UNIT 12 REGULATORY AND PROMOTIONAL POLICY

FRAMEWORK

Objectives

This deals with the regulatory and promotional policy framework that emerged out of the

industrial policies pursued since 1948. The Unit enables you to gain acquaintance with :

• The salient features of the regulatory and promotional industrial policy framework

comprising industrial licensing, MTRP Act, FERA, SSI protection policy, industrial

location policy, administered price mechanism, taxation etc, and

• The impact of regulatory and promotional policy framework on industrial structure

and performance.

Structure

12.1 Introduction

12.2 Taxation

12.3 Impact of Regulatory Framework on Industrial Structure and Performance

12.4 Summary

12.5 Key Words

12.6 Self-Assessment Questions

12.7 Further Readings

12.1 INTRODUCTION

Economic activities, in general, are regulated and controlled by the Government, be it a

developing country or a developed country. The Governments have invariably felt at

varying degree of intensity – the need for a public policy which could direct, promote or

control or regulate the economic activities in accordance with the goals and objectives of

the economy.

In almost all economics, Government plays a role, major or minor, directly in economic

activities and directs/promotes/controls/regulates the activities of private entrepreneurs.

Thus, public sector and private sector do exist with varying degrees of importance in

every economy.

India has accepted the principles of a mixed economy, wherein both public and private

sectors have to co-exist with fair degrees of importance. However, it was the public

sector which was assigned a major role under the Industrial Policy Resolution (IPR) 1956

for Industrialisation of the country, since private sector was found to be lacking in

resources and maturity or ability then to participate in a major way in the Industrialisation

of the economy.

To industrialize the country by assigning a major role to the pubic sector, Government

formulated regulatory industrial policies, keeping in view the basic goals of the nation:
economic growth, self-reliance and social justice. Therefore, the regulatory policy

framework had four major objectives :

1. The promotion of heavy industry with an emphasis on the public sector.

2. Economic self-reliance, which translated into broad efforts at import substitution

and restrictions on technology imports to promote indigenous innovation.

3. Protection to small industry sector

4. Balanced regional development

To achieve these objectives, the regulatory policy framework comprised a variety of

policy instruments :

- Reservation of vast areas of industrial activities for the public sector;

- Industrial licensing to regulate and control investments in industry and locations;

- Legislation to control large and dominant firms;

- Legislation to control foreign investment and technology inflow;

- Comprehensive policies and incentives to protect small scale industry;

- Restriction on location of industrial units and incentives to move into backward

regions;

- Price administration of infrastructural inputs; and

- Taxation.
On the whole, industrial activities were subjected to a wide variety of controls and

regulations due to the emergence of regulatory industrial policy framework.

12.2 INDUSTRIAL LICENSING

To regulate the flow of investment in desired channels of industries and locations and to

match supply of industrial commodities with demand on the lines of national priorities,

the Government introduced industrial licensing for entry, in terms of quanity of

production, by firm and product. A license is a written permission from the Government

to an industrial undertaking to manufacture specific articles. It includes particulars of the

industrial undertaking, its location, the articles to be manufactured, their capacity on the

basis of maximum utilisation of plant and machinery and other appropriate conditions

which are enforceable under the Act. It is also subject to a validity period within which

the licensed capacity should be established.

Industrial licensing was introduced under the Industries Development and Regulation

(IDR) Act. The IDR Act was passed in October 1951 and the Act came into force on 8th

May, 1952. The Act applies to all the industries specified in the first schedule of the Act.

Originally this schedule listed 37 industries but the scope of the Act had been enlarged

from time to time to include more industries.

The IDR Act empowers the Central Government to exempt any industrial undertakings

from the operation of all or any of the provisions of the Act. Exemption is granted on the
basis of investment involved, the nature of industry, foreign exchange requirements, etc.

The chief objective of the Act is the development and regulation of industries in a

manner befitting the policy of planning, socialistic pattern of society, and other social and

economic goals of the country.

The salient features of the IDR Act 1951 are :

- Existing undertakings need to be registered with the Government

within the prescribed time limit

- New units are permitted only through an industrial license

- Government has the power to conduct an investigation, assume

management control provide relief or control supply and distribution

of products of certain industrial undertakings.

