State Goods and Service Tax (SGST): Indirect Tax levied on Intrastate manufacture, sale and consumption of goods and services. Stamp duties and Land Revenue: Since land is a matter on which only State Governments can govern, thus the Stamp duties on transfer of immovable properties are levied by State Governments. State Excise on Liquor and certain agricultural goods. Apart from the above, certain powers of taxation have been devolved in the hands of local bodies. These local governing bodies can levy taxes on water, property, shop and establishment charges etc. Direct Taxes: They are called so as the burden of taxation falls directly on the tax payer. Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals and business entities as well as Non business entities also. The taxation level depends on the residential status of individuals. The thumb rule of residential status is that an individual becomes resident in India if he has remained in India for more than 182 days in a particular residential year. If he becomes resident in India, then his global income i.e. income earned even outside India is taxable in India. This has to be noted very carefully by Expatriates on deputation to India. They need to plan their stay in such a manner as to avoid becoming a resident in India. The following para explains this in a slightly more detailed manner: Tax Resident: An individual is treated as resident in a year if present in India: For 182 days during the year or For 60 days during the year and 365 days during the preceding four years. A resident who was not present in India for 730 days during the preceding seven years or who was non-resident in nine out of ten preceding years treated as not ordinarily resident. A person not ordinarily resident is taxed like a non-resident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India. What is taxable for a Non-Resident? Non-residents are taxed only on income that is received in India or arises or is deemed to arise in India. He is entitled to get benefit of any double taxation avoidance agreement that his country of residence has signed with India. Then he shall be liable for taxes at rates mentioned in the Indian domestic tax laws or the rates mentioned in the Double Taxation Avoidance Agreement whichever is lower. What is taxable for a Resident? The global income of a resident is taxable irrespective of whether earned or related or received in India. 101 CU IDOL SELF LEARNING MATERIAL (SLM)
Amounts invested in certain investments like Employee Provident Fund, Public Provident Fund, Tax saving Fixed Deposits, are also eligible for deduction under section 80C upto Rs.1,50,000 per year. Corporate Taxation: The rate at which Corporates are taxed in India is 30% plus a 3% cess. Thus the total comes to 30.9%. Further if the taxable income is more than Rs. 10 million, then there is an additional surcharge of 12% on the base tax rate. Dividend Distribution Tax (DDT): Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. So if a company declares divided, it has to pay an effective rate of 16.995% on the dividends declared. This is apart from the 30.9 % taxes mentioned above. The rationale for this tax is that after paying this tax, the dividend so declared becomes tax free in the hands of the recipient of dividend. Minimum Alternative Tax (MAT): Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but many a times due to exemptions under the income tax Act, there is huge actual profit as shown in the profit and loss account of the company but no taxable income. To overcome this issue, and in order to bring such companies under the income tax act net, the concept of Minimum Alternate Tax (MAT) has been introduced. The present rate of MAT is 19.05%. Another aspect which must be looked into is the concept of Withholding Taxes; also called as Tax Deduction at Source (TDS). Tax Deduction at Source (TDS): As per the provisions of the Indian tax laws, certain payments are covered under tax withholding norms. Under this, the person responsible for making any payment is required to withhold a certain specified percentage of the payment amount as taxes and deposit it with the Government treasury. In addition, the person is required to prepare a certificate of tax deduction and provide it to the person on whose behalf the deductions are made. Every quarter i.e., 3 months, returns have to be filed by the deduct or and credit must be given to the deducted in the returns. The following are the areas where tax withholding is most common in the Indian scenario: Salaries: The salaried employees of the drawing beyond the minimum taxable salary would be covered under the tax withholding requirements and annual tax withholding returns are to be submitted with the Revenue authorities. 102 CU IDOL SELF LEARNING MATERIAL (SLM)
Contractors:Payments made to a contractor for carrying out any work would require withholding of tax at source from such payments, if certain threshold limits are crossed. Typical examples of such payments will include: Advertising payments Broadcasting and telecasting payments Office renovation payments Vehicle hire payments Catering payments. Job Work Courier Professional Services: Payments made for professional and technical fees to Doctors, Chartered Accountants, Lawyers, Management Consultants, Engineers, Architects and other professionals would fall under this section and tax would be required to be withheld from their payments. Such withheld tax shall be deposited with the Government. Rentals:Payments for rentals would attract tax deduction at source. Indirect Taxes Indirect tax is generally imposed on suppliers or manufacturers who pass it on to the consumers using their good or services. The following are the list of Indirect Taxes as: 1. Service Tax: Applicable on the services provided by a company and paid by the recipient of their services, collected by and deposited with the central government. 2. Value Added Tax: Popularly known as VAT, it is levied on the sale of movable goods or goods sold directly to the customers. It is exacted by the respective state governments on intra-state sales. 3. Excise duty: Levied on the goods produced or manufactured in India, paid by the manufacturers of different goods. It is often recovered from the customers. 4. Custom Duty: Applicable on the goods which are imported into India from other countries. In some cases, it is also levied on the goods being transported out of India. 5. Entertainment tax: Levied on all financial transactions related to entertainment such as movie shows, amusement parks, video games, arcades, and sports activities, charged by the respective state governments. 6. Stamp Duty: Levied on the transfer of immovable property located within the state, charged by the State Government and may vary in rates. Also applicable on all legal documents. 103 CU IDOL SELF LEARNING MATERIAL (SLM)
7. Securities Transaction Tax: Levied at the time of trade of securities through Indian Stock Exchange. In India, there are many different Indirect Taxes which are applicable on different kinds of goods, imports, manufacturing and services. GST: Merging of various indirect taxes As there are many different types of indirect taxes levied on the expense incurred by a buyer, the government has made an effort to simplify the taxing process and merged all these indirect taxes into a common indirect tax called the Goods and Service Tax (GST). Merging of all these taxes has reduced the hassles of compliances associated with all these indirect taxes, improving tax governance in the country. Introduced in 2017, the GST has eliminated the cascading effect of multiple taxes. 5.8.2 Public Expenditure Policy: It influences the economic activities of a country to a great extent. In 2007-08, share of public expenditure in national income was 14.5 percent. Public expenditure may be of two kinds i.e. developmental and non-developmental, Developmental expenditure is of great importance with reference to the economic growth of the country. Developmental activities like development of means of transport, extension means of irrigation, completion of power projects and expansion of educational and health facilities requires huge amount of capital that cannot be contributed by the private sector alone, so increase in public expenditure is must. The following measures undertaken by the Government can help to increase the public expenditure which is as follows: Development of Public Enterprises: Basic and heavy industries requires huge capital and also involves more risks. So, private sector in the country cannot setup such establishment without any support. Since Industrial Policy, 1956 resolution, Government of India is actively involved in development of such industries. Support to Private Sector: In order to accelerate the rate of economic growth in the country, government is encouraging private sector by giving various subsidies, concessional loans, tax concessions, etc. Development of Infrastructure: Government spends huge amount for the development of infrastructure that includes development of railways, power projects, roads, air ports, ports, hospitals, bridges, dams, etc. which is important prerequisites for the economic development of any nation. Social Welfare: Government spends huge amount on public health, education, safe drinking water, sanitation, welfare of weaker section of society, etc. 5.8.3 Public debt policy 104 CU IDOL SELF LEARNING MATERIAL (SLM)
Government needs lot of funds for the economic development of the country. No government can mobilise so much funds by way of taxes alone. There are many reasons for it, viz. a) most of the population is poor; b) adverse effect of more taxes on savings and investments; c) taxes are levied only till taxable capacity of the people. It therefore, becomes inevitable for the government to mobilise resources for economic development by resorting to public debt. Public debt is obtained from two kinds of sources: Internal Debt: It should be mobilised in a manner that it has no adverse effect on private investment. It is more beneficial to collect small savings as it encourages the people to save more. Special efforts should be made to mobilise rural small savings. In India, small savings are being collected from large number of people through commercial banks and post offices. Internal debt constituted 95.9 percent of total public debt in the year 2007-08. External Debt: India cannot meet its financial requirements from internal debt alone. It has got to borrow from abroad as well. The main advantage of foreign loans is that these loans are received in foreign currency. External debt constituted 95.9 percent of total debt in the year 2007-08. 5.8.4 Deficit Financing Policy It refers to financing the budgetary deficit. Budgetary deficit here means excess of government expenditure over government income (including borrowings). Deficit financing in India means, “Taking loan from the Reserve Bank of India by the government to meet the budgetary deficit”. Reserve Bank gives this loan by issuing new currency notes. Consequently, money supply increases. Increase in money supply leads to fall in the value of money. Fall in value of money in turn leads to increase in price level. So deficit financing should be kept low as it leads to price rise in the economy. But in India, level of income is low. As a result, power to save in is also and their taxable capacity is also low. Due to low saving, there is a low rate of capital formation which leads to low rate of economic growth. Hence to accelerate the rate of economic growth, it becomes inevitable to increase saving and investment. Deficit financing is a kind of forced savings. On account of deficit financing, price level rises and people get less number of goods in exchange for the same amount of money than before. Government of India has also been taking resort to deficit financing since the beginning of the plans. Thus, due to deficit financing, on the one hand, necessary funds are made available for economic growth and on the other, inflation in the country increases. It is, therefore, essential that deficit financing be kept with safe limits. Presently our government is not using deficit financing for meeting its financial requirements. 5.9 FISCAL POLICY REFORMS INTRODUCED BY THE GOVERNMENT OF INDIA 1. Simplification of Taxation System: With a view to simplify the taxation system as recommended by Raja Chelliah Taxation Reform Committee, ex-Finance Minister Dr. 105 CU IDOL SELF LEARNING MATERIAL (SLM)
