UNIT 2

Planning and Economic Development and Problems in Indian Economy

 Chapter 1

Industrial Policy- 1991

1.1) Introduction

The industrial policy means the procedures, principles, policies rules and regulations, which
control the industrial undertaking of the country and pattern of industrialization. It explains the
approach of Government in context to the development of industrial sector. In India, the key
objective of the economic policy is to achieve self-reliance in all sectors of the economy and to
develop socialistic pattern of society. The industrial policy in the pre-reform period i.e. before1991
put greater emphasis on the state intervention in the field of industrial development. These policies
no doubt have resulted into the creation of diversified industrial structure but caused a number of
inefficiencies, distortions and rigidities in the system. Thus during late 70’s and 80’s, Governme nt
initiated liberalization measures in the industrial policy framework. The drastic liberaliza tio n
measures were however, carried out in 1991.

After 1980, an era of liberalization started, and the trend was gradually to dilute the strict licensing
system and allow more freedom to the entrepreneurs. The steps that were taken in accordance with
the policy included:

(i) Re-endorsement of licenses: The capacity indicated in the licenses could be re-endorsed,
provided it was 25 percent more than the licensed capacity (1984).

(ii) Liberalization of 1990: The measures were as follows:

a) Exemption from licensing for specific new units.

b) Investment of foreign equity up to 40 percent was freely allowed.

c) Location restrictions were removed.

1.2) Major Features of Pre-1991 Industrial Policy:

1. Protection to Indian Industries: Local industries were given shelter from internatio na l
competition by introducing partial physical ban on the imports of products and high imports tariffs.
Protection from imports encouraged Indian industry to undertake the manufacture of a variety of
products. There was a ready market for all these products.

2. Import-Substitution Policy: Government used its import policy for the healthy development
of local industries. Barring the first few years after Independence, the country was facing a
shortage of foreign exchange, and so save scarce foreign exchange imports-substitution policy was
initiated i.e. Government encouraged the production of imported goods indigenously.

3. Financial Infrastructure: In order to provide the financial infrastructure necessary for

industry, the Government set up a number of development banks. The principal function of a
development bank is to provide medium and long-term investments. They have to also play a major
role in promoting the growth of enterprise. With this objective, Government established the
Industrial Finance Corporation of India (IFCI) (1948), Industrial Credit and Investme nt
Corporation of India (ICICI) (1955), Industrial Development Bank of India (IDBI) (1964),
Industrial Reconstruction Corporation of India (1971), Unit Trust of India (UTI) (1963), and the
Life Insurance Corporation of India (LIC).

4. Control over Indian Industries: Indian industries were highly regulated through legislatio ns
such as Industrial licensing, MRTP Act, 1969 etc. These legislations restricted the production,
expansion and pricing of output of almost all kinds of industries in the country.

5. Regulations on Foreign Capital under the Foreign Exchange and Regulation Act
(FERA): FERA restricted foreign investment in a company to 40 percent. This ensured that the
control in companies with foreign collaboration remained in the hands of Indians. The restrictio ns
were also imposed on technical collaborations and repatriations of foreign exchange by foreign
investors.

6. Encouragement to Small Industries: Government encouraged small-scale industries (SSIs)

by providing a number of support measures for its growth. Policy measures addressed the basic
requirements of the SSI like credit, marketing, technology,entrepreneurship development, and
fiscal, financial and infrastructural support.

7. Emphasis on Public Sector: The Government made huge investments in providing

infrastructure and basic facilities to industries. This was achieved by establishing public sector
enterprises in the key sectors such as power generation, capital goods, heavy machineries, banking,
tele- communication, etc.

1.3)Review of Pre-1991 Industrial Policy

The pre1991 industrial policies created a climate for rapid industrial growth in the country. It has
helped to create a broad-base infrastructure and basic industries. A diverse industrial structure
with self-reliance on a large number of items had been achieved. At the time of independence, the
consumer goods industry accounted for almost half of the industrial production. In 1991, such
industries accounted for only about 20 percent. In contrast, capital goods production was less than
4 percent of the total industrial production. In 1991, it had gone up to 24 percent. Industria l
investment took place in a large variety of new industries. Modern management techniques were
introduced. An entirely new class of entrepreneurs has come up with the support system from the
Government, and a large number of new industrial centers have developed in almost all parts of
the country. Over the years, the Government has built the infrastructure required by the industry
and made massive investments to provide the much-needed facilities of power, communicatio ns,
roads etc. A good number of institutions were promoted to help entrepreneurship development,
provide finance for industry and to facilitate development of a variety of skills required by the
industry.

However, the implementation of industrial policy suffered from shortcomings. It is argued that
the industrial licensing system has promoted inefficiency and resulted in the high-cost economy.
Licensing was supposed to ensure creation of capacities according to plan priorities and targets.
However, due to considerable discretionary powers vested in the licensing authorities the system
tended to promote corruption and rent seeking. It resulted into pre-emption of entry of new
enterprises and adversely affected the competition. The system opposite to its rationale favored
large enterprises and discriminate against backward regions. Government announced a number of
liberalization measures in the industrial policy of 1970, 1973 and 1980. However, the dramatic
liberalization efforts were made in the industrial policy, 1991.
1.4) New Industrial Policy, 1991

India’s New Industrial Policy announced in July 1991 (hereafter NIP) was radical compared to its
earlier industrial policies in terms of objectives and major features. It emphasized on the need to
promote further industrial development based on consolidating the gains already made and correct
the distortion or weaknesses that might have crept in, and attain international competitiveness.
(Ministry of Industry, 1991). The liberalized Industrial Policy aims at rapid and substantial
economic growth, and integration with the global economy in a harmonized manner. The
Industrial Policy reforms have reduced the industrial licensing requirements, removed
restrictions on investment and expansion, and facilitated easy access to foreign technology
and foreign direct investment.

Pre vs. Post 1991 Policy

1. Distinctive Objectives of New Industrial Policy (NIP), 1991: NIP had two distinctive
objectives compared to the earlier industrial policies:

i) Redefinition of Concept of Self-Reliance: NIP redefined the concept of economic self-

reliance. Since 1956 till 1991, India had always emphasized on Import Substitutio n
Industrialization (ISI) strategy to achieve economic-self reliance. Economic self-reliance meant
indigenous development of production capabilities and producing indigenously all industr ia l
goods, which the country would demand rather than importing from outside. The goal of economic
self-reliance necessitated the promotion of ISI strategy. It helped to built up the vast base of capital
goods, intermediate goods and basic goods industries over a period of time. NIP redefined
economic self-reliance to mean the ability to pay for imports through foreign exchange earnings
through exports and not necessarily depending upon the domestic industries.

ii) International Competitiveness: NIP emphasized the need to develop indigenous capabilities
in technology and manufacturing to world standards. None of the earlier industrial policies, either
explicitly or implicitly, had made reference to international technology and manufactur ing
capabilities in the context of domestic industrial development (Ministry of Commerce and
Industry, 2001). For the first time, NIP explicitly underlined the need for domestic industry to
achieve international competitiveness.
To achieve these objectives, among others, NIP initiated changes in India’s industrial policy
environment, which gained momentum gradually over the decade. The important elements of
NIP can be classified as follows:

1. Public Sector De-Reservation and Privatization through Dis-Investment:

Till 1991, Public Sector was assigned a pre-eminent position in Indian Industry to enable it
to achieve “commanding heights of the economy” under the Industrial Policy Resolution (IPR),
1956. Accordingly, areas of strategic importance and core sectors were exclusively reserved for
public sector enterprises. Public enterprises were accorded preference even in areas where private
investments were possible.

Since 1991, the public sector policy consists of:

(i) Reduction in the number of industries reserved for public sector: Now only two industr ies
(atomic energy and railway transport) are reserved for the Public Sector. They are known as
“Annexure I” industries (Ministry of Commerce and Industry, 2001). The essence of
government’s Public Sector Undertakings (PSUs) policy since 1991 has been that governme nt
should not operate any commercial enterprises. The policy emphasized to bring down
government equity in all non-strategic PSUs to 26 percent or lower, restructure or revive
potentially viable PSUs, close down PSUs, which cannot be revived and fully protect the
interests of workers. Government’s withdrawal from non-core sectors is indicated on
considerations of long-term efficient use of capital, growing financial un-viability and the
compulsions for these PSUs to operate in an increasingly competitive and market oriented
environment (Disinvestment Commission, 1997).

(ii) Implementation of Memorandum of Understanding (MOU): As a part of the measures to

improve the performance of public enterprises, more and more of public sector units have been
brought under the purview of Memorandum of Understanding (MoU) system. A memorand um
of understanding is a performance contract, a freely negotiated document between the
Government and a specific public enterprise.
(iii) Referral to BIFR: Many sick public sector units have been referred to the Board for
Industrial and Financial Reconstruction (BIFR) for rehabilitation or, where necessary, for
winding up.

(iv) Manpower Rationalization: In order to make manpower rationalization Voluntar y

Retirement Scheme (VRS) has been introduced in a number of PSUs to shed the surplus
manpower.

(v) Private Equity Participation: PSUs have been allowed to raise equity finance from the capital
market. This has provided market pressure on PSUs to improve their performance.

(vi) Disinvestment and Privatization: Disinvestment and privatization of existing PSUs has
been adopted to improve corporate efficiency, financial performance and competitio n
amongst PSUs. It involves transfer of Government holding in PSUs to the private
shareholders.

2. Industrial Delicensing:

The removal of licensing requirements for industries, domestic as well as foreign, commonly
known as “de-licensing of industries” is another important feature of NIP. Till the 1990s, licensing
was compulsory for almost every industry, which was not reserved for the public sector. This
licensing system was applicable to all industrial enterprises having investment in fixed assets
(which include land, buildings, plant & machinery) above a certain limit. With progressive
liberalization and deregulation of the economy, industrial license is required in very few cases.
Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At
present, industrial license is required only for the following:

(i) Industries retained under compulsory licensing (five industries are reserved under this
category).

(ii) Manufacture of items reserved for small scale sector by larger units : An industr ia l
undertaking is defined as small scale unit if the capital investment does not exceed Rs. 10
million (approximately $ 222,222). The Government has reserved certain items for exclusive
manufacture in the small-scale sector. Non small-scale units can manufacture items reserved
 for the small-scale sector if they undertake an obligation to export 50 percent of the production
after obtaining an industrial license.

(iii) When the proposed location attracts locational restriction: Industrial undertakings to be
located within 25 kms of the standard urban area limit of 23 cities having a population of 1
million as per 1991 census require an industrial license.

Thus, excluding these, investors are free to set up a new industrial enterprise, expand an
industrial enterprise substantially, change the location of an existing industrial enterprise and
manufacture a new product through an already established industrial enterprise. The objective of
industrial delicencing would be to enable business enterprises to respond to the fast changing
external conditions. Entrepreneurs will be free to make investment decisions on the basis of their
own commercial judgment. This will facilitate the technological dynamism and internatio na l
competitiveness. Further industries will have freedom to take advantage of ‘economies of scale’
as well as ‘economies of scope’ in the current industrial policy environment.

3. Amendment of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969: An

important objective of India’s earlier industrial policies was to prevent emergence of private
monopolies and concentration of economic power in a few individuals. Accordingly, Monopolies
and Restrictive Trade Practices (MRTP) Act, 1969 was enacted and MRTP Commission was set
up as a permanent body to periodically review industrial ownership, advice the government to
prevent concentration of economic power, investigate monopolistic trade practices and inquire into
restrictive trade practices, which are prejudicial to public interest. An MRTP firm was mainly
defined in terms of asset size. An MRTP company had to obtain prior approval of the governme nt
for setting up a new enterprise as well as for expansion. However, MRTP Act was applicable only
to private sector companies.

Since 1991 MRTP Act has been restructured and pre-entry restrictions have been removed with
regard to prior approval of the government for the establishment of a new undertaking, expansion,
amalgamation, merger, take over, and appointment of directors of companies. The asset restrictio n
and market share for defining an MRTP firm has been done away with. MRTP Act is now
applicable to both private and public sector enterprises and financial institutions. Today only
restrictive trade practices of companies are monitored and controlled. The MRTP act has been
replaced by the Competition Act, 2002. This law aims at upholding competition in the Indian
market. The competition commission has been established in 2003 which mainly control the
practice that have an adverse impact on competition.

4. Liberalized Foreign Investment Policy:

India’s earlier industrial policies welcomed FDI but emphasized that ownership and control of all
enterprises involving foreign equity should be in Indian hands. The Balance of Payments (BoP)
difficulties in the mid 1960s forced the country to adopt a more restrictive approach towards FDI
through the setting up of a Foreign Investment Board, which classified industries into two
groups: banned and favored for foreign technical collaboration and FDI. The number of
industries for foreign investment was steadily narrowed down and by 1973 there were only 19
industries where FDI was permitted (Kucchal, 1983).The enactment of FERA, 1973 marked the
beginning of the most restrictive phase of India’s foreign investment policy. The NIP
radically reformed foreign investment policy to attract foreign investment. The important foreign
investment policy measures are as follows:

i) Repeal of FERA, 1973: FERA, 1973 has been repealed and Foreign Exchange Management
Act (FEMA) has come into force with effect from June 2000 (RBI, 2003). Investment and
returns can be freely repatriated except where the approval is subject to specific conditions
such as lock-in period on original investment, dividend cap, foreign exchange neutrality, etc.
as specified in the sector specific policies. The condition of ‘dividend balancing’ was
withdrawn for dividends declared. A foreign investor can freely enter, invest and operate
industrial enterprises in India,

ii) Dilution of Restrictions on Foreign Direct Investment (FDI): FDI is allowed in all sectors
including the services sector except atomic energy and railway transport. FDI in small scale
industries is allowed up to 24 percent equity. Use of brand names/trade marks is
allowed. Further, FDI up to 100 percent is allowed under the automatic route in all
activities/sectors except the following which require prior approval of the Government:-

- Sectors prohibited for FDI;

- Activities/items that require an industrial license;
- Proposals in which the foreign collaborator has an existing financial/technical

collaboration in India in the same field;

- Proposals for acquisitions of shares in an existing Indian company in financial

service sector and where Securities and Exchange Board of India (substantial

acquisition of shares and takeovers) regulations, 1997 is attracted;

- All proposals falling outside notified sectoral policy/CAPS under sectors in

which FDI is not permitted.

Thus most of the sectors fall under the automatic route for FDI.

5. Foreign Technology Agreement

The automatic approvals for technology agreement are allowed to industries within specified
parameters. Indian companies are free to negotiate the terms of technology transfer with their
foreign counterparts according to their own commercial judgment.

6. Dilution of Protection to Small Scale Industries (SSI) and Emphasis on Competitiveness:

SSIs enjoyed a unique status in Indian economy due to its diversified presence across the country
and thereby utilizing resources and skills, which would have otherwise remained unutilized.
Due to their potential to generate large-scale employment, produce consumer goods of mass
consumption, alleviate regional disparities, etc., industrial policies protected the sector for its
growth. The principal protective measures for SSI comprised: (i) Demarcating SSI from the
rest of industry through a definition under the IDR Act, 1951, (ii) Concessional credit from the
banking system, (iii)Fiscal concessions, (iv) Exemption from industrial licensing and labor
legislations, (v) Preferential access to scarce raw materials, both domestic and
imported, (vi) Market support from the government through reservation of products for
government purchase and price preferences, and (vii) Reservation of products for exclusive
manufacturing in SSIs and restrictions on the growth of output and capacity in the large-scale
sector for products reserved for SSI manufacturing. These policy measures protected SSIs from
both internal and external competition.
However, since 1991 the protective emphasis of SSI policy has undergone dilution. In August
1991, government of India brought out an exclusive policy for SSI. The policy marked: (i) the
beginning of an end to protective measures to small industry and (ii) promotion of competitive ness
by addressing the basic concerns of the sector namely technology, finance and marketing.
Subsequently, the number of items reserved exclusively for small industry manufacturing has been
gradually brought down. This policy has lost its relevance to a large extent because though these
products could not be manufactured by large enterprises domestically, they can be imported from
abroad due to the removal quantitative and non-quantitative restrictions on most imports by April
1, 2001 (Ministry of Finance, 2002). Concession element in lending rates for small industry has
been largely withdrawn during the 1990s (RBI, 2003). The number of products reserved
exclusively for purchase from small industry by the government has been reduced to 358 items
from 409 items. Measures have been adopted to improve technology and export capabilities of
SSIs. Thus the overall promotion orientation of SSI has shifted from protection towards
competitiveness.

1.6) Impact Of Industrial Policy, 1991

The all-round changes introduced in the industrial policy framework have given a new direction
to the future industrialization of the country. There are encouraging trends on diverse fronts.
Industrial growth was 1.7 per cent in 1991-92 that has increased to 9.2 percent in 2007-08.The
industrial structure is much more balanced. The impact of industrial reforms is reflected in multip le
increases in investment envisaged, both domestic and foreign. This is due to encouraging response
from the private sector. There has been dramatic increase in FDI since 1991. The foreign
investment as a percentage of total GDP has increased from 0.5 percent in 1990-91 to 5.7 percent
in 2006.Investments in infrastructure sector such as power generation have surged from players of
various sizes in different states. The capital goods have grown at an accelerated pace, over a high
base attained in the previous years, which augurs well for the required industrial capacity addition.

Conclusion

The Government policies and procedures in the pre-1991 period aimed at industr ia l
development of the country, but the enactment of the IDR Act, procedures laid down for
 obtaining industrial licensing and various rules acted as a great deterrent to the growth of
industries in the country. The bureaucracy acquired unprecedented powers and authority over
all kinds of industrial activities. The NIP announced in July 1991, unshackle the industr ies
from the cobweb of bureaucratic control to allow it to achieve international competitiveness.
NIP encouraged foreign investment in the economy and opened it to greater domestic and
international competition.