As per the IDR Act 1951 industrial licensing is mandatory :

1. to set up a new manufacturing unit.

1. for substantial expansion. Upto 1966, substantial expansion meant expansion

of production by more than 10 per cent of the licensed capacity. Since 1966,

substantial expansion means increasing production by more than 25 per cent

of the licensed capacity.

2. to change the location of the unit.

 3. to manufacture a new product, apart from the one fro which license is already

obtained by an existing manufacturing unit.

Till 1960, industrial licensing was needed for all units having investment of more than

Rs. 10 lakhs inland, buildings and machinery. Since then, the licensing exemption limit

has been raised from time to time (See Table 12.1) Since 1988, the exemption limit has

been fixed at Rs. 15 crores.

Table 12.1 Investment limit for Industrial Licensing Exemption

Year Investment limit (in land, building and machinery)

Upto 1964 Rs. 10 lakhs

1964 Rs. 25 lakhs

1970 Rs. 1 crore

1978 Rs. 3 crores

1983 Rs. 5 crores

1988 Rs. 15 crores

Procedures for obtaining a license

According to IDR Act 1951, all those industrial undertakings established prior to the

introduction of industrial licensing have to obtain Carry on Business (C.O.B.) license.

An application for an industrial license has to be made in an appropriate from prescribed

under the registration and Licensing Rules 1952. Form IL has to be used for licenses

required for new undertakings, manufacture of new articles and for substantial expansion.

Application for C.O.B. license has to be made in Form EE and application for changing

the location of an existing industrial undertaking has to be made in the Form `E’. The

application have to be submitted to the Secretariat of Industrial Approvals in he Ministry

of Industry.

Subsequent to the submission of applications, a Letter of Intent (L.O.I.) is issued to the

applicant within a month from the date of submission. The letter indicates the conditions

subject to which government will be prepared to consider favourably the grant of a

license. The condition may comprise furnishing details such as terms of foreign

collaboration, import of capital equipment, issue of capital, etc. Once the conditions

inculpated in the Letter of Intent are fulfilled, it is converted not an industrial license.

The initial validity of industrial licenses is two years within which commercial

production from the licensed capacity has to be established. This period can be extended

by the Administrative Ministry concerned if there is good and sufficient reason for two

further periods of one year each.

Since the 80’s a number of exemptions and relaxations were introduced in industrial

licensing to promote growth and competition in industry in general and selected industrial

in particular. More flexibility for increasing capacity was permitted under various

provisions such as “automatic growth”, “unlimited growth”, “Regularisation of capacity”,

“re-endorsement of capacity”, “broad-banding”, and “minimum economic scale”. A

number of industries were exempted from licensing. However, despite thee relaxations,

the system of capacity licensing continued to act as a significant barrier to entry and

growth.

The Industrial Licensing System which was a major regulatory and controlling

instrument for industrial growth, had been criticised on various fronts. The system had

shortcomings and had resulted in undesirable consequences over the period.

By and large, licensing system had discouraged potential investors, dampened the overall

growth of industrial investment, and inhibited the ability of firms to take advance of

economics of scale, technological progress and product specialisation.

There was no explicit economic criteria for weighing different objectives for granting or

rejecting industrial licenses. This was reflected in the `poor quality’ of techno-economic

examination of proposed industrial investments by the Directorate General of Technical

Development (DGTD), Ministry of Industry.

There was inordinate delay in the processing and clearance of applications for industrial

licenses. This had also deterred entry and growth. For example, between 1982 and 1985,

fewer than half of the applications for capacity licenses were decided in stipulated three

months of submission, and a third required more than six months.

In many instances, industrial licensing proved `counter productive’ to its objectives.

Licenses were obtained by some industrial houses to pre-empt entry or expansion by

competitors. Such licenses were usually not converted into installed capacity. IN such

cases, the most common reason for rejecting a license application was the existence of

“adequate capacity”. This is because, it was assumed that all sanctioned capacity was

fully utilised when license applications were processed. The presence of such unutilized

licenses had only facilitated the creation and substance of sellers’ market.