Manmohan Singh and Finance Minister Sh. Chidhambaram have taken several steps. These measures have provided big relief to tax payers. It is also imperative that administrative machinery should be made efficient and honest with simplification of taxation system. 2. Improving Tax to GDP Ratio: In recent years government has taken several measures to improve tax-GDP ratio. In year 2002-03 this ratio was 14.4 percent. In the year 2009-10 it has improved to 16.6 percent. It shows that scope of tax has increased. 3. Reduction in Rates of Direct Taxes: Policy of fiscal reforms aims at lowering the rate of taxes. Tax revenue is to be increased by reducing the tax rate. Government of India has been gradually lowering the rates of direct and indirect taxes in its successive budgets. In 1997-98 budgets, the maximum rate of income tax was reduced to 30 percent. Rate of Corporation Tax has also been reduced. In the budget for the year 2009-10, maximum rate of income tax is 30 percent. As a result of these reforms, collection of tax revenue has increased considerably. Although rates of taxes have been reduced yet the tax revenue has been rising constantly. In 1990-91, direct tax revenue was 1.9 percent of gross domestic product (GDP). In 2009-10, it rose to 6 percent of GDP. Of the total tax revenue, the ratio of direct tax revenue has increased from 19% in the year 1990-91 to 58% in the year 2009-10. Consequent upon different reform measures taken in respect of direct taxes, revenue from taxes has increased appreciably. 4. Reforms in Indirect Taxes: For the last many years the government has been making persistent efforts to reform the indirect tax structure e.g. lowering of the tax rates, increasing scope of tax, etc. Under reforms concerning customs, import duties were gradually reduced so as to bring down the cost of production. It has enabled the domestic industry to compete in the international market. Reduction in import duty has brought down the prices of imported goods to the benefit of the consumers. In year 2001-02, government adopted Central Value Added Tax (CENVAT). In CENVAT, three tier excise duties of 8%, 16% and 24% are started. In the year 2008-09 and 2009-10, excise duty rates have been reduced to boost aggregate demand, so as to protect the domestic economy from global recession. In place of retail sales tax, Value Added Tax has been introduced. All states /UTs have implemented VAT w.e.f. April 1, 2005. VAT is charged on value addition at each stage of production or distribution. For example, when raw materials are changed into work in process, some value addition takes place. Similarly, when work in process is converted into finished goods, again some value addition takes place. In VAT, tax is charged on each stage of value addition. In VAT, three tax rates have been determined, for gold and silver VAT rate is 1%, for basic goods it is 4% and for other commodities, VAT rate is 12.5%. 106 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Introduction of Service Tax: In the year 1994-95, service tax has been started in India. In year 2007-08, rate of service tax was 12 percent. In year 2009-10, service tax rate has been reduced to 10 percent. Initially this tax was applicable on a few seconds but now 114 services have been covered under this tax. 6. Reduction in Non-plan Government Expenditure: One of the major objectives of fiscal reforms was to put a check on unnecessary government expenditure. Government took several measures in this direction; for example superfluous appointments were banned, disinvestments in public enterprises incurring chronic losses. As a result of these measures, total non-plan expenditure of the central government that stood at 17.3 percent of GDP in 1990-91 came down to 11.3 percent in 2009-10. Thus, the central government has partially succeeded in scaling down percentage of non-plan expenditure. However, non-plan expenditure of government in absolute monetary terms instead of going down has actually been on increase. Rise in the non-plan expenditure of the government must be a matter of concern in so far as economic development is concerned. 7. Reduction in Subsidies: Central Government has to make huge payments by way of subsidies, for instance, fertilizer subsidies, export subsidies, food subsidies, etc. Government has been making serious efforts to reduce subsidies. No doubt, the total amount being spent on subsidies has been rising, but as a percentage of GDP it has been falling. In 1990-91, subsidies constituted 2.3 percent of GDP but in 2007-08 their share fell to 1.4 percent. But in the year 2008-09, it again increased to 2.2% of GDP. In 2009-10, subsidies constituted 1.8% of GDP. 8. Improvement in Tax Collection: For improving tax collection and to check tax evasions various schemes have been launched by government from time to time viz., - allotting Permanent Account Number (PAN), strengthening the norms of Tax Deduction at Source (TDS), Special Bearer Bond Scheme, Voluntary Disclosure Schemes, making e-filing of tax returns mandatory for certain assesses, extension of e-payment, facility of taxes, etc. Tax authorities have been given wide powers to conduct tax-raids. 9. Closure of Sick Public Sector Companies: Government has been closing loss making and sick public sector companies. This step has been taken to reduce the burden of these loss making units on government exchequer. 107 CU IDOL SELF LEARNING MATERIAL (SLM)
10. Disinvestment of Public Sector Units: Disinvestment here refers to selling the shares of public sector units to private hands. Through disinvestment government gets huge funds. This has enabled the government to overcome financial crunch. 11. Efforts to Reduce Government Administrative Expenses: For this government has offered attractive voluntary retirement scheme to its employees to overcome the problem of over staffing. Government has banned or reduced sanctioning new posts in some of its departments. Government has also reduced grants to various states, and privately managed institutions. 12. Enactment of Fiscal Responsibility and Budget Management Act: Government has enacted Fiscal Responsibility and Budget Management Act, 2003. The main purpose of this Act is to reduce fiscal deficit and for this, the target has been fixed for reducing fiscal deficit with the minimum annual reduction of 0.5 % of Gross Domestic Product (GDP). 13. Reduction in Central Sales Tax (CST): Government has reduced CST from 3 % to 2% from June 1, 2008. From 1st April 2011, CST has been abolished. 14. Introduction of Goods and Service Tax (GST): Central government is gradually reducing central sales tax, excise duty on goods and is increasing service tax. Government is moving towards imposing a uniform tax on goods and services named GST with effect from April 1, 2011. Goods and Service Tax is a comprehensive value added tax on goods and services levied and collected on the value added at each stage of sales and purchase. GST will have two components, comprising of Central GST and State GST. 5.10 INDUSTRIAL POLICY RESOLUTION, 1948 The Industrial Policy of 1948 broadly divided industries into four categories such as:- 1. The first category enlisted (a) arms and ammunitions, (b) production and control of atomic energy, and (c) the ownership and management of rail transport. These three were the exclusive monopoly of the Central government. 2. The second category included six basic industries and all new undertakings in these industries were reserved for the State except where, in the national interest, the State itself found it necessary to secure the co-operation of private enterprises. Such industries included:- Coal (the India Coal fields Committee’s proposal will be generally followed), (b) Iron and 108 CU IDOL SELF LEARNING MATERIAL (SLM)
Steel, (c) Aircraft manufacture,(d) Ship building, (e) Manufacture of telephone, telegraph and wireless apparatus (excluding radio sets), and (f) Mineral oils. 3. Eighteen industries under the third category were left to the private sector though their operation by the private sector was subject to Central regulation and control. These were: - (a) Salt, (b) Automobiles and tractors, (c) Prime movers, (d) Electric engineering, (e) Other heavy machinery, (f) Machine tools, (g) Heavy chemicals, fertilizers and pharmaceuticals and drugs, (h) Electro- chemical industries, (i) non-ferrous metals, (j) Rubber manufactures, (k) Power and industrial alcohol, (l) Cotton and woolen textiles, (i) Cement, (j) Sugar, (k) Paper and Newsprint, (l) Minerals, (m) Air and Sea transport, and (n) Industries related to defense. 4. The rest of the industries were left open to the private enterprises, individual as well as co- operative. The State would intervene whenever the progress of any industry under private enterprise was found to be unsatisfactory. For the development of small-scale industrial sector, it was decided in the Industrial Policy of 1948 to develop this sector on co- operative lines as far as possible. Industrial Policy of 1948 also recognized the need for securing the participation of foreign capital and enterprises, particularly related to industrial technique and knowledge. The main thrust of the 1948 Industrial Policy was to lay the foundation of a mixed economy where both the private and public enterprises were to be given importance and work together to develop economy to accelerate the pace of industrial development. In order to regulate the industry and to promote planned industrial development according to the Industrial Policy of 1948, the Industrial (Development and Regulation) Act in 1951 was passed. The principal objective of the Industries (Development and Regulation) Act 1951 was to arm the Government with sufficient power. The important provisions of the Act were:- (1) No new industrial units could be established or substantial extension to existing plants be made without a license from the Central Government, and while granting license for new undertakings, Government could lay down conditions regarding location, minimum size, etc., if necessary; (2) Government could make investigation into certain specified industries or undertakings in industries – (a) which showed a fall in production, a deterioration in the quality of the product, a rise in the price of the product, or which showed tendencies in these directions; (b) which used resources of national importance; and (c) which were managed in a manner likely to do harm to the interests of the shareholders or consumers and issue proper directions for rectifying the drawbacks; 109 CU IDOL SELF LEARNING MATERIAL (SLM)
(3) Government could take over the management of industries which failed to carry out its instructions for improvement in management and policies; (4) The Act empowered the Government to prescribe prices, methods and the volume of production and channels of distribution; (5) The Act also empowered the Government to set up Development Councils for the individual or groups of industries; and (6) Industrial units employing less than 100 workers and having fixed assets of less than Rs. 10 lakhs were not required to obtain a license. The Industrial Policy of 1948, despite very effective and concrete, was not without criticism. The first criticism was regarding the provision of the Act to retain control over private enterprises which was to be obviously held by the Government through the Industries (Development and Regulation) Act 1951. This has been levelled by a noted economist A.H. Hanson when he expressed that, at that time Government was more interested in the control of private enterprises than in the public- private balance. Elaborating this point The Industries (Development and Regulation) Act of 1951 empowered the government with the power to control the private sector. In the Industries (Development and Regulation) Act 1951, it was clearly mentioned that no new industrial units could be established or substantial extension to the existing plants could be made without obtaining a license from the Central Government. The Act further stated that while granting license for new undertakings, Government could lay down conditions regarding location, size, etc., if necessary. The Act also empowered the government to prescribe prices, methods, volume of production and the channels of distribution. It clearly states that the control of the private sector was totally in the hands of government. The Industries (Development and Regulation) Act 1951 developed a feeling of uncertainty in the minds of industrialists as it gave the government the power to investigate into any enterprise, if it had sufficient reason to believe that there had been usual decline in output or quality, or increase in price. In such a case, directions could be issued by the government to such enterprises following such investigation, and failure to follow these could result in takeover of management by the government. This was contrary to the belief that in independent India industry was to be allowed to flourish independently without stern checks. This presumption was belied by the Industries (Development and Regulation) Act of 1951. Despite these criticisms, the Industrial Policy of 1948 determined the nature and pattern of industrial development in the country for full eight years. 5.11SUMMARY The Major objectives of Monetary and Fiscal Policies are: To increase the rate of investment and capital formation, so as to accelerate the 110 CU IDOL SELF LEARNING MATERIAL (SLM)
