30 PU BL IC SE CT OR IN TH E

Ch ap ter IN DI AN EC ON OM Y

Th~ prese nt India n econo mic struct ure is often

ch aracte The answer to this questi on has been attempted by
produ t . nsed .
as 'mixe d
economy , . There are two fields of Hazar i accord ing to whom the indus trial progr amme
RX.
bl" c ion m the struct ure - the privat e sector and s of
the gover nmen t that emerg ed after 1955 were bui/J aroun
puf. . ic sector . The presen t chapte r is devoted to a discus d
o issue. s pe rta· · sion two hypoth eses:
irung to the public sector. ln particular we
sh all discu ss: (1) privat e invest ment in relarively simpl e goods would
'
be prom oted by s huttin g out impor ts as well as 1hro11
• Divis ion of the econo my into publi c and privat gl,
e excess capac ity at home, with a co11sequeflf boost to profits;
secto rs
and
• Role and perfor mance of the public sector
(it) public invest ment, being a11to11omo11 1· of profits,
• Probl ems of public sector enterp rises would take place in basic areas which had long gestat
lo,r
• Policy towar ds public sector since 1991 . perio ds, low or 110 profit s, a large foreig n exc/,a
,rge
comp onent , comp lex tec/,110/ogy a11d equal ly co mplex
probl ems of coord inatio n. 2
DIVI SION OF THE ECO NOM Y INTO
PUB LIC The logic of the first hypot hesis was that pri vate
AND PRIV ATE SEC TOR S
investment was in the nature of · induced investment
' and
At the time of Indep enden ce, activi ties of the public could be promoted by adopting a policy of protection agains
t
se~tor were restric ted to a limited field like irriga tion, imported substitutes. TI1e logic of the second hypoth
power, esis
railw ays'. ports, comm unica tions and some depar tment was that invest ments in low profit yield ing and heavy
al invest ment requir ing indus tries were in the nature
under taking s. After Independence, the area of activi of
ties of 'a utono mous inves tment ' and could , accor dingl y,
the publi c sector expan ded at a very rapid speed. To be
assure
the privat e sector that its activi ties will not be undul y curbe undertaken only by the State.
d,
two indus trial policy resolu tions were issued in 1948
and
1956 respe ctivel y. These policy resolu tions di vided ROL E OF PUB LIC SECT OR IN THE
the
indus tries into differ ent catego ries. Some fields were INDI AN ECO NOM Y
left
entire ly for the public sector , some fields were divide
d
betwe en the public and the privat e sector and some Public sector in lndia has been critici sed vehemently
others
were left totally to the privat e sector . 1 A cursory glanc by a numbe r of supporters of the privat e sector who
e at have
the division offields of industrial activity into the publi chosen to shut their eyes towar ds the achievements
of the
c
and priva te sectors clearly brings out that while heavy and public sector. Following description should be sufficient
to
basic indus tries were kept for the publi c sector , the convince one that public sector has played a def~ p.o
entire ~
field of consu mer goods industries (havillg high and early role in the economy.
return s) was left to the priva te sector . Outsi de the indust 1. Public sector and capital formation. The role of
rial
field, while most of the banks , financ ial corpo ration public sector in ~~llec tin_g saving s and investing them
s, during
railwa ys, air transp ort, etc., are in the public sector the plann i)2g ~0.as b~en very i.mgortant. Durin g the
, the First
entire agricu ltural sector (whic h is the larges t sector and Se~ d Plans , of the total inve s~n~
of the r cent- ;;s
econo my) has been left for the privat e sector . in the public sector and the remai ning in the privat e
sector.
The impor tant point that arises at this junctu re is - The share of public ~ec!.9!:_ rose_to--60- per- ce.ot in the
Third
why were the heavy and basic indust ries like iron and Plan but fell therea fter. Howe ver, even then it was as
steel, high
heavy engin eering , heavy electr ical plant, etc., select
ed for as ~5.7 p~r c~nt ~ the Seven th Plan. W ~ n ~
ds
devel opme nt in the publi c secto r while quick -yield of libera lisa]_Qn m 129.0s, the share of public sector in
ing total
consu mer goods indus tries were left for the privat e invest ment fell drasti cally to 34.3 per cent in the
sector ? Eighth
 Public Sector in the Indian Economy
381
Plan, 29.3 per cent in the Ninth Plan and 23.6 per
cent in of industr ial sector in GDP at fa~~ 2-pe F-C
the Tenth Plan. In the Eleven th Plan, th~~ hare of ent
public i_
n 2013-1 4 (at 2004-0 5 prices) . Accord ing to the new
sector in gross capital formati on was 2~c ent.
This series~ 1tnbas e year 2011-1 2, the share of the industr
reflects the increasing importa nce that is now being accord ial
ed sector in G VA (gross value added) at basic prices was ]..11.
to the private sector. The nationa lised banks, State Bank
of per cent in 2013-1 4 and 31.4 per cent in 2014-1 5.
India, Industr ial Develo pment BariK offirdti(" ll]_9llst This
riaf shows the incr easi n~d ustr
Financ e Corpor ation of India, State Finaiicfal ~ orporat .ial- sect or in
ions, the lngi~QJ,._conom y. Not only this, the industr ial base
LI~;-:_l IT!~ , havepl ayea an impa'rtant rnle in collecti of the
ng Indian econom y is now much stronge r than
savmgs and mobilis ation of resources. what it was in
1950-51. There has been signific ant growth in the defenc
Howev er, savings in the public sector itself are not e
industr ies and industr ies of strateg ic import ance
much. ~n fact, ·there has been a precipi . The
tous fall in the share govern ment has stµ.ng t·~ --r-1,.e.._j.!! du st rial~
ofp~bh c sector in gross domestic savings . During the
of Sixth Plan as a wh I period com,ae rably by placin g due emph!!§iS on t'Jieselifnjj
. . o e, publ " . up of
1c saVIng was 24.4 per industr ies in
total d~mest ic savmg and this fell to 15.0 per cent cent of the follg wing_fl .e/ds - iron and steel, heavy
during engine ering, coal, '1ieavy electri cal machin ery, petrole
tb_e penod of the Sevent h Plan and just 9.5 per cent um
in the and naiur.aL g..a-s, cliem1 cals and drugs,
Eighth Plan, 6.6 per cent in the Tenth Plan and further fertilis ers,etc .
to Becaus e of their low profita bility potent artiitli e short
just 5.6 per cent in the Eleven th Plan at current prices run,
year 2004-0 5).3 (base these industr ies do not find favour with the private sector.
Howev er, unless these industr ies are set up, the consum
. ~- Develo pm~nt of infrast ructur e. The primar er
goods industr
y fes cannot progre ss at a sufficie ntly
cond1t10~ of econorruc develop ment in any underdevelope rapid
pace. Therefo re, the produc tion of consum er goods industr
d
country ~s that the iru:i:ast ies
ructure shou_!_d d~velo ~!_ ain the private sector is
rapid also likely to
pace. Withou t a sufficie nt expans ion of irri gati_OJl facilitie suffer if the State does
n9t invest in heavy ~ i i i a u st r r e ~
s
aria po~ and energy , one cannot---;v en concei ~~f H.
H~ ·Even tfie\/i·e w that it is the functio n of the State
ag r i c u ~~~o pment. In the same way witho-~t-;n to provide only basic 'servic es' leaves room for a great deal
adeq~ lopmen t of transpo rtation and communication of public e n ~ ~ ~ . t u r i n g indust~
facili~ fuel ancfener gy,-and - ba§.ic_ well as in
and hearyin dusffie
power, transpo rt, commu
s;-- n i.c:ati ons,
the process c,nna etc. For consum er-
ustriaT isation canno~ ta-;:; gooas
;d.fudi a mdustr ies, which are usually capabl e of attracti ng
had inherit ed an unde~e loped ·basic infrastr ucture from some private capital, 'd epend on the 'servic es' of the produc
the er-
colonia l period . After Indepe ndence , the private sector goods industr
neither ies in which private capital is - at least
showed any inclina tion to develop i..t nor did it ha~e initially - less interested. Hence one can argue, withou
any t
resourc es to make this possibl e. It was compar ativelyany 'sociali stic' overton es, that as - for instanc e -
weak textile
both financi ally and technic ally, and was incapa or food-pr ocessin g industr ies need the suppor t of
ble of native
establi shing a heavy industr y immed iately. These metallu rgical and engine ering industr ies (the necess
factors ary
made the State's partici pation in industr ialisati on essenti equipm ent not being availab le from abroad owing to
al foreign
since only the govern ment could enforce a exchan ge difficulties, deliver y delays , etc.) and as no
large-s cale private
mobili satioi_i of capital , the coordi nation of industr entrepr eneurs show any inclina tion to pionee r the latter,
ial the
constru ction, and trainin g of technic ians. The governState must step in and do the pionee ring itself." 4
ment
has'no tonly improv ed the road, rail, air and sea transpo
rt 4. Econo mies of scale. In the case of those industr ies
system , it bas also expand ed them manifo ld. Thus, where for technol ogical reason s, the plants have to be
the large
public sector has enable d the econom y to develo p a requiri ng liuge mvestrn ents, setting up of these industr
strong .ies
infrast ructur e for th.e future econom ic growth . The in the public sea-or canpreven t the concentr.ati.on of econom
private ic
sector also-ha s benefit ed immen sely from giese iny~_ and ind~strial.pow er
stments in private han~ It is a ·i;own fact
underta ken by the public sector. that in the presenc e of signific ant econom ies of scale,
the
istrong indust rial base. The share of the industr ial
free market ~s not produc e the best results
conside rations of econom ic efficien cy require some
. Accord ingly,
sector (compr ising manufa cturing, constru cti ~ electric form
ity, of govern ment regulat
gas and water s1;pply ) -incfro ss- ion or public owners hip. Even in the
Domes tic Produc t at !actor
cost has increas ed slowly but steadil y dwjng the penocL USA firms in electri_c~ er, nalu!'.<!1 gas, telepho ne and
of some other industr ies are __!)eing
planning. The share cirtne·i~tri al.sectortnG DP regulat ed by Federa l and
at fact?r State regulat ory commi ssions. Countr ies like France
COSfI'ose from I 6 .6 per cent in l 950-.5J _to 2±:Q._p_ and
er cent m
-
the United Kingdo m have explici tly prefer red
1970-71 and further to 27 .7 per cent in 1990-91 . The public
share owners hip in these fields .
t--,..__
 382
Indian Economy

5. Removal of regional disparities. The governmen . n be used directly b)'_jhe_goy~rnmenLon_the

t pubhc sector ca
in India has sought to use its powe r of settin g e; o-Tarrunes O f •'-e
w
poorer sections of community·
.----c-----
a-dis crim_inat9 ry policy by,
up of w ~= -
industries as a means of remov ing regional di sparit . ") bl. secto r ~,opL
ies in 11 can a>" .
industria~ velopment. In . . the pre-Independerice ( P~ ;cmaterial~ W small indus_~riali~~ s .at low prices ~nd
period, suppl ymQ...- ;---;--• ,.t high prices · (m) publi c sector can give
most of the indus tnal progress of the country was b · · dustriahsts a
limited
in and around the port towns of Mumbai, Kolka ig m~- · · h lower staff' as compared-t0-.the_pQv_ .
ate
ta and better wage s to t e - - - -
Chenna i. Other parts of the country lagged far behind. a n alsoi. mplem ent P!Ogi:_<!mme s O
f Ib
Jl Q_ut \V~lfa
ilieuiiti"ation of the planning proce ss ~n the country in
After sector_~ c f I nies an-cf"iownshi_ps for Iat:?ourers, re,
1951 , con s'tfuctton o co O · · slurn
the government paid partic ular attent ion to the-problem - · - - . d (iv) public secto ·
and cleara nce, etc., an r _
can onen t produ ction
. _ : f - .
set up industries in ~ ber of areas negle cted by the machm ery _tow~ ds the production o mass consumption
private sector . Thus, a major proportion of public
investment was directed towards backward States .
four major steel plants in the public sector - Bhila
Plant, Rourkela Steel Plant , Durgapur Steel Plant and
sector
All the
i Steel
Bokaro
goods.
- PER FOR MAN CE OF THE
PUB LIC SEC TOR
Steel Plant - were set up in the backward States .
It was
believed that the setting up of large-scale public
sector It is usual to judge the performance .of p~ivate_ sector
projects in the backward areas would unleash a proeu
Jsive ·t b the yardstick of net profit or loss smce m their case,
mechani sm in them and cause econonuc developme urns y ·
nt of maximisation of profit is the sole aun. · Thi ds " k
thelilii terland. These considerations also guiclecrllie l s yar _ tic fail s
ocation miserably in the case of public sector undertaking
of macliinery and machine tools factori~s, <!ircr aft, transp s. Such
ort units are frequently started in those sec_tors wher~ profitability
equipment, fertiliser plants etc.
is low and gestation period long. For mstan ce, mvest
6. lmpo rf substitution and export promotion. The ment in
infrastructure and basic industries is not likely to yield
foreign exchange probl em often emerges as a early
seriou s returns and, accordingly, profi ts in the beginning
const raint on the progr amme s of industrialisation are likely
in a to be verv low and in some instances, may even be
devel oping economy. This constraint appeared in :.:.,,~ negative.
a rather Yet these investments serve important en ds smce . h~
t ey create
strong way in India during the Second Plan and the subse
quent the basis for expansion_of in1}:!strial activ ities in the
plans . Because of these considerations, all such indus future .
tries Investments made by the publi c secto r in the steel.
that help in import substitution are of crucial impor indus try,
tance for fertilisers, power projects, mining, etc ., come under
the economy. Bhara t Heavy Electricals Limited, this
B~ t category. Then , in some cases , publj c sect< ?_~vid~
Electronics Ltd., Hind ustan Antibiotics Ltd., India Ginr;,_yts
n Oil to the private sector (for example, iron an~ eel_!
Corp oratio i ...Oil and Natu rallJII:s- ~ i_~ ine
n, etc." :'i~ building, tools, automobile indus try, etc.) . It is very
vi ew. -
public sector are~ speci~ pQ( iance from -this__

Several public sector enterprises ha ve also played

__Qoint of it to earn huge profits by merel y hikin g the prices
output. However, thi s is likely to have an adver se
the industrial activity in the priva te secto r on the
easy for
of its
impact on
an one hand,
important role in expanding--the-exp01t s - 0f-t·he and push up prices on the other. Acco rding ly,
-country. prices are
Specific reference of Hind ustan St~_el LimiJed, _Hind intentionally kept low even thoug h this cuts into
ustan the profits
-------
Mach ine Tools Limit ed, Bhar at Elect ronic s L_td.,
- - - ------
Trad~ Cor.R9ration- and M~·-...__~--- and~
--------ls State
Tradi ng
of the public sector seriously. Also, as noted by Haza
Oza, private sector has inves ted mostl y in consu
ri and
mer and
Corporation can be made in this context. lighter goods wnich have been grant ed far great er
protection
7. Check over concentration of economic power. agam stexternal comp etitio n as comp ared to capita l goods
In which were mostl y produ ced by the publi c secto r
a capitalist economy wher e the publi c sector is pract and which
ically faced
non-existent or is of a very small size, economic powe stiff competition from impo rts finan ced by aid
r gets and
increasingly concentrated in a few hands and inequ foreign private investment. Anot her point that needs
alities of specific
income and wealt h incre ase. Durin g the four- and-a mention is that the publi c secto r is not mere
-half ly capita l-
decades of planning in this count ry, it has been intensive and chara cteris ed by longe r gesta tion
said time period s; in
and again that the expansion of publi c secto r will steel, which accou nts for the bulk of inves tmen
help in t, it is also
putting a brake on the tende ncy towards concentrati mate rial inten s ive, and to that exten t its value
on of added
wealth and economic powe r in the priva te sector. component is small er than in items like say chem
' , icals.
Publi c sector can help in reduc ing inequalities in Beca use of consi derat ions such as these , it is
thit often
eCOil.QIDY.jQ a !_1umber of ways. For instance (i) profit main tained that tire perfo rman ce of the publi c secto
s of the r units
• 4
- -- -- - should not be judg ed by what they earn in the form 0/
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lntert>st ':. C ~, /" J

