Indian Economy in Retrospect:

Entrepreneurship and SMEs

Dr. Sudhir K. Jain

Adjunct Professor & Former Head
Department of Management Studies
Indian Institute of Technology Delhi
Hauz Khas, New Delhi – 110016
Industrial Evolution of India (Upto 1991)
Upto 17th Century:
Metallurgical & Textile Industries
Handicrafts: artisans
18th Century
Industrial revolution in England/Europe

19th & 20th Century (up to 1947)

Setback to Indian Industry
Indian raw materials to England
British Finished goods to India

Industry Status in 1947:

Sugar, Cement, Cotton, Jute, Matches, Glass, Paper, Iron & Steel,
Electrical Equipment, Plantation Industry etc.

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 Industrial Planning in India: 1947
• Absence of medium scale units
• Absence of ancillary units
• Production of consumption goods
• Development of selected industries
• Absence of industrial planning in the past
• Apprehension of private sector about Indian govt.’s
post-independence industrial policy (viz. complete
nationalization)

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 Post-1947 Industrial Planning in India
• Industrial Policy Resolution (1948)
• Industrial Act (1951)
• Industrial Policy Resolution (April 1956)
• Industrial Licensing Policy (1970)
• Industrial Policy Statement (1973)
• Industrial Licensing Policy (1975)
• Industrial Policy (1977)
• Industrial Policy (1980)
• New Industrial Policy (1990)
• Economic Policy Statement (1991): Economic Reforms
• Continuation of Economic Reforms (1991-2022)
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 Indian Economy: Important Years
→ Focus on Entrepreneurship
Ministry of Finance, Bangladesh creation

1947 1961 1970 1980 Indira Gandhi came back:

Assassination.

1984
1950 1962 1971
1985
1951 1964 1972 1989-91
1952 1965 1975 1991 LPG Reforms
Industrial Revolution -
Transportation and communication
1996-97 PCs, computers industries :)

1956 1966 poor FX, 3yr

gap in YP
1977
New govt, small industries
with reservation 1998 India - 4th Largest economy

1957 1967 1979 2004-2008 2006 - small industries

Employment of engineers service institute SISI
Internal emergency in India

1969 2009-2014
Current congress made, FYP
2014-2021
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 Industrial Policy Resolution (1948)
• Progressively greater role of the State in the development
of industries.
* Active role of State in helping economy & private sector
- to provide infrastructure
- to protect domestic industries from unfair foreign competition
- to ensure supply of essential raw materials through imports
• Demarcation of entire industrial field between
public and private sectors

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IPR 1948: Exclusive State Monopoly

• Arms & Ammunition

• Atomic Energy

• Rail Transport

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IPR 1948: State Monopoly for New Units
(6 groups of Industries)

• Mineral Oil
• Coal
• Iron & Steel
• Mfg. of Aircraft
• Ship Building
• Telecommunication Equipment

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IPR-1948: State Regulation: 18 Industries

• Automobiles • Cotton & Woolen Textiles

• Tractors • Cement
• Prime-movers • Paper
• Electrical Engg. • Salt
• Heavy Machinery • Sugar
• Machine Tools • Air & Sea Transport
• Rubber • Minerals
• Power • Defense Industries
• Industrial Alcohol • Heavy Chemicals & Fertilizers

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IPR-19948: Unregulated Private Enterprises

• All industries not listed in above 3 categories

• State could nationalize any industry/industrial unit

• Role of cottage industries

• Support to Khadi & village industries

• Planning for support to entrepreneurs, ancillary

units & small-scale industrial (SSI) enterprises

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 The Industries Act (1951)
• The entire industrial sector was put under administrative
guidance, promotion & control of the govt. (negligible role
for market mechanism)
• Existing units to be registered with the govt.
• Licensing for setting up of new units or expansion of existing
units mandatory in 17 industries (later extended to 70)
• Provision for constitution of Development Council for one or
more group of industries to decide production targets,
efficiency norms, promotion of standardization, trading,
research, productivity etc.