rate of economic growth. To increase the rate of saving and discourage actual and potential consumption. To diversify the flow of investment and spending from unproductive uses to socially most desirable channels. To check sectoral imbalances. To reduce widespread inequalities in income and wealth. To improve the standard of living of the masses by providing social goods on a large scale. Neutrality of money; Exchange rate stability and equilibrium in the balance of payments;- Price stability and control of business cycle; Full employment; Economic growth; The Industrial Policy of 1948 broadly divided industries into four categories. Small- scale industrial sector was decided to develop on co- operative lines as far as possible. The main thrust of the 1948 Industrial Policy was to lay the foundation of a mixed economy. The Act focused mainly on granting license for new undertakings, especially regarding location, size, etc. The Act also empowered the government to prescribe prices, methods, volume of production and the channels of distribution. The economic growth and development of the country is mix of various plans, policies, efforts, strategies and efficient utilization of resources. The fiscal and monetary policy together is very important in the overall development of the country and helps to build the robust path for future development. The reforms introduced in both the policies have helped Indian economy to sail smoothly through global slowdown. Today, Indian economy is emerging as a strong economy in the world and the backbone of such successful status is our solid monetary and fiscal policies with effective instruments that help to continue the journey of growth and development. 5.12 KEYWORDS Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. Fiscal policy is the term used to describe all of the government’s decisions regarding taxation and spending. 111 CU IDOL SELF LEARNING MATERIAL (SLM)
Instrument - a means by which something is affected or done. Tax Resident: An individual is treated as resident in a year if present in India: -For 182 days during the year or -For 60 days during the year and 365 days during the preceding four years. Disinvestment of Public Sector Units: Disinvestment here refers to selling the shares of public sector units to private hands. 5.13 LEARNING ACTIVITY 1. Why it is important to understand the liquidity and ranking for measure of Money? ___________________________________________________________________________ _____________________________________________________________________ 2. Compare Public Debt and Expenditure Policy ___________________________________________________________________________ _____________________________________________________________________ 5.14 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain the meaning of monetary Policy. 2. Discuss the relationship of money supply with Monetary Policy. 3. Present the comparison of Qualitative and Quantitative methods of Monetary Instrument 4. What is the purpose of Fiscal Policy? 5. Why Taxes are the main source of revenue for the government? Long Questions 1. What are the objectives of Monetary Policy? Explain it. 2. Explain General Methods of Monetary Instrument. 3. Justify the role of Fiscal Policy 4. What is TDS? What are the areas where TDS is applicable? 5. Discuss the Impact of Fiscal Policy Reforms B. Multiple Choice Questions: 1. Monetary policy is the process by which the monetary authority of a country controls 112 CU IDOL SELF LEARNING MATERIAL (SLM)
the supply of money, often targeting a ___________________to ensures price stability and general trust in the currency. a. Inflation rate or interest rate b. Bank rate c. Cash Reserve Ratio d. Statutory Liquidity Ratio 2. If the RBI opts for a cheap or easy credit policy by reducing interest rates, the _______________in the economy can be encouraged. a. Investment level b. Bank rate c. Economic development d. Infrastructure development 3. Which measure of money is taken into account in formulating macroeconomic objectives of the economy every year? a. M1 b. M2 c. M3 d. M4 4. The resources can be mobilized through _______________by reducing government expenditure and increasing surpluses of public sector a. Private Savings b. Mutual Funds c. Public Savings d. Taxation 5. State Governments can levy ________________ tax. 113 a. Service Tax b. Custom Duties CU IDOL SELF LEARNING MATERIAL (SLM)
c. Stamp Duties d. Income Tax Answers 1-a, 2-b, 3-a, 4-d, 5-c 5.15 REFERENCES Text Books: Francis Cherunilam , Business and Environment, Text and Cases, [Himalaya Publishing House], T R Jain, Mukesh Trehan and Ranju Trehan, Indian Business Environment– VK Enterprise C. Fernando, Business Environment Kindle Edition, Pearson K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall. Justin Paul, “Business Environment”, Tata McGraw Hill Publications P.K.Ghosh : “Business Environment”, Sultan Chand Publishers, New Delhi Reference Books: Engineering Economic-Dr. Rajan Mishra by University Science Press The Gazette of India, Ministry of Law and Justice, New Delhi. No.311, June’16, 2006. Morrison J, The International Business Environment, Palgrave MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi Business Environment Raj Aggarwal Excel Books, Delhi Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi Dahl Modern political analysis. Englewood Cliffs, N.J: Prentice-Hall. Open Text Source: Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India. p. 2049. ISBN 9788180385926. 114 CU IDOL SELF LEARNING MATERIAL (SLM)
Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB). Bakshi; P M (2010). Constitution Of India, 10/e. Universal Law Publishing Company Limited. pp. 48–.ISBN 978-81-7534-840-0. International Journal of Scientific and Research Publications, Volume 2, Issue 12, December 2012 www.yourarticlelibrary.com https://courses.lumenlearning.com/ 115 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 6: INDUSTRIAL POLICY STRUCTURE 6.0 Learning Objectives 6.1 Introduction 6.2 Meaning and Objectives of Industrial Policies 6.3 Industrial Policy Resolution, 1956 6.4 Changes in Industrial Policies: Post 1956 Period 6.5 New Industrial Policy of India, 1991 6.5.1 Economic Reforms 6.5.2 Impact of New Industrial Policy, 1991 on Indian Economy 6.5.3 Impact of New Industrial Policy on Business: 6.6 New Small Scale Sector Policy, 1991 6.6.1 Recent Policies for Micro and Small Enterprises Sector: 6.6.2 Measures Initiated by the Government for The Development of MSE Sectors 6.7 Summary 6.8 Keywords 6.9 Learning Activity 6.10 Unit End Questions 6.11 References 6.0 LEARNING OBJECTIVES After studying this unit, you will be able to Explain the concept, meaning, features and objectives of Industrial Policy Appreciate the Industrial Policy Revolution, 1948 and 1956 Comprehend the changes in Industrial Policies, post 1956 period Understand the New Industrial Policy, 1991 Comprehend the impact of New Industrial Policy, 1991 on Indian Economy Appreciate New Small Sector Policy, 1991 Understand the definition of Micro, Small and Medium Enterprises. 116 CU IDOL SELF LEARNING MATERIAL (SLM)
Appreciate the recent policies for MSME Sector Comprehend the Measures initiated by the Government for the development of MSME sector 6.1 INTRODUCTION Economic development is contributed by the performance of the industries in the country which requires robust framework for administration popularly termed as the Industrial Policy (IP) of a country. Industrial policy consolidates government efforts largely supported by economic objectives of growth and development. Government is engaged in continuous planning and implementing various programs to motivate and channelize strategies in the development of various industrial undertakings. The transportation, telecommunication, agricultural products and medical devices are few major manufacturing sectors of the country. Industrial policies act an intervention to fulfil certain pre-requisites require to achieve the objectives set by it. Some provisions are specific and some are general covering wide aspects of economy. Industrial policy which is categorized as horizontal and vertical based on the inclination of the measure implemented. If general aspect like imposing tax on capital gain or restricting credit are example of horizontal and providing subsidy to the export industries and increasing custom duties on imports of clothes to prevent textile industry is an example of vertical or specific Industrial Policies. To prevent some industries, Government uses Industrial policies in combination with other economic policies like monetary and fiscal policies to tighten the restriction. Such measures provide enough time for domestic industries to adopt new technology and develop competitive advantage. Once, the relaxation is providing the domestic industry can compete in International market as well and secure market share in the country as well as expand beyond boundaries. Many types of industrial policies contain common elements with other types of interventionist practices such as trade policy and fiscal policy. An example of a typical industrial policy is import-substitution-industrialization (ISI), where trade barriers are temporarily imposed on some key sectors, such as manufacturing. By selectively protecting certain industries, these industries are given time to learn (learning by doing) and upgrade. Once competitive enough, these restrictions are lifted to expose the selected industries to the international market. 6.2 INDUSTRIAL POLICY - MEANING AND OBJECTIVES Meaning: 117 CU IDOL SELF LEARNING MATERIAL (SLM)
The significant part played actively by government in the growth of Industrial sector is cleared by means of Industrial policy. It describes the division of various industrial sector among the public and private sectors. It also outlines the contribution of large- and small- scale sector. It even incorporates the significance of foreign capital in the development of industry of the country. Industrial policy is the fusion of attainment of goals and initiatives directed towards attainment of these defined goals. It also allocates the set area for public and the private sectors. Development and shape of industrial activity is monitored by the guidelines and norms provided by Industrial Policy. With the advent of time, amendments and modifications were implemented according to the change in economic environment. Objectives: The major objectives of industrial policy are: (i) Increase the pace of Industrial Development: Main objectives of Industrial policy are to quicken the pace of Industrial Development which will be achieve by accelerating the growth of public and private sector. Government has always directed the strategic effort to provide conducive environment for development of capital structure and ease of raising fund option for business. Start-ups initiative under Make- in-India scheme is the example of government efforts for promoting industrial development and entrepreneurship. (ii) Stable Industrial Structure: Government always tries to achieve equilibrium among different industries in the country to ensure stability of Industrial structure. Emphasis is given to the development of Heavy industries and capital good industries which were unstable. Also, small cottage and handloom industry was underdeveloped. A dedicated policy and program is introduced to revive the imbalance in the development of cottage and handloom sector. (iii) Prevention of Absorption of Economic Power: To prevent the absorption of Economic power in the hands of few people, Government has segregated the economic activity meant for public and private business. Such segregation is supported by the norms, guideline and categorization provided in the Industrial Policy. Industrial policy also emphasis stability so this objective also ensures balance development of various industries instead of few. 118 CU IDOL SELF LEARNING MATERIAL (SLM)