Chapter 2

Public Sector Enterprises in India

Public Sector Enterprises (PSEs) or State owned and managed units have played a strategic role
in the Indian economy. The key factors contributing to stronghold of these enterprises are the need
of rapid industrialization with equitable distribution of economic wealth and inadequacies of free
market. India witnessed a greater degree of state ownership and increased regulation since second
plan that envisaged industrialization as a development strategy. By 1980s the poor performance of
state-owned companies was acknowledged and various efforts were made to improve
performance. In an era of economic reform process initiated since1991, privatization has become
a key component of public sector policy of the government. The survival of PSEs now depends
upon performance efficiency and profitability.

2.1) Definition Of Public Sector Enterprises

Public Sector Enterprises often referred to as government owned undertakings/enterprises or

state-owned enterprises are wholly or partly owned and controlled by the government and produce
marketable goods and services i.e. PSEs includes industrial and commercial enterprises which
are managed and controlled by government. Public sector and PSEs are different from each
other. The word public sector is wider and includes all kinds of organization commercial (i.e.
PSEs) and non-commercial that are owned partly or fully and effectively managed by Governme nt.
Thus Government funded universities, colleges, hospitals, schools are part of public sector but are
not PSEs because these organizations lack commercial orientation.

2.2) Rationale Of PSEs In India

The policy rationale for public ownership and government provision of certain goods and services
has been based on the presence of some form of market failure, which are addressed through public
ownership. In India, PSEs are assigned the responsibility of fulfilling specific social goals like
correcting regional and economic imbalances, providing employment and reducing the
concentration of monopoly power in the economy. Further, as a pre-requisite for balanced growth,
the state controls the key sectors of the economy which is popularly known as the 'commanding
heights' rationale of PSEs. The rationale of PSEs in India is discussed as follows:

1. Rapid Economic Development

The prerequisite of faster economic development is the creation of infrastructure and the growth
of basic industries like power, steel transportation; communication, banking etc. These industr ies
require huge capital investment and involve long-gestation period and so private sector may not
be interested to undertake the development of such industries. Further, the private sector lack
financial and technical skills to develop such industries. In other words, reluctance on the part of
private entrepreneurs to develop key industries due to high risk and low returns necessitated the
establishment of PSEs. Government with its capacity to mobilize huge economic resources can
develop the industries that are significant for growth prospects of the country. Thus in the earlier
phase of development heavy state spending on investment in basic infrastructural sectors and
service facilities(for example financial institutions, telecommunication banking etc.) is
essential for providing a congenial atmosphere to the private sector to facilitate the process of
accelerated development of the economy.

2. Reduction of Concentration of Economic Powers

PSEs reduce inequalities of income through welfare programmes, favorable pricing policy towards
small industries and supply of cheaper goods to the consumer. Private sector may manipulate the
price of essential goods and indulge into quick profit-making by controlling the volume and price
of such goods. PSEs prevent such concentration of economic power.

3. Balanced Regional Growth

Private sector generally neglects backward regions that lack infrastructure and other basic facilities
such as power, roads, telecommunication, skilled labor etc. PSEs set up large projects in these
areas and spend huge cost to develop such areas. In this manner PSEs help to achieve balanced
regional growth.

4. Employment Generation

The adequate generation of employment opportunities is a major objective of the public sector
enterprises. This sector has provided direct employment to more than 80 percent of organized
labor.

5. Import-Substitution and Export-Promotion

In the initial period of development foreign exchange constraints exist due to huge imports of
capital goods and low exportable surplus. PSEs produce importable goods domestically which tend
to save precious foreign exchange and facilitate exports.

6. Resource Mobilization
PSEs mobilize savings through large network of banking and financial institutions. The profits of
PSEs are ploughed back into developmental activities of the country. Further, PSEs contribute to
the Government’s exchequer through payment of tax and divideds.

2.3) Problems Facing PSEs In India

1. Defective Pricing Policy

The prices of goods and services produced by the PSE in India for long have been determined by
Govt. under administered price regimes (APR). In post-91 era with intense market competitio n
Government has dismantled the APR in most cases and PSEs have been given independence to fix
their own price competitively. In the recent years various price regulatory commission for
regulating prices in best interest of both consumers and producers have been established whose
recommendations are applicable both for private and PSEs. Government on its part continues to
be sensitive to the needs of the poor and price level in the economy. Any rise in price generally
warranted by market conditions is avoided. Pricing of petroleum is an example in this respect. The
rise in the international price of crude oil is hardly passed on to the consumers. The social approach
set prices in PSE causes a lower returns and financial losses.

2. Excessive Political Interference

There exists considerable political interference in the operational aspects of PSEs in terms of
appointment in the management, pricing of products, location of projects. The decisions are guided
by political considerations and not by economic factors.

3. Delays in Decision-Making

The red-tapism and bureaucratic management causes delay in decision-making of these

organizations. PSEs thus fail to take advantage of opportunities thrown open by the market.

4. Over-Manning

The public sector enterprises are overstaffed. It increases cost of production and inefficiency in the
organization.

5. Lack of Accountability
The appraisal system lack performance-based remuneration system. The system lacks incentives
to improve and penalties for delays and failures. The security of service makes them lethargic and
reduces creativity. This lack of accountability causes inefficiency and losses in the public
enterprises.

6. Under-Utilization of Capacity

The public enterprises operate at less than their full capacity and produce lower than potential
output. This increase the cost of production as the fixed cost is distributed over small output.

2.4) Disinvestment And Privatization

The New Economic Policy initiated in July 1991, clearly indicated that the Public Enterprises have
shown negative rate of return on capital employed and in wake of economic reforms the role of
PSEs have to be redefined so that it should withdraw from the areas where no public purpose is
served by its presence, and The public sector should make investment only in those areas where
investment is mainly infrastructural in nature and where private sector participants are not likely
to come forth to an adequate extent within a reasonable time perspective. In this direction,
Government has decided to adopt disinvestment and privatization policy which is explained as
follows:

Disinvestment vs. Privatization

Disinvestment refers to the dilution of government’s stake in a public enterprise. If the dilution of
government’s stake involves the transfer of management and control of the enterprise as well then
it is referred to as privatization. Thus if the government transfers 51 percent or more shares of
public enterprise to the private shareholders then this dilution would transfer the majority of
decision making power of the government. If less than 50 percent government’s shareholding is
transferred then the effective control would remain in the hands of government and the enterprise
is not said to be privatized.

Thus privatization involves the dilution of government’s shareholding that also leads to the
effective change to management and control. Disinvestment is wider in its meaning that extends
to dilution of government’s shareholding to a level where there is no change in the control to the
dilution that results in the transfer of management i.e privatization.

Objectives of Disinvestment

The following are the main objectives of disinvestment:

i) To provide fiscal support: The argument for fiscal support emphasizes that the resources
raised through disinvestment must be utilized for retiring past debts and there by bringing down
the interest burden of the Government.

ii) To introduce, competition and market discipline;

iii) To find growth;

iv) To encourage wider share of ownership in the public enterprises;

v) To depoliticise essential services and improve efficiency.

Modalities of Disinvestment:

In India three modalities are used for disinvestment:

(a) Offering shares of Public Sector Enterprises at a fixed price through a general prospectus.
The offer is made to the general public through the medium of recognized market intermediaries.

(b) Sale of Equity or Strategic Sale through Auction of share amongst pre determined cliente le,
whose number can be large. The reserve price for the PSE's equity can be determined with the
assistance of merchant bankers. In case of strategic sale, government retained a part of the equity
with it, though management control is transferred to the strategic partner. The strategic partner is
required to purchase an equity stake which is large enough to ensure a workable majority.

(c) Offer for Sale determining the fixed price for sale of a public enterprise, inviting open bidders
and accepting highest bidder’s quotation for sale.

Until 1999-2000, it was primarily the sale of minority shares of CPSEs in small lots. From 1999-
2000 till 2003-04, the emphasis of disinvestment changed in favor of 'Strategic Sale'. Currently,
the emphasis is on listing of unlisted profitable CPSEs (other than the Navratanas) each with
a ‘networth’ in excess of Rs. 200 crore, through Initial Public Offerings (IPOs). It also involves
sale of minority shareholding of the Government in listed, profitable CPSEs either in conjunctio n
with a Public Issue of fresh equity by the CPSE concerned or independently by the Governme nt,
subject to the residual equity of the Government being at least 51 percent and the Governme nt
retaining management control of the CPSE. Thus the emphasis is on the wider public participatio n
in the disinvestment process.

2.6) Progress of Disinvestment

The Government in July 1991 initiated the disinvestment process in India, while launching the
New Economic Policy(NEP). The crucial shift in the Government policy for disinvestment of
PSE's was mainly attributable to poor performance of these enterprises and burden of financ ing
their requirements through budget allocations. In 1991, there were 236 operating public sector
undertakings, of which only 123 was profit making. The top 20 profit making PSE's accounted for
80 percent of the profits, implying that less than 10 percent of the PSE's were responsible for 80
percent of profits. The return on public sector investment for the year 1990-91 was a just over 2
percent.

If we visualize the progress of disinvestment in the Central Government undertakings from 1991-
2007 The disinvestment proceeds are encouraging but have been far lower than the target except
for few years. Till 2007, cummulative amount Rs.49, 241.64 crore have been collected from
disinvestment proceeds.

The reasons for such low proportion of disinvestment proceeds as against the target set were
identified and presented below:

(i) The unfavourable market conditions are the main reason responsible for this down ward trend
of disinvestment.

(ii) The offers made by the Government for disinvestment of PSEs are not attractive and stringe nt
bureaucratic procedures cause the discouraging of the private sector investors.
(iii) The valuation process, procedures and surplus employees are other factors hindering the
disinvestment process.

(iv) The Government is not transparent about its approach towards sequencing the restructuring
and the methods of privatisation of PSE's.

2.7) Disinvestment Policy in India: Evolution and Recent Initiatives

The disinvestment of the Government’s equity in CPSEs started in 1991-92, when minor ity
shareholding of the Central Government in 30 individual CPSEs was sold to selected financ ia l
institutions (LIC, GIC, and UTI) in bundles. The shares were sold in bundles to ensure that along
with the attractive shares, the not so attractive shares also got sold.The Rangarajan Committee
recommended in April, 1993, that the percentage of equity to be disinvested should be generally
under 49 per cent in industries reserved for the public sector and over 74 per cent in other
industries. The Disinvestment Commission was established in the year 1996-97 to advise
Government on disinvestment issues. Government has now emphasized the divestment in the non-
strategic PSEs even below 26 percent. Since 2000, the increasing emphasis is placed on strategic
sale and the entire proceeds from disinvestment/privatization is decided to be deployed in social
sector, restructuring of PSEs and retirement of public debts. At present the emphasis is placed on
public offering of shares to the public. The salient features of recent disinvestment policy since
2004 of the Government with respect to Central Public Sector Enterprises (CPSEs) are as follows:

(i) The profit-making companies on principle are generally not privatized. Privatization is
considered on a transparent and consultative case-by-case basis. The existing
"Navratnas" companies in the public sector are allowed to raise resources from the
capital market.

(ii) The efforts are made to modernize and restructure sick public sector companies and
revive sick industry. The chronically loss-making companies are sold-off, or closed,
after all the workers have got their legitimate dues and compensation. The private
industry is inducted to turn around companies that have potential for revival.

(iii) The disinvestment proceeds are used to provide resources for social needs and to meet
investment requirements of profitable and revivable units. National Investment
Fund has been created in 2005 for this purpose that would channelize the disinvestme nt
proceeds.

CHAPTER 3
 ECONOMIC PROBLEMS IN INDIAN ECONOMY

India is a developing country and our economy is a mixed economy where the public sector co-
exists with the private sector. For an overview of Indian Economy, we should first go through
the strengths of Indian economy.

India is likely to be the third largest economy with a GDP size of $15 trillion by 2030.The
economy of India is currently the world’s fourth largest in terms of real GDP (purchasing power
parity) after the USA, China and Japan and the second fastest growing major economy in the world
after China.

3.1) Introduction to Indian Economy:-

 Low per capita income.

 Inequalities in income distribution.
 Predominance of agriculture. (More than 2/3rd of India’s working population is engaged
in agriculture. But in USA only 2% of the working population is engaged in agriculture.)
 Rapidly growing population with 1.2% annual change.
 Chronic unemployment (A person is considered employed if he / she works for 273 days
of a year for eight hours every day.)Unemployment in India is mainly structural in nature.
 Low rate of capital formation due to less saving rate.
 Dualistic Nature of Economy (features of a modern economy, as well as traditional).M ixed
Economy
 Follows Labour Intensive Techniques and activities.

Since 1991, the Indian economy has pursued free market liberalisation, greater openness in trade
and increase investment in infrastructure. This helped the Indian economy to achieve a rapid rate
of economic growth and economic development. However, the economy still faces various
problems and challenges, such as poverty in rural areas ,inequality & unemployment.

3.2) Poverty

Poverty can be defined as the inability of the people to attain a minimum standard of living. In
other words, poverty is a relationship between the essential needs of people to survive and their
ability to satisfy them. Those people who are unable to satisfy some of the basic needs such as
food, clothes, shelter, sanitation, etc. are called poor. Poor people live without fundame nta l
freedom of choice which makes their life better. They face vulnerability to ill health, economic
dislocation, and natural disaster. In words of Amartya Sen, a Nobel Laureate in economics, Poverty
is a deprivation of basic capabilities rather than merely a lowness of income.

Poverty is a complex social phenomena that normally refers to a "state of being poor, deprived"
where poor means anybody who is unable to fulfill even the basic necessities of life such as
minimum food requirements, shelter, clothing etc. Poor could include an individual or family or a
section of the society. Poverty becomes a social phenomenon and threatens to stop the economic
and social development process when large section of the population is deprived of the minimum
level of living and continues to live at an bare subsistence level. Poverty is a serious problem in
many countries of Africa, Latin America and Asia which also includes India. Even in a developed
country like USA and many Western European countries poverty does exist but having differe nt
nature than that seen in underdeveloped countries.

Poverty line

Who is poor? The most common definition being – anybody incapable of earning the required
income for meeting the basic necessities of life. This definition is referred to as income poverty.
The minimum income per month required to meet the basic necessities is called poverty line in
terms of income. The poverty line can also be expressed in terms of monthly consumptio n
expenditure. In order to satisfy the basic wants such as food, cloths etc. a person has to spend
money on them in the market. Hence anybody who is not able to spend that amount of money to
buy the goods must be a poor. The need to define poverty line in terms of consumer expenditure
arises due to the fact that mostly people do not reveal their actual income. Also in India majority
of people are in unorganized sector such as agriculture where income data is difficult to get. The
National Sample Survey Organization (NSSO) collects data on monthly consumer expenditure of
house holds in regular interval which is widely used to estimate poverty in India.

Study of poverty with respect to a specified poverty line in terms of either income or consumer
expenditure is called Absolute poverty. The number of poor or percentage of population below
this poverty line is referred to as head count ratio (HCR).
Most of the earlier studies on poverty in India referring to the period of 1960s and 1970s defined
poverty line directly in terms of income or consumer expenditure. For example the commonly used
poverty lines were as follows:

1. Income of Rs. 20 per month per person or Rs. 240 per annum per person at price level prevailing
in 1960-61. B.S. Minhas used this poverty line and found that number of poor people in Rural
India was 181 million in 1956-57 and it increased to 210 million in 1969-70.

2. Monthly per capita consumer expenditure of Rs. 15 in rural areas and Rs. 20 in urban areas at
price level of 1960-61 .P.K. Bardhan, M.S. Ahuwalia etc. used this poverty line. Ahluwalia found
that number of poor people have increased from 181 million in 1956-57 to 241 million in 1973-74
on the basis of consumer expenditure in rural India.

3. In recent years poverty line in terms of calorie requirements for a person per day has been used
very widely by researchers and government. Any body who is not able to get 2400 k calorie in
rural area and 2100 k calorie in urban area is termed as poor. Since a person need some money to
buy the food items in certain amount to meet the above calorie requirements we can convert the
poverty line in terms of calorie to monetary expenditure every year and then calculate the number
of people not able to meet that expenditure level.

States most affected by poverty :

As per 2015 estimates Chattisgarh is the poorest state with more than 39.9 percent of its population
below poverty line followed by Jharkhand with 36.9 percent. Manipur & Arunachal Pradesh follow
the order with more than 36.89 & 34.67 percent each respectively. Bihar with 33.74 percent, Orissa
with 32.59 percent, Assam with 31.98 percent, Madhya Pradesh with 31.65 percent and Uttar
Pradesh with 29.43& Karnataka with 20.91 percent complete the first 10 poorest states of India in
2015.

Composition of the poor

(i) From occupational status point of view, in rural area agricultural labour and artisan households
are the worst sufferers of poverty while in urban area the victims being the casual labour
households. In 1999-2000 the share of agricultural labour households in poverty ratio was
47 percent while the artisan households constituted 28 percent. The share of casual labour
households, was 32 percent of urban poor. It should be recognized that increasing
dependence of households on casual labour market exposes the poor to market risks and
tends to increase transient poverty.

(ii) Among the social groups, SCs, STs and backward classes constitute 81 percent of rural poor
in 1999-2000. These groups also suffer from the lower school enrolment ratio, high infant
child mortality rates and low nutritional status particularly among women. It should also be
noted that SCs and STs have more share in casual labour population.

(iii) Looking at the Gender Dimensions of Poverty female persons accounted for about 49 percent
in both rural and urban areas. Besides income poverty there are other dimensions of poverty
such as food insecurity, malnutrition and lack of medical attention. Females also face social
discrimination in terms of adverse sex ratio and economic discrimination in work place and
employment. While females are seen more as casual and agricultural labourers as compared
to males their wage rate is less than the males by 30 percent.

(iv) Finally looking at child poverty the situation is equally alarming. About 33 percent (one
third) of the children belong to poor households and there has been increase in percentage of
children among the poor population over the years. To make situation were, it has come to
our knowledge that India has the largest number of malnourished children which is a worst
form of poverty, in the world. According to National Family Health Survey in 2005-6 the
rate of child malnutrition in India stood at 46 percent which is very high even as compared
to Sub-Saharan Africa.