In certain industries like cement, the market demand and the periodic fluctuations in it

were not anticipated and budgeted appropriately by the licensing authorities. As a result,

the efforts to balance supply with demand by licensing led to alternating periods of

scarcity and excess capacity.

Licensing restrictions on exception and on producing a new product seemed to bemire

than those on entry. Thus, licensing had functioned as a barrier to growth, limiting

specialisation and the exploitation of scale economics. Due to the bias towards a new

unit, existing units tended to apply for licenses to build a new plant and produce a new

product rather than expand and specialize, resulting in excessive diversification and

industrial fragmentation.

There were also instances where companies did not adhere to the provisions of industrial

licensing. Plans of expansion were implemented even without prior licenses. In certain
cases, companies which obtained multiple licenses to reduce multiple products, utilised

less of the licensed capacity in one product whereas produced far in excess of the

authorised capacity in respect of some other products. Thus, there was considerable

diversion of resources and raw materials obtained in the name of one license to the

production of other licensed products.

Finally industrial licensing did not succeed to curb or restrict over Capitalisation in the

organised industrial sector. As a result, industry was characterised by excess capacities

in certain industries coupled with shortages in the rest. On the whole, the very objective

of matching supply with demand in accordance with the national priorities remained a

distant reality.

12.3 CONTROL OF LARGE OR DOMINANT FIRMS

An important objective of industrial policy and its important instrument of licensing is to

prevent the emergence of private monopolies and the concentration of economic power in

the hands of a small number of individuals. In April 1964, the Government of India

appointed the Monopolies Inquiry Commission to inquire into the extent and effect of
concentration of economic power in private hands and the prevalence of monopolistic

and restrictive practices in important sectors of economic activity other than agriculture.

The Commission submitted its report in October, 1965. On the basis of the

recommendations of the Commission. The Monopolies and Restrictive Trade Practices

(MRTP) Bill was enacted in 1969 and came into force in 1970.

The MRTP Act 1969 aims at controlling industrial activities of the country with a view to

give effect to directive principles of state policy which states that the ownership and

control of material resources of the country should be so distributed as to sub serve the

common good and that the operation of the economic system does not result in the

concentration of wealth and means of production to the common detriment.

The control over monopolies and restrictive trade practices in exercised through (i)

setting up Monopolies and Restrictive Trade Practices Commission as a permanent body,

(ii) regulation of substantial expansion, establishment of new undertakings, mergers,

amalgamations, take-over, appointment of directors and registration of dominant

undertakings, and (iii) registration and control of agreements relating to restrictive trade

practices.
MRTP Commission

The Commission under MRTP Act, 1969 was appointed in 1970 with a Chairman and

two members. The Chief function of the Commission is to review periodically the trends

in ownership of industries and advise the Government on measures to prevent the

concentration of economic power and on prohibition of monopolies and restrictive trade

practices. The second function of the Commission is to investigate into monopolistic

trade practices and to report to the Central Government its findings for necessary action.

The third important function is to inquire into any restrictive trade practices prejudicial to

public interest and order for its discontinuance.

Under the MRTP Act 1969, MRTP firms were originally defined as enterprises or

interconnected firms that had assets of Rs.20 crore or more or a dominant market share

(33 per cent or more). The definition of dominant market share was tightened in 1984 to

25 per cent or more. In 1985, the MRTP asset limit was raised to Rs.100 crore.

Other Provisions of the Act.

)I) concentration of economic power: Under section 21, subsection 1(a), “dominant

undertakings” shall not substantially expand their activities without prior approval.

Substantial expansion means 25 per cent increase in the value of assets, volume of

production or sales.
 (ii) Establishment of new undertakings: No person or authority other than the

Central Government shall establish a new undertaking without prior

permission if such undertaking is a dominant undertaking.

(iii) Merger, amalgamation and take-over Prior permission of the Central

Government is needed if merger or amalgamation or take-over of one unit

with another makes it a dominant undertaking.

(iv) Appointment of Directors: No person who is a director of a dominant

undertaking shall be appointed a director of any other undertaking without the

prior approval f the Central Government.

(v) Registration of agreements relating to RTP: The restrictive trade practices

include exclusive dealing arrangements, minimum sale-price maintenance

agreements, resale price maintenance agreements, tie-up agreements,

exclusive sole distribution ship agreement, any agreement for exclusion of any

person from any trade association, etc.

