw material into finished product with the
help of machines and manpower. The finished goods can be either consumer goods or producer
goods. E.g. textiles, chemicals, sugar industry, paper industry, etc.
 5. Construction Industry

Construction industries take up the work of construction of buildings, bridges, roads, dams, canals,
etc. This industry is different from all other types of industry because in case of other industries
goods can be produced at one place and sold at another place. But goods produced and sold by
constructive industry are erected at one place.

6. Service Industry

In modern times service sector plays an important role in the development of the nation and
therefore it is named as service industry. The main industries, which fall under this category,
include hotel industry, tourism industry, entertainment industry, etc
Role/Importance of Industries in Indian Economy Growth
1. National and in per capital income in the country: When there is development of industries
in the country, there will be the investment of large capital, use of modern   machineries, high
degree of specialisation and large-scale operations. As a result, there will be greater productivity
and higher national income. Higher national income, in turn, will contribute to increase in per
capital income. Thus, development of  industries will contribute to the growth of national and in
per capital income in the country.
2. Industrialisation  creates more and varied employment opportunities: and thereby, reduce
the problem of unemployment and under-employment in the country. Further it can absorb the
surplus agricultural labour, and thereby, reduce the problem of disguised unemployment in rural
areas. Again it can contribute to the development of cottage and small industries in rural areas.
3. Industries will promote agricultural development in the country in many ways. First, with
the development of  agro-based industries (i.e. industries based agriculture), such as sugar-cane, raw
cotton, raw jute, tobacco, oil seeds  etc. there will be more demand for these materials. This, in
turn will encourage the development of agriculture.
4. Industries will contribute to the development of  tertiary sector, i.e. trade, transport &
communication , banking insurance, etc.
5. Development of industries will be helpful in maintaining a proper balance between
agriculture, industry and the tertiary sector, which is essential for the all-round economic progress
of any nation.
6. Development of industries will contribute to the expansion of existing industrial areas and
growth of new industrial areas.
7. Industries in India is more stable: Agriculture in India is not stable, as it is largely dependent
on the vagaries of monsoons. On the other hand, industries are relativity more stable.
8. Industrialisation contributes to better utilisation  of natural resources like minerals, forests,
fisheries, etc. which the country has in abundance
9. Industrialisation will contribute to the expansion of the markets for agricultural crops,
minerals, forest products etc. Further, industrialisation  will contribute to the expansion of the
markets for capital goods or producer goods like plant & machinery.
10. Industries contribute to increase in the income and purchasing power of the people. Further,
they make available to the people a wide variety of goods for consumption.
11. Industries are indispensable for national defence. Arms and ammunitions, ships, aircrafts,
tankers,  etc.
Disinvestment in India
The Government in July 1991 initiated the disinvestment process in India, while launching the New
Economic Policy (NEP). The Government had appointed the Krishnamurthy Committee in 1991 and
Rangarajan Committee in 1992.

Both the Committees, have recommended disinvestments to fulfill objectives of modernisation of the
public sector through strengthening R & D, initiating diversification/ expansion programmes, retraining
and re-employment of employees, funding genuine needs of expansion, widening the capital market
basis and mitigating fiscal deficit of the government.

Disinvestment is the process by which the Union government either sells its stakes in a PSU–fully or
partially–or lists it on the stock market

Through disinvestment, the government of the day can spend the proceeds for better purposes. The
proceeds of the sale are channelised to the National Investment Fund, which was set up in 2005 as a
corpus of permanent nature to help the government.

The fund helps the government to recapitalise public sector banks and public sector insurance
companies to strengthen them and subscribe to shares being issued by the central PSUs on rights basis
in order to ensure that majority ownership in these undertakings does not dilute.

According to the Department of Investment and Public Asset Management, this fund is managed by
UTI Asset Management Company Ltd., SBI Funds Management Private Ltd. and LIC Mutual Fund
Asset Management Company Ltd.

The 1991 New Economic Policy, presented by then finance minister (and future prime minister)
Manmohan Singh pointed out several objectives for disinvestment. These objectives were as follows:
Reducing the financial burden on the government, improving public finances, introducing competition
and market discipline, funding growth, encouraging wider share of ownership, and depoliticising non-
essential services.

Case for Public Sector Disinvestment

• The Government needs resources to reduce its budget deficit.

• The Government urgently requires resources to make investment in infrastructure, social sectors
such as education, public health and for poverty alleviation programmes. Resources released
through disinvestment can be used for investment in these crucial sectors.

• A good number of existing public enterprises are working inefficiently and incurring huge
losses. Disinvestment can lead to the improvement of efficiency of these enterprises

Types of Disinvestment Methods in India

The method of disinvestment in India changes from time to time, mostly depending on the party at the
center.