(v) Finally let us look at human poverty, Poverty is multidimensional. Estimates of poverty line
interms of income or expenditure do not fully reflect deprivation in respect of education and
health which are important indicators of quality of life. Attainment in education and health
empowers the person and allows him/her to make choices and take up opportunities to stand
up to adversaries in life. Accordingly the UNDP Human Development report of 1997 defines
 poverty from human development perspective. Where human development is defined as
process of enlarging people choices, poverty from human development point of view is called
human poverty and is defined as denial of choices and opportunities most basic to human
development for living a long, healthy and creative life and to enjoy a decent standard of
living, freedom, dignity, self respect and respect of others. So human poverty focuses on the
situation and progress of the most deprived people in the community. Since some of the
aspects such as freedom, dignity, self respect etc. cannot be measured quantitatively an
quantitative measure of human poverty known as Human Poverty Index (HPI) is constructed
by taking into account deprivation in the following –

a) Longivity represented by percentage of people not expected to survive to age 40.

b) Knowledge represented by percentage of people who are illiterates.

c) A decent standard of living represented by combination of percentage of people without

access to safe water, percentage of people without access to health services and percentage
of under weight children.

Components of rural and urban poverty:

Poverty has multivariate nature for which a single variant approach is insufficient. The components

that constitutes vector of poverty are in terms of satisfaction and deprivation. There are nine
components of poverty that include occupation and employment, income and asset, food, shelter,
health, education, demographic features, values, interests and activities, power and politics.
Poverty is not limited to national boundaries. It is a worldwide concern for policy makers and
researchers. It is very difficult to measure and assess the world poverty. "For the purposes of
measuring poverty in the world as a whole, the World Bank's "$1 a day" measures have aimed to
apply a common standard, anchored to what "poverty" means in the world's poorest countries".

Main cause of increasing poverty at global level is that world is organized in such a way that
billions of people do not have access to these advanced technology and resources. Tough leaders
and powerful people promised that they will reduce the poverty but it still persists among populace.

3.3) Poverty in India

India is a developing country and it is apparent that poverty is widespread and is a matter of serious

concern for policy analysts and academic scholars because of its scope and intensity. The prime objective

of a country's policy and planning is to increase the standard of li ving and improve the productive

capabilities of its people. As population of India is exploding year by year, this challenge is particularly
intimidating for nation. When reviewing the past record of poverty, it is said that from 1951 to 1974,

India's first quarter-century of independence, the percentage of its population living in poverty rose from

47 to 56 percent. During the next quarter-century, that rate fell suddenly, and reached to 26 percent by

1999–2000. Between 1974 and 1999-2000, the poverty rate dropped by 53%, exceeding the millennium

development goal of a 50% reduction over a 25-year period. The number of poor people rose gradually

from 171 million in 1951 to a 321 million in 1974, before falling to 260 million in 1999-2000. (Fox James

W.:2002)

Many surveys and Economic reports after 1970s demonstrated that there is continuous decline in
rural poverty from 55 percent in the early 70s to less than 35 percent by the late 80s.Various
program conducted by government such as Green revolution, poverty reduction programmes,
political will and better policy framing along with many other factors assisted in deceasing poverty.
Jayaraman and Lanjouw (1999: 1-30) stated that, despite decline in poverty rate there is
considerable movement in and out of poverty. Some of this movement can be accredited to the
year-to-year fluctuations in harvest quality, and can also be associated with momentary factors
such as illness. Reports indicated that India still is a country with huge people living in poverty
line and it has a third rank of the world's poor. World Bank report of 2015 estimates, 42% of India's
population falls below the international poverty line of $1.25 a day; having reduced from 60% in
1980. According to the principle used by the Planning Commission of India, 27.5% of the
population was living below the poverty line in 2004–2015, reduced down from 51.3% in 1977–
1978, and 36% in 1993-1994. The planning commission report estimated BPL population to 27.5%
in 2004. The URP-consumption distribution data of the NSS 61st Round signified that a poverty
ratio was 28.3 percent in the rural areas, 25.7 percent in the urban areas and 27.5 percent for the
country as a whole in 2004-05 (Government of India Press Information Bureau (2007:2): Poverty
Estimates for 2004-05 New Delhi). Poverty in rural India has dropped considerably in current
period.

According to Fan Shenggen, Hazell Peter, Thorat Sukhadeo ( 2000:1038 ), "the percentage of the
rural population living below the poverty line fluctuated between 50 and 65% prior to the mid -
1960s, but then declined steadily to about one-third of the rural population by the early 1990s."
The occurrence of poverty hit rural as well as urban areas. But nature, extent and conditions of
poverty in rural and urban areas are dissimilar in many ways. The urban and rural poor have
differential access to physical, financial assets and many other services as well as infrastructura l
and human capabilities. Rahman, M. A. (1981:3) described the rural poverty as that section of the
rural population whose basic minimum needs for life and existence with human dignity are
unfulfilled. Such condition of poverty is considered by low income, generally related with various
forms of subjugation under social structure through which overriding social groups dictate the ir
terms.

At the regional level, the marginality of central and eastern India is explained largely by adverse
agrarian relations. Poverty has persisted in these areas though there are good endowment of natural
resources and a relatively strong focus of Indian development planning on "backward areas". It
was estimated in previous reports that more than seventy per cent of India's poor population reside
in six states that include Uttar Pradesh, Bihar, Madhya Pradesh, Maharashtra, West Bengal and
Orissa Uttaranchal, Jharkhand and Chattisgarh. In four of these states, Bihar, Orissa, Madhya
Pradesh and Uttar Pradesh, and Assam there is high levels of poverty (Mehta and Shah 2003).

The Planning Commission of India occasionally estimates poverty lines and poverty ratios for each
year for which Large Sample Surveys on Household Consumer Expenditure have been conducted
by the National Sample Survey Office (NSSO) of the Ministry of Statistics and Programme
Implementation. According to the survey conducted in 2011-2012, the percentage of persons
below the Poverty Line in India for the year 2011-12 has been estimated as 25.7% in rural areas,
13.7% in urban areas and 21.9% for the country as a whole. The corresponding ratios for the rural
and urban areas were 41.8% and 25.7% and 37.2% for the country as a whole in 2004-05. It was
50.1% in rural areas, 31.8% in urban areas and 45.3% for the country as a whole in 1993-94. In
the year of 2011-12, India had 270 million persons below the Tendulkar Poverty Line as compared
to 407 million in 2004-05, that is a reduction of 137 million persons over the seven year period.

It is clear from various surveys and poverty reports that Most of the rural population in India and
in other developing countries is living in deprived way because they do not own assets like land,
they work as agricultural labourers, get insufficient and insecure employment and less salary.
Degrees of inaccessibility, development stage of the region, low level of social capital are major
correlative aspects that causes rural poverty. Though small farmers having some access to land,
but they are dependent on unpredictable natural conditions, markets and chances of income
generation. Poverty in rural India also has dimensions of caste, ethnicity and gender. Scheduled
Castes and Scheduled Tribes of India's rural areas are the poorest people that constitute about 40
to 50 percent of its population.

When assessing the urban poverty in India, it is also a major worry for policy makers and
researchers as number of poor is increasing due to fast urbanization. The Urban Poverty Report
2009 has shown that India has entered the Eleventh Plan period with an impressive record of
economic growth. However, the incidence of decline of urban poverty has not augmented with
GDP growth. In fact, urban poverty will become a major challenge for politicians in India as the
urban population is growing which leads to urban poverty. The poverty rates as estimated in, "the
MRP-consumption distribution data of the 61st Round are 21.8 percent in the rural areas, 21.7
percent in the urban areas and 21.8 percent for the country as a whole" (Poverty Estimates For
2004-05 2007:2).

There have numerous efforts been made by government to alleviate poverty. Poverty is inter -
related to other problems of underdevelopment. In rural and urban societies, the nature of poverty
can be very different. In urban areas, people often have access to health and education but more
the problems faced by people due to poverty like overcrowding, unsanitary conditions, pollutio n,
insecure houses. When appraising the factors lead to rural poverty, it is found that there is often
less access to education, health and many other services but people usually live in healthier and
safer environments. Since the mitigation of poverty is major aim of development work, it is
necessary to understand the way to measure poverty. Development means that there has been some
improvement and improvements must be measurable. Government expenditure in India is divided
into non-development and development spending, and the latter is further subdivided into spending
on social and economic services. Social services include health, labour, social welfare and other
community services, while economic services include such sectors as agriculture, industry, trade
and transportation.

3.4) Social Inequality

One of the engrained sources of poverty around the globe is social inequality which originates
from cultural ideas about the relative worth of different genders, races, ethnic groups, and social
classes. Recognized inequality works by placing individuals in dissimilar social categories at birth,
often based on religious, ethnic, or 'racial' characteristics. Poverty and social inequality have direct
and indirect impacts on the social, mental and physical health of an individual. It can be said that
poverty and inequality are closely related. Wilkinson (1997) supposed that income inequality leads
to psychosoecial stress, which results in deteriorating health and higher mortality over time.
However, the association between income inequality and life expectancy is gradually disappearing
and is no longer generally accepted. Those who live in deprived societies, where there is under-
investment in the social and physical infrastructure, experience poor health, resulting in higher
mortality for those of lower socio-economic class. The effects of income inequality also tumble
over into society, causing stress, frustration and family disruption, which then increase the rates of
crime, murder and violence (Wilkinson, 1996).

Poverty, inequality and growth interrelate with one another. Inequality can indirectly influe nce
poverty as inequality affects growth and growth in turn influences poverty.

Wodon (1999) stated that Changes in income distribution have even huge effects on measures of
the depth and severity of poverty. Initial cross-country studies conducted by Birdsall et al. (1995)
have demonstrated that greater initial income inequality disrupts future growth even after
controlling for initial levels of GDP and human capital. It is established that Poverty and inequality
are inherently linked. Poverty reduction especially for the poorest can be greatly enhanced through
distributional policies. Facts confirm that distribution is vital to reduce poverty. Distributio n
objectives, particularly for assets, should be an integral part of the poverty reduction programme.

3.5) India’s Strategy to Remove poverty

Broadly India's strategy to remove poverty in rural and urban areas has three strands:

a) Promotion of economic growth

b) Human development and

c) Targeted programmes to address the multi dimensional nature of poverty.

India's national income and per capita income have been growing moderately during the planning
period. It has been supplemented by progressive taxation and public expenditure. But we are yet
to attain desired success interms of poverty reduction. In terms of human development although
India has shown better record in improving its literacy rate, gross enrolment ratio, life expectancy
and reducing infant mortality rate and maternal mortality rate but lags far behind even many
moderately developed countries. India also fares poorly in terms of gender development indicating
strong gender bias. Share of education and health in total expenditure or gross domestic product
(GDP), fall below desired on targeted level. The problem lies in production oriented approach of
planning without altering the mode of production. In fact the gain in production has mostly been
appropriated by the owners of instruments of production. The assumption of automatic
transmission of the benefits arising from economic growth to the poor households such as small
and marginal farmers, agricultural labourers, factory workers etc. without transferring property or
tenurial rights to the state or the peasantry is totally misplaced. So inequality of income persisted
with growth so that poverty remained almost unchanged in absolute numbers.

3.6) Poverty Reduction Programs

 Starting from the first five-year plan, the government has kept on introducing various
poverty reduction programs and policies.
 The Concept of Trickledown Theory

 Growth oriented approach was adopted with the assumption that all sectors would grow,
and percolate into every level of society and help to remove poverty.

 But even after such growth orientation, the condition has not improved, rather the gap
between rich and poor has further widened.

 The green revolution further worsened the condition by creating disparity between large
and small scale farmers.

 A special program — Food for Work aimed at eradication of poverty was launched in the
1970s.

 Many other programs including self-employment programmes (listed below) were also
launched around the same time −

o Rural Employment Generation Programme (REGP)

o Prime Minister’s Rozgar Yojana (PMRY)

o Swarna Jayanti Shahari Rozgar Yojana (SJSRY)

 Later in 1990s, the government changed the policy and started promoting Self-Help
Groups (SHG). It primarily encourages people to save their own money and lend among
themselves. At a later stage, government through banks will facilitate partial financ ia l
support.

 Swarnajayanti Gram Swarozgar Yojana (SGSY) is an example of SHG. SGSY has now
been restructured as National Rural Livelihoods Mission (NRLM).

 In the year 2005, the Parliament passed a new Act — Mahatma Gandhi National Rural
Employment Guarantee Act. This Act guaranteed wage employment to those rural
households whose adult members volunteer to do unskilled manual work for a minimum
of 100 days in a year.

 During the period 2013-14, about five crore households got employment opportunities and
benefitted from this act.
  Further, three major programs have been launched to improve the nutritional status of the
poor −

o Public Distribution System

o Integrated Child Development Scheme

o Midday Meal Scheme

 Some other programs launched for the better of the people in rural areas are −

o Pradhan Mantri Gram Sadak Yojana

o Pradhan Mantri Gramodaya Yojana, and

o Valmiki Ambedkar Awas Yojana

Before we take up the targeted anti-poverty programmes let us analyse the problem of
unemployment since the programmes aimed to remove poverty are essentially same as aiming at
employment generation. It is also an established fact that poverty is or a result of prolonged
unemployment.

3.7) UNEMPLOYMENT

Unemployment is a common economic malady faced by each and every country of the world,
irrespective of their economic system and the level of development achieved. But the nature of
unemployment prevailing in underdeveloped or developing countries sharply differs to that of
developed countries of the world.

While the developed countries are facing unemployment, mostly of Keynesian involuntary and
frictional types but the underdeveloped or developing countries like India are facing structural
unemployment arising from high rate of growth of population and slow economic growth.

Structural unemployment may be open or disguised type. But the most serious type of
unemployment from which those undeveloped countries like India are suffering includes its huge
underemployment or disguised unemployment in the rural sector.
Unemployment is a serious problem. It indicates a situation where the total number of job
vacancies is much less than the total number of job seekers in the country. It is a kind of situatio n
where the unemployed persons do not find any meaningful or gainful job in-spite of having
willingness and capacity to work. Thus unemployment leads to a huge wastage of manpower
resources.

India is one of those ill-fated underdeveloped countries which is suffering from a huge
unemployment problem. But the unemployment problem in India is not the result of deficiency of
effective demand in Keynesian term but a product of shortage of capital equipment’s and other
complementary resources accompanied by high rate of growth of population.

3.8) Nature of Unemployment Problem in India

Present unemployment problem in India is mostly structural in nature.

Unemployment problem of the country can now be broadly classified into:

(a) Rural unemployment and

(b) Urban unemployment.

(a) Rural Unemployment:

In India the incidence of unemployment is more pronounced in the rural areas.

Rural unemployment is again of two types:

(i) Seasonal unemployment and

(ii) Disguised or perennial unemployment.

(i) Seasonal Unemployment:

Agriculture, though a principal occupation in the rural areas of the country, is seasonal in nature.
It cannot provide work to the rural population of the country throughout the year. In the absence
of multiple cropping system and subsidiary occupation in the rural areas, a large number of rural
population has to sit idle 5 to 7-months in a year.
Seasonal Unemployment is also prevalent in some agro- based industries viz., Tea Industry, Jute
Mills, Sugar Mills, Oil Pressing Mills, Paddy Husking Mills etc.

(ii) Disguised or Perennial Unemployment:

Indian agriculture is also suffering from disguised or perennial unemployment due to excessive
pressure of population. In disguised unemployment apparently it seems that everyone is employed
but in reality sufficient full time work is not available for all.

In India, about 72 per cent of the working population is engaged in agriculture and allied activities.
In 1951 more than 100 million persons were engaged in the agricultural and allied activities
whereas in 1991 about 160 million persons are found engaged in the same sector resulting in as
many as 60 million surplus population who are left with virtually no work in agriculture and allied
activities.

(b) Urban Unemployment:

Urban unemployment has two aspects:
(i) Industrial unemployment and

(ii) Educated or middle class unemployment.

(i) Industrial Unemployment:

In the urban areas of the country, industrial unemployment is gradually becoming acute. With the
increase in the size of urban population and with the exodus of population in large number from
rural to the urban industrial areas to seek employment, industrialization because of slow growth
could not provide sufficient employment opportunities to the growing number of urban population.

Thus the rate of growth of employment in the industrial sector could not keep pace with the growth
of urban industrial workers leading to a huge industrial unemployment in the country.

(ii) Educated or middle-class Unemployment:

Another distinct type of unemployment which is mostly common in almost all the urban areas of
the country is known as educated unemployment. This problem is very much acute among the
middle class people. With rapid expansion of general education in the country the number of out-
turn of educated people is increasing day by day.

But due to slow growth of technical and vocational educational facilities, a huge number of
manpower is unnecessarily diverted towards general education leading to a peculiar educated
unemployment problem in the country. The total number of educated unemployment increased
from 5.9 lakh in 1962 to 230.50 lakh in 1994.

3.9) Salient Features of the Trend of Unemployment Rates in India in Recent Years:

Following are some of the salient features of the trend of unemployment rates in India:

i. The unemployment rate went up between 1993-94 to 2004. On the basis of the current daily
status (Unemployed on an average in the reference week) during the reference period
unemployment rate for males increased from 5.6 per cent to 9.0 per cent in rural areas and from
6.7 per cent to 8.1 per cent in urban areas.

ii. The unemployment rate for female increased from 5.6 per cent in 1993-94 to 9.4 per cent in 204
in rural areas and from 10.5 per cent to 11.7 per cent in urban areas.

iii. Furthermore, it is found that unemployment rates on the basis of current daily status were much
higher than those on the basis of usual status (unemployed on an average in the reference year)
implying a high degree of intermittent unemployment. This could be mainly because of the absence
of regular employment for many workers.

iv. Urban unemployment rates (current daily status) were higher than rural unemployment rates
for both males and females in 2013-14. However, in 2014, rural unemployment rates for males
were higher than that of urban males.

v. Unemployment rates varied sharply across states. States, where wages are higher than in higher
growing ones because of strong bargain or social security provisions; such as high minimum wage,
had high incidence of unemployment in general.
3.10) Causes of Unemployment Problem in India

Unemployment problem in India is the cumulative result of so many factors.