Thus, the MRTP Act provided the Government an additional instrument for controlling

large firms. In other words, large firms faced additional barriers to entering new lines of

manufacturing or expanding through the MRTP Act.

Even within the economic sphere permitted to MRTP companies, the MRTP clearance

procedure was more restrictive than he procedure for companies in general. Between

1982 and 1984, the approval rate of industrial license applications involving MRTP

clearances was 25 per cent whereas it was 40 to 50 per cent for the companies in general.
The processing time was usually longer. Less than half of all applications by MRTP

companies were decided within one year and may took two or more years.

Further, MRTP limitations on entry and expansion of large firms prevented them from

increasing competition in markets characterized by high concentration and excess profits.

Thus, the restrictions on large firms under the MRTP Act paradoxically protected firms

dominant in their markets when the Act was implemented. Thus the Act, in effect,

divided certain industries into a series of protected monopolies, each within an assured

share of the market. In machinery manufacturing for pulp and paper, earth moving

equipment, packaging, cement and printing, the fourth biggest firms accounted for more

than 70 per cent of the market in the mid 1980s. The trend only moved towards further

concentration. At the beginning of 1990s, in more than half of India’s industries, the

market share of four large firms ranged between 80 per cent and 100 per cent.

FOREIGN INVESTMENT CONTROL

The IPR 1948 duly recognized the role of foreign investment in India’s industrialization.

However, it emphasized that ownership and control of all enterprises involving foreign

equity should lay in India hands. The objective behind encouraging foreign investment

was to supplement domestic capital and to bridge technology gaps for industrialization.

A policy shift began in the mid 60s as the country opted for highly selective purchase of

technology and minority foreign equity participation.

The Foreign Investment Board was set up in 1968 to scrutinize and approve foreign

collaborations. Industries were classified under lists for banned and favoured sectors for

technical collaboration. Royalty rates and fees were prescribed for outright purchase of

technology. Separate policies were pursued for `Indian sing’ management and diluting

foreign equity share holding.

The coming into being of Foreign Exchange Regulation Act (FERA) 1973 put further

restrictions on foreign investment. FERA, with certain exceptions, put a general ceiling

on foreign equity participation in the country.

- FERA forced foreign equity to come down to 40 per cent or less or else

withdrawal from the country altogether.

- FERA emerged as a major barricade or discouraging/restrictive factors for

fresh foreign investment.

The major objective of FERA limiting equity upto 40 per cent was to limit the foreign

exchange drain in the form of repatriation of dividends. However, FERA did not have

any positive impact. New foreign investment decliend and the erstwhile subsidiaries with

minority equity status received a deduced flow of technology from parent companies and

had to enter into collaborations for relatively minor technology transfers. Thus, there was

touch improvement in the balance of payments. Royalty and technical fees increased,

dividend levels remained relatively constant and new investment fell.

12.5 PUBLIC SECTOR ENTERPRISE PREFERENCES

Assigning a major role to the public sector in industrialising the country formed an

important component of the regulatory framework. Vast areas of industry and

infrasctrure were exclusively reserved for the public sector. These included railways,

telecommunications, air transport, defence, minerals, coal etc. The objective was to

enable public enterprises to reach the “commanding heights” of the economy.

Public sector enterprises were also given preference for licenses in other industries

including steel, capital goods and oil refineries. Due to these deliberate policies of public

sector promotion, total investment in Central Government public sector enterprise rose

from Rs. 953 crore in 48 units in 1960/61 to Rs. 50,300 crore in 225 units in 1985/96.

The share of public sector in total manufacturing GDP went up from 7 per cent in

1960/61 to 31 per cent in 1983/84.

In addition to reservation of industries and preferences in licensing, public sector

enterprises (Poses) enjoyed low financial costs due to equity capital contributions from

the Government. PSEs also had the privilege of issuing tax exempted bonds. PSEs,

further had the access to budgetary funds which reduced pressures to minimize costs and

charge appropriate prices for their products. On the whole, there was all round

protection to the public sector. This is because, unlike the private sector, public sector

enterprises had been burdened with multiple objectives such as employment generation,
reduction in regional disparities through Industrialisation of backward areas, generation

of resources for further economic development etc.