1. Minority Disinvestment

Minority disinvestment in PSUs is such that, at the end of it, if the government of India retains a
majority stake (typically more than 51%) in the company, it ensures management control.

Historically, minority stakes have been either auctioned off to financial institutions or offloaded to the
public by way of an offer for sale.

The present government has made a policy statement for FY 2018-19 that all disinvestments would
only be minority disinvestments through public offerings.

Minority disinvestment via auctioning to institutions go back into the early and mid-90s and is no
longer the preferred method in India.

Some examples of minority disinvestment via Offer for Sale include recent issues of Power Grid
Corporation of India Ltd., Rural Electrification Corporation Ltd., NTPC Ltd., NHPC Ltd., etc.

2. Majority Disinvestment

Majority disinvestment in PSUs is such that, at the end of it, the government of India retains a minority
stake in the company i.e. it sells off a majority stake. It is also called Strategic Disinvestment.

If we look into the disinvestment history, majority disinvestments have been typically made to strategic
partners of the government of India.

These strategic partners could be other Central Public Sector Enterprises (CPSEs) themselves, a few
examples being BRPL/MRL to Indian Oil Corporation Ltd. (IOC) and KRL to BPCL.

Alternatively, these strategic partners can be private entities, like the sale of Modern Foods to
Hindustan Lever Ltd., CMC to Tata Consultancy Services Ltd. (TCS).

Also, same as in the case of minority disinvestment, in majority disinvestment case the stake can also
be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

3. Complete Disinvestment

Complete disinvestment or privatization is a form of majority disinvestment wherein 100% control of

the company is passed on to a buyer i.e government of India completely disinvests from that PSU.

Example of this includes 18 hotel properties of India Tourism Development Corporation (ITDC).

History of Disinvestment in India

In India, the new economic policy has given rise to significant focus for the privatization of public
enterprises in the year 1992. Disinvestment is a method of privatization for public enterprises.

It is a major step towards privatization and liberalization of the Indian economy.

The Indian economy was adversely affected by bankruptcy during the period 1981-91.

The public sector which was supposed to achieve new heights and was taught to be the perfect path for
India’s economic growth, right from independence was characterized by poor and sick performance.

In the year 1991, there were 236 operating PSUs, of which only 123 were profit making.

The top 20 profit making PSU’s counted for 80% of the profits, implying that less than 10% of the
PSU’s were responsible for 80% of profits. The return on PSUs investment for the year 1990-91 was
just around 2%.

Allowing the private sector to pump capital into these ailing PSUs would, of course, go some way in
turning around these entities even as it provides the government with funds to bankroll welfare
programs.

Hence, the process of disinvestment in India was started in the year 1992.

Major divestment steps were taken in the past by BJP led NDA government in the tenure between1999-
2004, made four strategic disinvestments –

Bharat Aluminium Company (BALCO) and Hindustan Zinc, both to Sterlite Industries Ltd.

Indian Petrochemicals Corporation Limited (IPCL) to Reliance Industries Ltd. and

VSNL to the Tata group

Again, in starting from 2014 to 2018, BJP led NDA government divested total Rs. 1,94,646 crore,
which also includes minority and majority stake sale of most profitable Public sector undertaking
companies, like ONGC-HPCL deal worth Rs. 36,915 crores.

In the budgetary announcement of the financial year 2017-18, The Finance Minister noted that the
government initiated strategic disinvestment in 24 PSUs, including Air India, this fiscal.

Since the financial year, 1991-92 to 2017-18 government led by political parties sold total public assets
of Rs. 3,47,439 Crore.

PROS OF STRATEGIC DISINVESTMENT

 The government can be a facilitator of a business-friendly environment.

 Brings operational efficiency in CPSEs and adopt a professional approach for the financial
management of CPSEs.
 Competitive dynamics for private players is maintained if the government is out of business.
 It would ensure accountability of PSUs and can incentivise them to improve structure.
  Improvement in public finance as Inefficient PSUs only leads to wastage of taxpayer’s money.
 A huge debt of PSUs can also be transferred to the private sector.

CONS OF STRATEGIC DISINVESTMENT

 Protest and opposition by PSU stakeholders trade unions and employees.

 It may result in crony capitalism.
 Disinvestment proceeds are mostly used to cover fiscal deficit instead of growth purpose.
 There is a possibility of creation of a private-sector monopoly.
 Job loss of workers in many PSUs.
 There are concerns related to national security in case of defence privatization.
 PSUs that are involved in welfare work can not be left in the hands of the private sector whose
prime motive is profit-making.
 Sale of debt-laden and loss ridden PSU can not attract a buyer.
 The government may lose cushion in the fiscal deficit.