(iv) Steady Regional Growth: Regional development is also an important priority of Industrial policy. There are certain states which has flourishing Industrial sectors like Gujarat and Maharashtra while some states have under developed industrial structure like Orissa and Bihar. Such underlying facts take the form of objectives in the Industrial Policy amendment and it is addressed with proper implementation of programs that attracts industry in these regions. Industrial growth ensures development of infrastructure and basic amenities in that region. Like setting up any factory will attract other initiatives of road development, railway connectivity, airports and also provides employment opportunities. This will attract more infrastructure like development of educational institution and so on. The first Industrial Policy was announced in the form of The Industrial policy of 1948, that was reframed in 1956 that was directed towards the development of public sector with minor changes adopted in 1977 and 1980. In 1991, new economy policy has changed the outlay of Indian Industry sector where private and public sector shares equal importance. 6.3 INDUSTRIAL POLICY RESOLUTION, 1956 The Industrial Policy Resolution of 1956 was meant to give a solid shape to the mixed economy model and the ideology of Socialist pattern of society. The Industrial Policy Resolution of 1956 classified the entire industrial sector into three Schedules:- Schedule A: In this category, those industries were included whose future development was the exclusive responsibility of the State. 17 industries were included in this category. The industries were:- Arms and ammunition and allied items of Defense equipment; Atomic energy; Iron and Steel; Heavy castings and forgoing of iron and steel; Heavy plant and machinery required for iron and steel production for mining, for machine tool manufacture and for such other basic industries as may be specified by the Central Government; Heavy electric plant including large hydraulic and steam turbines; Coal and lignite, gypsum, Sulphur, gold and diamond; Mining and processing of copper, lead, zinc, tin, molybdenum and wolfram; Minerals specified in the schedule to the atomic energy (control of production and use) order 1953; Aircraft; Air transport; Railway transport; Ship- buildings; Telephones; Telephone cables; Telegraph and Wireless apparatus (excluding radio receiving sets); and Generation and distribution of electricity. Of these, four industries- arms and ammunition, atomic energy, railways and air transport were to be government monopolies. In the remaining thirteen industries, all new units were to be established by the State. However, existing units in the private sector were allowed to be subsisting and growing. Whenever the need arises, the state was to render assistance to them. Schedule B: In this category those industries were included which were progressively State- owned and in which the private enterprises would be expected only to supplement the efforts of the State. In these category 12 industries were included. These were: - All other minerals 119 CU IDOL SELF LEARNING MATERIAL (SLM)
(except minor minerals); Aluminum and other non- ferrous metals not included in schedule A; Machine tools; Ferro- alloys and steel tools; Basic and intermediate products required by chemicals industries such as manufacture of drugs; Anti- biscuits and other essential drugs; Fertilizers; Synthetic rubber; Carbonization of coal; Chemical pulp; Road transport; and Sea transport. In these industries, State would increasingly establish new units and increases its participation but would not deny the private sector opportunities to set up units or expanded existing units. Schedule C: All industries not listed in schedule ‘A’ or ‘B’ were included in the third category. These industries were left open to the private sector. Hence, the responsibility with regard to establishment, function and development was of private sector, though even here the state could start any industry in which it was interested. However, the main role of the state in this category was to give favorable atmosphere and facilities to private sector to develop it. The lines of industrial activity given under all the three Schedules- A, B and C virtually became specified industrial activities for the entrepreneurs in the country, for a long time. Therefore, the Industrial Policy Resolution of 1956 became very powerful industrial Vedanta in the industrial history of the country. To encourage small sector, in the policy resolution, various steps were proposed such as:- (a) Direct subsidy was provided to small scale sector, (b) Suitable taxation relief was given to this sector, and (c) It was an important objective of the State to protect small scale sector by advancing technical assistance required for the production and improvement of competitiveness. The 1956 Industrial Policy Resolution also allowed foreign capital participation in Indian economic development but the major share should belong to India. In case of already existing foreign establishments, these will be replaced by Indian technicians gradually. Even though the policy rightly laid emphasis on building up of the basic and heavy industry in the public sector and encouragement of consumer goods production in the cottage, village and small- scale industries were visualized in the 1956 Industrial Policy Resolution as something to be patronized. But unfortunately, the Government failed to integrate these industries and their programmes with the production programmes of the large- scale sector. Moreover, the government also failed to establish suitable machinery for public sectors planning and execution. The Industrial Policy Resolution of 1956 was based on the ideology of socialism and in order to achieve this, expansion of public sector was must. The Resolution of 1956 expanded the scope of the public sector by reserving the future development of 17 most important industries to the public sector in Schedule A. Besides these, 12 very important industries were listed in the Schedule B for the development which the public sector was to play a dominant 120 CU IDOL SELF LEARNING MATERIAL (SLM)
role. But the critics pointed out that for several years even after the adoption of the Resolution, licenses were issued to private sector units in areas exclusively reserved for state ownership or where future expansion was intended to be in the public sector. This included coal, oil, fertilizers, chemicals, engineering etc. One of the major objectives of Industrial Policy Resolution of 1956 was reduction in regional inequalities and imbalances. But contrary to this, the actual operation of this policy resulted in increased regional inequalities. This becomes evident from the report of Dutt Committee which noted that the four industrially advanced States of Maharashtra, Gujrat, West Bengal and Tamil Nadu benefited the most from the operation of this policy. In this context the Dutt Committee report further mentioned that, in the decade 1955-65, these four industrially advanced States accounted for 59.3 per cent of the applications and 62.42 per cent of the licenses approved. On the other hand, the poor States of Bihar, Orissa, Uttar Pradesh and Madhya Pradesh received only 15.5 per cent of total licenses approved. In spite of all above, the Policy Statement of 1956 became a Constitution of Industrial Economics for about two decades. 6.4 CHANGES IN INDUSTRIAL POLICIES: POST 1956 PERIOD The following changes took place in Industrial Policies post 1956 resolution as follows: Monopolies Commission In April 1964, the Government of India appointed a Monopolies Inquiry Commission “to inquire into the existence and effect of concentration of economic power in private hands.” The Commission looked for concentration of economic power in the area of industry. On the basis of recommendation of the commission, Monopolistic and Restrictive Trade Practices Act (MRTP Act), 1969 was enacted. The act sought to control the establishment and expansion of all industrial units that have asset size over a particular limit. 6.4.1 Industrial Policy Statement, 1973 The Policy Statement of 1973 drew up a list of industries to be started by large business houses so that the competitive effort of small industries was not affected. The entry of competent small and medium entrepreneurs was encouraged in all industries. Large industries were permitted to start operations in rural and backward areas with a view to developing those areas and enabling the growth of small industries around. FEATURES: Provide for a closer interaction between the agricultural and industrial sectors Highest priority to the generation and transmission of power. Identify products to be reserved for the small scale sector: list of industries exclusively reserved for the small scale sector expanded from 180 items to more than 500 items. 121 CU IDOL SELF LEARNING MATERIAL (SLM)
Within the small scale sector, a tiny sector was also defined with investment in machinery and equipment up to Rs.1 lakh & located in towns with a population < 50,000 according to 1971 census figures, and in villages. Proposal for special legislation to protect cottage and household industries Compulsory export obligations, merely for ensuring the foreign exchange balance of the project, would no longer be insisted upon while approving new industrial capacity. In the areas of price control of agricultural and industrial products, the prices would be regulated to ensure an adequate return to the investor. 6.4.2 Industrial Policy Of 1977 The Industrial Policy of 1977 classified the small sector into three categories: - a) Cottage and household industries which provide self- employment on a wide scale. b) Tiny sector incorporating investment in industrial units in machinery and equipment upto Rs. 1 lakh and situated in towns with a population of less than 50, 000. c) Small- scale industries comprising industrial units with an investment of Rs. 10 lakh and in case of ancillaries with an investment in fixed capital upto Rs. 15 lakhs. The purpose of the classification was to design policy measures for each category. The measures suggested for the promotion of small- scale cottage industries included the following: (a) The number of items raised from 180 enlisted in the earlier resolution to 807, (b) Special assistance to be given to tiny sector and cottage and household industries in the form of margin money assistance, (c) Setting up of District Industries Centre (DIC) in each district as an agency to serve as the focal point of development for small- scale and cottage industries. This agency would provide under a single roof all the services and support required by small and rural entrepreneurs. (d) Revamping the Khadi and Village Industries Commission. It was found that the promotional work of 22 village industries which came under the control of Khadi and Village Industries Commission has been haphazard, and the pace of the progress is also very slow. Hence, the government planned to adopt modern management techniques for the development of these village industries. The Industrial Policy of 1977 attempted to define the role of large-scale sector by declaring them: (a) Basic industries for providing infrastructural items like cement, non- ferrous, steel, oil etc. to small industries and others; (b) Capital goods industries required by small- scale industries; 122 CU IDOL SELF LEARNING MATERIAL (SLM)
(c) High technology industries widely required by small scale and agriculture sector producing items such as fertilizers, pesticides and petro- chemicals; and (d) Other industries not enlisted as reserved items for small scale but essential for the development of economy. The main focus of this policy was the development of technology which would ensure efficient production and also facilitates continued inflow of technology in high priority areas where Indian skills and technology are inadequately developed. The important highlights of Industrial Policy 1977 were as follows: Public sector would act as a stabilizing force for maintaining essential supplies for the consumer as well as producer of important and strategic goods of basic nature. Strategy was depended on the enforcement of Foreign Exchange Regulations Act (FERA). Accordingly, foreign investment would be encouraged only for those industries in the national interest decided by the Government. This clearly meant that in areas where the foreign collaboration was not required, such case would not be reviewed. Yet, the Industrial Policy of 1977 came under the attack of critics. For encouraging small- scale industries, the 1977 policy suggested measures to reserve exclusive production of certain articles for the small- scale industrial sector only, thereby, limiting the productive capacity of large- scale industries. To achieve this, 1977 Industrial Policy had increased the number of goods to be produced by small scale industrial sector from 180 to 807. But though this number was increased, the critics point out that most of these articles were continued to be produced by large scale sector contrary to the provision of Industrial Policy of 1977. Reference of the cases where Government failed to effectively shift their production to the small- scale sector was given by Alak Ghosh. He stated that articles like footwear, bread and biscuits, brushes etc. continued to be produced by large- scale industries and multinational companies. The critics also pointed out that the lengthened list of 807 items which the Industrial Policy of 1977 reserved for small scale sector was deceptive as these were more repetitive rather new lines of small units. As pointed out by Nirmal K Gupta that the Policy had created confusion by bringing 807 items on the list of small scale sector, many of these items were repeated. The Industrial Policy of 1977 was short lived to pave way for another policy of 1980. 6.4.3 Industrial Policy Of 1980 Statement: - The industrial Policy Statement of 1980 placed accent on promotion of competition in the domestic market, technological upgradation and modernization of industries. Some of the socio-economic objectives spelt out in the Statement were Optimum utilization of installed capacity, 123 CU IDOL SELF LEARNING MATERIAL (SLM)