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The Industries Act (1951): Objectives
• Industrial production to conform to plan priorities

• Balanced regional (industrial) development

• Protection of small industries against competition

from large scale industries

• Prevention of monopolies & concentration of

ownership of the means of production

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 Industrial Policy Resolution by the
Parliament of India: April 1956

Dec’1954 Parliament Resolution:

• The objective of social & economic policy in

India was establishment of Socialistic Pattern
of Society

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 Industrial Policy Resolution (1956)
“The main responsibility of industrial growth should lie with the
government & public enterprises are most suited to achieve
the twin objective or rapid growth with social justice”

Schedule A: Included 17 industries (4+13)

*Exclusive responsibility of the State
Schedule B: 12 Industries
* State was to acquire progressively
increasing share in these
Schedule C: All remaining industries to be left in the private
sector, with extensive controls & regulation by
the govt.

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 Industrial Policy Resolution (1956)

Focus: Development of Heavy Industries

[Second Five-Year Plan (1956-61)]

Lacunae:
● Overemphasis on licensing policy

● No penalty on licensees for not installing

licensed capacity → Shortage Economy

● No consideration of economies of scale

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 1969: MRTP Act and
MRTP Commission
• To prevent concentration of economic power in
the hands of few
• To control:
o Monopolies
o Monopolistic and Restrictive Trade Practice

▪ MRTP Commission (1969)

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 Industrial Licensing Policy (1970)
License Requirement Waived if:
• For expansion of unit (upto Rs. 1cr. Investment)
• Applicant’s existing assets < Rs. 5cr.
• Applicant is not a large industrial house or a dominant
undertaking under MRTP Act (1969) or a foreign firm
• Foreign exchange requirement not to exceed Rs. 10 lakhs
• Reservation for small scale industrial units (1970)

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 Industrial Policy (1973)
In view of Approach to V Plan
• 19 Industries added to the Core Sector

• Basic industries defined:

– Industries of “critical” importance (with linkage to future)
– Industries of “strategic” importance (with export potential)

• Core Sector divided into Public, Private & SSI

• Items reserved for small scale industrial (SSI)
sector entrepreneurs & public sector

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Industrial Licensing Policy (1975)

• 21 Industries delicensed

• License requirement waived for non-MRTP units if:

– Investment upto Rs. 1 crore for new unit
– Investment upto Rs. 5 crore for expansion in heavy industry

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 Industrial Policy (1977)
(Janta Party Govt. under PM Morarji Desai)
• Items reserved for production by small scale industries:
180 to 504 (in 1977) → 807 (in May 1978)
• District Industrial Centres (DICs): For promotion of SSI units
& Cottage Industries
• Promotion of Handloom sector; Powerloom/Mill sector
capacity frozen
• Shifting of industries to backward areas
• Fiscal concessions for export-oriented units
• Only selective take-over of sick units
• Promotion of “tiny” sector in villages/towns with pop. 50,000
(Investment: Rs. 1 lakh)
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 Industrial Policy (1980)
(Indira Gandhi’s 2nd term as PM)
• Production-oriented
• In many cases clearance under MRTP Act done
away with
• In view of inflation, Investment limits for
various size sectors revised
• Integrated development of backward districts: one
nuclear plant per district & ancillaries
• 100% export-oriented units allowed K-
intensive techniques

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 New Industrial Policy (1990) [1/2]
• All new units upto Inv. of Rs. 25 crores (in fixed assets)
in backward areas & Rs. 75 crores in notified backward
areas exempted from licensing
• Delicensing of 100% Export-oriented units & units in
Export Processing Zones
• No licensing requirement, if existing unit produces new
product(s) without any additional investment
• Selective relaxation in location policy
• No prior clearance for foreign collaboration if royalty
payment does not exceed a particular limit

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 New Industrial Policy (1990) [2/2]
• Foreign investment upto 40% of the equity allowed on an
automatic basis
• Investment ceiling in plant & machinery for SSIs increased
to Rs. 60 lakhs & to Rs. 75 lakhs for ancillary units
• Inv. ceiling for “tiny” units raised to Rs. 5 lakhs
• High priority to Agro-based industries
• Special marketing agencies for products of rural & cottage
industries
• Special emphasis on training of women entrepreneurs