Public Private Partnership (PPP)

A public-private partnership is a contractual agreement between a public agency (federal, state or
local) and a private sector entity.

Through this agreement, skills and assets of each sector (public and private) are shared in delivering
a service or a facility for the use of the general public.

Each party shares risks and rewards potential in the delivery of the service and/or the facility.

The public partners in a PPP are government entities, including Ministries, departments,
municipalities, or state-owned enterprises.

The private partners could be local or international and may include businesses or investors with
technical or financial expertise relevant to the project.

PPP broadly refers to long term, contractual partnerships between public and private sector
agencies, specially targeted towards financing, designing, implementing, and operating
infrastructure facilities services that were traditionally provided by the public sector.

• According to IMF(International Monitory Fund): “Public-private partnerships refer to the

private sector financing, designing, building, maintaining and operating infrastructure assets
traditionally provided by the public sector.”

• According to National PPP Policy, 2011 “Public Private Partnership means an arrangement
between a government or statutory entity or government owned entity on one side and a private
sector entity on the other, for the provision of public assets and/or public services, through
investments being made and/or management being undertaken by the private sector entity, for a
specified period of time, where there is well defined allocation of risk between the private sector
and the public entity and the private entity receives performance linked payments that conform
 (or are benchmarked) to specified and pre-determined performance standards, measurable by the
public entity or its representative.”

• The Planning Commission of India has defined the PPP in a generic term as “the PPP is a mode
of implementing government programmes/schemes in partnership with the private sector. It
provides an opportunity for private sector participation in financing, designing, construction,
operation and maintenance of public sector programme and projects”.

• Supply and management contracts.

• Supply of equipment, raw materials, energy and power, and labour are typical examples of
supply or service contract.

• Government provide license for supply of particular services/inputs.

• The main purpose of such licensing is to ensure the supply of the relevant service at the desired
level of quantity and quality.

• Examples of such an arrangement include, catering services for passengers on railway systems
(the Indian Railways).

• BOT (Build-Operate-Transfer)

• A model that entails a concession company providing the finance, design construction,
operation, and maintenance of a privatized infrastructure project for a fixed period, at the end of
which the project is transferred free to the host government. u The granting of a concession by
the government to a private promoter, known as the concessionaire, who is responsible for the
financing, construction, operation, and maintenance of a facility over the concession period
before finally transferring the fully operational facility to the government at no cost

• Variation of BOT model includes: u BOO = Build-Own-Operate u BLT = Build-Lease-Transfer

u BOOM= Build-Own-Operate-Maintain u BOOT = Build-Own-Operate-Transfer u BOOTT =
Build-Own-Operate-Train-Transfer u BTO = Build-Transfer-Operate u DBFO = Design-Build-
Finance-Operate u DBO = Design-Build-Operate u DBOM = Design-Build-Operate-Maintain u
DOB = Design-Operate-Transfer u ROO = Rehabilitate-Own-Operate u ROT = Rehabilitate-
Operate-Transfer

• The Ministry of Finance centralizes the coordination of PPPs, through its Department of
Economic Affairs' (DEA) PPP Cell. I n 2011, the DEA published guidelines for the formulation
and approval of PPP projects. This was part of an endeavor to streamline PPP procedures and
strengthen the regulatory framework at the national level to expedite PPP projects approval,
reassure private parties and encourage them to enter into PPPs in India. This was one of the
main roles of the Public Private Partnership Appraisal Committee (PPPAC) which is responsible
for PPP project appraisal at the central level.

• The Government also created a Viability Gap Funding Scheme for PPP projects to help promote
the sustainability of the infrastructure projects. This scheme provides financial support (grants)
 to infrastructure projects, normally in the form of a capital grant at the stage of project
construction (up to 20 percent of the total project).

• The Government has also set up India Infrastructure Finance Company Limited (IIFCL) which
provides long-term debt for financing infrastructure projects. Set up in 2006, IIFCL provides
financial assistance in the following sectors: transportation, energy, water, sanitation,
communication, social and commercial infrastructure.

• To help finance the cost incurred towards development of PPP projects (which can be
significant, and particularly the costs of transaction advisors), the Government of India has
launched in 2007 the 'India Infrastructure Project Development Fund' (IIPDF) which supports
up to 75% of the project development expenses.

Finally, the PPP Cell has produced a series of guidance papers and a 'PPP Toolkit' to support project
preparation and decision-making processes. The objective is to help improve decision-making for
infrastructure PPPs in India and to improve the quality of the PPPs that are developed. The took it

Public-Private Partnership Benefits

• They provide better infrastructure solutions than an initiative that is wholly public or wholly
private. Each participant does what it does best.