Higher productivity, Higher employment levels, Removal of regional disparities, Strengthening of agricultural base, Promotion of export oriented industries and Consumer protection against high prices and poor quality. Policy measures were announced to revive the efficiency of public sector undertakings (PSUs) by developing the management cadres in functional fields’ viz., operations, finance, marketing and information system. An automatic expansion of capacity up to five per cent per annum was allowed, particularly in the core sector and in industries with long-term export potential. Special incentives were granted to industrial units which were engaged in industrial processes and technologies aiming at optimum utilization of energy and the exploitation of alternative sources of energy. In order to boost the development of small scale industries, the investment limit was raised to Rs.2 million in small scale units and Rs.2.5 million in ancillary units. In the case of tiny units, investment limit was raised to Rs.0.2 million. Industrial Policy Measures during the 1980s Policy measures initiated in the first three decades since Independence facilitated the establishment of basic industries and building up of a broad based infrastructure in the country. The Seventh Five Year Plan (1985-1900), recognized the need for consolidation of these strengths and initiating policy measures to prepare the Indian industry to respond effectively to emerging challenges. A number of measures were initiated towards technological and managerial modernization to improve productivity, quality and to reduce cost of production. The public sector was freed from a number of constraints and was provided with greater autonomy. There was some progress in the process of deregulation during the 1980s. In 1988, all industries, excepting 26 industries specified in the negative list, were exempted from licensing. The exemption was, however, subject to investment and locational limitations. The automotive industry, cement, cotton spinning, food processing and polyester filament yarn industries witnessed modernization and expanded scales of production during the 1980s. With a view to promote industrialization of backward areas in the country, the Government of India announced in June, 1988 the Growth Centre Scheme under which 71 Growth Centres were proposed to be set up throughout the country. Growth centres were to be endowed with basic infrastructure facilities such as power, water, telecommunications and banking to enable them to attract industries. 124 CU IDOL SELF LEARNING MATERIAL (SLM)
6.5 NEW INDUSTRIAL POLICY, 1991 AND MAJOR ECONOMIC REFORMS The year 1991 witnessed a drastic change in the industrial policy governing industrial development in the country since decades. This land mark change which in the economic history of India in the form of Industrial Policy of 1991 actually was entirely a new chapter which was to enforce totally open economic system as compared to the earlier mixed system. The country decided to follow the lines of capitalism. 6.5.1 Major Economic Reforms Industrial licensing policy: - In a major move to liberalize the economy, the new industrial policy abolished all industrial licensing, irrespective of the level of investment, except for a short list of 18 industries related to the security and strategic concerns, social reasons, hazardous chemicals and over-riding environmental reasons and items of elitist consumption (list attached as Annex II). However, of these 18 industries, three industries (motor cars, white goods and raw hides and skins and leather) were delicensed in April 1993. In 1996, another industry was delicensed namely entertainment and electronic industry. Further, in July 1997, five other industries were delicensed (animal fats and oils, tanned or dressed fur skins, chamois leather, asbestos and asbestos- based products, plywood and other wood and paper and newsprint). In continuation with the process of delicensing, three other industries were included in this category in 1998-99 namely coal and lignite, petroleum products and sugar. Later on drugs and pharmaceuticals industries were also exempted from licensing. Thus, at present only 5 items of health, strategic and security considerations remain under the purview of industrial licensing – alcohol, cigarettes, hazardous chemicals, electronic, aerospace and all types of defense equipment. The exemption from licensing will apply to all substantial expansion of existing units. The projects where imported capital goods are required, automatic clearance will be given- In cases where foreign exchange availability is ensured through foreign equity; or if the CIF value of imported capital goods required is less than 25 percent of total value (net of taxes) of plant and equipment, upto a maximum value of Rs.2 crore. In view of the current difficult foreign exchange situation, this scheme, (i.e., (iii)b) will came into force from April, 1992. In other cases, imports of capital goods will require clearance from the Secretariat of Industrial Approvals (SIA) in the Department of Industrial Development according to availability of foreign exchange resources. In respect of locations other than cities of more than 1 million population, the industrialists will not be required to obtain industrial approval from the Centre, except for industries subject to compulsory licensing. In the cities with population greater than 1 million, industries other than those of non- polluting nature such as electronics, computer software and printing will be allowed outside 25 km of the periphery, except in prior designated industrial areas. 125 CU IDOL SELF LEARNING MATERIAL (SLM)
Major amendments were made in the industrial location policy during 1997-98. The requirement of obtaining industrial approvals from the central government (except for the industries under compulsory licensing) for establishing units at locations not falling within 25 kms the periphery of cities having a population of more than 1 million was dispensed with. However, notified industries of a non- polluting nature such as electronics, computer software and printing, may be located within 25 kms of the periphery of cities with more than 1 million population and other industries are permitted only if they are located in designated industrial area set up prior to July 25, 1991. Zoning and land use Regulations as well as Environment Legislation continues to regulate industrial locations. Policy on Public Sector: - The 1956 Resolution had reserved 17 industries for the public sector. The 1991 industrial policy reduced this number to 8 naming- Arms and ammunition; Atomic energy; Coal and lignite; Mineral oils; Mining of iron ore, manganese ore, chrome ore, gypsum, Sulphur, gold and diamond; Mining of copper, lead, zinc, tin, molybdenum and wolfram; Minerals specified in the schedule to the atomic energy (control of production and use order), 1953; and Rail transport. But later on five during these reserved industries under public sector were also de-reserved. On May 9, 2001, the government opened up arms and ammunition sector also to the private sector. Now there were only three industries left reserved exclusively for the public sector. The policy also suggested that those public enterprises which are chronically sick and which are unlikely to be turned around will, for the formation of revival/ rehabilitation schemes, be referred to the Board for Industrial and Financial Reconstruction (BIFR), or other similar high-level institutions created for the purpose, in order to protect the interests of workers likely to be affected by such rehabilitation package a social security mechanism will be created. The government has announced its intention to offer a part of government shareholding in the public sector enterprises to mutual funds, financial institutions, the general public and the workers. A beginning in this direction was made in 1991-92 themselves by diverting part of the equities of selected public sector enterprises. Monopolistic and Restrictive Trade Practice limit: - Under the Monopolistic and Restrictive Trade Practice Act, all firms with assets above a certain size (Rs.100 crore since 1985) were classified as MRTP firms. Such firms were permitted to enter selected industries only and this also on a case by case approval basis. In addition to control through industrial licensing, separate approvals were required by such large firms for any investment proposals. The New Industrial Policy therefore remove the threshold limit in assets in respect of MRTP companies and dominant undertakings. This eliminates the requirements of prior approval of the Central Government in respect of the activities concerning expansion, new undertakings etc. The MRTP Act has been accordingly 126 CU IDOL SELF LEARNING MATERIAL (SLM)
amended. In the now amended Act, emphasis has shifted to taking appropriate action against monopolistic, restrictive and unfair trade practices on the part of monopolies. These dominant undertakings or monopolies have now been identified as those who control over 25 percent share of the market. The New Industrial Policy has widened and strengthened the provisions of the MRTP Act, and their implementation through the Monopoly Commission. Policy on Foreign investment and Technology agreements:- In the case of both foreign technology agreements sought by the Indian firms as well as foreign investment, it was necessary to obtain specific prior approval from the government for each project. It was argued that this caused undue delays and government interference and also hampered business decision making. The New Industrial Policy, therefore, prepared a specified list of high technology and high investment priority industries, wherein automatic permission was to be made available for direct foreign investment up to 51 percent foreign equity. The industries in which automatic approval was granted included a wide range of industrial activities in the capital goods and metallurgical industries, entertainment electronic, food processing and the services sectors having significant export potential. Besides, these included a number of other industries which were important for the rapid growth of the economy. In January 1997, the government also announced the first ever guidelines for foreign direct investment for expeditious approval of foreign investment in areas not covered under automatic approval. Priority areas for foreign direct investment proposals as mentioned in the guidelines included infrastructure, export potential, large- scale employment potential particularly for rural areas, items with linkages with the farm sector, social sector projects like hospitals, health care and medicines, and proposals that led to induction of technology and infusion of capital. The list of industries eligible for foreign direct equity investment under the automatic approval route by Reserve Bank was further expanded in 1997-98 and 1998-99. In 1997-98, equity investment upto 100 percent by NRIs/ OCBs (Overseas Corporate Bodies) was permitted in high priority industries. These included 9 high priority industries in metallurgical and infrastructure sectors and 13 other priority industries, hitherto eligible for 74 percent and 51 percent equity investment respectively. Foreign equity investment in mining (3 categories of industries) was also allowed upto 100 percent for NRIs/ OBCs. During 1998-99, the scope of foreign direct equity investment under the automatic approval route of Reserve Bank was enhanced. In a major drive to simplify foreign direct investment procedures, Indian companies were permitted to accept investment under automatic approval route without obtaining prior permission from Reserve Bank of India. Foreign equity up to 100 percent has been permitted in electricity generation, transmission and distribution (excluding atomic reactor power plants) and in construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, parts and harbors. However, foreign equity in projects of these industries under the automatic approval route was not to exceed Rs.1, 500 crore. 127 CU IDOL SELF LEARNING MATERIAL (SLM)