The broad causes of unemployment problem are as follows:

(i) Population Explosion:
The most fundamental cause of large scale unemployment in India is the high rate of population
growth since the early 1950s and the consequent increase in its labour force. It was estimated that
with the 2.5 per cent annual rate of population growth, nearly 4 million persons are added to the
labour force every year. To provide gainful employment to such a big number is really a diffic ult
task.

(ii) Underdevelopment:
Indian economy continues to be underdeveloped even as a vast quantity of unutilized and under
utilised natural resources are prevailing in the country. The scale and volume of economic
activities are still small. The non-agricultural sector especially modern industrial sector which
could generate huge number of employment, is growing very slowly.

During the pre-independence period also, Indian economy experienced a slow growth. British
destroyed the indigenous small scale and cottage industries instead of expanding and modernis ing
them. During the post- independence period also, the performance of the industrial sector has also
been found far below the plan targets and needs.

Moreover, the slow rate of capital formation is also responsible for the hindrances in the path of
realisation of growth potential in agriculture, industry and infrastructure sector. Thus this
underdevelopment is largely responsible for slow expansion of employment opportunities.

(iii) Inadequate Employment Planning:

In the first phase economic planning in India, employment opportunities could not be increased
adequately and little has been done to utilise the Nurksian variety of labour surplus existing in the
rural areas. Moreover, weak manpower planning is also another serious gap in Indian planning.
Less effort has been made for balancing the manpower needs and supplies in various production
sectors, indifferent regions of the country and also indifferent skills.

This has resulted to large imbalances in the sphere of educated and trained personnel like
engineers, technicians, cost accountants, plain graduates and port graduates, administrators etc.
Thus huge amount of resources used for developing manpower could not come into much help due
to faulty manpower planning.

(iv) Slow Rate of Growth:

In India the rate of growth of the economy is very poor and even the actual growth rate lies far
below the targeted rate. Thus the increased employment opportunities created under the successive
plans could not keep pace with the additions to the labour force taking place in the country every
year leading to a huge and larger backlog of unemployment at the end of each plan.

(v) Backwardness of the Agriculture:

Heavy pressure of population on land and the primitive methods of agricultural operations are
responsible for colossal rural unemployment and underemployment in the country.

(vi) Insufficient Industrial Development:

Industrial development in the country is not at all sufficient. Rather the prospects of industr ia l
development has never been completely realised. Due to dearth of capital, lack of proper
technology, scarcity of industrial raw materials, shortage of electricity and lack of labour intensive
investment industrial sector could not gain its momentum and also could not generate suffic ie nt
employment opportunities in the country.

(vii) Prevailing Education System:

The prevailing education system in India is full of defects as it fails to make any provision for
imparting technical and vocational education. Huge number of matriculates, undergraduates and
graduates are coming out every year leading to a increasing gap between job opportunities and job
seekers among the educated middle class.
In the absence of vocational education and professional guidance, these huge number of educated
youths cannot avail the scope of self-employment leading to growing frustration and discontent
among the educated youths.

3.11) Remedial Measures to Solve Unemployment Problem In India

Unemployment problem is a serious problem faced by a large populous country like India. Thus it
is quite appropriate to suggest some measures to solve this problem. In order to suggest appropriate
measures to solve this problem, it is better to identify some measures separately for the problem
of rural unemployment and urban unemployment.

A. Remedies to Rural Unemployment Problem:

As the nature of rural unemployment is quite different, it is better to suggest some special measures
to solve this problem.

Following are some of these measures:

(i) Expanding Volume of Rural Works:
One of the most important remedial measures to solve the problem of unemployment is to expand
the opportunities for work especially in rural areas. In order to clear the backlog of unemployme nt
and also to provide jobs to additional labor force joining the mainstream workers, this expansion
in the volume of works needs to be done rapidly and that too in the areas of both wage employme nt
and self-employment.

As large scale industries cannot provide adequate employment opportunities thus more importance
be given to the development of agriculture and the allied sector along with development of small
scale and cottage industries and also the unorganised informal sector and the services sector.

(ii) Modernisation of Agriculture:

In order to eradicate the problem of rural unemployment, the agricultural sector of the country is
to be modernized in almost all the states. This would derive considerable agricultural surplus which
would ultimately boost the rural economy and also expand employment opportunities in the rural
areas. Attempts should also be made for wasteland development and diversification of agricultura l
activities.
(iii) Development of Allied Sector:
The problem of rural unemployment can be tackled adequately by developing allied sector which
includes activities like dairy farming, poultry farming, bee keeping, fishery, horticulture,
sericulture, agro processing etc. which are having a huge potential for the generation of
employment and self-employment opportunities in the rural areas of the country.

(iv) Development of Rural Non-Farm Activities:

In order to generate employment opportunities in the rural areas, development of rural non-farm
activities, viz., rural industries, the decentralised and cottage small scale sector of industry, agro-
based industry, rural informal sector and the services sector, expansion of rural infrastructure,
housing, health and educational services in the rural areas etc. should be undertaken througho ut
the country with active government support. Since Eighth Plan, the Government is following this
strategy for the generation of rural employment.

(v) Appropriate mix of Production Techniques:

Although Mahalanobis strategy of development argued in favour of capital intensive techniques
but in order to tackle the problem of rural unemployment the government should adopt a
appropriate mix of production techniques where both the labour intensive and capital intensive
methods, of production should be adopted selectively in the new fields of production so as to attain
both growth in employment along with its efficiency.

(vi) Rural Development Schemes:

In order to eradicate the problem of rural unemployment, the Central as well as the State
Governments should work seriously for introducing and implementing rural development schemes
so that the benefit of such development could reach the target groups of people in time.

(vii) Decentralisation:
In order to reduce the extent of the problem of rural unemployment it would be quite important to
spread the location of industries around the small towns on the basis of local endowment position
so that migration of people from rural to urban areas can be checked.
(viii) Extension of Social Services:
It is also important to extend the social services in the rural areas in the sphere of education,
medical science and in other areas which will go a long way for the empowerment of the rural
people in general. Such a situation will indirectly motivate the people towards self-employment.

(ix) Population Control:

Adequate stress should be laid on the control of growth of population through family welfare
programmes especially in the rural and backward areas of the country. This would be conducive
for solving the growing problem of rural unemployment of the country as a whole.

(x) SHGs and Micro Finance:

Adequate steps be taken for promoting self help groups (SHGs) for generating self employme nt
opportunities. In this respect, micro finance flow through NGOs towards SHGs can play a
responsible role in solving the problem of rural unemployment.

B. Remedies to Urban Unemployment Problem:

In order to solve the problem of urban unemployment the country should follow certain important
measures.

Following are some of these measures:

(i) Rapid Development of Industries:
In order to solve the problem of urban unemployment, immediate steps must be taken for
enhancing the industrial efficiency. In this regard, immediate attempts must be made for expansion
and modernisation of existing industries in cost-effective manner and also for setting up of new
industries.

Some basic and heavy industries which were already established in the field of iron and steel,
chemicals, defence goods, heavy machineries, power generation, atomic energy etc. should be
modernized and more such new industries should also set up in the new and existing fields for
generating huge number of employment opportunities for the present and coming generations.

More new resource based and demand based industries should be set up for generating
employment opportunities.
(ii) Revamping Education System:
Indian education system still largely remains very much backward and fails to meet the demand
for present industries and administrative set up. Instead of giving too much stress on general
education, stress should be laid on vocationalisation of education which would help the younger
generation to involve themselves in small scale and cottage industries and also in the services
sector.

(iii) Motivation for Self-Employment:

In order to change the mindset of younger generation, especially from urban areas, attempts must
be made by both government and non-government agencies for motivating the young people to
accept the path of self-employment in the contest of squeezing scope of employment through
carrier counseling at the institutional level.

(iv) Development of SSIs:

Considering the huge number of unemployed, it is quite important to develop a good number of
small scale and cottage industries by adopting labour-intensive approach. Developing such S.S.Is
for the production of need-based products would help a lot for generating huge employme nt
opportunities in urban and semi-urban areas.

(v) Development of Urban Informal Sector:

As a good number urban people are engaged in urban informal sector, thus adequate steps must be
taken for the improvement and modernisation of this informal sector so as to expand the sector
further and also to generate more such employment opportunities for the growing number of urban
unemployed person.
(vi) Revamping the Role of Employment Exchange:
In order to utilise the huge governmental set up of Employment Exchange througho ut the country
it is quite important to change the role of such exchanges for motivating and guiding the younger
generations for self-employment in addition to its existing role for registration and placement.

(vii) Banking Support:

In order to solve the problem of urban unemployment, the scheduled commercial banks should
come forward with rational proposals for the development of SSIs, various units in the services
sector and also for the development of urban informal sector with a sympathetic attitude.

(viii) Works of National Interest:

In order to solve the problem of urban unemployment it is quite necessary to start the work of
national interest which would generate adequate employment opportunities in the urban areas.

(ix) Changing Pattern of Investment:

Attempt should also be made to change the pattern of investment into a viable and productive one
both from economic and social point of view so as to generate employment opportunities.

(x) Government Support:

In order to tackle the problem of urban unemployment, the government should come forward with
viable urban employment generation schemes in the line of PMRY, NRY etc. to assist the urban
unemployed for self-employment projects.

(xi) Growing Participation of FDI:

In order to tackle the problem of urban unemployment, the government should follow a suitable
policy in the line of China for promoting the smooth flow of foreign direct investment (FDI) into
our country for its growing participation in various important industrial and infrastructura l
projects.

C. General Remedies to Unemployment Problems:

(i) Special Employment Programmes:
In order to meet the gap between the requirement and the actual generation of employme nt
opportunities, special employment programmes must be undertaken as an interim measure till the
economy could reach the maturity level of securing jobs for everyone.

These kind of supplementary programmes are very important for the poor people residing in both
rural and urban areas and also residing in small 8 medium towns.
Seasonally unemployed can also be offered seasonal employment through such special
employment programmes. Moreover backward people like landless agricultural labourers,
marginal formers, rural artisans, tribal people settled in remote and hilly areas can also be benefited
from such progrmmes.

The programmes may be chalked out by providing direct wage employment as on rural capital
works or in the form of providing assets or providing inputs to those people for self-employme nt.
Currently, the steps taken by the government for the implementation of NREGA is a right step in
this direction.

(ii) Raising the Rate of Capital Formation:

In order to reduce the problem of unemployment, in general, it is quite necessary to raise the rate
of capital formation in the country. Raising the rate of Capital formation is necessary to expand
the volume of work.

Capital formation can directly generate employment in the capital goods sector. Raising the capital
formation helps the country to raise its capital-stock and thereby can raise the productivity of
workers by raising the volume of capital available per workers.

(iii) Manpower Planning:

Management of human resources in a right and scientific manner is quite important for solving the
problem of unemployment. This is important for ensuring promotion of employment scope as well
as for realization of development of the economy. All these call for proper manpower planning
which requires the following measures.

Firstly, going beyond the narrow domain of manpower planning simply related to matching
demand and supply of skilled personnel, it is quite important to adopt effective remedies to cut
down the growth rate of population which in turn reduce the growth rate of labour supply after a
gap of period and thereby reducing the problem of unemployment.

Secondly, in order to attain effective use of skills it is essential to tailor the supply of skilled labour
as per the it’s requirement so that excess or shortages in skills in different sectors are not faced.
Thirdly, while continuing with present strategy to promote high level skill formation through
education and Training confined to a small proportion of labour force, it is also essential to improve
the capabilities of large number of general people for their development.

This calls for several inter-related measures like making provision for adequate food and nutritio n,
elementary education, proper health facilities, training for jobs etc.

Fourthly, while introducing special programmes for employment, it is quite essential to ensure that
the programmes rightly matches the characteristics and abilities of targeted group and also match
with the overall development plans of various sectors. This will definitely make schemes quite
useful and meaningful.

3.11) Employment Policy and Schemes in India:

Since the Third Five Year Plan, the Government of India launched certain special programmes for
removing unemployment problem in the country. With that purpose, the Government of India, set
up Bhagawati Committee to suggest measures for solving growing unemployment problem in the
country.

The Bhagawati Committee submitted its report in 1973 and suggested various schemes like rural
electrification, road building, rural housing and minor irrigation works. Accordingly, the
Government undertook various programmes to generate employment opportunities and to alleviate
under-employment prevailing in the country.

These programmes were as follows:

(a) Rural Works Programmes:
This programme was undertaken to generate employment opportunities for 2.5 million persons
and also for the construction of civil works of a permanent nature. But this programme generated
employment only to the extent of 4 lakh persons only.

(b) Marginal Farmers and Agricultural Labourers Development Agencies (MFALDA):

During the Fourth Plan this scheme was introduced for marginal farmers and agricultural labourers
for assisting them with subsidized credit support for agricultural and subsidiary occupations like
horticulture, dairy, poultry, fishery etc.

(c) Small Farmers’ Development Agencies (SFDA):

This scheme was also introduced during the Fourth Plan with the object to provide small farmers
credit so that they, could avail latest technology for intensive agriculture and also could diversify
their activities.

(d) Half-a million Job Programme:

To tackle the problem of educated unemployment, a special programme—”Half a million job
programme” was introduced. In 1973-74, provision of Rs 100 crore was made and different states
and Union Territories were asked to formulate and implement this scheme for securing an
employment opportunities for definite number of persons.
(e) Job education for unemployed:
In 1972-73, another programme for educated unemployed and for highly qualified engineers,
technologists and scientists were prepared. Under this scheme, a sum of Rs 9.81 crore was allotted
to the states which created 45,000 job opportunities for the educated persons.

(f) Drought Area Programme:

This programme was introduced for the economic development of certain vulnerable areas by
organising productive and labour-intensive programmes like medium and minor irrigation, soil
conservation, afforestation and road construction. During 1970-72, the government spent Rs 30.80
crore, generating employment about 4.70 million man-days and in 1972-73 by spending Rs 38.51
crore about 40 million man-days of employment was generated.

(g) Crash programme for rural employment:

This scheme was introduced in 1971-72 for generating additional employment through the
introduction of various productive and labour-intensive rural projects.

The main objectives of these programmes were to provide employment to 100 persons on an
average to each block over the working seasons of 10 months in every year and secondly to
produce durable assets. But the various schemes introduced during the Fourth Plan could not
succeed in solving the problem of rural unemployment and underemployment.

OTHER POLICIES

(i) Mahila Samridhi Yojana (MSY):

The Mahila Samridhi Yojana was also launched on 2nd October, 1993 in order to benefit all rural
adult women. This scheme entitles every adult women who opens an MSY account with Rs 300
to get an incentive of Rs 75 for a year.

The MSY is aimed at empowering rural women with greater control over household resources and
savings. It is now implemented through post offices. At the end of October 1995, a total of 1,25,423
accounts had been opened under the scheme.

(ii) Prime Minister’s Rozgar Yojana (PMRY):

On 2nd October, 1993, the Government introduced another new employment oriented scheme —
Prime Minister’s Rozgar Yojana (PMRY) under the on-going Eighth Plan. The scheme is specially
designed for educated unemployed youth which will provide employme nt to more than one millio n
persons by setting up seven lakh micro enterprises during the Eighth Five Year Plan in industry,
service and business.

The scheme initially covered urban areas only during the 1993-94, subsequently covered both the
urban and rural areas. The scheme but involved an expenditure of ? 540 crore to meet the capital
subsidy, training and administrative cost during the remaining period of the Eighth Five Year Plan.

The scheme provided a loan, up to a ceiling of Rs 1 lakh in case of individuals. If two or more
eligible persons enter into a partnership, projects with higher cost can be assisted provided the
share of each person in the project cost did not exceed Rs 1 lakh.

An entrepreneur is required to contribute 5 per cent of the project cost as margin money in cash.
Subsidy at the rate of 15 per cent of the project cost subject to a ceiling of Rs 7,500 per entrepreneur
was provided by Central Government. All those who undertook Government sponsored technical
course for a minimum duration of six months besides matriculate and ITI diploma holders were be
eligible for the scheme.

Under the PMRY, unemployed educated youth between the 18-25 years age group and of families
with annual income up to Rs 24,000 along with certain educational and other criteria were eligib le
for such assistance.

In 2003-04, total micro enterprises developed under PMRY was 1.2 lakh and total employme nt
generated was 1.8 lakh. At the end of 2003-2004 PMRY has developed micro enterprises to the
extent of 17.2 lakh and generated employment to the extent of 24.82 lakh since its inception in
October 1993. Under PMRY, the Government assisted 20 lakh youth for self-employment during
the Tenth Plan.

(iii) JRY:
Moreover, the achievement of JRY in respect of employment generation was 782 million man-
days in 1992-93 and 1,026 million man-days in 1993-94. The 1994-95 budget provide for Rs 70.1
billion and set a target of employment generation at 980 million man-days, against which the
achievement of JRY in 1994-95 was 952 million man-days.

In 1998-99, the target of employment generation under JRY is fixed at 396.6 million man-days but
during 1998-99, the achievement was 375.2 million man-days. Under JRY, about 50 per cent
employment generation during 1998-99 came from SC/ST group.

(iv) Nehru Rozgar Yojana (NRY):

Nehru Rozgar Yojana (NRY) contemplated by the Ministry of Urban Affairs was designed to
create employment opportunities for urban poor. This programme was launched in October 1989
with the objective of providing employment opportunities to the unemployed and under employed
urban poor.

The Yojana is applicable to household living below the poverty line in urban slums and within this
broad category, SC/ST and women constitute a special target group.
Nehru Rozgar Yojana consists of three sub schemes:
(a) Scheme of Urban Micro enterprises. (SUME),

(b) Scheme of Urban Wage employment (SUWE) and

(c) Scheme of Housing and Shelter Upgradation (SHASU).

So far, 6.55 lakh beneficiaries have been assisted in setting up of micro enterprises under SUME.
About 541.52 lakh man-days of work have been generated through the construction of
economically and socially useful public assets under SUWE and SHASU till 1994-95. Under
NRY, total number of families assisted was 2.37 lakh in 1992-93, 1.52 lakh in 1993-94, 1.25 lakh
in 1994-95 and 0.6 lakh during 1997-98 as against the target of 1.2 lakh.