• They result in faster project completion and reduced delays on infrastructure projects by
including time-to-completion as a measure of performance and therefore of profit.

• A public-private partnership's return on investment (ROI) might be greater than projects with
traditional, all-private or all-government fulfillment. Innovative design and financing
approaches become available when the two entities work together.

• Risks are fully appraised early on to determine project feasibility. In this sense, the private
partner can serve as a check against unrealistic government promises or expectations.

• The operational and project execution risks are transferred from the government to the private
participant, which usually has more experience in cost containment.

• Public-private partnerships may include early completion bonuses that further increase
efficiency. They can sometimes reduce change order costs as well.

• By increasing the efficiency of the government's investment, a P3 allows government funds to

be redirected to other important socioeconomic areas.

• The greater efficiency of P3s reduces government budgets and budget deficits.

• High-quality standards are better obtained and maintained throughout the life cycle of the
project.

• Public-private partnerships that reduce costs potentially can lead to lower taxes.

Public-Private Partnership Disadvantages

 • Every public-private partnership involves risks for the private participant, who reasonably
expects to be compensated for accepting those risks. This can increase government costs.

• When there are only a limited number of private entities that have the capability to complete a
project, such as constructing a high-speed rail system, the relatively small field of bidders might
mean less competition and thus less cost-effective partnering.

• Profits of the projects can vary depending on the assumed risk, the level of competition, and the
complexity and scope of the project.

• If the expertise in the partnership lies heavily on the private side, the government is at an
inherent disadvantage. For example, it might be unable to accurately assess the proposed costs.

Salient Features of Foreign Trade

The following are the features of foreign trade
(i) Change in the composition of exports

After independence many changes took place in export trade. India exported tea, jute, cloth, iron, spices
and leather before independence. Now chemicals, readymade garments, gems, jewellery, electronic
goods, processed foods, machines. Computer software etc. are exported along with tea, jute and cotton
textiles.

(ii) Change in the composition of imports:

India imported consumer goods, medicines, textiles, motor vehicles and electrical goods before
independence. After independence, imports are fertilizers, petroleum, steel, machines, industrial raw
materials, edible oils and unfinished diamonds.

(iii) Direction of foreign trade:

Direction of foreign trade means those countries with which India has trade ties. Before independence,
India has trade relations with England and Commonwealth Nations Now India has trade relations with
U.S.A, Russia, Japan, European Union and Organization of Petroleum Exporting Countries (OPEC).

(iv) Balance of trade:

Simply speaking balance of trade means the difference between value of exports and imports. Balance
of payments is favourable if exports exceed imports and un-favourable if imports exceeds export.
India’s balance of payment was favourable before Independence. It was favourable to Rs. 42 crore, but
after independence it becomes un-favourable. It was Rs. 65741 crore adverse in 2003-04.

(v) Dependent trade:

Before independence, Indian foreign trade was dependent on foreign shipping, insurance and banking
companies. After independence, cargo ships are being built in India. Banks and insurance companies
have started taking interest in foreign trade.
(vi) Trade through sea routes:

India’s foreign trade is through sea routes. India has very little trade relations with neighbouring
countries like Nepal, Afghanistan, Pakistan, Bhutan and Sri Lanka etc.

(vii) Dependence on a few Ports:

Indian foreign trade is through Chennai, Kolkata and Mumbai ports. These ports are always over-
crowded. After independence ports like Kandla, Cochin and Vishakhapatnam have been developed.

(viii) Less percentage of world trade:

India’s share in world trade has been diminishing. It was 1.8% of world’s total imports and 2% of
world’s total exports in 1950-51. In 2003-04 India’s share in total world imports was 1% and in total
world exports was 0.8%.

(ix) Increased Share in Gross National Income:

Foreign trade has significant contribution in Indian national income. In 1950-51, India’s foreign trade
contribution into national income was 12% and rose is 29% in 2003-04.

(x) Increase in value and volume of trade:

The value and volume of imports and exports increased many fold. In 1950-51 imports were Rs. 608
crores and exports were Rs. 606 crores. So total value was Rs. 1214 crores. In 2003-04, it increased to
Rs. 6, 52,475 crore.

Multilateral and Bilateral trade of India

India has always stood for an open, equitable, predictable, non-discriminatory
and rule based international trading system. India is of the view that, Regional
Trading Arrangements, should be ‘building blocks’ complementing the
multilateral trading system.
Bilateral trade agreements are the agreements between two nations for the
purpose of exchange of goods and service each other for mutual benefit of
both of the countries. A detailed article about the meaning, scope and
objectives of bilateral trade agreement are explained separately in this web
blog. You may kindly go through the same.
Multilateral trade agreements are made between two or more countries to
strengthen economy of member countries by exchanging of goods and
services among them