During 1991-2000, the government decided to pull all items under the automatic route for foreign direct investment/ NRI & OCB investment except for a small negative list, which includes all proposals requiring industrial license under the Industries (Development and Regulation) Act, 1951; cases having foreign investment more than 24 percent in the equity capital of units manufacturing items reserved for the small- scale sector; and for all its requiring industrial license in terms of the location policy notified under the New Industrial Policy, 1991. In order to licensed foreign direct investment policy further, the government took some important decisions such as: 100 percent foreign direct investment allowed in Special Economic Zones (SEZs) for all manufacturing activities; 100 percent foreign direct investment permitted for Business to Business commerce; Removal of cap on investment in the power sector; 100 percent foreign direct investment permitted in oil refining; 100 percent foreign direct investment allowed in telecom sector for certain activities with some conditions; Off shore Venture Capital Funds/ Companies allowed to invest in domestic venture capital undertakings as well as other companies through the automatic route, subject to only SEBI (Securities and Exchange Board of India) regulations and sector specific caps on foreign direct investment; Existing companies with foreign direct investment are eligible for automatic route to undertake additional activities covered under automatic route; Foreign direct investment upto 26 percent is eligible under automatic route in the Insurance sector, as prescribed in the Insurance Act, 1991, subject to obtaining a license from the Insurance Regulatory and Development Authority (IRDA); and Automatic route is available to proposals in the Information Technology sector, even when the applicant company has a previous joint venture or technology transfer agreement in the same field, etc. On May 9, 2001, the government announced a number of concessions and incentives to foreign direct investment (FDI). The main incentives given by the government are as follows: In the pharmaceutical sector, 100 percent Foreign Direct Investment has been allowed through the automatic route (earlier on, the limit was 74 percent); 100 percent Foreign Direct Investment has been allowed in airports against the prevailing 74 percent; For the hotels and tourism industry the Foreign Direct Investment limit has been raised to 100 percent through the automatic route from the prevailing 51 percent; 100 percent Foreign Direct Investment has also been allowed in two fresh areas- Courier services and Mass Rapid Transport System (MRTS); 100 percent Foreign Direct Investment has been allowed in township development; In the telecom sector, Foreign Direct Investment limit has been raised to 74 percent from the existing 49 percent for Internal Service Providers (ISPs); 128 CU IDOL SELF LEARNING MATERIAL (SLM)
Subject to Reserve Bank guidelines, the foreign investment limit in the banking sector has been hiked from 20 percent to 49 percent; and Foreign Direct Investment upto 267 percent has been allowed in defense production. Abolition of Phased Manufacturing Programmes for New Projects: - In order to force the pace of indigenization in manufacturing sector, Phased Manufacturing Programmes have been in force in a number of engineering and electronic industries. The new policy abolished such programmes for future. Removal of Mandatory Convertible Clause: - Since large part of industrial investment in India is finance by loans from banks and financial institutions, these institutions followed a mandatory practice of including a convertibility clause in their lending operations for new projects which provide them adoption of converting part of their loans into equity of felt necessary by their management. This has been interpreted as an unwarranted threat to the private firms to be taken over by the financial institutions. Hence, the new industrial policy provided that financial institutions will not impose this mandatory convertible clause. 6.5.2 Impact of New Industrial Policy, 1991 On Indian Economy Improvement in Performance of the Economy – National Product The economy’s performance in the post reform era has been quite impressive. The reforms started in year 1991 and if one leaves out 1991-92, which was exceptionally a bad year, the average annual growth rate between 1992-93 and 1999-2000 was 6.3%. Gross National Product in India increased to 99965.15 INR Billion in 2013 from 89328.92 INR Billion in 2012. Gross National Product in India averaged 13945.09 INR Billion from 1950 until 2013, reaching an all-time high of 99965.15 INR Billion in 2013 and a record low of 103.60 INR Billion in 1951. Gross National Product in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI). The Gross Domestic Product (GDP) in India expanded 1.50 percent in the third quarter of 2014 over the previous quarter. GDP Growth Rate in India averaged 1.61 percent from 1996 until 2014, reaching an all-time high of 5.80 percent in the fourth quarter of 2003 and a record low of -1.90 percent in the first quarter of 2009. Wide Choice of Consumer Goods and Services Economic reforms have resulted in a sea-change in the standards of living and life-styles of people. The benefits that have already accrued are enormous. Today, one has variety of choices to choose from with regard to many of the consumer durables like fridges, televisions, music systems, DVDs, cars etc. Foreign brands of many of the consumer durables are easily available. Due to cutthroat competition, the prices of consumer durables have either come down or remained static. The T.V. viewers today enjoy 24-hour news channels. These 24-hour news channels and other channels depend heavily on the advertising industry, which in turn, depends on India’s increasing transformation into a consumerist society. 129 CU IDOL SELF LEARNING MATERIAL (SLM)
Easy Availability of Bank Loans In the pre-reform’s era, getting loan from a bank was unthinkable for a common man. The scenario has completely changed today. The reforms carried out in the banking sector have led to easy availability of loans. Banks are running after customers today requesting them to take loans. Lending rates have fallen. Computerization and installation of ATMs have brought sea change in the services being rendered by banks. Indian banks have started giving “European” look. The day is not far off when Indian banks may be preferred when compared to foreign banks. Growth in Employment Opportunities and Better Emoluments Employment opportunities have tremendously increased due to coming up of many new domestic private companies as well as multinational companies (MNCs). Many of the foreign companies are now outsourcing their jobs to India thereby increasing the job opportunities available in the country. In 1991, many Indians were terrified that globalization would cost us millions of jobs. Today, American politicians are terrified that millions of their jobs will be outsourced to India. The latest business to be outsourced to India by the US is mathematics coaching. Health services such as pathological and radiological tests are also being outsourced to India by some countries now. The jobs that have come up in computer software and call centres could not have been predicted ten years ago. The economic reforms have not only increased the job opportunities in India, but have also raised pay packages in many of the sectors benefiting the youngsters from the middle-class. This scenario has come up because the MNCs, which have set up their plants / units in India, pay much higher emoluments than the domestic companies. One important sector, which has vastly expanded and has generated vast employment opportunities in the country after liberalization, is the ‘Information Technology’. Other notable sectors in this connection are the telecom, automobiles, civil aviation and electronics. Large Reserves of Foreign Exchange In the pre reforms era, the country did not have large reserves of foreign exchange and therefore, was not easily available for a person traveling abroad. The procedure for getting foreign exchange was very cumbersome and one had to run from pillar to post to get even a small amount of foreign exchange. There were widespread illegal transactions in foreign exchange. The situation has changed and today foreign exchange is easily available in any amount for persons traveling abroad. The removal of restrictions has also helped in eliminating “black money” generated as a result of illegal transactions in foreign exchange. This is mainly because of the tremendous increase in foreign exchange reserves of the country. Foreign Exchange Reserves in India decreased to 337793 USD Million in the week ended March 7th, 2015 from 338079 USD Million in the previous week. Foreign Exchange Reserves in India averaged 181145.53 USD Million from 1998 until 2015, reaching an all- 130 CU IDOL SELF LEARNING MATERIAL (SLM)
time high of 383643 USD Million in December of 2009 and a record low of 29048 USD Million in September of 1998. Vast Expansion in Telecommunications A notable revolution has occurred in the telecom sector. In the pre reforms era, this was entirely in the hands of the central government and due to lack of competition, the call charges were quite high. Further, due to lack of funds with the government, the government could never meet the demand for telephones. In fact, a person seeking a telephone connection had to wait for years before he could get a telephone connection. The service rendered by the government monopoly was also very poor. Wrong billing, telephones lying dead for many days continuously due to slackness on the part of the telecom staff to attend to complaints, cross connections due to faulty / ill maintained telephone lines, obsolete instruments and machinery in the telephone department were the order of the day in the pre reforms era. Today, there are many players in the telecom sector. The ultimate beneficiary has been the consumer. Prices of services in this sector have fallen drastically. Telephone connections are today affordable to everyone and are also easily available. Gone are the days, when one had to wait for years to get a telephone connection. The number of telephone connections which was only 2.15 million (fixed lines) in 1981 increased to 5.07 million (fixed lines) in 1991. The total number of telephones in the country stands at 957.61 million, while the overall tele- density has increased to 76.75% as of 30 September 2014 and the total numbers of mobile phone subscribers have reached 930.20 million as of September 2014.[1] The mobile tele- density had increased to 74.55% in September 2014. In the wireless segment, 5.88 million subscribers were added in September 2014. The wire line segment subscriber base stood at 27.41 million. \"Private operators hold 90.05 per cent of the wireless subscriber market share whereas BSNL and MTNL, the two PSU operators hold only 9.95 per cent market share,\" Trai said India has the fastest growing telecom network in the world with its high population and development potential. Airtel, Vodafone, Idea, Uninor, Reliance, Tata DoCoMo, BSNL, Aircel, Tata Indicom and MTNL are the major operators in India. However, rural India still lacks strong infrastructure. India's public sector telecom company BSNL is the 7th largest telecom company in world Civil Aviation – Growth in Air Travel: The civil aviation industry in India has witnessed a new era of expansion driven by factors such as low-cost carriers (LCC), modern airports, foreign direct investments (FDI) in domestic airlines, cutting edge information technology (IT) interventions and a growing emphasis on regional connectivity. Simply going by the market size, the Indian civil aviation industry is amongst the top 10 in the world with a size of around US$ 16 billion. Domestic air passenger traffic in India has posted double-digit growth which is a growth of about 16.3 131 CU IDOL SELF LEARNING MATERIAL (SLM)