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PAT to turno , cr (",,) - fj
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s~urr.,
Ii) GO\crnmt·nt l, f lnd, J. l n d1.1 .'tll .'
~015 -16 CNr,, Ddht. 2 01 o l. \ l' lum'-"
 ~
384
/a,/1,m f,0 1110111 1•
in the publ ic SCT l or inclu de r f,AI. sl!'C-1. ti-,ti ll'!', cvn l11n1.1on o f ,ovc
. , tmcn t in the publ ic sect
s or should bed
cngmc-cring.. nnd med ium nnd hC'nvy , . .. , nrg . . , one
inal per capi ta rein vest men t quoti ent"
li~ ht ,,,,,u nerr i ng. 011 the hns1 ~ o 1 11 '
.
17,c puh lic stc- tr•r rntc- rp1
isc- f-. hn\C' nhl) ~pent I\ A1·c ord1ng to. 11.w1 , c riter io n, we mus t exam ine •
whct1 , •
c-onsiderat--lc nrn\"\unt 0 11 . ltol in ony . . 11 , d . . icr
thr dC', investme nt o f cap proJ CCt wd ea to max 1mis
,,11, 1,nwn t 1)f 111wnshi ps , , af
arf,und tl1cm Thcl-c 'nco mc at ony po int Jc,n
t0\\1 1.,hip s ,vc1-c p,,,, fried with fo ci litic of not ionoI I in the futu re or not. With%!
like !-Lh('f•ls. hl1sp i1:i ls. s:h,,pp s . . t the d" d
in11 ,"'('nll'k " ·s. etc. A ~n1hsta ntial ent erin g 111 o
cont rove rsy rega r mg etcr m ·rna ti on ~r
sum '"'f mc-nr , 1~ Sf'li.'111 . • tile IJUbli c sect or at this . . •
nn111 111 lh '"'n 1hr mainte11 311ce and lflVCStll1Cllt 111
•
Juncture , we woul''d
:idrm mst rntrn~ 1,f tJ1CF c hi\\i lik e to emp hasi se that
,s h.i ps and social overheads. eval uat1 0n_ of a ny Stat e entcrpr i!ie
The empl,,yl'c!- ,"'f the- pul"l lic shou ld be done on the basi
sc-.tor enterprises olso enjo y s of soci al bene fit and social
med1cnl nmt'nitiC'l,.. su hsi d1 and not on the basis of rate CO',t
scd c.1nt ccn fa cilit ies, tran of prof it.
and C'durnt10nn l facilitie.o: spor t
; , etc. Acc ordi ng to G.K . Shir okov , effic i~nc y of a publ ic
Public Sector snd Foreign ente rpri se s houl d not be ju~g
Exc hange Earning s ed on tbe bas_1s of pro~ tabi
alone. "The econ omi c effic lity
EntCIJ1n1-e!- m the puhl ic sc-ct or have helped the econ omy
ienc y o f a publ ic sect or indu
stry
in enrn1n& subs1antial amo unt man ifest s itsel f alon e in the
of foreign exch ange and a lso tran sfor mat ion of the indu strial
m '-:.n1n.g. the- fore ign exch struc ture mod erni satio n,
ange and high er labo ur prod uctiv ity
expe ndit ure via their coun try- ,~de scale etc." 6 The oa a
cff0 n~ a1 imp ort s ubst itut fact is that a high er proportion
ion. Ca pital good s , indu stria
mac hine i: . and othe r equi pme l of the value prod uced by the
nt whic h w ere total ly
pub lic sector industries is
ariou\ fr•ur deca des back are impo rted realised outside this sector, and
now bei ng mos tly man ufac ture it is, therefore, very difficult
tn lhe wun lf) d to estimate the effic ienc y of
itsel f. Thi s has sa \'ed , ·a luab l e fore ign pub lic sect or enterprises in
exch ange The ONG C and terms of cost and profitab ility. Mos t of the criti cs of the
lncli an Oil Corp orat ion ha
help ed thl' cmm tr~ in redu ve publ ic sect or ente rpris es fai
cing the depe nden ce on fore l to take soci al cost s and bene
1mportli . The ign into acco unt fits
Hi ndus tan Ant ib ioti cs and cons ider onJy net prof its or losse s. They
Ltd. and the Indi an
Drug ,; and Pha nna ceut icab are thus gui lty of igno ring
Ltd. have ente red the iield the righ t crite ria for judg ing
man uiac tw-e of of perf onna nce of publ ic sect the
drug i. and phar mac euti cal s in a big way . or ente rpri ses.
Whi le thii. has help ed m S,i\i Not only
ng fo reign exch ange on the Ulis. Eve n the loss
hand 11 h.as also enab one es incu rred by public
led the coun t:r) to brea k the stran gleh old sect or ente rpris es are, to a
of lore1gn com pan1 e~ m this cons ider able ex tent. due to
field . A1'J far as forei gn exch take over of sick the
ange unit s from the priv ate sect or to protect the
carrun;r~ an.· conc erne d. 1he publ inter ests of the worldng cl ass.
ic sect or has cont rib uted in For insta nce. of the I 02 los.s-
thre e v. a~!, UI thro ugh mak ing ente rpris es
din: ct e>..po rt of item s prod in 1991 -92,
the publr c :-ector. (ii) thro uced in a bo ut 40 per cent constituted
ugh serv ices rend ered sick unit s take n over by the
publ ic :-.ecto, unde rtak ings by the g over nme nt from the pri,a
. and ( 111 ) thro u gh trad ing sect or. Thu s. the loss es of the te
mar keti ng :..erv1cel> o1 the unde and priv ate sect or 'spil led over
rtak ings tJ1ro ugh whic h expo the publ ic sect or. · 10
an: canaJ,sed rts
Befo re w e c onc lud e this
sect ion, the follow ing.
T~ Qu.es.ti:ofl of Effic.ieoe~ com ments from Arif Sha rif a re in orde r : "No w
pub lic sect or perf orm anc e has that decrying
Thougl 1 the1 e J~ no d1:,pUt<:: beco me fash iona ble. 1na1ty
1 cg:tr d,ng the role
p1..1bl1t :-.ec tor undl :rt!ih of the seem to have forg
.lll!- '" 111 u,
otte n the cruc ial role it has pla yd iJt
un t i ) ·:-. eco n o mi c
dr\d opmcnl. yet tJw ludi u 's deve lopm ent sinc e the
kd1n J:! ._., ,ddy pre>\ ule-11 1 1& that the Sec ond Plan. which camrl'I
r!J..I, o ! profil 11 be mecu-ure d aga inst the valu
1 cl 1e~, w 1dl.!rt uls..111g :. 1:- v1 tJit·r
100 lo\, o r i s
e of its outp ut. The priw ltt
Hef'O OVc Aeu >rdm gl y, H~ctor ne,•e r had to bear such
Ll ie.) ttfc' 111...-l fil IL"lll resp ons ibilitic>s. hisu,1'J, ii
relir d 0 11 tire pub lic sut or to
H oweve1, 11 ,:-. not M 1 t' Ue.) t mc>et mu fh of its te\~h11t•ii
u d~·l 1dL· uhuu t tlw dltl
lt;'lll' ) 01111 l·Ail/ed mu11puwer '"""Jrc>1t1cn '~Y
ol d it- publH :>ector undrr10J'-111g ts. ••"
:- A:. nut i: d h) u:. ,.11liL· 1, th,·
rate o( pi t)fi l might l,, u g.oud a11e 11 1..111 l u Jud1;;t· t ill d Ill 1~·111
o i u pnv uu: !)c:l't1,r cmc: rpn~ )
c bur t.uu1.1u1 1,i: d1:c 11 wJ &u 1111 PRO BL, ,E M S OF PU
d BL IC SEC TOR
puhl,~ 1,cClur cnlc rprb r: l u _1 udgc: die dii1. 1 t·rn) u l u p11 hlit. E NT ER P RIS ES
M"C l1 Jf w ,drn u l.J11g
A I k lrnn wild Holl l b H l l 11:.·1w 1) 11.i\ 1.·
-- -- -- -- -
1c:, u rnfl 11:·1 ,dL d
IJ ,c trHcnu11 uJ :,u, 1.i l 1n<1 1g111 llw 1111..l ~\ i11\p, ,1 1,11\! l'fiti n 'i
,.d p 1u J 11111 ,11 ,
l\i h.•, it-,l ag~un,-t th,• r l1t"ilt,
Al..'.<.llldrng tu (.'/w,u-r~ tl 1L ::.t'. l·t u1 ha::. hl.'1·111lu1t , iu
rd.\lh)I\ t,, th,_; ,-.1pi1,1l ,·111pl,,~,' th
w1il11 -' ,it lll\n I.L ,.
p 1uJn l shou
t111 c·111 111 .i 11) k, d ul p h>l ll :, h ,1s
ld be- _1 1..1 dLl1.d t,~ li t- 1111p,H , , ,11 the· bn· n 111,1 lu,, . F, ,· 11 th,· ~ \1H11rnn,·11t h,h
Jill LIJf)c , h11 l t1 !lt-C
Ha 1t1111 a l '11111 l:>cd '111· puhlt,·
ill j.l d)'ll i el t lf t, 1Hl J JJ b lt il 111IIP St'1.·1 .ir i·nt,•rpt 1,;,•s 1..'ll
t\11-; ..-,,u11 t I ,,,
I I ,,1 ll h
"l> 111t"
A.Lt.illd1rig It> WalIrr t,r.1 111:>ta11l t" , tht' I· •~ h t h
k11t-L 11 unJ I lut, c~ I } 1, 1..· \' t' at Pk,11 11,*'" 1h,1l 1h..- 1'11 t, ~i,
1h ..- 11~tc111 . 1h,· ::.c ,·h >I h .lt, bc-,·u 1111,1 bk l,\
~,·,w, ,Ht" lld ,•, tll,lh' 1,•-;1Hlf••' ' 1' 11
~
l '11hlir· Sl', ·/o r i11 ti,, · l11,lio11 l·>11110 111y
staining: the growth proc ess. N 01 . 1. .
SU . _ . t l e var . f, .
esponsible for low profits m the publ' io us .ictnrs
r . . Jc sector th , f OII .
:ire parti c ularly important: · c ow ing
Price Policy of Public Enterprises
Priva te sector enterprises are O . . . d .
. - .· . . . pe1a te w ith the s 1·
311not maxums mgprofit.s . Accordinol)' • .
"" , pn ces ll1 e detenn •d
at :i levd that would cover total cost ( ' 1 ct· _ tne
. . ffi . . tnc u mrr taxes) and
Prov. ide a • sui c1ent net return over an . d ° · . '
a 6 ove this As
8 gatnst this. the purposes of setting up a ld . . · .
- . . ' t ope1 atmn pub It ,
sector enterprises are vaned and price p 1· . d O • · 1.:
. . . . o tcy ts etermmed
by the ob_1ecttves which they are expected t o serve. E- ven
. .
under
•
conditions
• •
of monopoly ' the obiect
J 1·ve o ·f t.11e pn•c mg.
poh:Y ot a . p~c~ar pub!ic sector enterprise may not be
proht m~xmusat10n. lnd1an Railways, Indian Airlines
Corporation. State. Electric ity Boards are exaillpl
. • , es o 1.- pu bl 1c
monopohes._~bhc enterprises like Steel Authority of India
and the Fe~1hser Corporation oflndia also operate in seller's
market. ~t 1s v ery ~asy f~r these enterprises to earn huge
profits simply b y mcreasmg their prices. But since th e ir
object w as not profit maximisation but fulfilment of some
social objectiv e , they opted for losses in some cases while
in some instances they just tried to equate tota l revenues to
total costs.
As an illustration of this statement, one may consider
the pricing policy for fertilisers and pesticides being produced
by the public sector in India. The main a im in this case was
to prov ide fertilisers and pes ticides at cheap pri ces so that
even average farmers can easily purchase them. This was
rendered essential because of the contribution that fertilisers
an d pesticides make towards incre as ing agricultural
production and producti vi ty . On acco unt of this reaso n,
Fertiliser Corporation of lndia and Hindustan Insec tic ides
intentionally kept their selling prices low . Even in rega rd to
the pri c ing of stee l, the government's policy was not to ea rn
high profits. Till May 1967, pri ces of s tee l were kept so low
that they either yielded losses o r very low p rofit s.
As regards the pricing policy of public !>'t! Clor
enterprises, we con find two different np111·ot1clH'.\' -
(i) the public utility approac h am/ (ii) the mt,• of rN11m
approach. The former imp/ie!>· 11 pricir,,: poliq, that yield.\·
a no-profit-no- loss sit1111tion. Tit/.\· prlci11,: po/1,y 11'{1 ,\ '
followed for a long period by many public .\'t!Ctor t'1tll.'tpris1',\",
It obtaine,J support from the jiu·t tlrnt many pu/,/1£- .,·N ·tor
1111its were ;,, the t1reu of bu.-.ic /111/w,trle \ 11111/ 11111/11~,, lti,:h
prices of their products c:011/d ,·1111.\'I' co.,·t /11, ·n,".\·1•,· 111,,.,. 11
large segment of tlte economy. T/111.\·, tltt• pr1·.\·s 11r,• to 111/opt
in some sen., ·e u min/11111/ prh-t• polil')' w11,· ,\·tn,11>: m11I
per.\·is te nt. 9 On t1ct.·01111t of th ew• re11\·011,·, 111/111/11/.wer,·1/
prh·es were i11tentio11t1/ly kepi l'('l'Y low. 1:or \.: .Xu1npl e. lhtJ
price of s te el ( as .ilr1:a d y m e nti on\.: d L'. arli1.:r) wa s kq1 t
.fH5
dclibornt ely low . Sin1il11r r rnc ti \.'.cs w1.:re fo ll owed by I ti11du.,1 Li111
Mu c hine Tools, 11 indus tun S hiry unJ a nd many o the r publk
se1.:t.or enterprises in the ini1i u l stages of' 1he ir opa..1 1i11n'> .
Because of consi dcniti o ns s uc h ~,s th1.:s c. it is u JiJ ll y
to rega rd the observe d rates of return , without de ta iled
~o e in vesti ga ti on, us evidence of'wastcfi.1J investmen t. In focl. :.i -.,
noted by Bhagwati a nd Desui. "in a s itua ti o n where d omcs lk
prices are di s torted by :.i va riet y or e ndogenous and poli cy-
imposed factors, th e obse r ved ra 11.:s of return ca nn o l bc
taken to g ive a proper ranking of the soc ial prolit.ibility o f'
a lt e rn at ive in ves tmcnt s ." 10 H oweve r , s uc h a policy of
delibera te unde rpri c in g has had two adverse e ffe c ts:" F irs ! ly ,
a policy of unde rpr ic ing ma y result in di s to rti o n o f choice or
tec hniqu e b y th e use r indu s tri e s. T hu s , fo r exu mpl e ,
underpriced stee l ca n res ult in cx1.:ess ivc , and s ub-optim a l.
'
use ofit as aga ins t othe r material s w he rever c ho in: is ava il .:ibk
(e.g.. with o fli ce furniture) . Second ly. eve n w here no s ul:h
choice is available. the fac t that, in ma ny ca ses. then: is no
de Jure (or de fac to) regul atio n o r th e pric\.:s of the cnd-
products of the user indus tTi es (e.g. . the prices or k: x ti l..::
mac hine ry) impli es tha t the p ro fits fo rego ne by th e publi\.'.
sector e nte rpri ses wind up with the LLScrs . w ho e ve ntual!_,,
tend to be in t:he priva te sec tor . Thc efft:l:l o f unde rpr icing.
by public sector e nte rpri ses is thus ~ub:,aa nt 1a II y to reJi stributc
reve nue in favom of' th1.: private s ect,)r : w hi ch . in turn .
compromi ses th e effort of th<-' c!O' c-rn rnt:nt :it r.:i is in g rc' ::i l
savings insofar as thi s k.i d.s to :1cld1t1 on::i l L·o ns um pti L111 in
the pri vate scc t or ." 11 1\11(1reov\.:r. a ~ f1L) in tL· d o ut b~
Krishnaswamy, pers is tcnt los~ o r Lllllk r ;,chiL·, L'rnc·nt h::id
se rious effects on the m o rak ot' borh the· man;1g_L'ITIL' IH ::ind
la bour in th e public e ntcrpri :-.L'S. P:1rti.::til:.1r L' \..lmpk s ,)f thi s
te nde nc y a re Coa l lndi :i Ltd ., !\·tinin g ::i nd .-\ I lied Machinery
Corporati o n a nd H eavy E ng. inec· ring Co~,1 r::i tion . As ag.,in s t
thi s . positi ve r e turn s h ad nll, ru k t>no s t in~ eff(' ,· ts in
e nt e rprises like Hindust a n IVbd1i nc' TOL)b, Blnr.11 l k::i, ~
E lec tri ca ls and IV1aruti U dyog Ltd .
Si11nt II lllrJ.: t' """"'"t of i111·t's tm enr lws gone inu,
public .\·ector t' fltt'rpri.\'I'.,·. it is t'S.\ t' t1ti11/ tltat tlr,·y yidd
.,·h.e11hk ret11r11.'lii. (f thi .. doe.\ ,wt Jrnpp c 11, tl1t· proc.-:.:s ,,f
eco11omic 1/e1•t'/01•mr111 will .H t/fer u .,·e,·cr.-· jolt a.,· ., ,·u,..-i'ty
of i111•t·stme11t n•.w111rct·.,· 11·0 111,J 11ppt'1lr. Th t· r r'ji> rr, ,,·hi/.-·
.wm,,· p11hlic .,·ector c·11tr1111·i.,·,,s might llllopt u ·p11Mic urifiry
llf'/lt'0111'II · /11 thc>/r pricl11g 1/eci.'iii1ms. orlt.-·n hu,·,· 1,, yit'l,-/
r1·t111·11s 011 i111•e.\'lm e11t. Thi.,· hri11gs " -" to th e> 'r11ti · 1•f re t1J r o
11ppro11cll · ll'hiclt l,11\ /»ce11 m ·,•q.lft> d hy th,· go ,·,·rnm,•,u ,H
th,, rl,:ht 11rl11dple/i1r 1frten11i11i11.i: th r r1ri,·i11g p,,fi,y ,,f ,J
111u11hn· of /111/11,·tril'ti. I h 1W \ ' \ ,·r. , I S th 1i--d h · 1'. ri slll\ .1, ,, . 11\1\ ' .
the rl' h 11 s, lwv11 111• r ,,11,i,h ·1h·, i11 lhL' ,11 ;1,\i\·,11i, ,11 \,t' 1h.is
prl11l·ipk . l.- 11, i11 s t:1 11l'1.'. in J\11' r.1-:1.· ,11' l'•' tr\,k tun 1'n1d u,·ts.
1111' Oil 11 1il'1..", l \1 111111itt,·1· \ I '>7 -1- 7h l ,·.l11·1il:1kd ll r,·te nt i,,n
p, h.:1.· fur L': 11'11 1,·1·111(T\' ,111 th1.· h ,1... is 111' :I i,:". f\)~S t' t'llll'tl 111' } )
 386
J11di<111 Ec·o 110111_,,
~er . ~ent on the total capital employed. In the cosc
of
tenihs ers. the Mar:ithe Clmunincc provided for a post-ta
x ss
renim of l:! per cent of net worth.
In an article published in 2006. R. Nngnraj argued that
the i:eal Cltlprit of poor public sector saving is not Centra
l were
public sect?r entt' rprises llhat have been the subjec
t of
m~ch of reforms) but inadequate pricin g of the utilities
and
1_ntras1TUc~c service s. and lack of recovery of user charge
s iate
tor the· sen·1ces rendered. 12 ln this context, he has provid
ed
d:it.n t? _show that the revenue-cost ratio for SEBs (Slate
Electnc1ty Boards). railwa ys and road transport corporations
t RT~s) has deteriorated over time (from 82.2 per cent
in
199_-93 to 68 .6 per cent a decade later in the case ofSEB
s e
~om 91.4 per cent in 1992-93 to 88.7 per cent in 2000-
oi
m the case of RTCs and from greater than one upto 1990-
91 to less th~n on~ therea fter in the case of railwa
ys).
P_erhaps a tell mg e~1dence of the problem, in the aggreg
ate,
I!> the movem ent ot the public sector
price deflator, relative
to the GDP deflator since 1960-61. Over the period
of
mor~ than 40 years spann ing 1960-61 to 2003- 04,
the
publ~c sector prices never exceed ed the overall price
level
and •~ 2003~04, the relati ve price stood just 83 per cent
of
what it_was m 1960-61. This shows that public sector prices
ha"e nsen at a slowe r rate than the overall prices in
the
econ~my 0\-er the long run, adversely affecting its financ
ial
pos1uon. Ln other words. the crux of the poor financ
ial
return s lies in incorr ect pricin g of these servic es and
poor
collec tion of user charg es.
In a n anemp t to tackle the above proble m, the
gove_rnment has annow1ced chang es in the pricing policy
of
pubhc sector enterp rises in recent years. The new
policy
relies less on comm and and contro l type mechanisms
and
more on marke t-base d instru ments of regula tion.
Price
contro ls on a numbe r of consu mer goods have been
lifted.
Cemen t and steel prices have been decontrolled. In fertilis
ers,
onl y nitrog enous fertilisers are now subjec t to price contro
l.
The new policy fa vours a more transp arent policy for
fixing
pn ces and the government has alread y recom mende
d the
adopti on of Long R.wi Margi nal Cost (LRM C) based
prices
for public enterp rise s. Howe ver, adequ ate steps to levy
user
charge s in public utility and infras tructu re servic es
like
power , ra ilways, and RTCs have not been undert aken
as
the ir pricin g is a po liticall y sens itive issue.
Undcruti.lis ation of Capa city
Undcrutilis:.iti on of insta lled capaci ty is anothe r reason
for tfo: low lcwl of profita bility in public sector enterp
rises.
A l:irgc numbt:r of thc,c cnll.:rpriscs h.ivc operat ed
nt less
1il:1n 51J per c:i:nt o f'th cir c~p::i c: it y f'or ,l numbe r ot' ycars.
Wl'
mu · I r,mdcr ·,eriuu ~ly why inves tments worth thousa
nds
,ll u ,,rL -. o l rupcn i11 thi: public ~cctm were not utilise
d
properly and resulted in substnn~ial tmderutilis~tion ~f capacit
y.
Some people hnve ::ittributed this to the lack ot fores1ghtcdnc
rt of the government. Howe ver, the facts are
on lhe pa
somewhat different. As pointed out b Y V. 1"J3Y .K e p--1u.1r, after
the Third Plan, public investments_ "".~1ch till t_hen
decided mostly 011 the basis of plan pnont1es, were mtluen
ced
by various other pressures. Tire public sect?r e_,rterpr
ises
''beca me it1creasingly i11str11ments for meetin g immed
or ad /roe deman ds suclr as produ cing mass consu
mption
goods , stimulating growtlr in econo mic~l ly bac~w ard areas
or 11si,rg locally availa ble raw mater ials wluclr were
in
some cases, like Kl1etri coppe r ore, of poor quality
.
Furthermore, a large numb er of indust ries which becam
sick 1111 der pril•ate sector mana gemen t were taken over
by
the govemme11t with a view to maint aining production
and protecting emplo yment ." 11 Other factor s that accoun
ted
for underutilisation of capacity in public sector enterp
rises
include inefficient operat ion and poor manag ement of
some
enterprises, political interfe rence in day-to -day workin
g,
labour disputes etc.
Problems Related to Planning and Construction of
Proje cts
As far as the phase of planni ng and construction of
projects is concerned, following proble ms had to be faced:
(i) select ion of site was not based on detail ed
soil
invest igatio n; (ii) there were seriou s omiss ions
and \
under statem ents of severa l eleme nts of the projec I
ts;
(Jii) the actual costs of projec ts far excee ded the
original \
estimates; (iv) the projects took much longer time to comple
te
than originally envisaged; and ( v) the projec ts often embod
ied
inappr opriat e techno logy or produ ct mix.
As far as completion of projects is concerned. several of
them were completed l 8 months to 2 years behind schedu
le.
Cost escalation has often been of the order of l 0-1 S to
80-90
per cent of the origin al estima te. Accor ding to Chaudhury. 14
cost escala tion was due to the follow ing two major causes
:
(i) last minute chang es in projec t design sometimes due
to
a belate d recogn ition that the produ ct mix that was chosen
origin ally was inappr opriat e to lndian marke t condit
ions.
This requir ed expen sive modif ication s to plant. Somet
imes
chang es were induce d by the need to add vitn\ parts
of the
plant which had not been includ ed in the origin al contra
ct:
and (ii) lag in startin g or finishi ng a projec t. which
landed
the projec ts with higher costs dut: to inllati on in suppli
er
countr ies. Very ulkn aid contra cts took much \ongi.:r
\t)
compl olc thnn origin ally envisa ged. ln somi.: cases. thc~do
m)r
countr ies took nclvantagi.: or the practi ces of t.ied-nid 10
increa se prices charg ed for plnnt and equipmt:nt. As
1101t·d
by /\ .K. Oagch i, foreign aid was norma lly tied t() pmchn
sc:-
ll!' t:q11ipmcnt and mater ials li·om the rountr ies giving Ivans
r .,
/ '11l1//r· S ,,r·t,,,. In ti,,, Inu/t;r, ,
/~r·r,n"IIIY
3117

