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General Studies - Indian Economy

Infinity IAS INDUSTRY, SSI Sector, PSUs, INDUSTRIAL SICKNESS, DISINVESTMENT : Industrial Policies since Independence : Industries It acts as generator of economic momentum in any country. Its high growth, wide distribution and diversification are important for equitable and balanced regional development. Objectives of Industrial Policy in India: The primary objective is Sustainable Agriculture and Industrial development. Steady expansion of gainful employment opportunities and progressive reduction in socio-economic disparities besides eradication of poverty and attainment of self reliance have always remained as focus of Industrial Policies in India. First Industrial Policy 1948: (Focus- Import substitution) Objectives : 1. Rapid growth of Industries in the country. 2. Due Protection and Promotion of SSI and Cottage Industries. 3. To ensure public and private sectors go hand in hand i e Mixed Economy 4. Foreign Capital wherever necessary 5. Policy strives to ensure Industrial Peace and Harmony. 6. Policy in tune with mixed economy concept classify Industries into 4 different categories.: A Government Industries: Exclusive Government Monopoly. (Arms and Ammunition, Railway, Atomic Power) B Mixed Sector Industries but where new units will only be set up by the government. (Steel, Cement, Aircraft, Mineral Oil, Ship Building) C Government Industries which if necessary can invite Private Sector (Consumer Goods) D Remaining all with Exclusive Monopoly of Private Sector. Second Industrial Policy 1956 : (Magna Charta of Industries in India) It was operational instrument of Second FYP i.e. Heavy Industries Plan. Objectives : Same as 1948 Industrial Policy + To prepare pool of Technical and Managerial manpower and prevent Concentration of wealth and predominant role of Public Sector in Mixed Economy. Division of Industries was done into 3 categories as follows : Schedule A: 17 Industries confined only to PSU :: Railways, Airways, Coal, Iron and Steel, Arms and Ammunition, Atomic Energy, Heavy Machinery and Tools. Schedule B: 12 Industries : PSU with some freedom to Private Sector. Automobile, Antibiotics, Chemicals and Fertilisers.

Schedule C : Industries.

All remaining Sectors including Consumer Goods, Light

Infinity IAS Industrial Policy of 1956 strengthened Industries Regulation and Development Act 1951 Popular as Inspector Raj or License Raj. (wide ranging powers to government officers in allotting licences) (Licence was Gate way to Steel and Cement at Concessional rate (Priority in getting Power and Water connection and Cheap credit) Most abused act of India in Post 1956 scenario. Licenses were given only in selected sectors to selected states and selected individuals, causing Regional Imbalances and Socio-economic disparities. Licenses were allotted only to selected few Industrial houses causing concentration of wealth. Lot of corruption took place in the allotment of licences. Also licenses was allotted for manufacturing of products reserved for SSI and no Foreign Capital was invited causing distorted Growth of Industries. To inquire into this misuse of IDRA 1951, was set up in 1967 which disclosed startling truths. It was followed by another committee in 1969,

P C Mahalanobis and Hazari Committee

Subimal Dutt Committee

on its recommendations, MRTP Act of 1969 was passed. Monopolies and Restrictive Trade Practices Act, 1969 was aimed at preventing concentration of economic power. Based on Subimal Dutt committee recommendations, Joint Sector was created, which was supposed to bring out happy wedding between public and private sectors. Reclassification of Industries based on Subimal Dutt committee recommendations was done as follows : 1. 2. 3. 4. 5.

Core Industry Sector Heavy Investment Sector Medium Investment Sector Joint Sector Co-Operative Sector