percent in October 2014, according to data released by International Air Transport Association (IATA). Domestic airlines flew 5.92 million passengers in October 2014 as compared to 5.01million passengers during the same period in 2013. The number of passengers carried by domestic airlines during the January-October 2014 period was 55.06 million as against 50.7 million in the year-ago period, according to data released by Directorate General of Civil Aviation (DGCA). Aircraft movements, passengers and freight at all Indian airports are expected to grow at a rate of 4.2 per cent, 5.3 per cent and 5 per cent, respectively, for the next five years, according to estimates by Airports Authority of India (AAI). FDI inflows in air transport (including air freight) during April 2000 to November 2014 stood at US$ 542.55 million, as per data released by Department of Industrial Policy and Promotion (DIPP). Easier Access to Foreign Technology One of the greatest benefits of economic reforms has been the free flow of global technology. A case in point is the cell phone technology, which came into India after liberalization. Had there been no reforms, this technology would have taken much more time to make entry into India. Due to easy accessibility to latest foreign technology, many of the private companies are adopting latest technology in their production processes to increase production and productivity, as well as to lower production costs to benefit the consumer. Significant fall in Poverty Ratio There has been a spectacular achievement in the sphere of poverty alleviation. The poverty ratio decreased from 36% in 1993 - 94 to 26.1% in 1999 – 2000 – a fall that was steeper than that in the 1970s or 1980s. Over the six-year period 1977-1978 to 1983, the poverty ratio fell from 51.3 to 44.5 percent; the decline between 1987-1988 and 1993-94 was from 38.9% to 36%. Indeed, while from the mid-1980s to early 1990s, the absolute number of the poor continued to hover around 320 million, the number registered a significant fall at 260 million by 1999-2000. Over the last decade, poverty has witnessed a consistent decline with the levels dropping from 37.2% in 2004-05 to 29.8% in 200-10. The number of poor is now estimated at 269.3 million, of which 216.5 million reside in rural India. Better Performance after Privatization Many public sector companies have been privatized after 1991. It has been reported that productivity and production in all these companies have gone up very high after privatization. The liberalized economic policy freed entrepreneurs to enable them to innovate and go in for modernization of their plants. The Bharat Aluminum Company Ltd. introduced VRS for its employees after privatization and went in for computerization in a big way. The plant was 132 CU IDOL SELF LEARNING MATERIAL (SLM)
also modernized. All this has led to increased efficiency and significant increase in production. Remarkable Growth in Foreign Trade Post-independence, India witnessed marginal increase in the volume of trade. It took a leap after 1992 when the country ushered into liberalization regime; but this too couldn't contribute remarkable share in the world's total trade. India's share in world trade was 1.78 percent in 1950, which further declined to 0.6 percent in 1995. Only two financial years 1972-73 and 1976-77 witnessed surplus trade of Rs 1,040 million and 680 million respectively. However, India's share in merchandise exports witnessed a constant rise, from 0.8 percent in 2003 and 2004 and 1.0 percent in 2005 to 1.1 percent in 2006 and 2007. Trade policy 2004-09 had set a target of 1.5 percent in world trade by 2009. World Trade Report 2011, released by WTO, states that India has improved its rank both in merchandise and service trade during 2010. In merchandise trade, it is placed at 20th rank, while in service trade its rank is 10th The country's export witnessed major compositional changes in last one decade with 10 percentage point fall in shares of manufactures, a 12.6 percentage point growth in shares of petroleum crude and products, and 3.3 percentage point fall in shares of primary products. The composition of import also saw changes in last one decade. The share of food and allied products which fell to 2.1 percent in 2008- 09 from 3.3 percent in 2000-01, increased to 3.7 percent in 2009-10 and fell to 3.2 percent in first half of 2010- 11, with slight fall in import share of edible oils and pulses. The share of fuel import remained at 33 percent. The remarkable change can be seen in the growth of capital goods import from 10.5 percent in 2000-01 to 15 percent in 2009-10 and then again fall to 13.1 percent in first half of 2010- 11. The share of gold, silver and electronic goods underwent down in first half of 2010- 11 compared to last two corresponding financial years. The share of pearls, precious and semi- precious stones witnessed a see-saw movement in last one decade. India's export cover over 7500 commodities to 190 countries, while over 6000 commodities are imported from about 140 countries. During first half of 2011- 12, exports grew by 52.1 percent to USD 160 billion and import witnessed 32.4 percent increase by USD 233.5 billion, leaving a trade gap of USD 73.5 billion. The foreign trade in India trend showed an upward movement with 15 trading partners contributing to 60 percent of India's total trade in 2007- 08. The trend however was constant till first half of 2011- 12. USA which was at first position in 2007-08, relegated to third position in 2008- 09. UAE replaced USA and China was placed at second position. The trend continued till first half of 2010-11. UAE replaced USA only because of exports and imports of gems and jewellery items. India had bilateral trade surplus with five countries- UAE, USA, Singapore, UK and Hong Kong in 2009-10 and continued till first half of 2010- 11. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
Regulated Capital Market There was a “free for all” atmosphere in the stock market prior to the introduction of regulation of capital market. There were many “scandals” in the stock market, which pauperized small investors. The setting up of SEBI (Stock Exchange Board of India) has greatly helped the government to keep an eye on the stock market and regulate it to protect small investors. Trading in shares has become very easy, quick and transparent. Stock Exchange brokers can no more take small investors for a ride. Due to dematerialization of shares, the investors have been freed from botheration of getting delivery of shares and sending the same to the concerned companies for transfer of names etc. Further, delays in transfer of shares, loss/pilferage of share certificates, the need to keep shares in safe custody by the investors have become a thing of the past. Increasing Foreign Direct Investment According to a recent report by global credit rating agency Moody’s, FDI inflows have increased significantly in India in the current fiscal. This, according to Moody’s, is due to India’s current pro-growth policies. Net FDI inflows totalled US$ 14.1 billion in the first five months of 2014-15, representing a 33.5 per cent increase from the same period in 2013-14. Total FDI inflows into India in the period April 2000–November 2014 touched US$ 350,963 million. Total FDI inflows into India during the period April–November FY15 was US$ 18,884 million. Mauritius is again emerging as the largest source of FDI in India, accounting for an inflow of US$ 83,730 million in the April 2000-November 2014 period. According to official data, the inflow of foreign investment from Singapore amounted to US$ 29,193 million, followed by the UK at US$ 21,761 million and Japan at US$ 17,557 million during April 2000-November 2014. Investments The government has announced that foreign investors can put in as much as Rs 90,300 crore (US$ 14.65 billion) in India’s rail infrastructure through the FDI route, according to a list of projects released by the Ministry of Railways. The Rs 63,000 crore (US$ 10.22 billion) Mumbai-Ahmedabad high-speed corridor project is the single largest. The other big ones include the Rs 14,000 crore (US$ 2.27 billion) CSTM-Panvel suburban corridor, to be implemented in public-private partnership (PPP), and the Rs 1,200 crore (US$ 194.79 million) Kachrapara rail coach factory, besides multiple freight line, electrification and signalling projects. Israel-based world's seventh largest agrochemicals firm ADAMA Agrochemicals, formerly known as Makhteshim Agan Industries, plans to invest at least US$ 50 million over the next three years. ADAMA's global president and Chief Executive Chen Lichtenstein said the idea was to expand both manufacturing and research and development facilities in India aimed at growing better than the average industry growth. 134 CU IDOL SELF LEARNING MATERIAL (SLM)
Apple - world's most admired electronics brand - that sells devices such as the iPhone, iPad tablet and iPod media player – is planning to open 500 'iOS' stores in India in its first major push that will include moving into smaller towns and cities. The Department of Industrial Policy and Promotion (DIPP) has moved a Cabinet note to allow 100 per cent FDI in medical devices as part of a strategy to not only reduce imports but also promote local manufacturing for the global market, which will be worth over US$ 400 billion next year. Real estate private equity FDI is set to double after the Indian government ended the three-year lock-in and has introduced 100 per cent FDI for completed assets, according to JLL India. With India now allowing 100 per cent FDI in the construction sector, real estate private equity investment could double – and boost demand from overseas property buyers, according to sector experts. FDI real estate private equity, which is currently estimated at around US$ 1billion - US$ 1.5 billion per annum, could reach to up to US$ 3 billion in the next few years, according to leading agency, JLL India. The Ministry of Finance has announced that it has cleared 15 FDI applications, including that of Panacea Biotech and Sanofi-Synthelabo (India), and recommended HDFC Bank's proposal to hike foreign holding to the Cabinet for consideration. Expanding Tourism Economic reforms have brought prosperity in every sector and the tourism industry is no exception. The expansion in civil aviation sector seems to have made a very big positive impact on the tourism industry. The number of foreign tourists increased from 1279210 in 1981 to 1677508 in 1991 and to 2537282 in 2001. The flow of foreign tourists during 1991 to 2001 has, thus, been more than double the flow during 1981 to 1991. Tourist Arrivals in India decreased to 761000 in February of 2015 from 790000 in January of 2015. Tourist Arrivals in India averaged 396744.61 from 2000 until 2015, reaching an all-time high of 877000 in December of 2014 and a record low of 129286 in May of 2001. Substantial Growth in Corporate Sector One of the greatest gains due to economic reforms is the huge expansion in the corporate sector. With easy flow of foreign investment and increase in domestic private investment, the number of industries in the corporate sector has gone up very high. Industrial Production in India increased 2.60 percent in January of 2015 over the same month in the previous year. Manufacturing rose 3.3 percent and electricity production expanded 2.7 percent while mining output shrank 2.8 percent. Industrial Production in India averaged 6.54 percent from 1994 until 2015, reaching an all-time high of 20 percent in November of 2006 and a record low of -7.20 percent in February of 2009. Industrial Production in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI). Growth in Tax Revenue of Central Government 135 CU IDOL SELF LEARNING MATERIAL (SLM)
When investments in industrial and other sectors expand, the benefits of such investments would also accrue to the central government in the form of more taxes. The tax revenue of the central government registered a sharp increase of Rs.85293.2 crore during 2000-01 to 1990- 91 whereas the corresponding figure during 1980-81 to 1990-91 was only Rs. 33620 crore. Despite a general slowdown in the Indian Economy, Government is able to maintain a healthy growth in collection of revenue through better monitoring and strict enforcement to deter tax evasion. Revenue collections are as follows: Comfortable Position of Balance of Payments on Current Account One of the remarkable achievements of economic reforms has been the comfortable position with regard to balance of payments on current account. The balance of payments, which was adverse in the pre reforms era, made a turn around after reforms were ushered in. In the year 1980-81, there was a deficit of Rs.2213.5 crore and this increased to Rs. 17366 crores in 1990-91, whereas in the year 2002-03, the balance of payments on current account was favorable with net earnings of Rs.19987 crore. India’s current account deficit (CAD) narrowed sharply to US$ 7.8 billion (1.7 per cent of GDP) in Q1 of 2014-15 from US$ 21.8 billion (4.8 per cent of GDP) in Q1 of 2013-14. However, it was higher than US$ 1.2 billion (0.2 per cent of GDP) in Q4 of 2013-14. The lower CAD was primarily on account of a contraction in the trade deficit contributed by both a rise in exports and a decline in imports. On a BoP basis, merchandise exports at US$ 81.7 billion increased by 10.6 per cent in Q1 of 2014-15 as against a decline of 1.5 per cent in Q1 of 2013-14. On the other hand, merchandise imports (on BoP basis) at US$ 116.4 billion moderated by 6.5 per cent in Q1 of 2014-15 as against an increase of 4.7 per cent in Q1 of 2013-14. Decline in imports was primarily led by a steep decline of 57.2 per cent in gold imports, which amounted to US$ 7.0 billion, significantly lower than US$ 16.5 billion in Q1 of 2013-14. 136 CU IDOL SELF LEARNING MATERIAL (SLM)