und gr1111ts. Th<: gowrnI rne nt rnaJc only haltinu ·•n -1, ,·r·ee ti.vc ib
' . · I • o " ullle "S ince thi H gcruti ny iM int.cns ivt: and depart ure from
,t1cmrt 11 t.o ms u utc 11c chrn eet-1 or techno lo . _
gy clnu1 prudu ct- cx ,11;ting standa rds can lead to cens ure and di~gra ce, the
I • . .
exerte d by forcion r· , • t 0[
111ix ug1111111t pr<.:NN Urcs
. . o irmH anu1 their Hcopc for imagi nati ve and quick at.1ion in the intd'e1>
o••cnts.
0
AN n res ult , _fore •ign rmppli crs oHen o1,ut uway wit. 11 better econom ic perform an ce is ine vitably jeopar dised.~
,'
• •
mi sspc~1fy in g the ca1~ac_1ty or the plants set up and their The work ethi c of a publi c enterpr i se is very much li ke that
ork,
op,:r ~111ng clrnru c t. c ri s t1 ~N. In f'uct, a ll cgc s Ba gc hi, a of a govern ment office - overoc cupatio n w ith fil e w
f . the <.:xcess <.:mils and dynam i c practic es, and keepi ng within the frame work
con~rd_c ru l~h: a 1~o unt o rules-o riented
y
incm c rcnc1es o f the publi c sector project s wa s Jue lo the of prescri bed rul es and norms . The costs of thj s length
fai l~rc of th~ go:~rn mcnt _to break or
out depend ence on proced ure or de lays in deci s ion often do not matter . ,\,fore
ul es
fore ign source s o f fund s whr ch were ti ed to sales of parti cu lar empha sis is lai d on preced ence and interpr etati on of r
ised that the
types of techno logy for setting up the im1ta ll ations . rs n,i s than on res ulLc; . It ha s not been duly recogn
of i se ha s to be di ffe re nt
shows that while some proble ms rega rding esca lation work ethic o f a public se ctor enterpr
ment office a nd practic es
cos t1- rose from the Indi a n s ide, blame for some others has from th e work ethi c of a govern
be
to be pl aced entirel y at the door of the aid relati onship Indi
a an d proced ures th at make th e latter e fficien t may not
entered into with other countr i es . s uitable fo r the fo rmer.
Al so, becaus e of the dec ision to locate large-s ized Politic al consid eration s have also contri buted to
industr ial projec ts in hith erto backw ard area s the cost
and oversta fjing of unskil led labour und payme nt of higher
executi on of the projec t depend ed heavil y on th e creatio n wages to such labour than in the pri vate sector . As far as
i ses
of adequa te infrast ructure faciliti es. Delays in comple tion skilled personnel are concern ed, the publi c sector enterpr
manag ement policy . It was necess ary
steel require d an imagin ative
also occurr ed due to the interlin king of project s - person n e l in the fo rm of
pl ants or with coal mines or to provi de inc enti ve to slcilled
plants with heavy engine ering the
better wages and better promo tion prospe cts than in
ies ; electri city genera tion with the
with railwa y facilit
private sector. Howev e r, in acrual practic e , it was exactly
manufa cture of e lectric ity machin ery, cables , transm ission the
port the opposi te . The pri vate sector bos:,es weane d away
towers and so on by o the r public sec tor unit s; c sec tor throug h variou s
the produc tion of cranes and other berthin g slci ll ed person nel from the publi
develo pment with
was incenti ves .
equi pment by public sector enterp rises. Thoug h there
nothing inhere ntly wrong in thi s practic e, it enhanc ed
the It is freque nt to disc uss the proble m of 'contr ol 1·s.
transmi ss ion of de lays and high cost in one unit to the autono my ' in the conte.>..'1 of manag erial proble ms. ·Control'
·
other. Moreo ver, huge townsh ips were constru cted around ofgovern mefll undert akings refers to their ·ucco11111abiliry
ees . to Parliame11t for their work. Thi s accoun tabil ity is j usti fie<l
many public sector enterp rises to house th e employ th e
on the plea that the public sector enterpr i ses are run w ith
Na tura lly, the costs increas ed. laner have every rig.ht to
help of tax-pa yers' money and the
Problems of Labou r, Person nel and Mana gemen t know whethe r these enterpr i ses arc being run efficie ntly or
h
Public sector enterp rises are often plague d with not. Since the w ill of the people is t.>xprcs s ed throug
g es contro l o, er Ulc.. '
undue politic al interfe rence in their day-to -day workin Parliam ent, it is the la tt er that exercis
effect the 111111w geme 11 t and sec tor undert aki ngs . For th is purpos e. P.1rli a me nt
and this has demor alising 011 public
irue
other person nel of the.,·e enlerp rise.v. M any a ppoin t~1cnts cons titut ed a separa t e coiruni ncc kno\\11 as the Comm
fis 1C'.nnl on Publi c Enh.:rp ri ses in I ()6-1. In additi on Ill this C,m1111 ittc..-c.
al the top a rc n ot m a de on gro unds of profc
c..'c;.'.
compe tence o r s uitabil ity but arc determ ined by v11no1~s Uurc..~n u nf Public Enlt·rp rist:s. Public /\CCllttnt s Conml itt
lo?, rs .· tht· pc-rfo.rm .in,•e
po litica l consid era ti ons. Oft.e n the mana gemen t _nt the_ the l'.sti111n11:s Comm ittee. ctr. a lsu t' vn h1ntc.
constit uted of the tradi ti ona l a dmini Htrntivc serv ices o f I .l .S. or p11blk scc..·tur enterpr i ses from time t,) time;.• .
ca l people 11rc
and I.A .S . T ht ~e non-s pec iali sed, non -techni 'Auton omy' rrf,,rs to tl,t' f rretlom gr,uu, ·d w rht'
oflen uneq ua l tu the t.a sk of prov iding the requi site rna11a gcrl11I t
11umal(1'ml'flt of ,, public t'lllt'q>rls,' to r,m it ,rirhou
compe ten ce in the comple x , cnp ital - intcn sivc ind11 stria~ l1111·rft're11ce of 011t.~i,lt1 111-:e"''i l's. Au11,1h)llly is c..'SfWl.'.i.,
tl y
11 t1 ,,r
project s in the pub li c sec-tor . Al so , us 11ut cd by 1Jh1~gw lrnportnnt in the com ex t of dny -tn- <ln y ,lJ't'ru ti,,,L,; n pub I ic..·
ivil service ba ckg round, thcN c o fll clu ls he
and Desai , with their c
and cnh;r pri sl) whc..·w 11m11y 011- thc -s p,1t dc..•cis i,lt\s kl\ c to
inevita b ly tended to ac t with hurcau 1.: ru tlc c11 11tion
1nkc 11 011 II \'Ill kt~' nl' iss 11l·S th .,1 ..:r,,p up bc..'lorc..•
1111.'
.
unimag i nativen ess rather th an in bo ld und i11v c111 iv u w11y1-1 rn111111 gl· 111v111 . l11t l:rti:r,•11'-'l' in s uc..: h dnilv \ \'L)f \-. is nc..·ithc..
'r
l11e actua l mana geme nt wa s altm h um med in by 1rndi1 il1 n11 I