However, the all-round protection and the burden of social objectives had a telling effect

on the financial performance public sector enterprise. The overall financial performance

of PSEs had been poor. In industries where both public sector and private sector

coexisted, the performance in terms of capacity utilisation and profitability was generally

high in the private sector than in the public sector. Thus, though public sector enlarged

its presence in core as also non-core sectors due to deliberate policies, its performance

was unimpressive in consideration with the huge public investments made in the sector.

12.6 SMALL SCALE INDUSTRY

Encouragement to Small Scale Industry (SSI) through exclusive policy measures of

protection formed another face of the regulatory framework. Principal measures of

protection for SSI comprised :

- Reservation of products for exclusive manufacturing in SSI sector.

- Restrictions on the growth of output and capacity in the large scale industry

sector producing items reserved for SSI sector

- Concessional credit from the banks

- Excise and sales tax exemptions/concessions

- Exemption from many labour legislations

- Exemption from licensing

 - Preferential access to raw materials, both domestic and imported

- Purchased support through Government procurement and price preferences for

SSI products etc.

These polices of protection treated large and small enterprises as watertight

compartments. These policies together motivated many small enterprises to stay small

rather than to grow, even where a product was not reserved. They increased their

operations by establishing more small units. Thus, “small became an end in itself”.

For products in which scale economies are important the policy of product reservation

limited the scales of production sub optimal level, by presenting or inhibiting growth

beyond the asset limits and by eliminating potential competition from medium scale and

large scale firms, SSI policies have considerably reduced the pressured for small firms to

improve technology, updated production techniques, introduced modern product designs

and reduce costs. As a result, technology upgrdation and Modernisation have become a

major challenge today tot eh SSI sector towards achieving competitiveness.

12.7 INDUSTRIAL LOCATION

Balanced regional development has been a major goal of India’s industrial policy. The

policy instruments used to achieve this goal varied from time to time. In the 50s and 60s,

publics sector enterprises were used as a weapon to reduce regional disparities in

development. Public sector enterprises were located in resource rich less developed
states. In addition, uniform prices were ensured for basic inputs like steel, cement and

coal fro industries across the country.

In the 70s, policy shifted from development of backward states to development of

backward regions, respective of states. Additional financial incentives in the form of

capital subsidy, interest rate concessions, transport subsidy and tax holidays were

introduced to attract industries to such regions. In the 1980s fiscal incentives were

supplemented by licensing polices to encourage MRTP and FERA companies to move

towards backward regions for further investments. Restrictions were also imposed on the

entry of large firms into cities having a population of more than a million.

In addition to central level policies, there were state level incentives including sales tax

exemptions, concessional finance and priority access to infrastructural facilities. These

state level incentives varied from state to state. The objectives of state level incentive

are two fold :

1. To attract more investments in a particular state in relation to others.

2. To disperse more investment to less developed as compared to more

developed districts, within the state.

However, in effect, industrial location policy emerged more as a constraint for rational

investment decisions than as a facilitator of balanced regional development.

12.8 ADMINISTRATED PRICES

Administered prices of certain commodities including critical industrial and

infrastructural inputs by the Government represented another features of the regulatory

framework. These commodities comprised steel, fertilizer, paper sugar, cement, drugs,

coal and petroleum products, among others. During the late 80s, prices of as many as 65

individual or groups of commodities were administered by the Government.

Administered price policy had three major objectives :

1. To provide certain products at concessional prices to favoured groups such as

Government, public sector units and the poor;

2. To provide subsidies through the pricing mechanism to encourage production of

items such as fertilizer; and

3. To control inflation by limiting price increases that might have arisen as a result

of shortages of items such as steel.

The prices of these products were set by the Ministry concerned, based on the

recommendations of the Bureau of Industrial Costs and Prices (B.I.C.P.) and various

industry specific committee. Prices were usually calculated on a cost plus basis to
provide reasonable return on capital. But the application of these principles varied from

industry to industry resulting in :

- a uniform price for all plants for a given product (egg. Steel)

- different prices for different plants for same product depending on the age of

plant, etc., (egg., fertilizer)

- different prices for the same product from a given plant (e.g., levy and non-levy

cement)

Administered price controls have adverse effects on efficiency and growth of industry :

- Shortages emerged from time to time in consumer goods industries like paper and

hydrogenated vegetable oil (vanaspati) which were subjects to price controls.