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 Economic Policy Statement (1991)
→ Structural Reforms
Objective:
• To bring about rapid & sustained improvement in the
quality of life of people of India, through rapid
growth of income & productive employment.
• Needed Economic Reforms
– Industrial Policy
Liberalization, Privatization & Globalization (LPG)
– Banking Reforms
– Public Sector Reforms
– Agricultural Subsidies
– Exchange Rate Flexibility
© Dr Sudhir K Jain 24
 Reforms in Industrial Policy

● Industrial licensing mostly abolished

● Separate permission of MRTPC abolished

● Reservation for public sector: (17 to 6 industries)

● Freer access to foreign technology

25
Public Sector Reforms (1/2)

● Phasing out of budgetary support (in form of non-

plan loans) to loss making PSUs.

● Disinvestment of equity upto 49% in selected

profit making PSUs:
- To mobilize non-inflationary resources
- To broad-base ownership to create greater
orientation in management of PSUs

26
Public Sector Reforms (2/2)

● Allowed forming International Joint Ventures

(IJVs) & raising fresh equity

● Flexibility in pricing of coal, steel, petroleum

products for timely price adjustments.

● Amendment of Sick Industrial Companies Act

(SICA) to bring PSUs within jurisdiction of BIFR

27
Financial Sector Reforms
New accounting (prudential) norms related to
income recognition, provisioning & capital
adequacy (in 1992-93 to ensure true reflection of
financial position through the books of accounts of
the banks)

● Reduction of SLR to 25% over next 3 years

● Reduction in CRR to 10%
● Capital Markets reforms

28
Tax Reforms (1992-93 Budget)
● Personal taxation system reforms
Max marginal rate of income tax reduced to 40%

● Abolition of wealth tax on all productive (financial)

assets.

● Broadening of tax base

(Presumptive taxation for small traders)

● Reduction in customs duties (for cost reductions)

● Simplification of excise duty structure

29
Trade & Exchange Rate Policies Reforms(1/2)

● Import control through licensing abolished for

almost all capital goods, raw material

Consumer goods imports to remain restrictive

● Import Duties Reduction in Stages

Maximum duty reduced to 150% in July 1991

110% in Feb. 1992
85% in Feb. 1993

For most capital goods, duties reduced to 25% to

35% range 30
Trade & Exchange Rate Policies Reforms (2/2)

● Liberalization of import of gold and silver

→ Reduction in “incentive for smuggling”

● Exchange rate of rupee to be determined

by demand & supply conditions in the
foreign exchange markets

31
New Approach to Public Investment
● All public investment is from borrowed resources

● Must generate appropriate returns

● Reduce / eliminate role of government as giant

financial intermediary

● Make investment through accountable entities

● Investing entity (PSU / Authority) to borrow directly

from market

● Government to only provide equity where necessary

32
 Key Ingredients

● Levy of “User Charges” (1992)

● Widespread Privatization

● Retirement of Debt

● Continuing Tax Reform

33
 Consequences

♦ Higher Income Growth

♦ Higher Savings Growth

♦ Dramatic Changes in Indian Market Demographics

♦ Higher Consumption Growth

♦ Lifestyle Changes

34
 Some Important Features of
WTO Era & Implications (1.1.95)
• Reduction in Customs Duties
• Increase in International Trade → Scope for SMEs
• Global Opportunities & Global Competition
• National Treatment →
– Advantage to WTO member countries’ companies in India
– Advantage to Indian companies in WTO member countries
• TRIPS – An Integral Part of WTO
• Importance of Technology & Patents
• International Technology Transfer
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 Future Scenario
• Globalization of industry
• Outsourcing: a general norm
• Price cutting & cost cutting
• Opportunities for SMEs
• More R&D → More Patenting
• Lesser meaning of national boundaries
• Future winners: Pro-active firms/countries
• 2020-21: Priority to Covid-19 Related Problems

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 Thank you
- Prof. Sudhir K. Jain

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