li.:us ihl u tllll 11eCl' SS ar~·. In fol·t, ii cn11 011I) ~r'-'utc impcdi nwnts
1n· !J
a udit proccd un:s 1111d scrutin y o f whclhl·r th e c .~ri:11di1 the
wi ihin the frumcw ork uf the uurhor hrn tirnr s. un the..· n111.: l111nd nnd d .:1flllra lise th.: 111:uia ge nwnt l)ll
in c urred wc ri:
otlll·r .
 388 Indian Economy
The Iine between 'control' and 'autonomy' is very
thin and has not been properly spelt out. Managements of
many public enterprises feel that controls on their operations
are too much and too frequent inhibiting the possibilities of
independent action unduly . Even in routine matters ,
interference persists. This leads to a sense of insecurity and
indecision in top management cirdes and a lot of time that
could be utilised more productively is wasted on drawing
up explanations to convince ' persons who matter '.
To solve these problems, it is necessary to define
clearly and explicitly the limits of control , i.e . the spheres
where control is to be exercised and the activities that are to
be left entirely to the management. Once the limits of control
a1·e specifically laid down and the spheres for freedom of
action for the management are explicitly recognised, scope
for conflict and suspicion will be considerably narrowed
down. It would also be a wise policy to involve the
management of State enterprises in the process of policy-
formulation, target-setting, delineation of functional limits,
organising efficient working, etc.
POLICY TOWARDS PUBLIC SECTOR
SINCE 1991
The new industrial policy announced by the government
in July l 99 I emphasised the following four major measures
to ' refonn' the public sector enterprises: (i) reduction in the
number of industries reserved for the public sector from 17
ro 8 (reduced still further to 2 later on) and the introduction
of selective competition in the reserved area ; (ii) the
disinvestment of shares of a select set of public sector
enterprises in order to raise resources and to encourage
wider participation of general public and workers in the
ownership of public sector enteprises; (iii) the policy towards
sick public sector enterprises to be the same as that for the
private sector; and (iv) an improvement of performance
through an MOU (memorandum of understanding) system
by which managements are to be granted greater autonomy
but held accountable for specified results. 17 In addition,
there was a drastic reduction in the budgetary support to
sick or potentially sick public sector enterprises.
Dereservations
As stated in the Chapter on 'Industrial Policy ' , the
1956 Resolution had reserved 17 industries for the public
sector. TI1e 199 1 industrial policy reduced Lhis number to
8: (I) arms and ammunition, (2) atomic energy, (3) coal
and lignite,
'-
( 4) m.ineral oils, (5) mining
....
of iron ore ' manoanese
e,
OJ,_,_ chrome ore, gy psum. sulphur, gold and diamond,
( 6 ) mining of copper. lead, zinc, tin, molybdenum and
wo lfram, (7) minerals specified in the s<.:hedule to the
atomic energy ( control of production :ind use order}. 1953,
and (8) rail transport. In I 993 , items 5 and 6 were deleted
from the reserved list. ln 1998-99, items 3 and 4 were also
taken out from the reserved list. On Ma y 9, 200 I, the
government opened up anns and ammunition sector also to
the pri vate sector. During 2014, pri vate im·estment in rail
infrastructure wa s allowed . At presel11 only 2 industrial
sectors are resen•ed for public sector. They are: ( I) atomic
energy and (2) railway operations (excluding construction ,
operation and maintenance of certain works/projects like
suburban corridor proj ects through PPP, hi gh speed train
proj ect, dedicated freight lines. mass rapid transport systems.
etc .)
Memorandum of Understanding
One of the major initiatives towards the publi<.: sector
as outlined in the new industrial policy of July 1_?91 _wa s to
bring all public sector enterprises under th e system of
Memorandum of Understanding (MOU). The sys tem of
MOU envisages an ann ' s length relationship between the
PSU and the administrat~ rruru st~ s~Jtgives clear ta~gels
toPSUs and ensures ~ alional autonomy to them for
achieving those targets. The MOU system was started in
1987-'88 with- four PSUs signing MOUs. This number went
upto 291-CESEs in - 201Ll=-l 5. The government ha s now
decided that all CPSEs including risk and loss-making and
CPSEs under constrnction will be covered under the MOU
system.
Navratnas, Maharatnas and Miniratnas
The government has identified l.Q_ public sector
enterprises as _!!p yratnas and decided to give enhariced
powers to the Board of Directors of these enterprises to
facilitate.Jheir b~ ming glob;i players. The Boards of these
Navratna enterpris;s have be en pr~fessionalised by induction
of non-official part-time profesisonal Directors. These PS Us
have been delegated substantial enhanced autonomy and
operational freedom which include : (i) incurring capital
e.ispenditure, (ii) entering into joint ventures, (iii) effecting
or_ianisational restructuring: {iv) creation and winding up of
posts below Board level, (v) to raise capital from the
domestic and international markets, and ( vi) to establish
financial joint ventures subject to equity investments with
special limits.
The government has also granted financial and
operational autonomy to some of the other profit-making
PS Us subject to fulfilling certain conditions. These enterprises
are categoris~d_as Miniratnas . The enterprises which have
made pr£!:its continuouslilir._the J;is_t_tn.tc~ Y.fES and ha ve
earned a net profit o.L~.JJkyore or more in one ofthe three
years, with positive net worth are categorised as Miniratnas I.
Category II Miniratnas s hould have made profits for the
 /'11/1//1 ,,,. ,, /;11
111111 tltr ct y,·,ur,1 ~ ,111lnµ,111 •1 ly a11d 11 l1c,11ld l11J V(· 11 1,onl11 w ,wl
w,,rth , Both thcr11~ u 1fr:gr,, i,·11 111' p11bl k 1H·<:11,1 t: nl, ·1111 h .:~: 11 n-
f-') fl11i l~d t:crt :tl11 n11tr111 n1r1y li kt· in(..111d11 K u ,p lfrtl 1·x pc1,di1111 1·
witl11 111t f!.1, v,· rrn11 r.11t tl pf!n, v:d 11111,, t \()fJ c rnrc ,, r 1: q11 1tl to
ll1i.:l r 111; 1 wo, ti, wli lclwvcr 111 l,,wcr ( I,,, c1il c/-'.r ,1 y . M /11 /,-o/l'lft
c1m1p1111ii.;•1 ) 11ncJ 11p1, , ~ I ;'i ll c r< ,rt.: or 11plll '> 0 per cc,;11 t ,,I
thc lr ne t worth wl1i cl 11; v1;1 i1'1 l1,v,/1;r ( I(., ca t1;v_,,, y II /vf/ 11 /mtno
corrirrin icf, ). ' 1111.:111; c11t cq ,ri ne11 Cl111 nlfl (J c,;11l i.;1 1111(1 i1, i111
vc 11lur1;11 111Jhj1;ct lo i.;crt itin cn11dili1,n ». 11c1 11r 1;11lw id iary
cornpuni c11 uncl ,,v1,;rt11;a1-1 •lf'fi cc11. cnl c.;r l11l0 lc1,;hr1ol,,v.y joi 11 1
vcnturcH, etc . ·1he u ,t ,d n111 r1 hcr or Mlnlru 1nr1 ( \ :nl rn l puhli1;
111;ctor cnlcrprl Kc!I i11 rrc11t; 11t ly 7 1 ( q cat c/!.ory I and I X
cat c~ory II) ,
111 Dcccmhcr 200tJ, the <lovc,;rnrncnt of l11di ;, ;,pprovcd
the introducti on nr Mahoralno catcv,,,ry for ( 'PSl1.M (Centr:tl
Publi c Sector E11tcrpri 111.: !-I ). Th e muin oh j1;c-li vc of' 1;re,1ting ,l
Maha ratn a catc~'."'Y iH to cm power th e ea pa hi e ( 'l'SEfl to
1.---x pund thtir opcrat.ion11 a nd 1.;m1,;rl:.'.c ,11 1 g loha l g.i :in LH. T hc
\
Hoard of Mahuratno CPSl1.H will hc unl c 10 cxcrciKc all
powcn1 given lo Nu vr a1,w C PS E1-1 and , in additi on, cxcrcisc
cnhunccd pow1.:r in the areu of invc!l lmcnt in join! v1.;nlurcH/
s ub s idi a ric H. Se ven pub I ic sec t.or enlcq1ri s1.;s ha vc been
1 w-antcd the M ahal'ullw Htalu1-1 so fo r.
l
I
I
Oi11invc11tment of Share~
The Government o f India ha s decided to w ithdraw
from the industri a l sector and, in accordance with thi !l
decis ion, it is privatis in g the publi c scclor ente rpri ses in a
pha sed manner . The main approach of the government in
thi s regard is to bring down its equity in all non-strategic
public sector undertakin gs to 26 per cent (or lower) and
close down those public sector undertakings whi ch cannot
be revived. For purpose.</ of privatisation, the government
has adopted the route of disinvestment which involves the
sale of the public sector equity to the private sector and the
public at large . All through the peri od of economic reforms,
success ive go vernments al the Centre have advocated the
sale of public sector equity as a means of public sector
' reform .' Equity sale, as the industrial policy statement of
July 1991 argued , wa s a means of en suring financial
di sciplin e and improv ing performance. However, as correctly
pointed out by C. P. Chandrasekhar and Jayati Ghosh, the
ex peri ence s uggests that fi sca l convenie nce was th e prime
move r o f s uc h d is inve stment s . The proce e ds from
di sinvestments were used to financ e budget de ficits and
thus to 'window-dress' budgets. "This meant that while
there ha s bec.,-n much talk of managerial re fo rm, voluntary
retrenchment, and greater publi c sector auton omy for meeting
the new market environment , the thru st of publi c sector
reform wa s almo~ t entirely concentrated on the sa le of
//1 //II' /111//t /// / ,/ ll// 111// f' t/('.I
1·411 ily .' " 1: ·1lir d1 t1111 vc ~t,rir11I pr1,;Ha 111rrr1· 1•: di ~:r 11•,· .crl 1r,
dt:11,il 11 , ll1t' ,1c x l 1:h;,pl c1 fHJ " l'r iv1 d i<:afi,m r,f h1hl i1, \ t,; c l llr
11.ril n 1,1 li.r •;: I ltc I ) l•.11 1Vt 1.l1 11 t:1i1 1' 111s,r:,1111 rn: ,n l11d1 :1 "
Sdfin~ up of UJ< J•S J,'.
·111c 1~11vcr 1,1, w nl 11'1 I ) n .. 1,; 1111,n t fH1'1 •:t:I 11p ;, fl, 1: 11 rl fn r
l<t:L.u11·:1r11t li11n ,,I hil 1l1 e 1.\1;(,. l/ ,r l 1,111 e rp11 •.l", (l:f( l' l:J.J 111
l'cCi 1111111c1,d 1nc:1111 1r1;ll 11,r 1c•1tr11(j 11ri1,y/r1,. --v ivin11 ( '(' 11lr:il J'S I J,,
rcl crrcJ l11 ihc111 . '111(: llf<l'~I·. al<io r cv , ir,rm.: n<h c a<.t,; '> wl, cr, ·
tl luin vc1: lrnc11I or cln1111ri.: ur ,.:de :1ri; j11!.lif icd. l·,,r 11,,~ p1Hrr,:.c
of 1n,1ki111; rc fi.;n.:11 cc to l1f<1•S l1•• :1 1,; 1,mpa11y i•. u ,r.-.i(krcd
fl ic k 11· ii l, ;11 , :,cc,mwl:,t cd lrlf111c 1 i11 :i r, y li1H1 11c; i:il y(·:,r i; q11 ; ,I
1
tr, $() ~ c r cc nl or rno rc 111' i1 ~1 il Vt,; r;wc; nc-t worrh du rirw 4
yca rH in11;1cdi u1c ly pr1;ccdi11 1~ wd 1 fin a ni; i;il ye:,r :ind/or a
co,nr,;,ny whicl1 iH ;, 11 ii; k 1,; urnpi111y wi thi n 11,c rnc:1n in1~ ol
Sic k l11dw.triul ('ornpa ni cH (Spcd:,I l' rov iKionc.J Ac t. I 'J X'i
(SIC A) . ·11,c l! c,i! rc.l h ;,i 11 give n il q rccr,rn mc nd;i li r,nK to lh i;
governme nt in rell r cct or (14 Central l' SE~i ~o r,.,r.
NOTES
I . l'or lk1alln. p lca ,c refe r 1< , 1hc U ,apt cr 1,n ' lnd u •1 1r w l /'r,i1 l.y '.
2. 1< .K. I /r,1, ,ri ant.I A .N . Oz,,, ,,.., li e P ub lk <,cc1nr in Ind ia '', in /•.. A (i
l<ohin r,r ,n un t.l M ic h1lcl K idr1Jn ( ,;1.h . ) , 1-:Cr, nr,m/c lJ1·vdopmr-n1 In
So uth AN/a ( Lo ndo n , 19 70) , p . 'JI
3 . C:ornpu U: t.l from l<.c•,cr vc fl a n k n l In t.I I;,, llun d hur,k o/ S 1u1/,1•tlc., 1,n
Indian Econo my 2 01 2-13 (Mu m bai, 20 13 ). hh lc 10 , p. 48 .
4 , A . I I. H a n91Jn , Pu hllc t::nlr:rp r /Act u nd l::cn n o m lc Dcvdopm ,;n t
( Londo n, 196 5) , p . 188.
5. IJ im a l J a la n , lndlu '!! Et:onom lc l'n//cy ( New De lh i, 1996). p. 2 1.
6. G.K. S hiro kov, lndu,, trlal/.,a//t, n nf India (M ooc<,w, 197 3 ), p . 13 9 .
7. Arif S ha rif, " Pla nning a D i.!lho n o urab lc Ex it ". Th e Eco n1,m1c Ti m eJI,
April 4 , 1993 , p. 7.
8. Governm ent o f India, Plann ing Comm is s ion , Elg h1h Fi ve Yeo , Pla n ,
1992 -97 ( Delhi , 1992 ), Vo l. If . p. 108 .
9. K .S . Kris hn as wam y , " Pu b lic S ecto r Und crt~k in g$ " , Th e t .'connm lc
Time., , 8,9 & IO Ja nuary, 198 1.
JO . Jagdis h N . Bha gv,a ti a nd P a dm a Desa i. In dio - Plo nnlng fn r
lndu.v1rlallsa1/on (Lo ndo n, 19 70), p. 155 .
11 . Ibid .. pp . 156 -7 .
12 . R. N agaraj, " Publ ic Secto r Per fo rm a nce S in ce I 95 0 : A Frc , h Look ",
Economic a nd Po /It /ca l Weekly , Ju ne 2-1. 2006. p. 2 5 54 .
13 . Vljay Kclkar , "'Publi c Secto r : Mcll5 u re5 10 Impart Efficiency ", n, e
Economic Tim e,. Janua r y 3, 199 1. p . 11 .
14 . Pra mlt C h a udhury, The /11 dlcm Economy (Delhi. 19 79), pp . 157-8.
15 . Ami ya Kum a r Bagc h i. " l'ubl ic Secto r l.n du s l ry a nd 1hc Po lit ica l
Economy o f Indi a n Deve lo pm e nt ", in Te re nce J. By res (ed .), Th e
S tc, tc, Devclopm enl Plan11lnJ:: and l.lhaa /i,a t/o r, In India (New
Oc lhi, 1997 ), p . 30 8 ond p. 3 I 0 .
16. Bhugw atl a nd Desai, op . c it, p . 165 .
17 . Gove rnment o f Indio, Eco nomi c S 11 n ·cy, 199 2-93 , pp 14) -5 .
18. C. P. C handrasekh ar a nd Jo yoli G ho~ h . n,t·
,1,,/urk-,1 tlior Fall,·d , I
De,;ac/e of Neo /lbcral Econnm lc Rc /o n ns 111 /nc/1<1 ( New Odh,
2 0 02). p . 88 . .
DOD
 29 INDUSTRIAL POLICY
\
Cit~• tcr 1'

\ t\,1 hhki\.' 1\J('lh' ,' . ti\\' ';,,, l' \ 1\111\' III 1\ I lt1dlll :- 11;.' lt :1"\'\.' l'l l·d LIil' impona nc_i.: l ) r both pri , all'. :inu nubJ,· .
'"I\ 1h ,l l'\\.\,\h' h \\, th, dn d,,p~ll\"'111 1 1' 1h\' 1111.hi,tn :11 '\'Ct11r
1
- - - - - - - -- t l ~Cl.I i
111 lhl' 1ndustri ::i l L'c11110m.} of lnd1 :1 . It di , idL•J th l· d :'
111
h
II\ Iii,' 111,l\l-: ln ,II l\,lk , " \''-1'l11th111 I ,qi,: ll11~ \\ ,1, !'11l1,1" 1.· d . . . U,1t i,
111tl, the fo ll ow1~ f our ca tt'l_!0n e:;: ·•
1,~ lh,· h11.l11,l11;1 \ \\,(i~~ l, t1:-11 hHl\lll . I 0 ~t, It, h 'l\\\'\'11. th\' f,
I. lnduslrirs whcrr Sral r bud u mono 1ot,· I
~,n,•1 11111rnt 11\lmd\h' \'<l 111,, h1du, 11 k:- (1),·, ch,l'lll\'111 11 11d 1 • • 111 11·
rnt1.·1;wrv. r/11 ·t 'l' ticlds ol' :icti, it, \\ i.:r1.· :-JX\' ilii.:d -,
R\.'~\lhl 111111 ·\ 1.' \ , 1° .\ I h11\.'lllllnt1.· nnJ 1.·11111r,,I tlw d1 1 rt ,1r111rnl
1 d I '1 · ·1 • • 1111 \ ,lji,j Jr
tllllllHHl iiillll, :11n111ic l'l)(.'rg.~ and~ ~pon - '
,,r nw pri , :11(' :<l.'\'h'I'. 111 I \J(,0 . I\ IRrt 1 1\ 1.· 1 (l\ h 11 111p11li<'S :1111! b
Rc~1riclh 1.• l'nn.k Pn,cti\'l.'s r\1.:t) \\'11:; uth1pt1..'d 11, p1\· , ·t 111 2. Mind S{'clor. In th is ca tegory. the 1l11lm1-rnp, ,
1
,,
\'1.'I\\CCllll~lli1111 ,,r l.'{'0tn,mir pvwcr and C\_\1\1 1'1\I lll1)1\l)£)lllk-s . i11uus11:ks w,.:rc S~L·cit:iL•tl_ - CJ:1 1. iron anu :,11., :I, ;_i i1qa11 IT

:''hlthc'.' k gisl_ttti,111 that lm d consi,k•rnbk ii11plicatirn1s 1~,r 111n1111l11cturl', sh1pb~ ld1 ~. rnanufa_q urs lit' tdl.'ph o!}t,
111u11strm l p1.1'1 cy (as fo r as th~ purt·kip:lli011 ,,r ti..1r1:ig11 tt•kgrnJ~' nnd wireless 11pporntus (l'Xcluding rn tl io M'L, ) u~ n
c,1111pan.ics in industriul sector of India is 1.' 00Cl'rncd) wu:; n~111:rul oils. New undertakings in Ihis l'ill i.:gury wen: ru ht {f

ll~c ~1lrc ign Exd,ai-tgc R~gulution Act (FERA) ::idoped in sol up by till· State but existing privutc 11ndcr1uki11l',' wcie
197.J . How1.J ver. nil thcSl' 111cusur1:'s whkh guided and all owed to continue for IOyea rs a llor whid1 th\' g.ov\.'mmcm
dl.)t~nninod th~ Srntc i11tt.1 rvcJ.1tion in the fidd ot' industriu l wns to review the situation and ucquirc nny cxisting 11ndcrruking r(

dc w lopmcnt fJiled in ochfoving the ohj13clives laid down oner payi ng compensa ti on on a foir nnd cquit nbk h11~is.
· for thl'l\\, They also created a number of inefticicncics. 3. The field of govcrnml'nl l'onlrol. I!< i11d11slrics of Jr
distortions und rigiditi~s in the system . Therefore. the nation::i l importance were incluucd in this- cutcgory. ·n1e tc
gon,rnmcnt started liberolisingthe ind11strin l policy in 1970s government did 1101undertake the respons ibilit y of de veloping m
nnd I980s. The most drastic libera lisu tion was ca rried out these ir~dustri cs _but considered them or such importancc tr
i11 l 99 1 when a New Industrial Poli cy wa s announced. that: their ~egulnt1on ;i nd direction wu s ncccssury. Some of a,
M
We shall discuss Lhe MRTP Ac t in Chapter 32 on the mdustnes _mcluded were - automobiles, lknvy chemica ls,
<11
'Priv;1le Sector in the lndlnn Economy' and th!:! FERA in heavy machin ery, mac hine tool s, fer tili sers, dcc lrical
n_
Chapter 40 on ' Multinatioun l Corporn tions, FERA and FEMA.· engineering, sug~r, paper, cement, coll.on and woollen tex tiles.
ar
Other constituents or indust:riu.l policy an~ discussed in this 4. The field of private ~ntcrprls(•, All other industries
chapter. The focus of discussion in this chapter, therefore, (not inclt~ded in the a_bove three categories) were li;O upcn
is on: to tJ1e private sector. However, the S"tatc could take over n,
• Industrial Poli1.:y R.!:!solutions of 1948 and 1956 any i_ndustry in thi s sector also if it s progress was
t: J
unsatisfactory .
• lndustries (Deve lopment and Regul ation) Act, 195 1
The 1948 Re~olutio~ also accepted the importance of nr
• Criti cal review of pre-1991 industrial policy and
S!_ll_!~ and cottage mdustnes as they are particularly-s uited
libcrnli s..Jtion trends CZ
for tne- ttfflisation of local resources and lor crea tion of
• New Industrial Policv. 1991 and its critical appraisal employment opportunities.
• Nntion:i l Manufacturing Policy , 20 I l. J.g"trial Policy Resolution, 1956
• Mukc in India . 1
Y The J956 Resolution laid down the followin g objectives
for the industrial policy: (i) l~_accelerate lhe rate of gro.wth de
and to spe_ed _up_ in~~lrJ.~sati~n ; (ii) _to d~ velop heavy ;n
INDUSTRIAL POLICY PRIOR TO 1991
industri es and machine malcing mdustnes; <111 ) to expand Ju
public sector: (1v) to recfti'ce disparities _in income aod ra
Industrial Policy Resolution, I 948
wea lth; (v ) to build up _a..:_ lar-ge- and growing cooperative F
The first import::in1 industri al policy sta1 ement was st clor; nnd ( l'i) lo prevent mo~ polies and th e concentration Cv
made in the Industrial Policy Resolution, 1948 issul!<l by the t!'J
Gow rnrncnt of India on Apri r 6, 194 8. The Resolution

------------ /-
I
 /11d11 sn·io/ Polic} '

l,f wealth and income in the hands of

• · 'duals. a sma 1I numbe r or government regulations nnd control s us sped lied in lndu slr iL·s
ind.in
(Development ond Regulation) Act. 195 1 uml oilier n.: l11I L·d
These objectives, it was thouoht , Id . rcgulntions.
• :::- • \\ OU 1l e 1p 111
!reoeratmg more emplovment opporh•~=n ·e s an d 111 · ra1smo • •
- . . ., u .uu The 1956 Resolution recogn ised till' imporluncc ol'
the standard of h v mg of the masses F t 1 · , :::-
. . • . · • o l 11s purpose. sma 11-scnle and cotta ge indu s tries ,ius l as Ihe I 94~ Rc solul io11
stress "as laid. on cooperation between pub! " d •
. 1c an pnvate had done . It also called for the reduction in reg iorud iinhulo11 ccs
sectors but an mcreasmg role was envi· saoed t·or tl1e tiormer
• ~ r::, and inequa l.fie s . For tliis (JITTpC?S~. ii -~1~1,:at"ccl th.it 1ri:iiis poi ·1
so that,• m •due course of time ' it could sa ...... 1·n • d'
. conunan 1110 facilit1es_., power and other fo c ilil'ics s ho~ild be pnwl ded in
heights ot the economy.
0
- ..:... .. --·-
bacJ...·ward region~.
-
Jbe 1956 Resolution dhided £be indusu· ies into the A s ~ompared to the 1948 Reso lution . the 19 5 (,
follo"ing three categories: Resolution considerably enla rged the area o r operation pf'
. l ~ ~ no~oly .!!!_ th~ -~tate. In this category, _17 tl1e public sector a s the exch'rs ive respo ns ibility or the S tal e
rndustnes l',:.ere 1Rcluded whose future development wa0o was enlarged from G lo 17 indus tri es ( Sc hedul e /\ ). In
be the ~ ~ive responsibility of the STate. These" were - addition. another category including 12 in'l.lu s trics ( Sclwdulc
listed in..Scbedu) e ,A ap15e-miedroT o.eR"'~on. Of the 17 B) was de fin ed where th~ S tall' could p,1rticip;ilc on an
industries. 4 industries - arms and ammunition. atomic increasing sca le . However. the 19 56 Rc so lution droppcd
energy. rail"-~ O T ' t " = - - \ v e r e to-oego,,emme nt the 'threat" of nationali sari on that the I 94~ Rcso l11tion
monoputies:-i:n -e-remaiaing--- 1--3-industries. new~ units were contained and th e division o!"inclus tri cs in difl e re nt catcgo ri l·,._
to be estabhs.hed by the State but existing·privat e units were was more tlexibl e in the lormcr a s -:ornparcd 10 the l..11ter.
allowed to subsist and expand. New units in the private The fact is that the basic ob·ecti ve o l' bo I '
sector could also be allowed 'when the national interest so wast 1e same - s trengthening. rhe mi xed -:conom y s tructurc
required..
2. M.ixed sector of public and pri\'ate enterprise.
--------
of the coun11y