- There were substantial shortages in the supply of cement until rapid investment

followed the partial decontrol of prices in 1982.

- Suppressed increases in steel price during the late 1960s, and 1970s reduced

internal resource generation, thereby hindering Modernisation which resulted in

low efficiency and technological backwardness, and

- Price controls created a bias towards plants of uneconomically small scale in

several sectors.

12.9 TAXATION
High rates of tax structure, both direct and indirect, formed another significant aspect of

the regulatory framework. The level and incidence of direct and indirect taxation had a

detrimental effect on entrepreneurial behaviour and incentives and thereby the efficiency

of industrialist ion. Higher rates of corporate and income taxes only encouraged task

evasion and discouraged risky and innovative manufacturing efforts by entrepreneurs.

High level of indirect taxes, especially excise and sales taxes had made India a high cost

economy and hampered exports. The cascading nature of these taxes also encouraged

vertical integration and discouraged product specialisation and efforts to achieve

economics of scale. Further, varying rates of states sales taxes and Octroi have

contributed to fragmentation of production by hindering inter-state trade and increasing

transport costs.

12.10 IMPACT OF REGULATORY FRAMEWORK ON

INDUSTRIAL STRUCTURE AND PERFORMANCE

The regulatory policy framework, emerged out of the Industrial Policy Resolution of

1956 and pursued for more than three decades, had affected :
1. The structure of industry comprising structure of industrial production, size

distribution for firms within industry scale of production market concentration of

forms and product specialisation, and

2. The growth and efficiency of industry.

Structure of Industrial Production

The primacy importance assigned to the development of heavy industries produced

structural changes in industrial production (Table 12.2).

Table 12.2 : Changing Structure of Production in India (% share)

Industry Group 196- 1970 1980 1984

Basic Industries 26.8 32.3 35.3 40.4

Capital Goods 12.9 15.7 17.6 16.6

Intermediate 24.3 20.9 19.6 17.8

Goods

Consumer 36.0 31.0 28.0 25.6

Goods
Total 100.0 100.0 100.0 100.0

The basic and capital goods industries which accounted for less than 10 per cent of

manufacturing value added (MVA) in 1950 and 40 per cent in 1960, accounted for 57 per

cent in 1984. The share of consumer goods which accounted for more than one third of

MVA in 1960 declined to about one-fourth in 1984.

Size Distribution of Firms

The regulatory policies created differential barriers to entry, growth and exist for

different sizes of firms. Thee had a dampening effect on the gradual growth of firms, a

significant characteristic of a economy attaining industrial maturity.

Production Scale

Another consequence of regularly policies was to constrain plant size. Even large firms

were often made up of many small production units. Licensing constraints, protection to

small industry units, and limited size of the domestic market together had led to the

growth of plants with less than economic scales of production. The average plant size of

existing Indian companies is small relative to international standards in such major

sectors as steel, automobiles, chemicals, aluminum, paper etc. Production costs, as a

result, are higher than could be achieved with plants of minimum efficient scale.
Market Concentration

Though many Indian plants are small by international standards, production was

concentrated only in a few firms in many industries. This is a paradox considering that

industries licensing in general, and MRTP Act in particular, were aimed at controlling

large and dominant firms. This probably reflects the small size of the domestic market.

As mentioned earlier, in industries such as pulp and paper, earth moving, packaging,

printing and cement, the four largest first accounted for 70 per cent or more output in

1983/84. The concentration ratios were similarly high another industries including basic

metals, synthetic fibres and paper products.

Concentration in India was also high relative to other countries. For example, indicia 55

per cent of Industrial segments had four-firm concentration ratios in the range of 80 to

100 percent whereas in Japan only 9 per cent of industrial segments had this degree of

concentration.

The important issue that needs to be noted here is that not only a few firms had a

dominant share in many industries despite legislations to control monopolies, but more

importantly they were protected from competition, both within the country and abroad,

by not allowing other firms to enter into those `highly concentrated’ industries.