Infinity IAS Industrial Policy of 1978 : (Janata Government Policy) : 1. George Fernandes (Union Minister for Industries) : Stressed on Indigenisation : for MNS/foreign companies to Indigenise i e to reduce foreign stake up to 40% (many Industries complied). Coca Cola, IBM left India. Phillips/ Hindustan Lever continued. Indigenisation was not made compulsory on companies using high-tech machinery. 2. No of items reserved exclusively for SSI sector increased from 531 to 800. Industrial Policy 1988 : (Rajiv Gandhi Government Policy) : 1. Growth Centres: Development of backward districts by providing infrastructure. (Communications, Power, Water etc). 2. Broad Banding: Means providing freedom to manufacturer to optimise his capacity by permitting him to manufacture allied products without need to obtain separate license in view of constantly changing demand patterns. e.g. Permitting Refrigerator manufacturer to manufacture Washing Machines. Broad banding started in white goods i e Consumer goods/Electronic Products. New Industrial Policy of 1991 (Rao-Manmohan Model of Development) : (Beginning of Liberalisation, Privatisation and Globalisation) 1. Large Scale De-Licensing except of 18 Industries of Strategic Social, Health, Environment Concern. De-licensing before 1991 was selective i e adhoc in nature, Today 2009 only 3 Industries are subjected to licensing. 2. Public Sector role Diluted. 3. Automatic approval up to 51% foreign equity participation in 34 selected/ specific High Technology Industries. 4. Automatic approvals for foreign technology agreements up to certain fees and subject to certain royalty. 5. MRTP Act diluted by abolishing the threshold limit of 100 Crore of asset for determining monopoly. How Public Sector Role was diluted under L P G Model and Economic Reforms : 1. Number of Industries in list of schedule A was reduced from 17 to 8 and Today 2009, there are only 3 Industries in Schedule A. 2. Selective Disinvestment of PSU shares carried out. 3. Sick PSUs were referred to BIFR (Board of Industrial Finance and Reconstruction which was set up in 1987 to revive Sick Units. Originally it was set up for reviving Sick Private Sector Units) 4. Managing Boards of PSUs were made professional, by appointing non official Directors. e.g. Rahul Bajaj appointed to Air India/Indian Airlines


New Industrial Policy of 1991 also laid down that: Convertibility clause will be abolished. Financial Institution mentioning a clause that part of their finance shall be converted into equity. This clause was in their loan agreement. Phased Manufacturing Program was abolished. Related to Indigenisation of Technology in Electronic Industries. Locational Requirements were redefined and relaxed for ensuring wider dispersal of Industries. Policy was also to set up FIPB- Foreign Investment Promotion Board. Infinity IAS Industrial Development Strategy from 1950s to 1991: Industrial Policy in India has evolved over years with 1956 resolution being fundamental to it. It classified Industries into 3 schedules two being exclusive for Public and Private sectors an one for joint partnership. To raise confidence and efficiencies of Private Sector, 1956 policy provided for development of transport, power, other measures. Village and SSI were provided differential taxation, Subsidies and other motivating measures. Though role of Foreign Capital in industrialisation was recognised, Progressive Indigenisation of foreign concerns through Ownership, Control and Training was sought after. Public sector was envisaged to acquire commanding heights of economy. Industrial Policy was modified from time to time to meet new challenges. In late 70s emphasis was laid on decentralisation and role of Small Scale and Cottage Industries. In the wake of liberalisation movement world over, in 1980s Technological and Managerial modernisation of Industry was pursued as a key instrument for increasing Productivity, Reducing Costs and Improving Quality.

Infinity IAS Public Sector Enterprises :: At a Glance :: 1951 AD 5 PSEs with an investment of 2900 Crore. 2008 AD 240 PSEs (excluding Railways, Post and Telegraph ) with investment 250000 Crore out of it 82000 Crore of government equity and remaining Borrowings) Of 240 PSEs Manufacturing Sector (160), Trading & Services(about 60)(e g EIL, AI, IA, Shipping Corporation) Constructions (about 6) Of total 240 PSEs, 130 Profit Making, 110 Loss Making. 65% of Total profit comes from Oil, Power and Telecom Sector NTPC is Sixth largest Organisation to produce thermal power in the world. Contribution of PSEs : 1. 2. 3. 4. 5. 6. Contribution to National GDP Employment Generation - 70% in Organised Sector including Private Sector. Import Substitution (e g. ONGC, HAL etc) Capital formation (Investment/ Asset creation) Export Promotion (e g. BHEL and BEL) Contribution to exchequer (in the form of Excise, Custom duty Corporation Tax, Dividend)

Objective of PSEs : (PSEs were expected to perform and met following objectives) : 1. 2. 3. 4. To attain Commanding heights in National Economy. Generate additional Employment Opportunities. Bring about Balanced Regional Development. To be an instrument of Socialist Democracy by way of providing essential Goods and Services at reasonable price. 5. To provide counter - wheeling power to private sector. 6. To generate surplus resources for further investments in the country. Problems of PSEs : Under utilisation of the Capacity and Poor Customer Service. Over-manning and Overstaffing Mounting Losses and Corruption. Excessive Political and Bureaucratic interference resulting into Lack of Autonomy

High overhead cost by way of amenities to staff including Housing Colonies, Clubs, Hospitals etc Tendency to interlink one Project with another & Delays in Project Execution. Cost overruns due to frequent delays due to administrative formalities. Overcapitalisation resulted due to higher expenses.