Industries (Development :.nc: ~~...:;,:a la tion) Acl, 1951 /

/
/

In this sect.lc:iIL 12 i!l<ius.trien isted in Scb ~ e B (appended To control and regub tc 111...: pr,Kc:ss 01 · indu s tri a l
to the Resol~ ) \vere included. These were: all otl1er development in rhc: coumr~ . : il1 r\-.:1 \\' ~I'.', rassed by the
min erals (except minor minerals ) , road trans p.Q!l._sea _ Parliament in O ctober l'>:- I. KnL1 \ ,11 .1:-. l !l L' lndu :-. lric s
transpm\ actufie toots, fetroaltoysan dtoolsteels. bas rc' (Developmt!nt and Regulati,ln) A.:t. I •>:- I. Ille t\ -:1 camc int o
and imerrnediare--p rc.,ducts r equ.ir-ed-by--che mic-al industries force on May 8. l 952 . T hi: oh_i n ·11\ cs th:11 th e A1:1 soughl
such as manufa-eture-
_____, ofclru2s, dvestuffsand \ ./

lisers,
phrslics ,
synthetic
--
antibioti cs and oilier essential drugs , terti
" and production according to p lan priorities and targe ts:
rubb er. chemical pulp, carbonisation of coal, and aluminium
and oth er non-ferrous metals not included in the first
c.ate2orv. In these industries, State would increasingly
establish new units and increase its participation but would
not deny the pri va te secfor opportunities to set up units or
expand existing units.
3. Industries left for private sector. All industries
not listed in schedules 'A ' or ' B ' were included in the third
cate2orv. These industries were left open to the privat e
se.ct;r. -Their development was to depend on th e initiative
and enterprise of the pri vate sector, though even here the
Sta re coul d st.art an y industry in which it was inte rested .
The 1956 Reso lution em p hasised the mutual
depende!.1.E!..-Ef p ublic and e_ rivate sectors. !J!.!__~~•I.Y. 4
industries in which private sector !_!'~S .!!!!_f a!_/~~ ed to
fun ction · were ainis and - umni u llitio_11 , (I.IO~Jl.ic..,__.~11ugy ,
railways ana air lransport. /ln a ll o tht'.f 111~1.lSlflCS , c1_1hc r the
private sector was affowe-<1 to operate Jred y or it s hdp
could b e obtained if the governme nt dee med lit '. H owever.
the p-rivate secto r was to r emain s ubje c t to va riou s )
to accomplish were : (i) th \:' regula11 n11 01·indu stri a l in vcs tml·nt
(ii) protection of small entreprenc:ms against competition
from large industries: (iii) preYention or monopol y a nd
concentration of ownership of industJ·ies: a nd (ii') balan ced
regional development witl1 a view to reduc ing Ji spari ties in
the levels of development ofditferenr regions of the economy.
t. Restrictive Provisions. Under this catcg,)ry come
all measmes des igned to curb unfair practic"·s ad0ptecl by
industries . These pro\'isions w1:.'rt' as foll,iws : (i) Rt•gistrati<>n
anti licem,i11g of im/11stritll 111u/ertaJ..i11gs - Undertakings
or nil those industries which were• indudcd in tl1l' srhl'duk
o f the Incl11s trics ( Dcvdopment nmt Rl·gul:Hion) Act. I 95 I.
were re quired to bl' registered whether the~, C('tnl' nndc.r thl·
pri vate sector ,)I' the public scct,ll'. Ewn it" tlw c\istin~
undertakings intended l.'xpanding their acti\'ities. tlw~ r"·q,1ir,.:d
prior pl·r mission 1ll' till· g o\'ernnw11t: ( ii) Euquiry of
J11tlw,tri1•.,· /i.,·tt',I /11 ,1,., .,·,·l,.-1/11/t· l'lw r~·sp1,11s ibilit~' L,r
th e: Stal l:' did 1wt end with th'-· r1::µ is trnti1111 1,r ~r:111ti11 ~ 1,t'
li cences to the 11lllkrtakinµs . II' tlw \\11rl--i11~ 111' 11 l'llrti'-·ulnr
ind11 s1riul unit wns 1H1t s:Hisliwl1 1r~ 1, 11\ ti,r 1' , :1111pk . tlwr'-'
wa s ~1.1hs ta111i11I 1111lkl'lltilis :1111 1n 11 t 1·.q•:1,·1h ,,1 l'r,iduct \\' lls
 370 Indian Econ om)'
. .
not up to the mark or cost of productio Col]1Illlttee m 19 67). pcin ted out that the licensi
. . ,
n and price were and D utt hiev e ,ts obJe ln ng
excessive ), the government could set up . h d failed to ac Ctl\ es. many casi'<: a.
an enquiry into the policy a th
. ·ust the opPo site of wha t e governrne-..,
affairs of the particular undertaking; and the results were J m h
(iii ) Can cella tion . Poin ts of criti cism have been ~
of regis trati on and licen ce - If a parti had plan ned. The roam
cular industrial
undertaking had succeeded in obta ining follows :
industrial licence •1· t·
and regi strat ion by subm ittin g wron g . . and und erut 11sa f
info rmat ion, the 1 L1cens1Dg 100 o capacit..,
gove rnme nt could cancel the regis trati on L" · ed to ensu ·
re crea tion o f capacn,"" - ··
under article 10(A) · g was supp os K
of the Act. In the same way, the governme ,cens~n l riori ties and targ ets. How ever , no clear -,
nt could cancel acco rdin g to P an P a
the licence if the undertaking was not · t sect or were la1 ·d d · l
set up within the own m pans and
stipu lated period. Priori ties for pnv ·
ae
ate · d · .
Ii
there fore th e pnv sect or chos e thos e m ustn es which
th · tl
2. Refo rma tive Provisions. In this categ ofita ble ln many case s, es e rndustries.
ory, following appearedd morbe ~~u ry in.dustries and F
provisions were considered: (i) Dire ct regu happ ene to e freq uent ly they al~ e
latio n or cont rol . . GT
by tire gove rnm ent - lf the gove rnme nt
felt that a parti cula r
satis fied the tech nica 1 cuno s1ty of the D . . .D . (D.!Iet:torat.e g
indu stry was not bein g run satis facto Gen eral of Tech nica l Dev elop men t)
rily, it could issue anfd w er:, 1~eduefor~
sr le
direc tions for carry ing out reforms. If these .
gran ted 11cen sin defia nce of the need s o e.sse ntla rn
directions were se tries g
not heeded to, the government coul d take . g . 5
over the management producm co mmo ditie s for mas s cons ump t10n .
and control of that unit in its hands; (ii)
Control on pric e, The gran t of a licen ce to an ent~ rpris e ,v 0
distribution, supp ly, etc. - The governme as no guarantee
nt was empowered that the prod uctio n capa city penr utte p
in the Act to regulate or control the supp ~ wou ld actually be
ly, distribution and insta lled. The gove rnm ent had the ngh h
price of the product manufactured by units t t~ take away a
belonging to the licence only seve ral year s later . Bec ause d
industrie s listed in the schedule of the of this fact, capacity
Act, if it so wished; crea ted, in som e case s , was less
and (iii) Con stru ctive mea sure s - than allo w ed. Man)
To insp ire mutu al indu strie s ( espe ciall y thos e belo ngin g
conf iden ce and elici t coop erati on from
the work ers, the hous es) indu lged in such prac tices to
to the larg e mon opoly ~
gove rnme nt estab lishe d Cent ral Adv isory restr ict outp ut and ;
Cou ncil and a raise pric es . Sinc e the gov ernm ent had
num ber of Dev elopment Cou ncils for no guar ante e that
diffe rent prod ucts . the licen sed capa city wou ld actu ally be 0
ln the initi al stages, 37 indu strie s (spe cifie insta lled within lhe
d under the stipu lated time , it adop ted the prac tice l[
Act) were brou ght unde r the purv iew of of gran ting licence;
the Act whic h was for capa citie s far in exce ss of the plan
later exte nded to include 70 indu strie s targ ets, from the end
. Of thes e spec ified of the Sec ond Plan . In thos e case
indu strie s, only thos e units were brou s whe re actual a
ght unde r the Act impl eme ntati on was larg er than expe
whe re the capi tal emp loye d was ~ l cted (as, for exam ple, Ti
lakh or mor e. The in the case of pape r indu stry, cem ent t}
exem ption limit was subs eque ntly incre indu stry and ceramic
ased in stag es to prod uctio n) a size able unut il-ise d capa tl
~ l cror e in 1970 and to ~ 3 cror city appe ared. 1n
e in 1978 and furth er to som e case s, ov erlic ensi ng of an indu
~ 5 cror e later on. The gove stry de terre d the /•
rnme nt anno unce d a majo r licen cees from imp leme ntin g thei r full
pack age of indu stria l delic ensi ng duri lice nsed capacities a
ng the year 1988 -89. for fear of exce ssiv e capa city crea tion
This pack age prov ided that henceforth, only in the indu stry ..\s 1
projects involving a cons eque nce of this, indu strie s ov erlic
a n inve stme nt in fixed asse ts of more
they are loca ted in back ward area s, or
than ~ 50 cror e, if Plan were mar ked by unde rfulf illm ent
ense d in the Third E
more than t 15 cror e of capa city.
if they are loca ted in non- back ward 2. Licensing and concentration of econ tl
area s wou ld requ ire omic power. c
indu stria l licences. As note d b y Aur obin do Ghos h. in Indi
a : ·'lt is industri:il p
licen sing whic h limi ts the areas of priv
ate investment anJ
also dete rmin es entry into spec ific 0
RE VIE W OF PR E-1 991 indu strie s . TI1e t0t1\ ,
IND US TRI AL volu me of licen sabl e priv ate inve stme
PO LIC Y AN D LIB ER ALI nt is norm ally ~ th1.1ugh ·1
SA TIO N TRE ND S not alwa ys) fixed in rela tion to the tota
l P lan t:lfft't l)i ~
priv ate inve stme nt in indu stry. This
The actual opera ti on of the industrial polic gene ra lly ho\ds rrue l1l ~
y (pait icula rly licen sing in part icul ar indu strie s also
th e indu stri a l li ce ns ing polic y ) has been . i.e .. in C\.) rresp 1.)ndt'n1..'I: s
a subj ect of muc h w ith Plan targ ets of capa city in spc-
deba te and cri tici sm. Seve ral studi es on cific in dust ries. In su..:h ,,
the impl eme ntati on a s ituat ion. olig opol isti c riva lry proc eeds
or the li cens ing po li cies and th e func ti onin
g of the indu stri a l
princip3 \\ y thr-1.1 ugn_
a ppro va l sys1cm po int ed o ut a num com peti tion for inv estm ent \_)ppo rtun
it it'S at the ~t ~1~'-' l,t d
b er o f llaw s and entr y into thl' indu s, ry it self ' . 1 T hi s
clc li c ienc il.: S. Re po rt s of th e var io t>\.pl:1ins thL' hc' h:1,i1.)\\f ,,
us C omm ittee s and of the large indu stri a l hou ses in \
Commi ss ions appo inted by lhc gove rnm 11 dia who Sl)llt -h t ··pre- )
ent it sclf( M onopolics emption t~f i,rve stmt •llf opport1111ities " tliro
Enq ui ry Commi ss ion in A pril I %4, D ugh acquiring ,
r. R.K.. Haz ar i in 1%S "-" "''" ''' im/11 .,·tritll lice ,r,•e.-. as poss iblt
.> ther eby ensuring I
 Ind ustrial Policy
an incretHinJ: s hare of new capaciti es created on the one
hand, ,md 011 the other hand keeping out potentia l rivals.
. 3. Discrcti o?ary powers of licensing authorit ies.
Ma rtrnu!<:scn ha s pointed out that because ofthe consider able
di.\·cretionm y powers vested in the regulato ry agencies, the
whole system tended to promote corrupti on, rent-see king
anti discrimi nation ha!,ed on pen,ona listic relations hips . 2
In thi s contex t, Martinusscn e mph as ises two featu res of
th e formc1l bureauc ratic institut ions func ti oning in Indi a :
First , "a lthou gh sepa rat ed from the res t of society by
e ffective sociali sation processe s and speci fi c rul es which
govern th e ir be haviour, governm e nt offi c ials often rema in
loya l to outs ide social n e tw ork s. T hey a re inclin ed in
gene ral to favour m emb e rs of the ir ow n soci al oetwork." 3
Second, " th e incli vi dual go vernmen t offi cial at high er leve ls
o f th e hi era rc hy is vested w ith cons ide rable di scretiona ry
power s in his di sc ha rg ing of admfoi strati ve fun cti ons. Thi s
ha s inc rea sed th e scope for o ut s ide in0ue nce a nd for
di scrimin a tion based on persona li stic rela ti onshjps." 4
Because of th e loyalty to outs ide social netw orks a nd
pcrson a li stic re lati ons hips , a stron g nex us between high
governm ent official s a nd manager s of la rge industria l houses
eme rged in thi s country. As a result, th e actua l fun cti oning
of the industria l a pproval system in Indi a fa voured large
indus trial houses .
4. Licensin g and regional imbalan ces. One of the
avowed objective s of industria l li cens ing po li cy was the
reduction in reg ional inequalit ies and imba lanc es. H owever,
the actual operatio n of this policy ha s accompli shed just
th e oppos ite - it ten,led to increase regional inequali ties.
As noted by the Dutt Committ ee, the four industria ll y
advanced States of Maharas htra , Gujarat, W est Benga l and
Ta mil N adu benefited the most from the operation of thi s
po licy. For example , in the decade 1955-65 , these four
industria lly advanced States accounte d for 59.3 per cent of
the applicati ons and 62.42 per cent of the licences approved .
On the other hand, the poor States of Bihar, Orissa , Uttar
Pradesh and Madhya Pradesh received only 15 .5 per cent
of total licences approved . These trends continue d in la_ter
yea rs also. For instance, during the thirteen year penod
J 979 to 1992, the four industr1a lly advance d States
of
Maharas htra , Gujarat, Tamil Nadu and West Bengal rece!ved
46.4 per cent of total licences issued whereas the combme d
share of Bihar, Orissa , Madhya Pradesh and Uttar Pradesh
w as only 16.2 per cent.5
5. Delays in process ing of applicat ions. Two
developm ents added significa ntly to the burden on both the
regulator y authoriti es and the private entrepren eurs . On the
one hand, the coverage and degree of detail of the regulatio ns
w as increased significa ntly (for instance, an amendm ent to
the IDR Act in I 953 made it compulso ry for comparu es to
obtain a licence for the productio n of a ny · nevv a rt 1c le ·
w rule in 1956 industria l activj ty and produc ts were defined
in much grea ter deta il. thus a ddin g to the n umb e r of
permissi ons required), wh ile on the other hand. indlL'; tria l
growth a nd di vers ifi cation in c reased the scarci ty of resource s
a ll ocated admjn istrativel y . T he o utcome wa s incr l!as ing
de lays in the processing of appli cations. 6 Moreo\ CL the
Licensin g Committ ee worked in a very haphazar d and a d
hoc ma nn er and there were no de fi nite criteria adopted fo r
accepta nce or rejection of applica tions. Thi s lack of ex pli ci t
economjc cri ter ia was accompa nied by the genera ll y pour
quali ty of techno-e conom ic exa minati ons conducte d by the
Directora te General of Techni ca l Deve lopment ( D .G .T.D )
whi ch a lso took a n wrnecess ar i ly long ti me fo r dis po s ing o f
cases and submittin g its recomme nda t ions to the Lice ~i ng
Committ ee. All these factors impede d indust r ial grov. th .
The Liberali sation Trend s
Because of the above cri tici sms in di ca tin g the failure
of the industri a l li censi ng policy in acru eving .its objec ti\'-'" ·
th e G overnme nt of Jnru a announce d a number o f libera li sati on
meas ures in the Indus tri al Licens in g Po li cy a nnoun ced in
19 70, 1973 and 197 8. In 1980 , th e governm e nt c~ me
fo rwa rd with an Indus tri a l Pol ic) Sta tement which sc:n ed
as a gu ideline to vari ous liberalisa tio n mc:a sures und erta ke n
a ll through the 1980s. Some of these'. meas ures . ,. , ere a s
fo ll ows:
1. Exempti on from Licens in g. The li m it ofe;-. . empci on
fro m licensi ng was conti nuously rai sed upwards. In M a rch
1978, the limit was fi xed a t~ 3 crore . Duri ng 19 80s . it v. as
fir st raised to t 5 crore in 1983 and th en to a whopp ing
~ 15 crore fo r projects located in non- backwar d areas and
~ 50 crore for proj ects located in ba ckwa rd areas in 1988
-
89 (under certain conditi ons) .
2. Relaxati ons to MRTP and FERA Compan ies .
Under the pretext of expandin g industrial productio n and
promoting exports, various concess ions were prov ided to
comparu es falling under the MRTP Act (Monopo lies and
Restrictive Trade Practices Act ) and FERA (Foreign Ex change
Regulatio n Act). The most important relaxati on related to
the raising of the limit for MRTP comparu es fro m ~ 20
crore to ~ 100 crnre (i.e ., by the times ) at one stroke in
March 1985. In May 1983 , the governm ent notified th2t
MRTP comparu es are el igi ble to set up, v.i thout the a ppro '-al
of the governm ent, new capacitie s in industri es o f high
national importan ce or industrie s \'-ith import substitu1ior.
potential or those us ing sophist icate d techn o logy . On
Decemb e r 24 . 19 8 5 , th e gov e rnm ent per m i tte d th e
unrestric ted entry of lar ge industria l houses a nd comp.a.rues
governed by FERA into 2 1 high -techno lo gy items of
manufa cture. With trus pe rmission, the large i.nciu.:,-tria! hous,es
falling within the purview of the ~ 1RTP Act and FE R.~
 372 Indian Economy
companies were allowed to freely take up the manufacture
of 83 items . The government specified a list of 33 broad
groups of industries under Appendix 1 in which MRTP and
FERA companies were permitted to set up capacities,
provided the concerned items are not reserved for the
small-scale or public sectors. Various other concessions
like regularisation of excess capacity and capacity re-
endorsement, fac iI it ies to set up industries in backward
areas etc. were also granted to MRTP and FERA companies.
7 realisation of economies of sca~e by expansion of existing
3. Deliceosing. With a view to encouraging production,
the government delicensed 28 broad categories of industries
and 82 bulk drugs and their formulations. For these industries,
only registration with the Secretariat for Industrial Approvals
was now required: no licence had to be obtained under the
Industries ( Development and Regulation) Act. This was
subject ro the conditions that the undertakings concerned
do nor fall within the purview of the Monopolies and
Restricti ve Trade Practices (MRTP) Act or the Foreign
Exchange Regulation Act (FERA), that the article of
manufacture was not reserved for the small-scale sector
and that the undenaking concerned was not located within
specified w·ban locales. During 1989-90, some more industries
were delicensed.
4. Re-endorsem ent of Capacity. With a view to
improvi ng capacity utilisation in industries, the government
announced a scheme of capacity re-endorsement in April,
l 9iQ . Du.ring 1986, this scheme was liberalised to allow
undenakings whi ch had achieved 80 per cent capacity
utili sa tion (as against 94 per cent earlier) to avail of the
fa cility. The re-endorsed capacity was to be calculated by
taking the highest production achieved during any of the
pre vious five years plus one-third thereof. The undertakings
which were able to achieve capacity utilisation equal to the
re-endorsed le vel were to get further re-endorseme nt
according to the ·hjghest production achieved in subsequent
yea rs . The number of industries for which automatic re-
endorsement of capacity was not available was reduced
from 77 to 26. With a view to encourage modernisation ,
reno vat ion. replacement, etc., the government announced
in J986 exemption from licensing requirements of increases
up to 49 per cent over licensed capacity.
5. Broad-banding of Industries. The scheme of
broad banding of industri es was introduced in 1984. This
implied cla ssification under broad categories - of two-
w heelers, four- wheelers, tractors, .i s well a s machinery
for fertili sers, pharma ce utical s. and paper and pulp etc.,
into Qe neric categories. Thus. tu tah: one example, cars,
; , ,,-, 1 ~ li ght , medium and hea vy commercial
vehicles. etc ..
1 9. Enhancement of Investment Limit for SSI Units
·\\c' ;.l' d 11 hhed ,,,., •rhcr inr o 1he gene ric c::ikgory ul" " four-
\\ hL' ek• r -; " ·r ';: · in c: 1q 1r e was intended lo enable the
11.:i nufoclurer..;
to change their product-mix ra pidl y to match
. demand patterns without incurring procedural
changes in . . d .. k"
ther costs associate wit1l see mg amendments
delays an d° .
to their industrial licences. !3road-band111g was extended in
ver 45 broad mdustry groups.
stages to Co .
6_ Minimum Ecoo~m1cs of
~cales of Operation.
Another important conc~p~ introduced m_the field of industrinl
licensing was that of 1:11111mum econ~mtc level of operation.
nus was introduced m 1986 · The idea was to encourage
instalJed capacities of un~ertaki~1gs _to minimum economic
levels of operation. With this en~ m view, minimum economic
acities (MECs) were specified forII d108 industries till
cap · . .
I 989. Expansion of ex1st111g msta e capacities was
encouraged upto these MECs if they l_ell sh~rt of the latter.
During 1989-90, MECs were specified for some more
industries.
7. Development of Backward Areas. For promoting
the development of backward areas , the government extended
the scheme of delicensing in March 1986 to MRTP/FERA
companies in respect of 20 industries in Appendix l for
location in centrally declared backward areas . The scheme
was later extended to 49 industries for location in any
centrally declared backward area and to 23 non-Appendix -
1 industries for location in category 'A ' backward districts.
The conditions permitting MRTP and FERA companies to ·
establish non-Appendix I industries in backward districts
were also liberalised.
8. Incentives for Export Production. Various
concessions were announced by the government in its
industrial policy and export-import policy from time to time
to promote the expansion of exports. As mentioned earl.ier,
MRTP and FERA companies were permitted (outside the
Appendix I industries) if the product was predominantl y for
export. With a view to providing fillip to production in
industries of high national priority and/or those meant
exclusively for export, the government introduced Section
22-A in the MRTP Act whereby it could notify industries or
services to which Sections 21 and 22 of the Act would not
apply. l.n October 1982, all I 00 per cent export-orient ed
industries set up in the Free Trade Zones were exempted
from Sections 21 and 22 of the Act. ln addition. the
government identified some industries which were specially
important from export angle. These industries were allowed
5 per cent automatic growth per annum, upto a limit of 25
per cent in a plan pe riod over and above tl1e normal permissible
limit for 25 per cent excess production over the authorised
c::ipacity.
and Ancillary Units. As stated earlier, the July 1980
Statement fixed the investment limit for small-scale industries
at ~ 20 lakh and for ancillary units at ~ 25 lakh. In March
r /11.f!l ,\ {/'J, ,/ /\ , / /, I
{ ,' /