Total man-days of employment generated under NRY was 140.5 lakh in 1992- 93, 123.7 lakh in
1993-94, 92.9 lakh in 1995-96 and 44.6 lakh during 1997-98 as against target of 135.8 lakh. In
December, 1997, this programme was amalgamated with SJSRY.

(v) Prime Minister’s Integrated Urban Poverty Eradication Programme (PMIUPEP):

The Prime Minister’s Integrated Urban Poverty Eradication Programme (PMIUPEP) was launched
in 1995-96 with a specific objective of effective achievement of social sector goals, community
empowerment, employment generation and skill upgradation, shelter upgradation and
environmental improvement with a multi-pronged and long-term strategy.

The Programme covered 5 million urban poor living in 345 class II Urban Agglomerations (towns)
with a population of 50,000 to 1,00,000 each. There was a provision for Rs 800 crore as central
share for the entire programme period of 5 years. In 1995-96, Rs 100 crore were allocated for the
programme.

The programme benefitted about 150 lakh urban poor in 1996-97. As on October 1996, over 14,000
and 1,00,000 beneficiaries had been identified for self-employment and shelter upgradation
respectively. In December 1997, this programme was amalgamated with SJSRY.

(vi) The Swarna Jayanti Shahari Rozgar Yojana (SJSRY)/National Urban Livelihoods
Mission (NULM):
The Swarna Jayanti Shahari Rozgar Yojana (SJSRY) which subsumed the earlier three urban
poverty programme viz., Nehru Rozgar Yojana (NRY), Urban Basic Services for the poor (UBSP)
and Prime Minister’s Integrated Urban Poverty Alleviation Programme (PMIUPEP) came into
operation from December 1997.

This programme sought to provide employment to the urban unemployed or underemployed poor
living below poverty line and educated up to XI standard through encouraging the setting up of
self-employment ventures or provision of wage employment.

The scheme gives special impetus to empower as well as uplift the poor women and launches a
special programme, namely, Development of women and children in Urban Areas (DWCUA)
under which groups of urban poor women setting up self-employment ventures are eligible for
subsidy up to 50 per cent of the project cost.

An allocation of Rs a 181.0 crore was provided in 1999-2000 (BE). In 1998-99, the DWCUA
scheme had assisted 0.01 lakh women related to their self-employment schemes. During 2001-02,
Rs 168 crore was allocated against which’ Rs 45.50 crore was spent. In 2002-03, all allocation of
Rs 105 crore was provided against which Rs 74.0 crore was spent.

Two special schemes of SJSRY include—the Urban Self-Employment Programme (USEP) and
the Urban Wage Employment Programme (UWEP). SJSRY is funded on a 75: 25 basis between
Centre and States. During 1997-98, 1998-99 and 1999-2000, a sum of Rs 102.51 crore, Rs 162.28
crore and Rs 123.07 crore respectively were spent in the States and Union Territories under
different components of SJSRY.

About the performance of SJSRY, total number of beneficiaries under USEP was 0.04 million in
1998-99 and 0.10 million in 2003-2004 and total number of persons trained under USEP was 0.05
million in 1998- 99 and 0.12 million in 2003-2004. Again, total man-days of employme nt
generated under UWEP was 6.60 million in 1998-99 and 10.14 million in 1999-2000 and 4.56
million in 2003-04.
The number of urban poor assisted for setting up micro/group enterprises in 2005-06 was 0.9 lakh
against a target of 0.80 lakh. The number of urban poor imparted skill training in 2005-06 was
1.42 lakh against a target of 1.0 lakh.

Budget allocation for the SJSRY scheme for 2011-12 is Rs 813.0 crore of which Rs 676.80 crore
had been utilized till February 16, 2012. During 2009-10, as reported by States/UTs, a total of
28,613 urban poor have been assisted in setting up individual enterprises, 13,453 urban poor
women have been assisted in setting up group enterprises and 27,463 urban poor women have been
assisted through a revolving fund for thrift and credit activities and also 85,185 urban poor have
been imparted skill training. A total of 3,63,794 beneficiaries have been assisted in the year 2011-
12.

NULM:
SJSRY was replaced by the NULM in September 2013. It aims to provide gainful employment to
urban employed and under employed. The NULM will focus on organizing urban poor in SHGs,
creating opportunities for skill development leading to market based employment, and helping
them to set up self- employment ventures by ensuring easy access to credit.

The NULM aims at providing shelter with basic amenities to urban homeless. If also plans to
address livelihood concerns of urban street vendors. During 2013-14, Rs 720.43 crore was released
and the number of persons skill trained and assisted for self-employment was 6,83,452 and
1,06,250 respectively.

(vii) The Swarnajayanti Gram Swarozgar Yojana (SGSY) and NRLM:

SGSY was launched in April, 1999 and is the only self employment programme currently being
implemented. It aims at promoting micro enterprises and to bring the assisted poor families
(Swarozgaris) above the poverty line by organizing them into Self Help Groups (SHGs) through
the process of social mobilization, training and capacity building and provision of income
generating assets through a mix of Bank credit and Government subsidy.

The scheme is being implemented on a cost-sharing ratio of 75: 25 between the Centre and the
States. Since inception of the Scheme up to December, 2012 a total allocation of Rs 42,16,842
crore was made available by the Centre and the States which formed 42.05 lakh SHG’s and assisted
168.46 lakh Swarojgaris. The SGRY restructured as National Rural Livelihood Mission (NRLM).

The SGSY is restructured as National Rural Livelihood Mission (NRLM) and it has been renamed
as Ajeevika and now being implemented in mission mode across the country since 2011.

The main features of Ajeevika are:

(a) One women member from each identified rural poor household to be brought under the SHG
network;

(b) Ensuring 50 per cent of the beneficiaries from SC/STs, 15 per cent from minorities, and 3 per
cent persons with disability while keeping in view the ultimate target of 100 per cent coverage of
BPL families;

(c) Training for capacity building and skill development;

(d) Ensuring revolving fund and capital subsidy;

(e) Financial inclusion;

(f) Provision of interest subsidy;

(g) Backward and forward linkages and

(h) Promoting innovations.

The objective of NRLM is to ensure that each family, once it is in the SHG network for a period
of 6- 8 years, it is able to achieve household food security and have 3-4 stabilized livelihoods
through a strong convergence with panchayati raj institutions (PRIs).

The mission has covered 97,391 villages and mobilized around 20 lakh SHGs, of which 3.8 lakh
are new. During 2013-14, Rs 22,211.18 crore of SHG bank credit has been disbursed. For 2014-
15, Rs 3,560 crore has been allocated to NRLM.

(viii) Sampoorna Grameen Rozgar Yojana (SGRY):

The Sampoorna Grameen Rozgar Yojana (SGRY) was launched in September 2001. The schemes
of Jawahar Gram Samridhi Yojana (JGSY) and Employment Assurance Scheme (EAS) have been
fully integrated with SGRY.

The objective of the scheme is to provide additional wage employment along with food security
creation of durable community, social and economic assets and infrastructure development in the
rural areas. The scheme envisages generation of 100 crore man-days of employment in a year. The
cost of the programme is to be shared between the Centre and the State on a cost sharing ratio of
87.5 : 12.5 (including food grains component).

In 2005-06, 82.18 crore person-days of employment were generated with the centre releasing Rs
5497.43 crore as cash component and about 37.30 lakh tonnes of food grains to the states and UTs.
Besides, under special component of SGRY with the states/ UTs meeting the cash components,
centre released 15.64 lakh tonnes of food grains to the 11 calamity affected states.

In 2007-08, up to December 31, 2007, the number of person days of employment generated under
SGRY was 11.60 crore while the centre’s contribution in terms of cash and food grain component
up to December 31, 2007 were Rs 1,142.27 crore and 9.55 lakh tonnes.

(ix) Pradhan Mantri Gramodaya Yojana (PMGY):

PMGY was launched in 2000-2001 in all the States and the UTs in order to achieve the objective
of sustainable human development at the village level. The PGMY envisages allocation of
Additional Central Assistance to the States and UTs for selected basic minimum services in order
to focus on certain priority areas of the Government.

PMGY initially had five components viz., Primary Health, Primary Education, Rural Shelter, Rural
Drinking Water and Nutrition. Rural Electrification has been added as an additional component
from 2001-02. The allocation for PMGY in 2000-01 was Rs 2,500 crore. This was enhanced later
on to Rs 2800 crore for 2001-02. For the year 2002-03, an amount of Rs 2,800 crore was provided.

During the last two annual plans, the six sectoral programmes of PMGY were managed by the
concerned Central Administrative Departments. However, from the current year, the Planning
Commission is to directly implement this programme. New guidelines on the implementation of
the PMGY during Annual Plan 2002- 03 have been issued to all the State Governments and UTs.

(x) Pradhan Mantri Gramodaya Yojana (Gramin Awas):

The scheme seeks to achieve the objective of sustainable habitat development at the village leve l.
Central allocation for rural shelter component of PMGY. GA in 2001-02 was Rs 406.85 crore out
of which an amount of Rs 291.51 crore was released by Ministry of Finance.

(xi) Pradhan Mantri Gramodaya Yojana—Rural Drinking Water Project:

Under this programme, a minimum 25 per cent of the-total allocation is to be utilised by the
respective States/UTs on projects/schemes for water conservation, water harvesting, water
recharge and sustainability of the drinking water sources in respect of areas under Desert
Development Programme/Drought Prone Areas Programme.

(xii) Pradhan Mantri Gram Sadak Yojana (PMGSY):

The PMGSY, which was launched on 25th December, 2000 is a programme to provide road
connectivity through good all-weather roads to 1.60 lakh Unconnected Habitations with a
population of 500 persons or more in the rural areas by the end of the Tenth Plan period (2007) at
an estimated cost of Rs 60,000 crore.

The programme is being executed in all the States and Six Union Territories. While the focus of
the programme is on providing road connectivity to Unconnected Habitations of stipulated
population size, connectivity is being provided to all Panachayat Headquarters and places of tourist
interest under the PMGSY irrespective of the population size.

Thus, the main objective of PMGSY is to provide all weather connectivity to all eligib le
unconnected habitations in rural areas of the country having population of 500 persons and above
in plain areas and 250 persons and above (as per 2001 census) in special category states, selected
tribal and desert areas.

It also permits upgradation of existing rural roads. In 2001-02, an amount of Rs 2,500 crore was
allocated for this scheme. Since inception, projects for providing new connectivity to 1,44,717
habitations with a road, length of 5,44,462 km have been cleared at an estimated cost of Rs
1,82,560 crore including upgradation cost.

A total of 3,99,979 km road length have been completed and new connectivity have been provided
to over 97,838 habitations up to March 2014. During 2013-14, about 25,316 km of all-weather
road including new connectivity to 6,560 habitations has been completed at an expenditure of Rs
13,095 crore. Upgradation on selected existing roads has been taken up.

The present source of funding for PMGSY is the diesel cess, 50 per cent of which is earmarked
for PMGSY. Efforts are underway to raise additional resources for the programme with financ ia l
assistance from the World Bank and the Asian Development Bank.

(xiii) Maharma Gandhi National Rural Employment Guarantee Act Scheme (MGNREGA):
The National Rural Employment Guarantee Act Scheme (NREGS) was formally launched on
February 2, 2006 by Prime Minister Manmohan Singh at Bahdlapalle Gram Panchayat of Anantpur
district of Andhra Pradesh marking an important milestone of the UPA Government’s efforts to
provide jobs to the rural poor.

The Act passed in August 2005 was launched in 200 districts and has been expanded to 330
districts in the second phase and by next four years, i.e., by 2008-09 all the districts was covered
under the Act.

This is for first time a job guarantee scheme has been introduced in the country. Under this Act,
one member of each of the country’s 150 million rural households will have the legal guarantee to
get at least 100 days of employment at minimum wages of Rs 65 for one person in each household
irrespective of poverty levels they belong to.

Accordingly, rural household in selected districts will have the right to register themselves with
the local Gram Panchayats as persons who seek employment under the Act. Thus this Act provides
a social safety net for the vulnerable groups of people of our society and thereby makes an attempt
to attain growth with equity.
The main features of this Act are:
(a) NREGA is not just a scheme but an Act providing legal guarantee to work.

(b) Any adult person in the notified are willing to do unskilled manual work, can apply for
registration with Gram Panchayat. The Panchayat will then issue a job card to that person and the
person will be entitled to apply for employment.

(c) The registered persons will then have the legal right to demand employment.

(d) The person will get the right to get employment within 15 days of their demand.

(e) The person will get the right to receive unemployment allowance if the employment is not
given within 15 days.

(f) One third of the beneficiaries will be women.

(g) Employment will be given within 5 km. of the applicant’s residence, else additional wags will
be paid.

(h) Panchayati Raj Institutions ((PRIs) will have the principal role in planning, monitoring and
implementation.

(i) The beneficiary will get the right for statutory wages.

(j) The beneficiary will get the right to worksite facilities like drinking water, sheds for children
and first aid.

The Centre is bearing 80 per cent of the total cost of the programme and the State Governme nt
will have to play a crucial role. The wage component of the implementation of this Act will be
borne by the centre and cost of materials and other components of the work would be shared
between the Centre and the State Governments.

Thus this flagship programme of the government aims at enhancing livelihood security of
households in rural areas by providing at least one hundred days of guaranteed wage employ me nt
in a financial year to every household whose adult members volunteer to do unskilled manual work
with the stipulation of one-third participation of women.

The MGNREGA provides wage employment along with focusing on strengthening natural
resource management through works that address causes of chronic poverty like drought,
deforestation and soil erosion and thereby encourage sustainable development. The two-pronged
objective of the Act are firstly to ensure food security through employment generation and
secondly, creation of permanent assets.

However, the successful implementation of NREGA depends on two important factors, i.e:
(i) The efficient and regular functioning of Panchayati Raj institutions and

(ii) Proper use of the Right to Information Act.

However, the most striking feature of this Act, it is the first attempt of its kind at the national level
to work out an employment guarantee programme with 80 per cent central funding and with its
legal force which makes it quite different than that of other employment generation schemes
introduced earlier in the country.

The MGNREGA, being a demand driven scheme, has its definite focus on works relating to water
conservation, drought proofing, land development, flood protection/control and rural connectivity
in terms of all-weather roads. Of the Rs11,300 crore allocated for NREGA in 2006-07 (BE) Rs
6,714.98 crore was released up to January 31, 2007.

Till January 31, 2007, about 3.47 crore job cards have been issued and of the 1.50 crore households ,
who have demanded employment, 1.47 crore households have been provided employment under
the scheme. Under this scheme, up to December, 2006 of the 53.56 crore person-days of
employment generated, 21.13 crore were for women, and of about 5.81 lakh work taken up, 2.34
lakh were completed.

As against the employment demanded by 2.61 crore rural households, 2.57 households have been
provided wage employment during 2007-08. A budget allocation of Rs 12,000 crore (includ ing
NER Component) was made for 2007-08 and Rs 10,501.02 crore has been released till 30.01.2008.
The Government is now considering a proposal of raising the number of days of guaranteed jobs
from 100 days to 200 days.

In 2007-08, the IT-enabled network of India Post has been successfully utilised for disburseme nt
of wages to the beneficiaries of NREGA in 19 districts of Andhra Pradesh and in all 22 districts
of Jharkhand. The scheme is also operative in Karnataka, Madhya Pradesh, and West Bengal.

In 2008-09, the Government has stepped up the allocation for its flagship programme of rural
employment scheme NREGA by over 65 per cent to Rs 26,500 crore. The additional amount of
Rs 10,500 crore has been provided to meet the additional requirement of NREGA Scheme.

Under phase II, 130 additional districts were notified and brought under its ambit with effect from
April 1, 2007. Under the programme, so far 293.46 lakh jobs have been provided to households.
In 2008-09, the entire Sampoorna Grameen Rozgar Yojana (SGRY) was subsumed in NREGA
Scheme.

The coverage was extended to all the rural districts of the country in 2008-09. At present, 619
districts are covered under NREGA. During the year 2008-09, more than 4.51 crore households
were provided employment under the scheme. As against the budgeted outlay of Rs 33.000 crore
for the year 2013-14, an amount of Rs 25,894.03 crore has been released to the states/UTs till
January, 2014.

The number of households covered under the scheme increased considerably from 3.39 crore in
2007-08 to 4.47 crore in 2008-09 and then to 4.78 crore in 2013-14 with an average wage
employment of 46 person days.

Out of the 219.72 crore person days of employment created under the scheme during 2013-14, 23
per cent and 17 per cent were created in favour of SC and ST population respective ly and 53 per
cent were in favour of women. Thus NREGA provides a social safety net for the vulnerable groups
of people of our society and thereby makes an attempt to attain growth with equity.

The MGNEGA is thus playing an important role in improving the livelihood security as well as
improving the resource base at the rural level. At national level with the average wage paid under
the MGNEGA increasing from Rs 65 in 2006-07 to Rs 115 in 2011-12, the bargaining power of
agricultural labourer has increased as even private sector wages have increased as shown in many
studies.

Improved economic outcomes, especially in watershed activities, and reductions in distress

migration are its other achievements. Wages under MGNREGA are indexed to the consumer price
index for agricultural labour (CPI-AL). Recently the government has taken some initiatives under
MGNREGA to make it much more effective and transparent.

These are:
i. The basket of permissible activities has been expanded to make it more meaningful.

ii. Electronic fund management system (eFMS) in all states has been initiated in a phased manner
to reduce delay in payment of wages.

iii. Additional employment over and above 100 days per household is notified in drought-affected
talukas or blocks is now permissible.

iv. Provision has been made for seeding in Aadhaar into the MGNREGA workers records in order
to prevent leakage.

v. Convergence of the MGNEREGA with the total Sanitation Campaign (TSC) has been
undertaken.