Production Specialisation
Absence of product specialisation and horizontal diversification in many industries is

another outcome of regulated policy framework. The structure of production in many

industries was characterised by inappropriate product miss at the firm as well as at the

sub-sector level. Too many products are manufactured by one single firm in many an

industry.

The insufficient industrial product specialisation was due to :

- highly protective industrial and trade policies aimed at acquiring self-sufficiency

locally encouraged domestic production of any item that could be produced in the

country with reasonable profits.

- many firms produced intermediate inputs for in-house consumption even if

buying from other sources was more economical

- high relate of excise duties encouraged in-house production of inputs

- the licensing regime was less restrictive in granting licenses for new product lines

than for expansion within the same product category. This promoted horizontal

diversification and curtailed vertical growth of firms.

Growth and Efficiency of Industry

The regulatory industrial policies affected the overall growth and efficiency of industry as

well. Though industry grew rapidly during 1950-65, the growth decelerated during 1966-
1980 and therefore, slowed the process of change in the economic structure of the

country.

In the process of economic development, as observed by economists, countries go

through two stages of structural change. In the first stage, the share of agriculture in

Gross Domestic Product (GDP) falls and that of manufacturing output increases. In the

second stage, the share of agriculture continues to fall and that manufacturing output

increases. In the second stage, the share of agriculture continues to fall and that of

manufacturing after reaching the level of 25 to 35 per cent of GDP also starts declining

combined with the increasing share of service sector.

India did experience this kind of structural change in the economy the share of agriculture

declined, the share of services increased but the increase in the share of manufacturing

was not significant, both absolutely and relatively (Table 12.3).

This brings out that our restrictive industrial policies aimed at `planned Industrialisation’

of the country, resulted in decelerated (below-the-potential) growth of industry and

slower change in economic structure. Thus, the manufacturing sector still has the

potential for rapid growth and relative increase in the share of GDP, particularly in the

light of experiences of other Arian countries.

Table 12.3 : India : Structural Change in GDP 1966-83

Sector/year India China South Korea Developing World

countries

Agriculture

1966 47.8 37.5 34.9 28.6 9.4

1978 38.6 29.8 20.2 21.4 7.2

1983 35.6 35.3 13.9 20.8 6.4

Mining

1966 1.0 4.4 1.9 4.7 2.5

1978 1.4 5.5 1.4 6.2 3.5

1983 2.9 6.7 1.4 7.8 4.6

Manufacturing

1966 14.3 30.3 18.6 21.1 27.9

1978 15.9 37.5 27.8 22.2 25.6

1983 16.7 32.5 27.4 20.6 23.0

Construction

1966 5.1 3.2 3.7 4.5 5.8

1978 5.3 3.7 7.9 5.9 6.4

1983 5.0 4.6 8.4 5.7 5.6

Services

1966 31.7 24.5 41.0 44.1 54.4

1978 37.7 23.6 42.7 44.3 57.3

1983 40.0 20.9 48.9 45.1 60.3

Not only was the growth of industry not as high and significant as it could have been, but

more importantly the efficiency of industry did not increase, rather it only declined. This

was reflected in rising capital intensity of the overall industry. The incremental Capital

Outpour Ration (ICOR) in the manufacturing sector incised from 2.8 in the fifties to 4.4

in the sixties and 6.3 in the seventies. The ICORs were higher in industries (i) where

import substitution had taken place in the absence of natural comparative advantage; and

(ii) which were characterised by underutilization of capacity and technological obsolesce.

The decline in efficiency of industry could also be attributed to regional dispersal

policies, excess capacity creation, fragmentation into units of uneconomic size and

raising input costs of material inputs and services from the public sector units. All these

have resulted in low growth of total factor productivity. The growth of total factor

productivity was around 1 per cent between 1965 and 1980 as against 2 to 5 percent in

other developing countries. The slow growth of productivity and rising trend of capital

intensity adversely affected the competitiveness of Indian industry in the international

market and thereby affected the growth of Indian exports as well.

Activity 1

1. Meet (a) a private entrepreneur, and (b) the manger of District Industries Centre

of your district and discuss the pros and cons of the role of the Government as a

regulator and promoter of industrial growth.