-
1qs5 . Lhcse limjt:; \\1.'rc enh a nced l,i ~ .• .'i
IJ'-.h a 11d \ 45 lukh : 111d11•,l 1111 1 ,·, l'lll'- 1\T '<'.
:.in,~s c1µ..- a nd d.:t·,·11~·,· ,·qu1p111,•111
l'Sllnl'nt li mi t s 11,,,J at ,111d ph 11 1111 ,11·1.· 11l ll 111 1-.:
rcs~' t·tin:I>·- For tin y unit.s , 11,c im h:1, ard u us l'i1c111ic :1Is: Jru ~:-- 1 -- t k
ruisl' d subsc q u1.:111l y . II hik ~:11 ,, d , I dl'11 ,·:
i.:: l:1kh. ll1cs c i11, cstrn e11t limit s \\ Cf\.'. c11t cr1(1iftt11 e 111 L'l,·,·1r,,11i,·., : 11 11d
11 11 -,·, ,11d111 ,,11,·r ~. ,·1,·, ).
The l\1Si\ 1E D AcL 20ll6 . hns li:,...cd
tlw im,•s trnr-11 1 li111i1 l~,r rdri bcra tl1r:-- . wa :-. hinr 111;1\'11i111.·:-- . 11
,·,,· 111d11 :-- t11 l''- IH11 , · lll.'-
sm:11 1-sca lc lU1i ts to~ 5 crorc for
m:i nufactlU'in g enter prise s \\ ' ith tlw p:1ss agc ,1f lillll'. """ ' ,11'1h
ln :.: i , ,.,,,,,,,,,1."11:1· /t1 r
:ind ~ 2 crorc for ser\' ice c11te rpri
Sl'S. b..-:l' n <.k lin:ns ,·d .. l .1· of 11,111 ·. li.·c 11,
/,,. f. c l ,1.,·,11 •, ·fft •, • .,,,,·,·ij!J·d
011/t · 5 i11tl11.,tri,•.1. J'l,,··., c , ir1 · ,,/,·o 11 •·•·
· , o cr, 11-;•u1.1•· """ ·,l, j,·
t'l1•, ·f r11 1t1 ,.- .
l,11 ~t1 rtl,, 117jc l,t; tlic11/,· - .'
:ylINO UST RI.A .._".__ - :__ ~ .. - ·
" 11 ,~ 11., u l
111 r l·:-- 1•,·1~1"I.'_
N E
L
P
O LI CY, 1 99 1 ,·qu'}!"'.:. !._'!__:_""" i! 1d11.,·rr~11I 1'. \7•/_11,\/1 ·, ·, .
11<1111 th1· l l'l\11 llll 1, III
/ tntl1L~fn· . lhl nppn l\ UI ·~ ll''(llll l' d
l n l ·me. \\,·u 1 1
th e 1·1 . · ·
1oeruhs::it1on me us url·s a 1111ou 11ccd
ow1('e d a Nt:w lndus1ri.a l Public Sl'l'h H'"s Rok l>ih1h·d
durin g the 1980 s. the goYl' mmc nt nitn T he }1)5() H,:si,lut illn 11 11 11 n ·:-1.·1,
n l 17 i111h1:-- 11 i1.·:-- '"'
poli cy ~ ll'S 1hc
Polic y on Juh 24. 199 1. This new t.ilL' publi l' S \:'\.:IOr . T h,· l')') I i11du:-
11 i11 I 1'1,li,·y rvd 11n ·d tli i:-
t-r. 11,c 11\:Jjo r gy .
industrial econ omy in 3 s ubsta ntial mann c i;n ins munb cr hi ~ : ( I) umi:- 11 11 d 11111 1111111
it1t111 . ( 2 ) :i 11 1 111il· L'11,·1
" to bui ld ~
objec tives of the ne\\' polic y arc , J) ,. , 1 (~li g llill'. (•I ) 111i11l:rn l 1•il
:-. ( <; } 111 i11i111·. 111' ir ,,11
I I II
1111·-' ·
I
disto rtions or we1-m·.ss ,·s that 1 11
de. corre ct the -..- 11111. "" I' 1111 . ,. ,, 1 11111
aJrea <l_ - ma~
ll1Hll gn nc s1.: ,ir1.·. l'lirnm1.· 1,r,·. t!)' p:--
- . l
_ (o1>s -l•~
' I --:- -,-- --::i ~ gr~ ·1~ n 1 i1ll' . 1i11 . 111, 1 ly b1k1111111
m1g 11 ha\'e crep t m . mam tnm diam ond. (6) millin g 1,r l'l'pp cr. k 11d.
und a tt ain int,~rna1ionnl i11 th,· :- d, .. d11 k- Ill ll1 L·
produ c-ti \'.i.ty and gai nful emp lo~·m enL a nd w1Jltimn, ( 7) 111 j 11 L·rnls S(K'l' ili1..·d
the se ob_jec ti\'\:S. lhl'
.:om petit ivene ss ." In purs uit- of O'f-t'
:il 1..llllll' l'ncrg:_v t 1.: 1..~n1rol ol pwdu cli1•11
11ml use Prd,·1). 1') 5 .'l .
f i1titi :.llj \"1..'-S in rL·spe c11 ·111s <; t111d c, wcn· ddcl l'J
goven1?1~1ll rum ~unc ed a se!·ic s o_ :iml (8) mi l tr·a us po, 1. In ( lN 3 . i11..
ng. :.i.rc:1:; : "' -.: \,<'~ , .~
tJ1e po licies relati ng to tJ1e to llo,,1 from 1hc r<:".sL'n ,·d li st. l11 199~ -')•J . ik111s {
11 11d •I ,wn.: :il:- 1 1
, } ~ ct,;' A~)
A . Indus tria l Li cens ing. 0 11 ~1~ll )' l):. 2('.!11 ., lh c
toki:n 11ui frl,lll th,· rl' s1.·rvn l lisl.
1
.8-- "t, e.___ • ~
f"~ 11111_11,11 :-u lna t'.1 :-. ll t:•
-
B . Publi c Seclo r Po li cy e rn1111..' llt opcm·d up un11s ll llCI 111111111
C. MRT P Act (M o ,-,op :pt0 xu
-\nc..\ .... gove
1,ri va ll' rn v1.:s l111c• nl 111 ra 11I
f CC{ }\'t hi: tJriv•i _ , tc se1..·10 r ·
D urin••c- -'1 01-l •
D . F ore1c · r1 l n,·esl lnen t ::111 d T , , .: I111 0 I,11.is~ :, l'r - \I e was alk,w cd . A t pre.,·c11t 011~1 ' ! 1,u/11.wr/11
/
, ,. .. in frnstr uclur : ( /) 11101111' ·
~~natl . ic r. Tlll '. I' 11r('
- - - sec tors are r c!St! f'l't•tl for puM
:;;cc(o
A pacl-.<1ge tor tJ1e and T111y Sl'ctn rs 1..)t _,ndusl ry · I ,\ · (--·
d( ?) rat.111'11,I' Of' ~'l'll , 1(1 ·ltili,·,1<"',., . l ,, - l·l•·1 , 11 ,
~ 111 , 11 11
L .,l
1ced se()3. r.ltelY 111 Amn is t 1991 (3lre:.1d,• d1 sn c;si:d 1!.!.JJ:,IJt.l'• 1111 - 1
,,1:1.s:1 .nnow rluin wml-.s/ prvj 1.:L·ls likl·
op.:ra ti on nncl ma inkn nm:c ul' ,·1..-
_ -, n • -
• _ , .
m det111l m Chap ter_: :;) . h Pl'I', hi g h :-. pl.:nl lr:1i11
sublU'ban corri dor prl,j1.·1.·1s throu g
AbolitiOW' of lndu strh1 l Lice nsioo prnje c t. dedic ated fr1:i g.ht li111.:s . 111:1 s:-;
rnpid lrnns rort ~~1s l1.: 111s .
wn s gowr ncd by
/2d ustria.l licen s;ng po licy in 1t7dia etc .) .~
Regu lati on) Act. 195 J. A.s s llrnl 1h1.· go vc rr1111L·111
the Indus tries (Dew lopme nt a nd T he new indus tria l p,1l icy nlso :-;111tc
tri:il liee.n sing polic y and ling puhli l' c nlt.: rpri scs i11
we have discu ssed a bO\--e , indus w ill tu1d0 rtake revil'\\' o r llw L'Xi s
derab l y from time to Li me. lra tq:. i1.: arL'II:- us a ls n
proce dures were liber a lised consi low tedm ol ogy . small -s cale u11d mn1-s
y conti nued to be resentt>d l 1.'. ,,11 s i<.kr:11i,,n ur ruhli c
Y e t. the indus trial licen sing polic w hen tJ11.;re is low or nil so1.· ia
s as it led to unne cessa ry to 1l1L· H11:1rd [i., r l11dus tri :i l
se,-er ely all along by the'en trepre nt>ur purpo se. Sick. unit s will b1.: rd1c:· 1T1.~d
inter frren ce . dela ys in s imilm htHly ) lix 11 d v icc
gove rnme ntal and bure aucra tic nnd Finnm :ial Reco nstrul'li011 (,,r a
ption . etc. Not only
inn~s tmen t decis ions. red-m pism . corru abou t rehnb ilit ntion und l"L'l.:On s
lruc ti,,11 . F0r ,·111 .:rpr is,·s
as a lso unab le to achi eve is s lutnl lhut tl11.:y wi ll h1..·
this, the indus trial licen sing polic y w rema ining in tJ11.: publi c s0cto r. il
by the gove rnme nt. On
provided a much grea ter dcg rl'c or
the obje ctiw s laid dO\\l l for it 111a 11ug.,· rn 1.·n1 a ut ,,11 ,1in)
and in order t o lib er:i.lise 11d11rn ,,r 11ndn :- 1:rndi nµ. ).
acco unt of these consi dernt ions . thro ugh the syste m vf ~IOU {1111.:111Lwa
entre prene urs to make
the econ omy and to enab le the d it s inlt.::11\it,11 111
of their own conu nerci al The gove mnll:' nt hns ul s,1 tllllll'lllll'C
inves tmen t decis ions on the basis ,1ldi11 ~ in lh,· puhl ic :--,Tlo r
y a bolis hed indus tr ia l o tre~ ~_l:'I o r ~\"\:' rt1.l\Wllt sha rl'i1
j udge ment . the 1991 indus tria l polic i11s1it111i11ns. rh1.· g,;11t-r:d
. The 18 indus tries fo r ent erpri ses to mutu al ftmds . tina m·inl
licen sing for all hut 18 indus trie.s :'. in tlii :-- dirc,: 1iP11 " .1,
were as unde r - coal publi c and t.he wo rker.- . A b,·g.i 11nin!
whic.h licen sing was k ~pt_n__::cessary n~ p:,rl t•f" fil l' l'q 11it i..-... I ,1
rt'fdc)7U11i itsa.i stilla tion made in 199 1-92 it:slc'lr b:,· di \'CSli
and lignit e; petro leum ( other thanc ._-r tl w p.:riL,d t qq j . l } : t, ,
o falc91}.9ljs drinks : S_!!gar : selec ted publi c secto r cnte rpriSl'S. O,
prod u~di stilla tion and brew ing r,1i,t·d \ : _oq _~::,.: x cr,, r,·
~ls: c"igar s and- cigar ettes: asbes tos and April 8. 20 16. the gL1 v1.:mm t·nt lms
animal fats and 1ri :il p1,ti 1:: i1 11.lil·,11L-, 1h._·
and otf1er w ood-b ased throu gh thi s ,neo ns. -111e nl' w indus
asbes_tos=i;ased prodi.1cts: ply~y ood r lk r 1c1: '-'r 1'-11t i..: i\'.ll i,, 11
er: tanne cfo~ ssed gO\--e rnme nt's ~~1 ti ~n to invite n i::r'-·:ik
p r ~~ra~ -hide s and skins and leath ;11 ._·,1, 1'1 tlw 1.·1.·t'l)•'in: .
oic
d news print : el ec_E:o by tl1e priv,J tc sec!l)r in imp1.1rt:ull
~k ins ; motor ca.rs: pape r an
 374 Indian Econo my
/ . .. Mea s ure~
MRT P Limit Goes (,jbe ralis a 110 11 • ,
hc ll~ d. In a &.::r.1an i.r;,.
du.stria! loca t",o 0 .,..noJ,c,v libera.nd J_ , •
Under the M RTP Act, a ll finns with as.sets above
a 1. Io -
certain size ~ 100 crore s ince 1985)~v~;c:"c lus
sificd ·as
fa
from- the ea r ic-r
r Jocauo. n..... ., 1 polirv -,, far ·1 us1.r1e-~, tht rw.,- 11
. !" prov1u . -' ~" .L~• in locati ons otht.-r th::.n <-hi-
~~ - Such i.;.u uuu. . • _ ,
firm s were permi t.!_ec!_ to cnt:~ sclc ~ industrial po ,cy_ . ulation, th.er'e w,ll be MJ:'f:l'J.UJ. rfCTl'ltt
I million pop ~
industries onh· and thi s a l:-o on a case- by-case
approval ofmo re _th_an . dustri a l apPJ'a val.s from ~he • · "'
bas' is.l~ tion 10 contro l throug C:<--ntrt, c..,-.~
h indus trial licens ing, of obta1rung ,n . cornp uli;.ory li ct,ns ing_ In cit~
separa te a p ~ ~ _:;re . · ubJec t ,_ w - -
r.£9_uir ed b_y__:;1 -tch .Jar .~ f~r for indus tri es _s ~ 1
f
any inYes tment proposals. The gover nmen t felt I uon o more than 1 millio n, i~t rit ~ 'Jlrrf:;:.
that th1s with a popu a _ l]utin g natur e , w ere reqyi red 1..o I-~
was ha,in g~e leterio us effect on many large firms
in their than those ~fdea ;;n ~ of the perip hery.
plans for gro,vth and diversifi cation . The new located outs•
indus trial · . , .
polic y rhere/ore scrap ped the thres hold limit of
. dment in the in.dustnal locau on polLc.-- y w~
asset s in MaJor amen •
respe ct of.W RTP and domi nant unde rtakin gs. . in I 997-9 8. The requr•remeru: o f ob · •
These firms effec te~ dur g Is from the Centr al gover nmem. ta1mng
are now at par with other s. and do not requi
re prior industrial appro va (e7~
appro nl from the gov e~f ~r investment . . ·es under cornpuJsory Licens . · c ~-Li· , -
in the delice nsed mgJ 1.or <C""\4l' leiltr,i
industries. The MRT P Act has accordingly for the mdusn:1 .
been amen ded. uni ts at ]ocat1ons not fall~ wt·thin 25 kms of the ~ -
. . ha . . . •.
The amen ded Act gives more emphasis to the preve ntion Of CltlCS
a popu lation of more than 1 !Il!Hton ·;,-~
VlOg ·
and contr o_l of monopolistic, restrictive- indust • C r
- ancr unfai rtrad e d1. spens e d w1·th.. How ever ' notif ied nes o, a nor.:-
prac~ o that consu mers are adequatel y prote~ .· .
cted from
suclf pract i ces .
- poII utmg
. .
na
ture such as elect romc s, .comp uter softv..
. . . . .
may be locat ed withi. n 2 5 kms o f t ·he pe:ripb .
•are
an d pnntm g, . f:r.-
. . ~ ' L - - ;.~A• - -' _ -·
Fr✓i:°try to Fore ign Inves tmen t and of cities w .ith more than l rruUi on ~ wav .
u~ ~ =
. -
Tech nolo gy are penn
itted·only if they are locat ed m desig nated mcilb-
uia!
areas set up prior to Jw y 25 , 199 1. Zo~-a • d r - - -'
As in the case of dome stic indus trial inves tmen
t, n ~ ru-Ux
foreign inves tment Regu lation s as well as Envir onme nt Leg:islat:10
bas also been tradit ionall y regul ated in n contII IDe to
India. In the case of both foreign techn ology regul ate indus trial locat ions.
agree ments
£ought by India n firms as well as foreig n inves tment 2. Abol ition of Phas ed Man ufac turin g Prog ram
, it was ~
neces sary to obtai n spe.d fic_p rior appro val for new proje cts. To incre ase the pace of indig
from the enisa .tioo in
goYernment for each proje ct It was argue d that manu factu ring, Phas ed Manu factu ring Prog ramm
this cause d es have
undue delay s and gover nmen t interf erenc e and
also hamp been in force in a numb er of ·engi neeri ng and
ered electronic
busm ess_-de cisioo-fu.ak §g. There fore: the liew indus trial
indus tries. The new indus trial polic y has aboli
shed such
polic y prepa red a speci fied list of high techn ology and high- progr amme s in future as the gove rnme nt feels
lhat dlre to
inves tment priori ty indus tries (liste d in Anne xure Ill) where in subst antia l refor ms made in the trade polic
y and tb:
autom ati c perm ission 9 was to be made avail able
for direc t deval uatio n of the ~ , there is no longe r any need for
foreign inves tment upto 5 1 per cent foreig n equity
. The enfor cing the local conte nt requi reme nlS on a
case-by-<:a.~.
indus tries in which autom aticap prova .1wir s-gfa fitea
mclu ded admi nistra tive basis . Vario us incen tiv es that
are curreutly
a wide range of indus trial activi ties in the capita l goods and avail able to manu factu ring units with e x.isti
ng Phased
metal lurgic al indus tries, enter tainm ent electr onics , food Manu factu ring Prog ramm es · will conti nue.
proce ssing., a nd the servi ces secto rs havin g signi fican t 3. Removal of mandatory conv ertib ilin· claus e
expor t poten tial. Besi des, these inclu ded a numb
er of other . . ..-\
large part of indus trial inv estm ent in India is
indus tries w hich a re impo rtant for the rapid grow th of the
financed by
loans from bank s and finan cial instiM ions. Thes
e-C(l)nomy. The limit was subse q uentl y rai sed from 51 per e instirutioos
cent to 74 per cent and then ha v e follo wed a man dato ry prac tice of
to I 00 per cent for many of inclu ding ~
conve rtibil ity claus e in their lendi ng opera
theSl:: indus rries. Prese nt ly FOi (Fore ign Direc t In
vestm ent) tions for n-e"'
proje cts. This has provi ded them an optio n
is perm itted for mos t acti vities and a small negat
i ve li st has of coo, l!rting
been noti fied wher e ei ther th e a utoma pa rt of their loans into equity if fe lt neces
tic route is not avail able sarv b, thi!ir
m a n agem ent . Altho ugh thi s optio n has not
or there a.re lim it!> on FD J. For de ta ils regar ding
steps take n gen~ 11~- b~,
exercised., it hos often been int e rpre ted ns a; lm,,
to promote foreig n inve stmen t and techn o logy in the
period a~·:rn:N
s in ce 199 1 plt:a~i: rder to th e ch.a pter on ' Fore threa t to pri vate firms of takeo ver bv financi
ign Capi tal al in5tituti~,n.-
and Aid. ' The new industrial polic y has pr~, ided thnt
he-nn:forth
fi na nci ·d · · 1·1 ·
~ in s 1u11ons wil ·
l n o t impo se: th is m.ind ah'r~
co nvertibilit y c la usl·.
 Industrial Policy
APPRA ISAL OF NEW INDUS TRIAL
POLIC Y
Accordin g to J.C. Sandesar a, the new indu: rial policy
seeks to raise efficiency and accelerat e industrial production
in five different ways : 10
I . A number of changes in industria l licensing policy,
foreign investme nt, foreign technolo gy agreeme nts and
MR TP Act are such as to do away with the prior clearance
of the governm ent. In such cases, project time and, therefore ,
project cost will be reduced. Material and human resources
engaged in cultivatin g contacts and 'getting things done '
will be released for more productiv e uses. Thus, efficiency
wi II improve.
2 . The changes in respect of foreign investment and
foreign technolo gy agreemen ts are also designed to attract
capital , technolo gy and manager ial expertise from abroad.
This will raise the availabil ity of such scarce resources in
the country on the one hand, and will improve the level of
efficienc y of productio n on the other hand
3 . Some changes as regards public sector may
enhance the 'allocativ e efficiency' . Opening up of the areas
so far reserved for the public sector to the private sector
implies an opening for the sector which has, by and large,
given a better account of itself. Closure, liquidatio n or
rehabilit ation etc. of sick/wea k public sector units will free
resource s for more productiv e use. Similarly, privatisa tion
may make for improved efficiency of the public sector,
through its being subjected to the stock market discipline .
4. Other measures in this area such as purposeful
formula tion and impleme ntation of Memora ndum of
Understa nding and its monitoring, professio nalisatio n and
greater autonom y may be expecte d to_ i~prove t~e
performa nce of the enterpris es that will remam m the pubhc
sector .
5. Greater emphasis in controlli ng and regulatin g
monopolistic, restrictiv e and unfair trade practic~s _and ~e
strengthe ning of the powers of the MRT!' Conmuss10n_ w_1ll
curb anti-com petitive behaviou r of firms m the monopoh shc,
oligopoli stic and ineffectiv ely competitive markets and thus
promote competition and efficiency.
However , the new industrial policy 1991 has invited
scathing critici sm from a number of quarters. The main
points of criticism are as follows:
1. Erratic and fluctuati ng industria l growth. As
noted above;tn en'eW fndustifa r1,e-ricy cons iaer ably r~duced
the intervent ionist barri ers to _the entry of domes_t,c and
c · ·
1orc1gn mves tors resulting in what has been proclaimed as
, . . . ..
a mu.ch more competit ive environm ent m the •md ustria . ·. I
rs
sector. It was hoped th.at tbi s 'much more compe111.1 \ t:
environment' would, in itsel f: induce higher gro ..vth rat~ u:;
the industrial sector. However , as discussed in Chapt~ :::.6
this has not happened. In fa.ct. the rate of groMb in ~ht
industria l sector declined in the post-refor m per iOG
(particularly during the latter haJf of ]990sJ. For msta...-we .
the rate of growth of industrial production was o.oJ: 5. 0 pe1"
cent per annum during the period of the ~intb P lan i 19r -
98 to 200]-02) whereas it was 7.8 per cent per a::muro io
the pre-refor m decade (] 980-8 l to J 991 -92 ). During l 990s
as a whole ( 1990-91 to 1999-200 0). the .rate of grov-,...b of
industry was onl y 5.7 per cenl per annum 'Ihnat i s mvre.
the post-199 1 period witnesse d erratic and fluctua t~
industrial growth rates in different years leading t o condru-:,m
of instability and uncertainty.
This suggests that "liberali sation per se h as not been
enough to ensure high rates of gro wth of investme nt u.na
productive activity, and that other strategies may b e nec essary
to encoura ge the 'animal spirits ' of entrepre neun. " 11
2. Distortio ns in prod uctio!J structll! e· Frc.n::1 the
point of V1ew of long-run industrial developm ent. the m051
important group of industries is the group of capita] goods
industries. However , the rate of grov.rth of this group of
industrie s fell drastical ly from 9 .4 per rem per >qnnm
during 1980s to only 4.7 per ceor pey arm~ o~·~r ~ 1'intb
Plan period The rate of growth of capital goods indusU;·
ruffled negative in 2012-1 _3_ ~~ ~ 1 4 . This pomts to fue
distortio osin·produc{ion structure in the post-refo rm period..
3. Threat from foreign competit ion. In the ec::-i:,
euphoria of liberalisa tion, the pri vate sector industriil is'.::s
welcomed the new industrial policy 1991 but they som
came to realise that opening up the Indian econo:ny :o
foreign competition meant more and cheaper imports. more
foreign investment, opportunities to the MN Cs (multira.ti.cim...l
corporations) to raid and takeover their enterpris es. and
worse, their inability to meet the challenge fr om ~Cs Cfile
to their weak economic strength vis-a-vis the ~Cs_ In the
new liberalis ed scenario that has emerged in tht! pcsl-
1991 reform phase, the Indian business mt!n are f acing
unequal competition from MNCs. 1be ' t.mequal ~ t i 0 : : i -
stems from a number of reasons discussed in detail iD the
section on 'Effects of Globalis ation' of Chap,er ~: 0::i
"Globali sation and its Impact on the Indian Eoanom) .- -~
stated therein, the Indian enterpri ses suffer from · ~iz.e
ctisadvantages ' as they are just minuscules in oompans oo
with MNCs ; they have for long operate<l in a protecti 0.ni51
environment which promoted ineffi ciencies in produnio r..:
the cost of capital to Indian business is much higher tl11I1
for MNCs; th ey are very weak fi na ncially in corr:pans on
with MNCs; high. multipk ,md cascading iodiren U.,e--5' -
especiall y at the loca l level , wh1:re they are not appl:c.2."b le l 0
 3i6 Indian Economy