While commending the success of MGNREGA, Prime Minister Dr. Manmohan Singh recently
observed that “MGNREGA has brought momentum in the financial inclusion of our rural
population. Besides direct financial benefit, the scheme has given many indirect benefit to
the people and brought down the migration graph”.
Nothing that more than four crore accounts have been opened in banks besides those in post
offices, the Prime Minister observed that, “these bank accounts will assist the government in
reaching the incentives of the Direct Benefit Transfer Scheme to the rural population. Moreover,
the use of information technology in MGNREGA at many levels has helped making governance
better and increase accountability and transparency in government work. There are enough proofs
that the scheme has helped to a great extent in getting the small and very small farmers a better
produce by increasing land productivity and water conservation.”

Thus it can be observed that with better planning of project design, capacity building of panchayati
raj institutions (PRTs), skill up-gradation for enhanced employability, and reduction of transaction
costs, gaps in scheme implementation could be plugged to a greater extent and the assets so created
could make a much larger contribution towards raising land productivity and improvement of
living conditions of rural people in general.

3.12) Global Economic Recession and its Impact on Unemployment Problem in India

After facing the brunt of the Great Depression of 1930, the world economy again started to
experience the current recessionary trend in its economic activity since 2007 along with a serious
degree of financial turmoil.

The current recession has once again shown its ugly need with a slump in aggregate demand in
most of the developed and developing countries of the world especially in industries related to
motor vehicles, electronics, consumer durables, textiles, realty sector etc.

The first sign of recession was experienced in USA in December 2007 and that has gradually
deepened in US and other countries of the world under the present regime of globalisation.

Indian economy has also started to face the brunt of global recession in 2008-09. As a result, the
growth rate attained by the industrial sector has come down from 11.2 per cent in 2006-07 to mere
3.0 per cent in 2008-09. The global recession has seriously affected some of our export oriented
industries leading to huge laying off of workers.

India’s export oriented leather industry employing 2.5 million workers would be forced to lay off
around 5.0 lakh workers with the worsening scenario in USA and Europe. Similar threat is
apprehended in vehicle industry, diamond Jewellery industry, garments industry, readymade
garments industry, handicrafts industry etc.
Impact of the economic recession was also felt in terms of job losses in different industr ies.
Industry Department opined the impact of job losses to the extent of over 10.0 lakh in the handicra ft
sector and another 10.0 lakh in the textile sector in the years that followed.

The Labour Bureau of the Ministry of Labour and Employment conducted a survey on the
economic slowdown on employment in India. A sample size of 2581 units taken from eight major
sectors, covering 20 centres across 11 states were taken up for the survey.

The survey report reveals that the total employment in all these eight sectors had come down from
16.2 million in September 2014 to 15.7 million by December 2015 showing a total job losses of
5.0 lakh during this three month period.

However, the scenario of lay-offs would be much more serious in the coming months. According
to the latest study made by Citigroup, the country does not appear to have remain unscathed from
the massive lay-offs witnessed throughout the world and the extent of unemployment could rise
further with the home coming of migrant workers or declining remittances from abroad.

The report further stated that although there is a job loss of about 5.0 lakh during the three month
period (Oct—Dec. 20012), with export oriented sectors such as genes and jewellery and textiles
being most impacted but this statistics only covers the organised sectors which comprises just 10
per cent of the country’s work force close to 385 million.

Although India’s unemployment rate in officially stated at 8.2 per cent but the extent of disguised
unemployment prevailing especially in rural areas can magnify the problem into serious
proportion.

However, employment opportunities in 2011-14 were affected by the global financial crisis and
economic slowdown in India. While comprehensive employment data for the year are not
available, some sample surveys conducted by the Labour Bureau, Ministry of Labour and
Employment, indicated employment losses in the wake of global financial crisis and economic
slowdown.
The Government was concerned about the possible impact of financial crisis on the Indian
economy, including employment and several measures, financial and fiscal, were taken. Sample
survey of the Labour Bureau indicated job gains in the sectors covered.

Thus, even on the basis of this small sample, estimated employment in the selected sectors had
experienced a net addition of 1.51 lakh during the last one year from October 2014 to September
2015. However, the situation has improved in India in recent years due to stimulus packages
provided by the government and improvement in global scenario.

Chapter 4

Industrial Concentration

Industrial concentration means sellers concentration. In other words, in a market some big firms
have dominance over production and sales. The limit of this industrial concentration depends upon
two main factors, firstly number of active firms in the given market, secondly, quantity of demand
fulfilled by a firm out of the total market demand. If in a market number of firms is limited, the
size of firms will be relatively big and a big firm will have the control over a large portion of total
supply.

This situation is known as high quantity of seller (or industrial) concentration. High-class industr ia l
concentration depends upon the market power of every firm. Market power means the capacity of
a firm or seller to influence the price of a product or commodity. In the perfect competitive market
situation, this market power is zero, which means the industrial concentration is zero. However,
more we move towards the monopoly market more the industrial concentration.

4.1) Growth of Monopolies and Concentration of Economic Power in India

Monopoly Situation:
Monopoly situation is s situation in which a group of producers acts and behaves in such a way
that it begins to effectively control the supply of a particular commodity. Monopoly can be of
different forms. Monopolies have their own advantages as well as disadvantages.
These days there is an increasing demand that Monopolies should be checked and controlled, for
which different steps and already of Monopolies and developing nations are taking particular steps
for their control, so that the masses are not exploited and welfare of the people is not ignored.

Monopoly situations and conditions are prevailing in all economics, either in one form or the other.
Though some of the nations are trying to check monopolies, yet the fact remains that these are
rapidly increasing and not being checked; because the system has its own advantages.

Monopoly Defined:
Monopoly is a situation in which a group of persons is in a position to end competition in a
particular commodity and control sale and supply of that commodity. That group is also in a
position to influence its prince. An extreme Monopoly situation arises when a firm o group of
closely connected and interested persons only begins to produce a particular commodity.

In the words of Stonier and Hague, “The pure monopoly, as we may call it, will occur when a
producer is so powerful that he is always able to take the whole of all the consumer’s income
whatever, be the level of his output.” Similarly Liftwich has said that, “Pure Monopoly is a Market
situation in which a single form sells a product for which there are no good substitutes.” From both
these definitions it becomes clear that under monopolies there is sole right to supply the product
or service thus collected.

In Perfect Monopoly Possible?

Perfect monopoly situation is not possible in the world. For production, distribution and pricing
there must be some sort of competition, though in some cases it may be very though, while in
others only normal. It will be only an ideal situation in which competition can be completely
eliminated.

Form of Monopoly:
A monopoly situation provides the monopoliser with an advantage of fixing the price, and produce
quality of goods or distribute them in the way he lakes and as such every person or business house
is in a position to have monopoly.

This monopoly is created either by an individual with his vast resources, or by combining together
and thus pooling their resource or groups of industries coming together so that mutual competitio n
is avoided and monopoly is created.

The monopolies may be classified as:

(a) Natural Monopoly;

(b) Legal Monopoly;

(c) Social Monopoly and

(d) Voluntary Monopoly.

(a) Natural Monopoly:

This is monopoly in which individual has less and nature has more roles to play. In its nature
blesses the nation with bounties in a particular commodity and that is available in that country,
which can control that in the way that likes. Arab nations oil monopolies and they can control the
world economy is so far oil and oil products are concerned. In it the people have contributed less,
whereas nation has contributed far more.

(b) Legal Monopoly:

In some cases, a product does not exist or if that exists that is comparatively less or unknown. An
organisation an individual works hard, carries out research, spends his life and is in a position to
produce and market that. He feels that his product is being well received and does not wish that
any individual or organisation should take advantage of his labour.

He gets his trade mark and formula registered with the Government by paving fixed fees. After
that has been accepted no one else can either use formula or trade mark; that then becomes his
absolute monopoly. It is called legal monopoly. We find that in every country patent marks are
registered with the state.

(c) Social Monopoly:

In every society there are certain civic amenities and facilities to be provided to the citize ns.
Therefore, an organisation may be allowed to provide those facilities e.g., in Delhi, electricity is
supplied by Delhi Electric supply undertakings or water is supplied Delhi Water and Sewerage
Department and so on. This type of organisation which is solely responsible for the supply of a
particular civic amenity is staled to be enjoying a social monopoly in that commodity.

(d) Voluntary Monopoly:

It is also known as combination. In it some of the producers dealing in the same commodity come
nearer and closer to each and combine in one form or the other so as to avoid competition. There
is no external force or compulsions to join or to combine, that is why it is called voluntar y
monopoly. Such a monopoly can be in the form of Trusts or cartels.

This voluntary monopoly can be both vertical and horizontal. A vertical combination is also known
as integration. A horizontal combination can be in the form of pools, holding company and
complete merger.

Monopolies are not very much appreciated these days because it is felt that socially these are
harmful than useful to the society.
4.2) Monopoly and Concentration of Economic Power:
Monopoly refers to the control on production or distribution of any commodity by any institutio n
or firm. Therefore, market power is essential for monopoly. State of monopoly can be found even
in small-scale industries. On the contrary concentration of economic power means centraliza tio n
of effective control over important economic activities (Industry, Agriculture, Transport etc.) to
decide, to make jobs available and on the stream of income and wealth in the hands of some
persons or groups.

In India concentration of economic power has been occurred through monopoly. Thus monopoly
is the means through which concentration of economic power flourishes and its flouris hing
enhances the power of monopolistic institutions.

Concentration of Economic Power

To check concentration of economic power, diffuse, and decentralize economic power has become
the accepted goal of a modern economy. Concentration of power in a few hands is a negation of
social justice since it leads to larger inequalities of income and wealth.

In free enterprise economies and in mixed economies with an important role for the private sector
there exists a tendency for the economic power to be concentrated in a few hands. In India a few
big business houses each being controlled by members of a family or house wield large economic
power.

The economic power is manifested in the control by few big businesspersons over the price of
industrial products, the attempt and pattern of investment and the choices of technology and
therefore over the creation of employment opportunities in the economy.

4.3) Extent of the Concentration of Economic Power in India

In a developing economy such concentration of economic power widens the gap of disparity in
income and wealth, which is harmful to the development of the country. This malady is growing
fast in India. Many committees were formed to study it and to suggest remedies.

1. Mahalanobis Committee (1960):

According to this committee, the working system of the planned economy has encouraged the
growth of big companies in Indian industries. These received financial assistance from Indian
Industrial Finance Corporation, National Industrial Development Corporation etc., which are
public institutions. These have derived more profit of tax reliefs and other facilities.

2. Monopoly Enquiry Commission (1964):

Monopoly Enquiry Commission (1964) has studied the extent, effect and causes of this
concentration and concludes that, “Concentration has been promoted more by way of planned
economy which was adopted for rapid industrialisation in the country.” The main causes,
according to the commission, are defective licensing system and discrimination in availability of
institutional loans.

3. Other Committees:
Hazari Committee Report (1966) and Batta Committee (1967) have also underlined that big houses
had adopted corrupt means for getting licences. 8% big houses received 38% licences.

4.4) Extent of Concentration

According to the Mahalanobis Committee, in 1960-61 86% companies (which have paid up capital
less than Rs. 5 lakh) had only 14.6% of the total paid up capital in the country while Big Companies
having paid up capital above 50 lakh, and which are only 1.6% in number had 58.1% of the total
paid up capital of the corporate world in the country.

Monopoly Enquiry Commission found out that there is high grade of concentration in 65
commodities, medium in 10, low in 8 and zero in 17, and 2259 goods under study. These are
controlled by 82 Industrial houses.

According to the Sachhar Committee, “Top 20 houses had 89.4% growth in their assets during
1972-78.” They had assets of Rs. 648 crores in 1951, which were multiplied nine times up to 1978
(5795 crores).

Current Position:
According to the Economic Times Research Beareau, in 1987-88, There are 251 big companies in
private sector in which 101 are considered Jiant’ and 150 as mini Jiant. Rs 29,720 crore were
invested in the Jiants’ The Biggest in these is the Reliance Industries (which had 250,00 crore
rupees assets in 1988). Next come Tata Steel, Larson & Tubro, Tata Engineering. J. K. Synthetics,
and Southern Petro-Chemicals.

In 1987, Tata Group had the biggest assets. Then came Birlas and Reliance. Five Toppers out of
20 have increased their assets from 7312 crores in 1983 to 14311 crores in 1987 that is 95.7%
growth during the period of 5 years. Also they controlled 58.4% of the total resources under the
top 20.

This means that the utmost concentration has been in these 5 toppers. Among these five, Reliance
stood first in the growth rate, i.e., 259.2%. Among 20, Chidambaram Group had the most
spectacular growth rate. During 4 years it had 910% growth in its assets; it has leaped up from the
47th position in 1983 to 9th in 1987.

4.5) Forms of Concentration of Economic Power

Monopoly Enquiry Commission has mentioned two forms of concentration in 1964:

1. Product-Wise Concentration:
When a production or distribution of any commodity or service is controlled by any person or
group, it is called product-wise concentration.

It is divided in three parts:

(a) High Concentration:
On 75% or more by 3 main producers or distributors.

(b) Medium Concentration:

On 60% to 75% by 3 main producers or distributors.

(c) Low Concentration:

On 50% to 60% of production or distribution by 3 main producers, if the concentration is less than
50% it will not be considered as concentration.

2. Country-Wise Concentration:
If ownership or control of most enterprises engaged in production or distribution of different goods
is in the hands of one person, family or industrial group it is called country-wise concentration.

4.6) Causes of Concentration of Economic Power in India

In a rapidly rising and growing economy like India some degree of inequality and concentratio n
of economic power and wealth in a few hands is to be expected, but the disturbing things is that
the degree of inequality and concentration is very much more that can be justified on a ground.

The following are the major causes for concentration of wealth and economic power in few
hands:
1. Government Policies:
The Dutta Committee (1969) pointed out nearly that the Government of India never specifie d
clearly to the licensing authority the objective of preventing concentration of economic power or
monopoly.

2. Rule of Government Financial Institutions:

The financial institutions contributed to the growth of concentration of wealth and economic
power. The financial institutions were set up with the ideal of helping the private sector. But the
large industrial houses managed to influence its lending policies of those institutions. The Dutta
Committee found that about 56 per cent of the total assistance provided by the IFC, IDBI etc. had
gone to the large industrial houses.

3. Guidelines of Large Industrial Houses:

So, after independence the Government of India launched upon a programme of massive economic
development. The government provided financial, tax benefits, etc. for the promotion of the private
sector. The industrial houses which were already in the field saw the abundant chances for their
growth and expansion. They took full advantage of the concessions.

4. Role of Commercial Banks:

Before Bank nationalisation the large industrial houses controlled the banking system. The bank
deposits coming from the general public were used exclusively for financing industries owned and
managed by large industrial houses. Even after nationalisation in 1969 there was not much of a
change in the lending policy of the nationalised banks.

5. Inter-Company Investments:
Inter-company investment means, purchasing shares of a company by other company. Big
companies or Industrial groups purchases stock of other companies on large scale and make them
as their subsidiaries.

6. Technological Progress:
Big firms can reduce the production cost through modern technology due to their sound financ ia l
condition. Thus they get large economies and become more powerful.

7. Managing Agency System:

This system has greatly controlled in the development of big companies by providing financ ia l
assistance. These maintained their credit through intercompany investments. Though the system
was abolished in 1970, its dominance still remained upon industrial groups.

8. Monopolistic and Restrictive Trade Practices:

Monopolistic firms adopt such practices as creating artificial shortage of goods, and get high
prices, decide high distribution rates of goods, exploit the consumer by distributing market among
themselves. Sell goods on different prices to different purchasers, rejecting sales to some buyers
or by other producers etc.

9. Strict Import Policy:

After independence the Government had given protection to various industries, and restricted
imports. This resulted in imposing monopoly by some Indian producers upon the market.

10. Foreign Collaboration:

After independence India has accepted foreign collaboration on large scale. Foreign industrialists
prefer to collaborate with big firms. Thus their dominance got increased.

11. Taxation Policy:

Government offers many concessions on starting new industries, such as relief in income tax and
sales tax. Grants are also provided. Big industries derived utmost advantage from this.

4.7) Evils of Concentration of Economic Power

1. Concentration of economic power is associated with monopolies and therefore with high prices
and exploitation of consumers.

2. The small scale units are not in a position to compete with them without the development of
small and cottage industries concentration of economic power cannot be diffused.

3. The large profits made by the rich people are usually spent on luxurious consumption, this
creates demonstration effect and as a result propensity to consume of the other people is raised.
This reduces the rate of saving.

4. The big businesses block the entry of new young entrepreneurs in the industrial field by the use
of their advertising strength and large resources and influence.

5. Big businesses use their resources to corrupt officials and politicians. To quote the words of the
commission appointed by the government of India, “We cannot ignore the unfortunate reality that
some big business houses do not hesitate to use their deep pockets to try to corrupt public offic ia ls
in the attempt to continue and increase their industrial domain.”

In view of the serious evils of concentration of economic power steps should be taken to check
this concentration and ensure wider diffusion of economic power. Small scale industr ies,
cooperative enterprises should be encouraged.

4.8) Findings of the Monopolies Inquiry Commission

i. Causes of Economic Concentration:

According to the Commission, the development of joint-stock companies and the economies of
scale arising out of continual technological advancement that was taking place were the main
causes of increasing concentration of economic power in the private corporate industrial sector.
The Commission noted. “The evolution of the corporation has made it possible for captains of
industry to use these economies of scale to their greatest advantage.” An industrialist holding a
small percentage of share capital was in a position to collect through the scale of shares vast
amounts of money and acquire control over the industrial establishments and the process went on
in a snowballing manner— controlling other companies through the originally promoted company,
a third company through the first and second company and so on.

ii. Managing Agency System:

Along with the joint-stock form of business organisation and economies of scale, the managing
agency system played a vital role in bringing about industrial concentration in the private corporate
industrial sector. Dearth of management skills in the country result in vesting enormous economic
power in the’ hands of those who had the capital to function successfully as managing agents.

Acquiring shares of another industrial company by one company and continuation of this process
gave enormous economic power to the managing agents, which led to increasing the number of
companies in control of each managing agent.