12.11 SUMMARY

To provide a planned direction to Industrialisation, India opted for a regulatory and

promotional policy framework. Industrial licensing, MRTP Act, FERA, reservation of

industries for public sector, protection for small scale industry, restrictions on industrial

location, administered price mechanism for infrastructural inputs and taxation formed

different components of the regulatory framework.

Though the regulatory framework had `sound economic objectives’ , their

implementation and outcome were far from satisfactory. Excess capacity on the one hand

and shortage of industrial products on the other were paradoxical features of industry.

Fragmented uneconomic units, high concentration of output in a few firms in strategic

industries, low productivity, high capital intensity became the characteristics of Indian

industry. These, factors among others, affected its competitiveness to penetrate into

international market.

12.12 KEY WORDS

Administered Price : Price of a commodity or service is fixed by the Government rather

than determined by the free play of market forces of demand and supply.
Commanding Heights : The prominent objective of promoting Pubic Enterprises (Peps)

In India, as emerged out of the Industrial Policy Resolution 1956, was to enable PEs to

achieve `Commanding heights’ of the economy. This means to facilitate PEs to grow and

function in all strategic and core areas of the economy to produce goods and services, to

generate employment, to promote balanced regional development, to generate resources

to accelerate the overall economic development and thus become the pillar of India’s

economic prosperity.

Gross Domestic Product (GDP) : The value (at market prices) of total flow of goods

produced in an economy during a year. Only goods used for final consumption or

investment goods are included.

Incremental Capital Output Ration (I.C.O.R.) is the ration of net investment to change in

output.

Manufacturing Value Added (MVA) : The difference between the value of total

manufacturing outpour and the cost of raw materials, services and components

purchased.

Monopoly : It is market structure with only a single seller of a commodity or service

dealing with a large number of buyers. The seller is then said to be a monopolist.
Sellers Market : A market situation in which sellers hold the stronger strategic position

of bargaining advantage because buyers are prepared to buy, at existing prices, larger

amounts of goods than sellers are currently able or willing to produce and sell.

12.13 SELF-ASSESSMENT QUESTIONS

1. What were the objectives and shortcomings of industrial licensing policy in India?

Discuss in detail.

2. How effective was MRTP Act in achieving its principal objective ? Analyse.

3. Foreign Exchange Regulation Act, 1973 was a turning point in the foreign

investment policy of India. Why ?

4. The promotion of public sector to achieve “commanding heights” of the economy

was the most noteworthy feature of India’s industrial policy. Did public sector

achieve the “commanding heights” in terms of its performance ?

5. Describe the salient features of the protective policy adopted by the Government

for small scale industry ?

6. What were the objectives and achievements of administered price mechanism ?

7. Critically analyse the achievements and adverse effects of regulatory policy

framework in the course of India’s Industrialisation.

8. “The role of public sector is as significant and indispensable as the role of private

sector in the Industrialisation of a developing economy”. Discuss.

9. “Industrial licensing is an instrument to channels the limited resources of an

economy in the most productive way for Industrialisation”. Analyse this

statement on the basis of India’s experience.

10. “Foreign investment is a panacea for the economic ills of a developing country”.

Critically evaluate this statement.

11. “Promoting competition is the best strategy to accelerate Industrialisation”. Do

you agree ?

12. “India has succeeded in preventing concentration of economic power through

MRTP and protection to small scale industry”. Is it true ? Illustration.

12.14 FURTHER READINGS

1. “India : Small World”, The Economist, May 4-10, 1991, London

2. Adiseshih, Malcom S. (ed) : Perspectives of Industrial Development, Lancer-

Publishers Pct., Ltd., 1991.

3. Brahmananda, P. R. Is India a High Cost Economy ? Lancer International, 1988.

4. Kumar L R : Industrial Licensing – Policies and Procedures, Volumes I and II,

Indu Publications, New Delhi 1988.

5. Reserve Bank of India : Foreign Collaboration in Indian Industry, Fourth Survey

report Bombay, 1984.

6. Khurana, Rakesh : growth of Large Business : Impact of Monopolies Legislation,

Wily Eastern, New Delhi 1981.