. . . t ces · As correctl y pointed

f'oreign imports - re s ult in maki ng Indian goods II best ,n our c1rc11ms air . . out . by.
,e
. f I d. ·s industn a h sat,on 1s
uncompetitive; etc. h ,m. O f the very purposes O 11 ,a
one
ur very large manpow er resources are
· · -
4. Dangers of business colonalisation. The various h . .
measures to promote.foreign in,·e., ;tment contained in the
:~feec:S:~ tu~~is~d- This implies the adoptio~1 ol labour-
.
n e w industrial policy and the 11ario11s co11cessio11s to such mtens1. ve Y .
and cap1tal-savmg . t . lmologies in wluche ver areas
ec - . . _ ~ .
·t · c sible to d o so Th 1s . ma y 1·n,plv ., maJor readJu:.tJnt:nts
·
i111•eslrne11I anno1111ccd in recent years l,a,•e provided , ,s 1ea · . • I l · bour-scarcc
opportunities to ~if/\'C , t,; p e ,,etrate thl' /11dia11 economy in technologies that have deve loped ~n I ie a b. . , _ ,
and gobble up Indian enterprises. Baldev Raj Nayar has and capital-abundant rich cow1 tri es. This will not c :m ~as)
pointed out three stra tegies adopted by the MN Cs to penetrate task. 13 , , / •
· KPcrsooaHstic
the Indian eco no m v throug h FDI ( foreign direct relationships and corr~p t prnctaces.
investrnent). One. so~e forei;i in vestors ha ve bought off continue to prevail. As stated ~arlier, the . ltcenc~ per~m~
1.~:
1
~

existing local brands alongwith their branded products with
the aim of replacin g s uch products with their own
internationall y known products. eliminating in the process
the possibility of competition from the local products. Two,
some foreign investors initially opted for joint ventures with
Indian partners to gain easy foothold in the domestic industry
but , once having consolidated their position, reduced the
Indi an partner to a subordinate position or simply ousted
him . Thus, many Indian businessmen feel that MNCs simply
use them as a ' door-mat' for entry and spread risk only to
be dumped later. Three, some foreign investors, even as
they started out with local partners in a joint venture, then
went on to set up parallel I 00 per cent subsidiaries of their
own in the same field, which were then favoured with
greater sources and more modern technology, rendering the
joint venture uncompetitive and useless. The aggression
which MNCs have shown to devow- domestic enterprise
has raised the dangers of business colonalisation.
· 5. Misplaced faith in foreign investment. Various
policy pronouncements of the government in recent years
i~cate that it expects foreign investmertt to help in
technological upgradation of the industrial sector and push
up export earnings. However, this faith in foreign investment
is misplaced. As pointed out by H.K. Paranjape, none of
the MNCs operating in this country has attempted to
develop India as 011 important base for a significant part
of its worldwide research and development work. Despite
various tax concessions and incentives none of the
multinationals tried to expand expo.rt markets. They
undertook export activities only to th~ extent they were
compelled to do so under export obligations, or when it
was found necessary to do so in order to be able to earn
foreign exchange for importing some of their essential
requirements .
Coming to the import of foreign technology, Paranjape
again expresses some reservations. According to him, in
the whole eagerness to import foreign technology, little
attention seems to l,o,·e been f'Oid to tlte possibility that
production and managerial tecltnologies found more
suitable in other cfJrmtries may not necessari{v prove to be
raj . of the pre-1991 period provided am_ple sc~pe r~_nt
seekino as the entire operations of the i_ndus~1al 11~1;;1~:;~ng
policy :vere governed by personalisti~ relat1~ns!u~s. Acc01du:~
to John Dengbol-Martinusse n_ wh1lc deli ccns 1ng -~nd _d1c:
.
regu Iatton I1as un doubtedly d1 scotu-aged rent- scekmg ..111d
.
corruption at tI1e Cen tral goverrunent level, these practices
have contmue . d an d n1,ay have even increased at the. State
government Ieve I . Thl·s is due to the reason. that ~
while
_ .the,
· t t·
nurn b er o f 111 erac ton po·
i nts
. between governm1c:nt
. of11c1al s
and entrepreneurs have declined at the Umon. l~vel, they ......
have generally increased at ~e State level pro:1~m g
scope for continued interaction on a personah stic baSJS,- ·
a~p:~ __)
N,/'..ft ONAL MANUFACTUR ING POLICY
,- 7
India ' s recent economic growth has been due to a
massive surge in the services sector with the manufacturing
sector continuing to stagnate, contributing only 15-16 per
cent of GDP. As against this, the manufacturing sector in
China accounts for about 42 per cent of GDP. In fact,
India's manufacturing sector is only about 13 per cent of
that of China's. It is now being increasingly recognised that
unless India's manufacturing sector picks up strongly, it
will be difficult to sustain rapid economic growth on the
one hand, and provide productive employment opportunities
to the increasing labour force on the other hand. History of
all developed countries, Asian Tigers (South Korea, Hong
Kong, Singapore and Taiwan) and China shows that all of
them have attained economic growth by focusing more on
the manufacturing sector where output is more tangible and
where most of the innovations are first generated. All these
considerations have once again brought back industrial
policy into focus in the form of the National Manufacturing
Policy (NMP) released by the Government of lndia on
November 4, 2011.
Objectives of NMP
The main objectives of NMP are as under:
1. Increase manufacturing sector growth to
12-14 per cent over the medium term.
 /1:d11str/,il /'r, /1,:1· 377