Another device was inter-locking of directorships. The same boards of directors in several
industrial establishments producing similar product or producing the needed raw materials and
engaged in the production of allied products resulted in increasing economic concentration in a
few hands or in a few industrial houses.

Also, large fortunes amassed during the Second World War (1939-45) helped entrepreneurs to
promote new industrial companies when the country became independent in 1947 and the Five
Year Plans with emphasis on rapid industrialisation began to the implemented since 1951 and
especially with the commencement of the Second Five Year Plan (that is, after 1956).

iii. Sale Out of British Firms:

Also, when the country became independent, many industrial houses in India managed to acquire
industrial establishments of British and other foreign nationals who sold them and left India for
good. This had the effect of accentuating economic concentration.

iv. Licensing Policy:

Further, acceleration of the concentration of economic power in the private corporate industr ia l
sector took place because of the system of industrial licensing, control of capital issues and
regulation of imports due to the difficult balance of payments position in the country.

The already well-established industrial companies could take advantage of their position in
securing additional licences for expanding the already existing industrial units or starting new
ones, and securing permission for additional capital issues, additional imports and so on.

v. Additional Funds:
The big industrial houses were in a more favourable position to raise additional funds because of
their well- established connections and past experience; licensing authorities preferred to give
additional licences to companies already well- established than to some unknown industr ia l
concerns; well-established companies could get additional licences because of their ability to
manage to get foreign collaboration agreements, foreign companies naturally preferring already
well-known industrial companies rather than entering into agreements with some unknown
companies; new companies found the procedure for obtaining licenses extremely complicated and
time-consuming and almost beyond their capacity.
 Chapter 5

Capital Formation in India

The term capital formation or capital accumulation simply indicates all the reproduced wealth,
which helps to accumulate wealth both directly and indirectly. The word capital indicates that part
of current produce, which is used for further production instead of being consumed immediately.

Similarly, capital formation indicates that part of current product, which is directed to the making
of those goods facilitating productions, i.e., machines, tools and instruments, means of
transportation and communication, irrigation project, canal etc. Therefore, capital formatio n
broadly involves a sacrifice of immediate consumption in order to obtain a larger flow of
consumable goods in future.
However, the term capital formation is used both in broader as well as narrow sense. In narrow
sense, capital formation indicates physical capital stock viz., machines, tools etc., but in a broader
sense, it includes non-physical capital or human resources, which include visible and invis ib le
capital, human efficiency, craft, public health etc.

Prof. Colin Clark observed that capital goods are “reproducible wealth used for purposes of
production. But capital formation refers to the net addition made to the existing stock of capital in
a given period of time.” Thus, capital formation may take the form of material goods as well as
non-material goods such as knowledge, skill, health etc.

According to Prof. Ragnar Nurkse, “The meaning of capital formation is that society does not
apply the whole of its productive activity to the needs and desires of immediate consumption but
directs a part of it to the making of capital goods, tools and instrument, machines and transport
facilities, plant and equipment— all the various forms of real capital that can so greatly increase
the efficiency of productive effort.”

Again Dr. Singla has aptly stated, “Capital formation consists of both tangible goods like
plants, tools and machinery and intangible goods such as high standards of education, health,
scientific tradition and research.”
Again Prof. Simon Kuznets rightly stated, “Domestic capital formation would include not only
additions to constructions, equipment and inventories within the country, but also other
expenditure except those necessary to sustain output at existing lands. It would include outlays on
education, recreation and material luxuries that contribute to the greater health and productivity of
individuals and all expenditures by society that serve to raise the morale of employed population. ”

5.1) Scenario of Capital Formation in an Underdeveloped Country like India

Capital deficiency is a characteristic feature of underdeveloped countries. Underdeveloped

countries require an increased supply of capital for two purposes: to increase national income by
transferring population from agricultural to non-agricultural occupations (industrialisation) and to
increase its agricultural yields. Thus capital formation is regarded as a key factor in economic
development of a country.
In simple terms, capital formation means directing a part of income and wealth for the making of
capital goods.

In the words of Prof. Ragnar Nurkse, “The meaning of capital formation is that society does
not apply the whole of its productive activity to the needs and desires of immediate
consumption but directs a part of it to the making of capital goods, tools and instruments ,
machines, transport facilities, plant and equipment all the various forms of real capital that
can so greatly increase the efficiency effort.”
Although the definition given by Ragnar Nurkse puts importance only on the physical aspect of
capital and made no reference to human capital formation but in recent years the “investment in
men” popularly known as human capital formation has also been included within the scope of
capital formation.

As Professor W.A. Lewis puts it “the proximate causes of economic growth are the effort to
economize, the accumulation of knowledge and its application, and the accumulation of capital.
These causes, though conceptually different, usually develop and grow together in any society.
Again Simon Kuznets also wrote in this connection, Domestic capital formation would include not
only additions to constructions, equipment and inventories within the country, but also other
expenditure except those necessary to sustain output at existing lands. It would include outlays on
education, recreation and material luxuries that contribute to the greater health and productivity of
individuals and all expenditures by society that serve to raise the morale of employed population. ”

Although it is true that all the above mentioned three requirements must be met if economic growth
is to take place, it seems unquestionable that capital accumulation is the most important limiting
factor in the underdeveloped countries of the present day.

The whole process of economic development turns around the possibility of achieving a much
higher rate of capital formation than exists at present in most of the under developed countries.
There are communities in which per capita income is increasing very slowly, invest only 5 to 6 per
cent of their national income, while progressive economies invest 12 per cent per annum or more.
Probably the most important task involved in economic development is to convert an economy
from a 5 per cent to 12 per cent saver—with all concomitant changes in attitudes and institutio ns.
This is not an impossible task to achieve in the underdeveloped nation.

‘No nation is so poor’, W.A. Lewis aptly points out, that it could not save 12 per cent of its national
income if it wanted to; poverty has never prevented nations from launching upon wars, or from
wasting their substance in other ways.

Prof. Lewis wrote, “The central problem in the theory of economic development is to understand
the process by which a community which was previously saving and investing 4 to 5 per cent of
its national income or less, converts itself to an economy where voluntary savings is running at
about 12 to 15 per cent of national income or more. This is the central problem because the central
fact of economic development is rapid accumulation, including knowledge and skill with capital.”

On the problems of capital formation of the underdeveloped countries, Prof. Nurkse wrote, ‘There
is small capacity to save, resulting from low level of real income. The low real income is reflectio n
of low productivity, which in its turn is due largely to the lack of capital.

The lack of capital is a result of small capacity of save, or again, “The low level of productivity
is the result of small amount of capital used in production.” Economic development, according
to productive capacity approach, will mean the discovery of new resources, and better and
improved utilisation of existing resources of country.
In other words, this approach means:
(1) A rise in the rate of saving and capital formations to national income and

(2) An increase in the capital-output ratio.

It has been agreed unanimously that the best known measurable indicator of economic growth in
terms of productive assets is the rate of capital formation. It is highly desirable that the capital
formed by country, by cutting or reducing the share of consumption, should be productive.
Broadly, economic development can be termed as a process which ensures a new and better
utilisation of resources and an increase in the economy’s productive capacity for raising the
standard of living of the people.

Economists have agreed that economic development, to a great extent, means capital formatio n.
The urge for economic development arises on account of the fact that as much as 67 per cent of
the world population is existing in underdeveloped regions under most pitiable conditions of living
with as little as 15 per cent of the world’s total wealth at their disposal.

To get rid of such problems, an underdeveloped country like India should manage to fulfill certain
basic, requirements or the ‘minimum critical efforts’, as the United Nations experts call it.

The indispensable role of capital formation has been accepted by Modern Developme nt
Economists. The absence of capital is the biggest handicap with the underdeveloped countries like
India and thus occupies the central and strategic position in the process of their economic
development.

Meier and Baldwin are of the view that the accumulation of real capital in underdevelope d
countries involves three independent activities:
(i) An increase in the volume of real savings, so that resources that would have been used for
consumption purposes can be released for other purposes;

(ii) A finance and credit mechanism, so that the resources may be claimed by investor;

(iii) The act of investment itself so that resources are used for the production of capital goods.

In an underdeveloped country like India, the role of savings seems to be of foremost importance
in relation to its economic development. It is, therefore, necessary that positive efforts should be
made to push up the country’s rate of saving in order to bring about development.

The question of the magnitude of savings appears automatically with its importance. Though,
requirements are liable to vary from country to country and from time to time, it has been estimated
that with a rise of 1 per cent in population, a community should save 4 per cent of national income
annually to keep its per capita income from falling.
It is generally found in underdeveloped countries like India that, despite their very small capacity
to save, whatever little they save, goes into most uneconomic forms such as the purchase of
precious metals and jewellery, luxury building, holding of foreign exchange assets.

Thus the main problem of these countries like India is to bring together idle man and idle
equipment to produce goods and services to satisfy felt needs, to channel resources to this end and
to subordinate other objectives to the early attainment of a decent minimum standard of living for
the masses.

5.2) Process of Capital Formation in India:

Considering the importance of capital formation in the economic growth of underdeveloped

countries it is quite essential to look into process of capital formation and to determine the desirable
rate of capital formation.
About the desirable rate of capital formation, most of the theories of capital accumulation suggest
to step up the rate of capital formation in a short period of time. Prof. Rosenstein Rodan, in his
theory of Big Push, also emphasised on a minimum rate of capital accumulation and investme nt
as a necessary condition of economic growth and objected the path of gradualism in this context.
The whole process of physical capital formation in a country is to pass through three
important stages:
(i) Generation of Real Domestic Savings:
The first stage of physical capital formation is to generate the volume of real domestic savings
through the curtailment of consumption and to divert these resources towards investment purposes.
Therefore, it is quite necessary that people should save from the present consumption. But this
generation of savings depends upon the power to save, willingness to save and facility to save.

(ii) Mobilisation of Savings:

The second stage of physical capital formation is making provision for the mobilisation of
domestic savings so that the mobilised savings can be converted into investible funds. Thus proper
steps must be taken for the establishment of adequate number of banking and other financ ia l
institutions for mobilising the savings of the community.
Banking facilities offer considerable incentive to boost up the rate of mobilisation and also for
channelisation of savings.

(iii) Productive Investment of Savings:

The final stage of the process of capital formation is to invest this mobilised savings in a most
productive and efficient manner. This needs investment of this savings into capital goods. It
requires the emergence of a class of efficient, skilled, dynamic and daring entrepreneur which can
properly utilise the community’s savings into various channels of productive investment.

Alternatively it also requires state’s participation in the entrepreneurial function. Thus in order to
increase the rate of capital accumulation in a given period of time, national income (Y) should
exceed level of consumption (C).

The excess of national income over the consumption constitutes savings of the country, i.e., Y =
C + S and this saving should be again equal to investment, i.e., S = I. Thus investment refers to
investible surplus and the capital formation means the addition to the existing capital stock.

Any part of investible surplus should be used for the production of capital goods only for the sake
of capital formation and it is one of the pre-conditions of capital formation with the increased
volume of savings unless it is used for the production of capital goods.

Moreover, there can be an increase in capital formation if investible resources can be transferred
from the production of consumer goods to the production of capital goods.

In the mean time different countries followed different policies to boost up the rate of savings of
the community. Russia and other centrally planned economies imposed curbs on consumption for
achieving a high rate of saving. Alternatively British economy has been able to raise the rate of
saving by maintaining low wage rate and ploughing back business profit for economic expansion.

Both of these policies are extreme in nature. It is quite difficult to follow such a policy in India
under the present democratic set up. Thus under such a situation, domestic savings alone may not
be sufficient to provide necessary capital for the expansion of the economy.
Thus, if necessary, a part of the investment activities may be financed through the import of foreign
capital. Here external assistance is only a short term measure.

In this context, Indian economy has prepared its own path of capital accumulation needed for
economic development where much stress has been laid on real domestic savings and a partial
stress on the inflow of foreign capital.

During the period of the Second and the Third Plans, inflow of foreign capital at higher rate was
permitted for initiating the conditions of take-off but from Fourth Plan onwards, efforts have been
made for progressive reduction in the volume of foreign aid to obtain self reliance.

But again during the Eighth Plan, i.e., during the early part of 1990s, India has laid much stress on
the import of foreign capital for meeting the problem of depleting foreign exchange reserves and
also for conducting its economic re-structuring and reforms smoothly.

5.3) Causes of Low Rate of Capital Formation in India

In India, the rate of capital formation is low as compared to that of advanced countries of the world.
The capital formation primarily depends on the levels of savings and investment attained in the
country which are also low in India.
Though the country has attained some improvement in respect of rates of savings and investme nt,
but it remains still lower in comparison to that of other developed countries of the world. It is quite
imperative to know the causes responsible behind this low rate of savings and investment in India.
Some of these important causes are given below:
(i) Low rate of growth of national income and per capita income.

(ii) High rate of growth of population leading to heavy population pressure in the country.

(iii) Vicious circle of poverty.

(iv) Higher marginal propensity to consume of the people in India leading to lower propensity to
save.

(v) Poor banking facilities in the rural areas of the country.

(vi) Demonstration effect and conspicuous consumption reduces the urge and ability of the people
to save.

(vii) Lack of financial institutions to mobilise savings.

(viii) Peoples’ indifferent attitude towards raising the rate of capital formation.

(ix) Continuous inflationary pressures are eroding the saving capacity of the people of the country.

(x) Small size of the market.

(xi) Lack of enterprise.

(xii) Higher rate of taxation in the country is creating disincentive to raise the level of savings and
investment.

(xiii) Lack of infrastructural facilities in the country is creating disincentive to raise the level of
investment.

(xiv) Backwardness of agriculture resulting in low agricultural productivity is limiting the flow of
investment in this sector.

(xv) Application of outdated and primitive techniques of production due to low level of
technological knowhow available in the country leads to low productivity in the productive sector.

(xvi) Huge deficit financing adopted continuously by the Government has led to inflationary rise
in prices, creating disincentive to investment activities.

5.4) Measures to Increase the Rate of Capital Formation in India

In order to increase the rate of capital formation in India by raising its level of savings and
investment, the following measures may be followed:

(i) Raise the level of national income and per capita income;
(ii) Raise the volume of voluntary savings;

(iii) Mobilizing the huge untapped savings;

(iv) Deriving growing surpluses from public sector enterprises of the country;

(v) Controlling hoarding and unproductive investment;

(vi) Controlling inflation to raise the saving capacity of the people;

(vii) Introducing suitable monetary policy;

(viii) Rationalising the tax structure so as to promote savings and investment;

(ix) Formulating suitable industrial policy to promote investment in the industrial sector;

(x) Attaining price stability and regulating deficit financing; and

(xi) Making systematic efforts to increase export and curtailing non-essential imports.
 Chapter 6

Industrial Sickness

One of the adverse trends observable in the corporate private sector of India is the growing
incidence of sickness. It is causing considerable concern to planners and policymakers. It is also
putting a severe strain on the economic system, particularly on the banks.

There are various criteria of sickness. According to the criteria accepted by the Reserve Bank of
India, “a sick unit is one which has reported cash loss for the year of its operation and in the
judgment of the financing bank is likely to incur cash loss for the current year as also in the
following year.”
The strength of the industrial sector, largely, determines the soundness of the economy.

A developing economy like India cannot afford the growing sickness in industries as it results in
a colossal wastage of physical, financial and human resources. In the presence of the resource
crunch, the industrial sickness becomes all the more an alarming problem. Industrial sickness
usually refers to a situation when an industrial firm performs poorly, incurs losses for several years
and often defaults in its debt repayment obligations.
The Reserve Bank of India has defined a sick unit as one “which has incurred a cash loss for one
year and is likely to continue incurring losses for the current year as well as in the following year
and the unit has an imbalance in its financial structure, such as, current ratio is less than 1: 1 and
there is worsening trend in debt-equity ratio.” The State Bank of India has defined a sick unit as
one “which fails to generate an internal surplus on a continuous basis and depends for its surviva l
upon frequent infusion of funds.”

However, prior to the enactment of Sick Industrial Companies Act (SICA) in 1985, there was no
agreement on the criteria to be used to describe an industrial unit as sick. According to SICA, as
amended in 1992, an industrial company can be declared as sick which has at the end of any
financial year accumulated losses equal to or exceeding its entire net worth. It may be noted that
Sick Industrial Companies Act (SICA) applies to registered companies which have been in
existence for at least 5 years.

In case of small scale industrial unit (SSI), it is regarded as a sick unit if it has:
(i) Incurred a cash loss in the previous accounting year and was likely to continue with losses in
the current accounting year and further its cumulative cash losses are equal to 50 per cent or more
of its peak net worth during the last five years and

(ii) It has defaulted in meeting four consecutive installments of interest.

According to the Development Commissioner, a small-scale industrial unit (SSI) becomes

sick if its:
(a) Capacity utilisation is less than 50 per cent of the highest achieved during the preceding five
years (incipient sickness)’,

(b) Net worth has been eroded by more than 50 per cent; and

(c) The unit has remained closed for a period more than six months.

On the basis of the above definitions of a sick industrial unit, it emerges that the symptoms of the
sickness of an industrial unit manifest themselves in the form of unbalanced financial structure,
erosion of more than 50 per cent of its net worth, absence of the generation of internal surplus,
under- utilisation of capacity and survival of the unit upon frequent infusion of funds.

6.1) Nature and Causes of Industrial Sickness:

Competition breeds efficiency but adversely affects weak industrial units and makes them sick.
The clear directional changes since 1982-83 towards liberalisation of industrial licensing policies,
foreign collaboration approvals, the concept of minimum-size plants are welcome from
consumers’ point of view. But the weaker units have to pay the price. The inevitable cost of
achieving competitive efficiency is that the weak must be allowed to fade. But the country cannot
allow this to happen.

The Sick Industrial Companies (Special Provisions) Act, 1985, was enacted to help and revive the
sick units. The substantive portions of the Act came into force from May 15, 1987. The Act
provided for setting up of a quasi-judicial body designated as the Board for Industrial and Financia l
Reconstruction (BIFR) to deal effectively with the problem of sick industrial companies. The
Reserve Bank of India has issued guidelines to banks to strengthen the monitoring system and to
arrest industrial sickness at the incipient stage.