' l_n'-".n:'..J.Se the s.hm~ L'f rrmnufa . .-1uri11g in GDP
tnmi ID"\! pn.~$ent k Yd ,,f about 1t- .0 pt' r l'~nt
t~, .: 5 ~~r (~11{ tiy ..::o~ .
- . C r e-ate l()() mi llion :1ddition:1J j(\hs in th,'
m:umf-al'tu.ring St."\.'IOT by 20.: .: . .
4 . C'n:-,ltt' appI\.1 prime skill se~ amonl.! tJic rurnl
m i~runt a nd urb :rn p oo r f,,r tht:'i r 1:'n s,·
::i.t,ls...)rrti,m in mannf.icruri ng. -
5- . lnnt'-l St:' d ~, mes ti..: n 1l ut:' :1 ddition and
k"c hi1~ h_, gi c3. I d q _
, th in m:111 ufu..: turi n g.
6 . E nh:i.Ih·e f: lobal ..:ompetiti.Yent:'s s of lndian
msnuf.-i.:rurin~.
T h e :'\\ 1P no ted tha t the co ntributi o n of the
n:um.1.1.'°:lcnrring s-e-c-r0.r at about 16.0 pc-r ..:e.nt of lndin ·s GDP
is mu.::h t:-ck,,Y its p,)tenti::i..I and a ca use of concern especia lly
m the ..."Ou.rt:>:\., of o-tha A.si:m ...·otmrries in similar stages of
<l-e,ciopm~m . This also bas its s1.x:io-t>conomi c rn:mife.st; tions
and pre,cnts India from full y leYc.r:1giQg the opportunities
of globtli53.tiC'l1. India is a ymmg. country with ov-er 60 per
c--ent of its popubtion in tht> ,..-orking :.1ge group . W itJ1 0\-e.r
2:0 millioo peopl e cstim'.ltc'd to join the workforce in the
~-r de;:ade. the tll1Ilub cturing sector \\ill haYe to create
gainfoI employment opportunities for :.it least half this number.
Pone~· Interventions
\\-ith a , iew iO acc ele ra ting the gro\\ib of the
manufacturing s.ector. the manufacturing policy proposes
to create an enabling emironment suitable for the sector to
flourish in India_ The N1vf.P envisages simplification of
bus iness regulations '1.ithout diluting their intent. Recognising
the imponance of s:mall and medililU entell'rises (SMEs) in
th e- country · s e-conomy. the policy contains dedicated
intl·rwnlions fo r SMEs in acldilion to other interventions for
mmmfocturing industry gcnorally. These interventions relate
prima.ri ly to tcdmology upgra clation: adoption of cnvironme~t-
fri~•nd ly te c hnol ogy; and equity investments. Skill
dcvcluprnent. to make young people employable. ha s been
given high priority in the policy through fi scal incentiv~s for
the priva te sector and government s chemes . National
Inves tment and Manufacturing Zones (NlMZs) are al so
provided for on-lands which are degraded and w1cultivablc.
NIMZs are envisaged as integrated industrial townships
with world-class physical and social infrastructure (see
Box 29. l ). According to Economic Survey 2011-12, "The
NMP. which is ilie first such dedicated policy measure for
the manufacturing sector in the country, is expected to
change the manufacturing landscape of the Indian economy
through increased capital formation ; industrial infrastructure
of global standards; technology upgradation; creation of
innova tion and vocational skill development infrastructure;
and industry, worker, and environment-friendly regulations." 15
Eight investment regions along the Delhi-Mumbai
Industrial Corridor (DMIC) project nodes have been accorded
in-principle approval as NIMZs. In addition, twelve NIMZs
outside the DMlC region have been granted in-principle
approval. 16 ·
A Critical Evaluation of NMP 17
While accepting that the NMP is a ' well-crafted
document having its various sections or parts clearl y
delineated ', Sunil Mani has criticised it on follo w ing counts:
l. The NMP aims to increase the share of the
manufacturing sector in India's GDP from the present level
of around 15-16 per cent to about 25 per cent by 2022 and,
in that process, create 100 million jobs. Crucial to this w ill

I
Box 29.1
Na tional In ves tment and M.anufacturing Zones
I

The r--.'MP provides for the de. elopment of N ll\1Zs as integrated industrial townships with state--of-the-..1fl infras rru crure und land
use oo the basis o f zoning;; lean and energ)-efficient tec hno log)'; necessary soc ial infrasrru cture; (lnd skill develo pmt'nt foci. Ii.ties to
pro,)de a p:roducri,,e efi\ironment to persons trans iting from th e primary sector to th e secondary and terti!U)' st"Ctors. Key feanm."s of
t.l:i e proposed ""ThQs are as follows :
• Th."e Sw.e g<l\ ernment "ould be re-spon.sible fo r the selectio n of su itab le land hav ing un !l.l'ltll r,f 5,000 hecmn:.·;; in s ize.
• AI kast 30 per ce.n t o f the total area proposed under N IMZs wi ll be utilised for locmiun of m ru\11 1!\cturing units.
• A special purpose vebid e (SPV ) \1 ill be co nsutu ted to dis charge th e offo irs of the N IJVtZ.
• Tue S12!.r go, eniment v. o uld fac11Jlfile the pro vis ion mg of wille r, power conn .:c ti vity, a nd otlll'r i11 fm.s trnc tmc• und utiliti,·,-; link..\_ll,es.
• The Crotnil g.o, cmmem ,,qJJ bear Lhe cos:t o f m as ter plan nin g und ,lill 1111prov d pro vich: extcmrn l physirn l inln btruclll\'\' hnk. mre:;. to
~lMZs mcludmg rad, road (na ttonal highwoy., ), nirpo n.s, tmd td eco mniu 111c1111o ns in u t11n ..--hound m un n er. •
• The Cen tral governmen t ,1ill prov ide fmancrn.l ~uppon in th e fo m1 of viub1h1 y gap f1111din g {VG F) not n.rc•eJing :w tx' r cent ,,f
project c.osts .
• Soft loans from mulullileni.l finan cial 111 st1ru11 ons w ,11 be· n plo red ,md th e J e w l1)1wrs 0 f NIM i'..s will be allo w c\l 1,, t ttisc• <' \knH\l
commerc-ial borrowings (ECBs) for dc ve lop lil g unernal U1fra~rru ctllr~ of th e NIM!-~,
Source · Governmen t of Ind.i.a , Economi c Sun <'J . 2 01 1- 12 (Dc lh1 . 2UI :> ) , Box 9.:1, p 2 16 ,
 3i 8

/11rlia 11 Econo my
be inc rea sin g tJ1e
rat io of dom estic
do me stj c va lue value added to the 5. As far as pro
of ou tpu t thr ou gh no un cem en~ s on
technologicaJ dep nn enh anc em ent
tJ1 in manufncturi of technology acquisitio
n, skill upgradation
i~sues such as
ng. In other words
polic y aim s at im , the tra de policies etc , public procurement
pro ,·ing local value
addition by ensuri . are con ~e rne d, NM
tJ1at the industry
ha s most of the com ng anything new . It
merely brm gs tog
P do es not stat~
ponents, spare par
an d raw ma terial
s locallv n,11ilabl ts tm eth er sep ara te issu
es
tar get s a.re fixed on e. Ho we ve r, "no specific
der one umbrella
hea d.
Ynlu ; add ed and so 6. NM P ha s fai
in Yagu e ter ms wh the goal is expressed led to ide nti fy
ich makes it s mo manufacturing ind a sm all se t of
nitoring in1possib ustries in wh.ic~
2. Th e po lic y do le." Ind ia has a compet
arr i,in g nt the tar cum ent is tla we d in its arithmeti
position or is likely
to att ain on e m the nea itive
get to ach iev e a 25 c of con~ext, it may
be po int ed o~ t tha
r future. ln this
GD P . Ac h.i e,i ng .0 per cent sha re of
the t Ch ina ' s success
the tar get will req
uir e the manufact
bas ica lly due to the
rea son tha t 1t car efu is
sec tor to gro w by w-ing diligence , a small lly defined with due
I per cen tag e point
or set of tho
oYer the ne xt ten
ye ars ov er the
more every yea r wh ich it could gra du ate
se ma nu fac tur ing
industries in
9.0 per cen t gro to wo rld -cl ass po
ach ie, ·ed by the sec
tor in 2009-1 0 (in wtJ1 siti on s .
fact. as sta ted earlie
the Nlv\P em isa ge
s a gro wt h rat e of r,
12- 14 per cent over
me diu m ter m) . "G
iven the ver y high the MA KE IN IN
DI A
the gr o" th per for int er- yea r va riability in
ma nce of the sec
app ear s to be ,ir
tua lly im po ssi ble
tor see n since 199
1, th.is Th e Pri me Mi nis ter lau nc he d
.'' global initiative on the 'M ak e in Ind
ia'
Se pte mb er 25, ~O
As far as NI MZ s
are con cer ned , Su.nil and for eign investors to 14 t~ invite b~ t~~ o~
est ic
tw o im po rta nt qu Ma ni raises inv est m Ind ia.
est ion s : (i) in ilie
light of rec ent ins bas ed on four pil Th e m1tiative is
in We st Be ng al an
d Or iss a, how wi tances lar s, wh ich ha ve
be en ide nti fie d to
arr an ge for a lan ll tJ1e Sta te governm
ent
boost to ent rep ren
eur shi p in Ind give
d hav ing an are a s ia, no t on ly in manuf
(ii) alt ho ugh the of 5,0 00 hec tar es? but als o other sec
tor s. Th acturing
; and e four pil lar s are
NI MZ s are sup po
sed to be different :
SE Zs (sp eci al eco
no mi c zon es) in from 1. New Processe
s. 'M ak e in Ind ia'
no t pro ,id e ilieir ilie sen se tha t they may of doing bu sin ess ' as rec og nis es 'ease
occ up ant s ,vith tax the sin gle mo st
im po rta nt factor
a nw nb er of tax inc
ent ive s and the se
con ces sio ns, the re
are
pro mo te ent rep ren
eur shi p. A nu mb to
will als o ad d to the er of ini tia tiv es
for eg on e by the
ex ch eq ue r. If the tax
accordingly bee n
tak en to eas e bu have
sin e·ss environment
}H M.Zs inc rea ses
the revenu e for ego
est abl ish me nt of
the 2. New Infrastructu .
re. Go ve rnm en t int
ma tte r of con cer
n as lib era lisa tio
ne , it wi ll be a ser
iou s ind ust ria l cor rid ors an end s to develop
n has alr ead y led d sm art cit ies , cre
en orm ou s inc rea
se in the fin anc ial to an inf ras tru ctu re wi
th sta te- of- the -ar
ate wo rld class
inc ent ive s to the spe
sec tor . Mo reo ve r.
as rig htl y po int ed pri vat e ed com mu nic ati on . Inn ov
t tec hn olo gy an d
high-
no t co rre ct to ou t by Su.nil Ma ni, ati on an d res ear
ass um e tha t firm it is are sup po rte d thr
ou gh fas t pa ced ch activities
inn ov ati ve tha n the s in a clu ste r are
mo re im pro ved inf ras tru reg ist rat ion system and
firms tha t are no ctu re for int ell ect
t a pa rt of the clu ual pro per ty rig hts
ste r. reg ist rat ion . Th e
req uir (IPR)
4 . Sin ce the NM
P foc use s on inc em en t of ski lls for ind
thr ou gh inc rea sed rea sin g eff ici enc y ide nti fie d an d acc ust ry are to be
ord ing ly de ve lop
com pet itio n be tw
een ma nu fac t\lf ing be tak en up. me nt of wo rkf orc e
it will na tur all y inc
rea se the po ssi bil firms, . is to
ity of no t ver y eff
firms ex itin g from
the ind ust ry. Th is ici ent 3. Ne w Se cto rs. 'M ak
is lik ely to res ult e in Ind ia ' ha s
los ses . To tac kle
tllis pro ble m, NM in job 25 sec tor s in ma ide nti fie d
P pro po ses a sui nu fac tur ing . inf
co mp en sation to tab le ras tru ctu re an d
be pa id to the wo act ivi tie s. De tai led
inf orm ser vk e
of rwo a lte rna te rke rs thr ou gh the op era tio ati on on the se sec tor s. alo
fun din g sch em es n det ail s of the FD
I Po lic ngwith
- the job loss po y, Na tio na l Ma nu
th e si nk ing fun
d . Un de r th e for licy and Int ell ect ual Pro pe fac tur ing Policy.
op e rat in g withjn me r, the fir ms ~n t are
rty Ri gh ts an d
the pro po sed Na
an NIMZ ma y ins ure lnclustriul Co rri do
rs inc lud ing De tional
the ir wo rke rs flgnin
lo% of empl oy me
nt in the even t of sl Co rri do r (D MI C)
is be ing pro vided
lhi Mu mb ai lnd
ust rir1l
the firm closin g
or red uc in g lab o
ur Jor ce - du e do wn we b-p ort ul nnd
pro fos sio nal ly dev
thr ou gh an intc roc
ti, .-
to the ac tivati on
red un da ncy sch
eme . Th e sec on d of il hns be en op,.me
d up
elo pe d bro ch nn~:-
. FD\
scheme, kn ow n as in De kn cc produ
sinking fun d, 1s to
be fun ded by con trib the Mc dicul devices.
Co nstruction and Ra
ction. lnsur.u1c~ .
uti ons ns dec ided
tJ,e S P Y . J-lo w e w r,
the co mp en sc1 ti on hy i11 11 bi g wa y. ilw av int'rnst111ctnn
;·
is eq u iva lent to um kr th1: tw o sch
t.:m-.: s ·
jus t ;:ibou t s<: ven
mo nth s or pa y at the ru -t . Nl• w M ind
k
o f averag,(.; pa y set. In 11n\cr (l, i'H
pL' f munt h ow rlnt'r wi th industr~
do es no t flmoun 1 r the I 0-ye ar per
iucl whi ch
e1.:ono1t11l' d1.: vd op
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to mu ch or a l'<
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.....-

379
Indust rial Policy

t India as regul ation s and a

The Gove rnme nt of India has set up Inves Indian SMEs with less stringent rules and
facilitation agency. rs of Make in India . Further,
the national inves tmen t promotion and special focus on 25 thrust secto
in the country, Units Deve lopm ent Refin ance Agen cy (MU DRA )
With the objec tive of promoting investment a Micro
cell has been set up provi de devel opme nt and refina nce
a full -fledged Inves tment Facilitation Bank has been set up to
in India initia tive, prima rily to support all ercial banks /NBF Cs/co opera tive banks for loans
m1der the Make to comm
handh old and liaise with fol1ow a credi t-
investment queri es as well as to given to micro units. MUD RA Bank would
on behal f of poten tial inves tors. Invest cial litera cy and
various agenc ies plu; appro ach by also provi ding finan
for guiding foreign etc.
India will act as the first reference point addressing skill gaps, information gaps,
on all aspec ts of regul atory and policy issues and
investors
ning regul atory cleara nces.
to assist them in obtai NOT ES
Policy and Promotion
The Depa rtmen t of Industrial
ltatio n with vario us Central ministries, iour of Monop oly House s -
(DfPP ), in consu I . Aurobindo Gbosh , "lnves tment Behav
and Politic al Wee kly.
other stakeholders, Econo mics of Pre-em ption" , Econo mic
State gover nmen ts, industry leaders and November 2, 1974, p. 1868.
formu lated a strate gy for increa sing the contribution of s, In stitutio ns and Indust rial
has 2. John Degnb ol-Mar tinusse n, Policie
r to 25 per cent of the GDP by 89.
the manu factu ring secto Develo pment (New Delhi, 2001) , p.
2020. 3. Ibid , p. 89.
ing Policy 4. Ibid, p. 89 .
As en~saged_ by the Natio nal Manufactur Handb ook of Indu strial
seeks to create 100 millio n additional 5. Compu ted from Gover nment of lndia,
2011 , Make m India ics, 1992, Table 77, pp. 194-5, and Handb ook of Indust rial
nment is taking Statist
.
jobs in manu factu ring by 2022. The gover Statist ics, 1993, Table I 00, pp. 192-3
of workers/the 6. John Degnbol-Martinussen, op. cit.
, pp. 88-9.
a numb er of steps to enhan ce the skills
impro ve their employability. chapte r on "Priva te Sector in
unemployed in India in order to 7. For a detailed discussion refer to the
and boos t Econo m y" and the chapte r on "Mult inatio nal
to tap the creat ive poten tial the Indian
In order Corpor ations, FERA and FEMA ".
the Start- up India, Stand -up India
entrepreneurship in India, : A Refere nce Annua l (Delhi ,
ation promotion 8. Govern ment of lndia, India 20/6
camp aign has been annou nced. An innov 2016), p. 507 .
(AIM) and a techno- al is not require d; only the
platform called Atal Innov ation Missi on 9. Under the automatic route, prior approv
progr amme called Self- for monito ring purpos es.
financ ial, incub ation and facili tation reporti ng stipula tions have to be met
approv al reduce s the scope of discret ionary use of
Talen t Utiliz ation (SET U) are being Tbe automatic
Empl oyme nt and the Foreig n Investm ent Promo tion Board.
start-ups in India. powers by
implemented to encou rage innovation and : Questi ons of Efficient Growt h
I 0. J.C. Sandes ara, "New Industrial Policy
fy selected Politic al Weekly , Augus t 3-
'Mak e in India ' initiative also aims to identi and Social Objectives", Econo mic and
le~de rship in innov ation and · 10, 1991, p. 1870.
domestic comp anies havin g , Th e i\,farke t that Failed : A
into globa l cham pions. 11. C.P . Chand rasekh ar and Jayati Ghosb
new technology for turnin g them s in India (N ew Delhi.
and advanced Decad e of Meo-li beral Econo mic Reform
The focus woul d be on prom oting green 2002), p. 23 .
anies to be part of and Nan·on alism (New Delhi.
manufacturing and helpi ng these comp 12. Baldev Raj Nayar, Globa lizatio n
l value chain . 2001), pp . 173-4.
the globa Policy : A Cnpitalist i\la nifesto"',
the small and 13 . H.K. Paranjape, "New Industrial
For suppo rting the financial needs of r 26, 199 I. p. 24 76.
ups and Econo mic and Political Week()". Octobe
secto r and prom ote start- pp. 205-6.
medi um enter prise 14 . John Degnbol-Martinussen, op. cit.,
taken various steps Sun·ey . 20 I 1-1 2 (Ddhi . 2012).
entrepreneurship, the government has 15 . Government of Ind in. Eco nomic
ation Fund has also p. 215 .
through Make in India . The India Aspir - A Refere nct' A nn ual. op . cit .
Indus tries Deve lopment Bank 16. Government of lndin, lndia 2016
been set up under the Small pp . 5 1J -4.
(SID BJ) for ventu re capita l financ ing of newly set-
of India 17. Discu ssioh in this section is bnsed
on Sunil MMi' s article '"Nuti onnl
the MSM E secto r. SfDBI Make in 11 Powt> rhuust·'?." E,·,•11v m1c
up or expan ding units in M11nufoctmin g Policy : Mnkin g lndin
ha s been launched 1 l , pp. 16- IO . Allqu otntiL,n s
India Loan for Small Enterprises (SMILE) and Political IVeekl,1 ·. December J l. ~0
short-term loans to nrn nlso from this nrtlc le.
to offer quasi-equity and term-based

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