6.2) Nature of Sickness

Sickness in industry can be classified into:

(a) Genuine sickness, which is beyond the control of the promoters of the concern despite the
sincere efforts by them,

(b) Incipient sickness due to basic non-viability of the project, and

(c) Induced sickness which is due to the managerial incompetence and wrong policies pursued
deliberately for want of genuine stake.

This is a man-made sickness in which some unscrupulous promoters adopt fraudulent practices to
start a concern and to get away with the money obtained by fraud and deceit.
The FICCI study entitled ‘Industrial Sickness — Dimensions and Perspectives’ says that the causes
of sickness are both internal and external, often operating in combination. External factors are
government policies on pricing, duties, taxes, high interest rates, taxes on profit, slackness in
demand, sluggishness in export markets, high labour cost, inadequate availability of inputs, lack
of infrastructure and the like.

The internal factors which contribute to sickness are wrong planning in relation to location,
technology, capital cost, technological obsolescence, management deficiencies and industr ia l
unrest. We explain below these external and internal factors in some detail.

External Factors:
The following are some of the external factors causing industrial sickness in India:
(i) General Recessionary Trend:
Sometimes a general depression hits industrial units. This is reflected in lack of demand for
industrial products in general. An overall slowdown in economic activities affects the performance
of individual projects. Improper demand estimation for the products to project lands the industr ia l
units in difficulties.

(ii) High Prices of Inputs:

When the costs of manufacture are high and sales realisation low, the industrial unit cannot stand
in the market. This happens when the prices of inputs such as price of fuel such as petroleum
during energy crisis goes up whereas the competitive forces keep down the prices of the products.

(iii) Non-Availability of Raw Materials:

When the supplies of raw materials are not available regularly or in good quality, the industr ia l
units are bound to be in trouble. This often occurs in case of supply of imported raw materials.

(iv) Changes in Government Policies:

The industrial sickness is also caused by certain changes in policy designs of the governme nt.
These frequent changes affect the long-term production, financial and marketing planning of an
industrial unit. Changes in Government policies regarding imports, industrial licensing, taxation
can make viable units sick. For example, liberal import policy since 1991 has rendered many small-
scale industrial units sick.
(v) Infrastructure Bottlenecks:
Often the infrastructure difficulty is responsible for industrial sickness. No industrial unit can
survive prolonged transport and power bottlenecks.

Internal Factors:
The following are the important internal factors which are often responsible for industrial
sickness:
(i) Project Appraisal Deficiencies:
The industrial unit becomes sick when the unit has been launched without a comprehens ive
appraisal of economic, financial and technical viabilities of the project.

(ii) Industrial Unrest and Lack of Employee Motivation:

When there is labour discontent, no industrial unit can function smoothly and efficiently. When
labour lacks motivation no good results can be expected and this results in sickness and non-
viability of several industrial units.

(iii) Wrong Choice of Technology:

If the promoters use wrong technology, results are bound to be unsatisfactory. Many industr ia l
units, especially in the small-scale sector, do not seek professional guidance in installing the
correct machinery and plant. If the machinery and plant installed turn out to be defective and
unsuitable, they are bound to suffer losses and become sick and non-viable.

(iv) Marketing Problems:

The industrial unit becomes sick due to product obsolescence and market saturation. The industr ia l
unit becomes sick when its product-mix is not attuned to the consumers’ demand.

(v) Wrong Location:

If the location of an industrial unit happens to be defective either from the point of the market or
the supply of inputs, it is bound to experience insurmountable difficulties.

(vi) Lack of Finance:

Inadequate financial arrangements or in the absence of timely financial aid an industrial unit is
bound to come to grief. It will not be able to withstand operational losses.
(vii) Improper Capital Structure:
If capital structure proves to be unsound or unsuitable especially on account of delayed
construction or operation, it will result in cost overruns or unduly large borrowing and create
financial trouble for the unit concerned.

(viii) Management Deficiencies:

The biggest cause of industrial sickness is the managerial inefficiency. Lack of professiona l
management or experienced management and the existence of hereditary management is an
important cause of industrial sickness. Inefficient management results in inability to perceive
things in proper perspective devoid of routine considerations. Inefficient management is also
unable to build up good team and inspire confidence for an organised collective effort and takes
autocratic and high-handed decisions.

(ix) Voluntary Sickness:

There is some sickness which is voluntarily invited by the entrepreneurs for various motives like
getting government concession or aid from financial institutions. Thus industrial sickness cannot
be attributed to any single, or simple cause but may be the result of a combination of number of
allied causes.

An analysis of 637 large-scale units identified that deficiency in management was responsible for
52 per cent cases of sickness. While labour troubles caused sickness only in 2 per cent of the
industries, market recession and environmental factors came second with 23 per cent.

The other causes were technical factors and faulty initial planning (14 per cent) and infrastructura l
factors such as power cuts and shortage of critical inputs (9 per cent). Of the 637 large units, 350
could be put back on the track. Of these, 221 units, with the outstanding credit of Rs. 1,125.06
crores were put under the nursing programme.

6.3) Incidence

In Dec. 1980 the total number of sick units was 24,550, involving outstanding bank credit of Rs.
1,809 crores. As at the end of March 2000, the total number of sick units stood at 307,399 involving
an outstanding bank credit of about Rs. 23,656 crores. Of these 14,793 were potentially viable,
278,423 were non-viable and the viability of the remaining 14,183 has not been decided.

Three major industries affected by industrial sickness are jute, engineering goods and textiles.
Some of the industries such as the real estate, light consumer goods, automobile, diamonds and
many others are reeling under the impact of steep fall in demand, inadequate supply of finance,
large proportion of non-performing assets and constraints of finance due to huge amounts of funds
getting blocked in ageing receivables

6.4) Government Policy

A number of measures have been taken to tackle the problem of industrial sickness. The
importance of detection of sickness at the incipient stage has been emphasised by the RBI. The
policy framework in respect of measures to deal with the problem of industrial sickness has been
laid down in the guidelines issued on October 1981 (which were subsequently modified in
February 1982) for guidance of administrative ministries of the Central Government, State
Governments and financial institutions.

The salient features of these guidelines are the following:

(a) The administrative ministries in the Government will have specific responsibility for pre-
vention and remedial action in relation to sickness in industrial sector within their respective
charges. They will have a central role in monitoring sickness and coordinating action for revival
and rehabilitation of sick units. In suitable cases, they will also establish standing committees for
major industrial sectors where sickness is widespread;

(b) The financial institutions will strengthen the monitoring system so that it is possible to take
timely corrective action to prevent incipient sickness. They will obtain periodical returns from the
assisted units and from the Directors nominated by them on the Boards of such units. The Industria l
Development Bank of India and results of such analyses conveyed to the financial institutio ns
concerned and the Government will analyze these.

(c) The financial institutions and banks will initiate necessary corrective action for sick or incip ie nt
sick unit based on a diagnostic study. In case of growing sickness, the financial institutions will
also consider taking of management responsibility where they are confident of restoring a unit to
health. The Ministry of Finance will have to issue suitable guidelines for management;

(d) Where the banks and financial institutions are unable to prevent sickness or ensure revival of
a sick unit, they will deal with their outstanding dues to the unit in accordance with the normal
banking procedures. However, before doing so, they will report the matter to the Governme nt,
which will decide whether the unit should be nationalized, or whether any other alternative-
including workers’ participation in management— can revive the undertaking.

(e) Where it is decided to nationalize the undertaking, its management may be taken over under
the provisions of the Industries (Development and Regulation) Act, 1951, for a period of six
months to enable the Government to take necessary steps for nationalization.

(f) Finally the industrial undertakings presently being managed under the provisions of the
Industries (Development and Regulation) Act, 1951, will also be dealt with in accordance with the
above principles.

6.5) Concessions

The Government has also provided certain concessions to assist revival of sick units without direct
intervention. For example, the Government has amended the Income-tax Act in 1977 by addition
of Section 72A by which tax benefit can be given to healthy units when they take over the sick
units by amalgamation, with a view to reviving them.

The tax benefit is in the form of carry forward of the accumulated business losses and un-provided
depreciation of the sick companies by the healthy companies after amalgamation. A scheme for
provisions of margin money to sick units in the small-scale sector at soft terms to enable them to
obtain necessary funds from banks and financial institutions to implement their revival scheme has
been introduced from January 1, 1982.
Moreover, financial assistance in the form of long-term equity up to Rs. 15 lakh to units with a
project cost not exceeding Rs. 10 lakhs at a nominal service charge of 1% is available to potentially
viable sick SSI from the National Equity Fund.

6.6) Establishment of BIFR

The Central Government has set up a Board for Industrial and Financial Re-construction (BIFR)
with effect from 12 January 1987 in pursuance of enactment of the Sick Industrial Companies
(Special Provision) Act, 1985. This is a major step for intervening at an early stage and detecting,
preventing, as well as taking ameliorative, remedial and such other measures which to be taken
with respect to sick and potentially viable companies.

The role of the Board for Industrial and Financial Reconstruction (BIFR) needs a re-look in the
face of a steep rise in the number of industries turning sick. BIFR was constituted to facilitate the
revival of industries deemed sick. When an industry turns sick, BIFR acts as an operating agency
(generally the lead financial institution having the largest loan exposure among the creditors) to
devise a revival strategy proposal.

Progress in the right disposal of sick company cases registered with BIFR has been slow because
of the conflicting interests between the companies and the creditors (banks and financ ia l
institutions, government bodies/agencies) and certain lacunae in the SIC A Act. The rehabilita tio n
schemes met with 40-45% failure, as a result of which many of the cases had to be reopened.

The rate of registration/sickness increased substantially during 1997-98 due to (a) the recessionary
trends prevalent in industry, (b) poor financial market conditions, and (c) the tough stance taken
by banks/financial institutions (FIs) towards defaulters/potentially sick companies under their non-
performing assets (NPA) accounts for rescheduling of repayments, etc.

The problem appears even more acute if we take note of potentially sick BIFR companies, as also
the NPAs of FIs and banks. In fact, the NPAs of banks and others have continued to rise.
Upto 1997-98 the outstanding bank credit against sick companies has reached an abnormal’
proportion of over Rs. 23,658 crores, in March’ 2000. Companies turning sick have affected over
15 lakh workers.

IRBI (IIBI):

The Industrial Reconstruction Bank of India (IRBI) set up in 1985 has initiated various steps for
checking the growth of industrial sickness and helping in industrial revival. From April 1997 the
name of IRBI has been changed to Industrial Investment Bank of India (IIBI). By March 2000,
cumulative financial assistance sanctioned and disbursed by it stood at Rs. 10.090 crores and Rs.
7,353 crores, respectively.

A significant measure taken during 1986 was the setting up of Small Industries Development Fund
(SIDF) in the IDBI. This is meant to provide special financial assistance to the small-scale sector.
The Fund would be used for providing refinancing assistance not only for development, expansion
and modernisation, but also for the rehabilitation of the small-scale sick industries.

Modernisation Fund:

The Government has set up two funds, namely the Textile Modernisation Fund and the Jute
Modernisation Fund, for modernisation of the textiles and jute sector. Under these two funds,
assistance is provided not only to the healthy units for modernisation at 11.5% rate of interest; but
also’ to sick but potentially viable units. Special loans are given to the weak units for meeting a
part of the promoters’ contribution.

Goswami Committee Report:

The Committee on Industrial Sickness and Corporate Restructuring under chairpersonship of Dr.
Omkar Goswami submitted its report in July 1993.

The main recommendations of the Committee with respect to sick companies are:
(a) For early detection of sickness the definition of sickness should be changed to:-

(i) Default of 180 days or more on repayment to term lending institutions, and
(ii) Irregularities in cash credits or working capital for 180 days or more.

(b) Amendment of the Urban Land (Ceiling & Regulation) Act, 1976 to improve generation of
internal resources of sick companies.

(c) Empower the BIFR for speedier restructuring, winding- up and sale of assets of companies; and

(d) A sick company’s own reference of BIFR should be voluntary, not mandatory.

SICA Amendment Act, 1994:

The modifications brought in the Sick Industrial Companies (Special Provisions) Act, 1985 by the
1994 Amendment Act pertain to the changes in the definition of SICA, expansion of the term
operating agency, clarification that an enquiry as to sickness shall be deemed to have commenced
on receipt of a reference by the BIFR complete in all respects, scope for reverse merger, “deemed
consent” after the lapse of 120 days, “single window concept” for release of funds by
banks/financial institutions to the sick company, monitoring implementation of sanctioned revival
schemes by BIFR, holding on operations by financial institutions/banks/State Governme nts,
empowering the Central Government, State Government, banks, institutions, etc., to report cases
of potential sickness, etc.
In the definition of sickness the period for the registration of an industrial company as sick has
been reduced from seven to five years. Furthermore, the condition of incurring cash losses during
the preceding two years has been waived. This means that an industrial company would be
considered a sick industrial company once its net worth is completely eroded and has been regis -
tered for not less than five years.

6.7) Suggestions for Rehabilitation of Sick Units:

The rehabilitation of sick units or restoring them to normal health is a matter of great urgency in
view of the serious social, economic and political consequences of industrial illness.

The following measures may be suggested:

(i) Cooperation between Term-Lending Institutions and Commercial Banks:
Since commercial banks provide working capital, they are in a position to know about the working
of industrial concern. However, assistance from term-lending institutions is also essential for
rescue operations.

(ii) Coordination between Various Government Agencies:

All government agencies, both regulatory and promotional, must join hands to restore sick units
to health.

(iii) Full cooperation from various suppliers,’ unsecured creditors and other stakeholders,
particularly from the employees, is also essential to take the concern out of the difficulties in which
it is involved.

(iv) Willing Cooperation and Clear Understanding with the Project Promoters:
Generally, there is a lack of trust and confidence among the various interests concerned. It is found
that government agencies and dealing institutions are more worried about their money and are
anxious to recover them instead of curing of the health of the sick units.

(v) Checking Over-Valuation of Inventories:

The banks should verify on a regular basis the valuation of inventories in terms of both quantity
and price. This would prevent over-borrowing on the hypothecation of inventories.

(vi) Marketing:
There should be well organised and scientific marketing by the project promoters otherwise
launching of a project will be a leap in the dark. Good marketing arrangements will prevent
industrial sickness.

(vii) Recovery of Outstanding:

Every effort should be made to realize outstanding advances so that the concern is able to gather
funds to avoid sickness.

(viii) Modernisation of Machinery:

If the sick unit is to be restored to health, old and obsolete machinery and outdated technology
should be discarded at the earliest.
(ix) Improving Labour Relations:
Restrictive labour and unreasonable trade unions are great obstacles. Improving labour relations
will go a long way in curing industrial sickness.

(x) Efficient Management:

If necessary inefficient management should be replaced. The key to industrial health lies in alert
and efficient management. The management should show a calm approach, patience and
perseverance, courage and ability to steer in bad weather.

(xi) Performance Incentives:

It is necessary to offer performance incentives to the executives and the workers to induce them to
put in their best efforts. This will be quite helpful in curing industrial sickness.

(xii) Sympathetic Government Attitude:

During periods of industrial illness, the government agencies should adopt a sympathetic and
understanding attitude so that the problem is not aggravated but moves towards a solution instead.

(xiii) Austerity and Economy:

Austerity and disciplines should be enforced at all levels. Every effort should be made in raising
funds internally through the sale of excess assets, surplus machinery, etc. Uncalled for tours, lavish
entertainments, unnecessary personal expenses should be ruthlessly cut down.

6.8) Conclusion

In view of the large-scale industrial sickness, it would be necessary to organize a task force
consisting of competent and experienced executives in various branches of business to go into the
case and monitor recovery. Rehabilitation of sick units is not an easy and simple affair. An all-
round effort is necessary to root out the disease; first necessary step is the identification of sick
units, which can be made viable through renovation, expansion, and diversification. Units beyond
recovery should be wound up.

The second step is the reconstitution of management. Where the management is unwilling or
unable to play its proper role, the financial institutions and the government agencies should
intervene to fulfill their large social responsibility of ensuring efficient use of national resources.
Since industrial sickness is due both to external causes, e.g., general recession, and internal causes
like dishonest and inefficient management, the remedy must also lie in both directions.

With a view to meeting the situation, the early warning system is strengthened. Viability studies
should be undertaken to identify the sick units including creeping sickness, which could be
eventually restored to health with additional financial aid on liberal and easy terms. To an extent
increase in industrial sickness is inevitable result of the very process of modernization or
technological development industry. It is natural that the units, which cannot keep pace with the
ongoing technological change, will become sick, they should be allowed to wind up.

Review Questions of Unit 2:

Questions

1. Discuss the major steps in industrial policy since the beginning of planning and their
contemporary relevance.
2. What types of industrial policy changes were undertaken during the 1980s?
3. Evaluate the process of industrial policy reforms since 1991.
4. Throw light on MRTP Act and its amendment later.
5. Define public sector enterprises? Explain the rationale of PSEs in India.
6. What are the different problems faced by the public sector units?
7. Explain the concept of disinvestment. Briefly describe disinvestment policy in India.
8. Analyze the pattern of employment in Indian economy & its sectoral distribution.
9. Discuss various types of unemployment & analyze the pattern of unemployment in India.
10. Elucidate upon the nature & extent of unemployment in India and measures to counter it
effectively.
11. What do you mean by inequality? Explain the nature of inequalities in India.
12. What are the major challenges in reducing poverty and inequality in India?
13. Do you believe that industrialization and economic growth has led to monopoly and
economic concentration in India? What methods were taken to tackle this problem?
14. Explain concept of monopoly & concentration of economic power?
15. What are the different forms of concentration of economic power?
16. What are the major causes for concentration of wealth and economic power?
17. Why capital formation is important for economic Growth?
18. What is the process of capital formation?
19. What are the causes of Low Rate of Capital Formation in India?
20. What measures can be adopted to increase the capital formation in India?
21. Define industrial sickness. Explain nature and causes of Industrial Sickness?
22. Describe the different measures for rehabilitation of sick units?
23. Explain the consequences of Industrial sickness.