Notably, non-gold imports recorded a modest rise of 1.3 per cent as against decline of 0.6 per cent in corresponding quarter of last year reflecting some revival in economic activity. As a result, the merchandise trade deficit (BoP basis) contracted by about 31.4 per cent to US$ 34.6 billion in Q1 of 2014-15 from US$ 50.5 billion in the corresponding quarter a year ago. Net services receipts improved marginally in Q1 of 2014-15 on account of higher exports of services. Net services at US$ 17.1 billion recorded a growth of 1.2 per cent in Q1 of 2014-15. Fig a: Balance of Payment 2015 137 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig b: Balance of Payment 2020 Elimination of Illegal Transactions in Foreign Exchange The determination of exchange rate in the foreign exchange market, by market forces, has eliminated illegal transactions in foreign exchange. Foreign currencies are now easily available in any amount for persons traveling abroad. The removal of restrictions has also helped in eliminating “black money” generated as a result of illegal transactions in foreign exchange. Improvement in Power Supply The reforms undertaken in the power sector have already started yielding good results. In Delhi, after privatization of distribution of power, power availability has drastically improved. Power theft has almost been eliminated. Consumers get electricity connections or increase in load-capacity easily. Incidence of power failure, voltage fluctuations, variations in frequency etc., has come down sharply. In short, privatization of power sector has definitely improved the quality and quantity of power supply in Delhi. Higher Revenue due to Value Added Tax Value Added Tax (VAT) is termed as the best practice in taxation all over the world. This has been introduced in India from April 2005. Many states have already shifted to Value Added Tax regime in place of Sales Tax. There has been buoyancy in revenue collections of many states after the introduction of VAT. According to the Empowered Committee of State Finance Ministers on VAT, the VAT regime has improved tax compliance among the traders and has also brought down the prices of many commodities. 6.5.3 Impact of New Industrial Policy on Business: 138 CU IDOL SELF LEARNING MATERIAL (SLM)
The factors and forces of business environment have lot of influence over the business. The common influence and impact of such changes in business and industry are explained below: 1. Increasing Competition: After the new policy, Indian companies had to face all round competition which means competition from the internal market and the competition from the MNCs. The companies which could adopt latest technology and which were having large number of resources could only survive and face the competition. Many companies could not face the competition and had to leave the market. For example, Weston Company which was a leader in Т. V. market with more than 38% share in T.V. market lost its control over the market because of all round competition from MNCs. By 1995-96, the company almost became unknown in the T.V market. 2. More Demanding Customers: Prior to new economic policy there were very few industries or production units. As a result there was shortage of product in every sector. Because of this shortage the market was producer-oriented, i.e., producers became key persons in the market. But after new economic policy many more businessmen joined the production line and various foreign companies also established their production units in India. As a result there was surplus of products in every sector. This shift from shortage to surplus brought another shift in the market, i.e., producer market to buyer market. The market became customer- oriented and many new schemes were made by companies to attract the customer. Nowadays products are produced/manufactured keeping in mind the demands of the customer. 3. Rapidly Changing Technological Environment: Before or prior to new economic policy there was a small internal competition only. But after the new economic policy the world class competition started and to stand this global competition the companies need to adopt the world class technology. To adopt and implement the world class technology the investment in R & D department has to increase. Many pharmaceutical companies increased their investment in R and D department from 2% to 12% and companies started spending a large amount for training the employees. 4. Necessity for Change: Prior to 1991 business enterprises could follow stable policies for a long period of time but after 1991 the business enterprises have to modify their policies and operations from time to time. 5. Need for Developing Human Resources: 139 CU IDOL SELF LEARNING MATERIAL (SLM)
Before 1991 Indian enterprises were managed by inadequately trained personnel’s. New market conditions require people with higher competence skill and training. Hence Indian companies felt the need to develop their human skills. 6. Market Orientation: Earlier firms were following selling concept, i.e., produce first and then go to market but now companies follow marketing concept, i.e., planning production on the basis of market research, need and want of customer. 7. Loss of Budgetary Support to Public Sector: Prior to 1991 all the losses of Public sector were used to be made good by government by sanctioning special funds from budgets. But today the public sectors have to survive and grow by utilizing their resources efficiently otherwise these enterprises have to face disinvestment. On the whole the policies of Liberalization, Globalization and Privatization have brought positive impacts on Indian business and industry. They have become more customer focus and have started giving importance to customer satisfaction. 8. Export a Matter of Survival: The Indian businessman was facing global competition and the new trade policy made the external trade very liberal. As a result, to earn more foreign exchange many Indian companies joined the export business and got lot of success in that. Many companies increased their turnover more than double by starting export division. For example, the Reliance Company, Videocon, MRF, CEAT, etc. got a great hold in the export market. 6.6 NEW SMALL SECTOR POLICY, 1991: The Industrial Policy Scheme 1991 was accompanied by a separate Policy Statement for the promotion and strengthening of small, tiny and rural industries which had following features: 1. Increase in the investment limit in plant and machinery of tiny enterprises from Rs. 2 lakhs to Rs. 5 lakhs, irrespective of the location of the enterprise. 2. Inclusion of industry-related services and business enterprises, irrespective of their location, as small-scale industries. 3. Introduction of limited Partnership Act. This would limit the financial liability of the new entrepreneurs to the capital invested. 4. Introduction of a scheme of Integrated Infrastructural Development (including technological back-up services) for small-scale industries. 5. Introduction of factoring services to help solve the problems of delayed payments to small sector. 140 CU IDOL SELF LEARNING MATERIAL (SLM)
6. Market promotion of small-scale industries products through cooperative / public sector institutions, other specialised professional/marketing agencies and the consortium approach. 7. Setting up a Technology Development Cell in the Small Industries Development Organisation. 8. According priority to small and tiny sector in the allocation of indigenous raw materials. 9. Setting up of an Export Development Centre in the Small Industries Development Organisation (SIDO). 10. Widening the scope of the National Equity Fund (NEF) to enlarge the single window scheme and also to associate commercial banks with provision of composite loans. Objectives: The primary objective of the Small Sector Industrial Policy during the nineties was to impart more vitality and growth impetus to the sector to enable it to contribute its mite fully to the economy, particularly in terms of growth of output, employment and exports. 1. Government have announced increase in the investment limits in plant and machinery of small scale industries, ancillary units and export-oriented units to Rs. 60 lakhs, Rs. 75 lakhs and Rs. 75 lakhs respectively. Such limits in respect of “TINY” enterprises would now be increased from the present Rs. 2 lakhs to Rs. 5 lakhs, irrespective of locations of the unit. 2. Inadequate access to credit—both short term and long-term—remains a perennial problem facing the small-scale sector. Emphasis would henceforth that from subsidized cheap credit, except for specified target groups, and efforts would be made to ensure both adequate flow of credit on a normative basis, and the quality of the delivery, for viable operations of this sector. 3. A Technology Development Cell (TDC) would be set up in the Small Industries Development Organisation (SIDO) which would provide technology inputs to improve productivity and competitiveness of the products of the small-scale sector. 4. National Small Industries Corporation (NSIC) concentrate on marketing of mass consumption items under common brand name and organic links between NSIC and SSIDCs established. The SIDO has been recognized as the nodal agency to support the small-scale industries in export promotion. 5. Government will continue to support first generation entrepreneur through training and will support their efforts. Large number of EDP trainers and motivators will be trained to significantly expand the Entrepreneurship Development Programmes (EDP). Industry Associations would also be encouraged to participate in this venture effectively. Women entrepreneurs will receive support through special training programmes. 141 CU IDOL SELF LEARNING MATERIAL (SLM)
6. Handloom sector contributes about 30 per cent of the total textile production in the country. It is the policy of Government to promote handloom to sustain employment in rural areas and to improve the quality of life for handloom weavers. 7. The activities of the Khadi and Village Industries Commission and the State Khadi and Village Industries Boards would be expanded and the organizations strengthened to discharge their responsibilities more effectively. Important observations on the new small enterprise policy these are: 1. The new strategy is based on a thorough grasp of the fundamental issues confronting the small-scale sector, and the actions offered are well-targeted to alleviate the different disadvantages that this sector faces. 2. There are two aspects to the change in the definition of micro units. First, because the investment maximum has been lifted from Rs.2 lakhs to Rs.5 lakhs, and the locational condition (limit of 50,000 people) has been removed, any new units under Rs. 5 lakhs that are located in larger towns (population of 50,000 or more) would fall into the tiny sector. 3. Second, and perhaps more importantly, while the term \"industry\" formerly only referred to manufacturing, the new policy has expanded the definition to encompass industry-related service and business companies. This is a more realistic approach. 4. The new strategy ensures that the small business sector receives ongoing support, such as better access to institutional funding, preference in government procurement, and relaxation of some labour restrictions. The proposed package of incentives for the little sector will help it flourish with more vitality, since it is the nursery of traditional talent. This is excellent news. 5. Another significant regulatory adjustment concerns equity participation by other businesses of up to 24% in a small unit. Other businesses could be tiny or huge, Indian or foreign. This 24 percent stock stake is predicated on two fundamental assumptions. For starters, foreigners with up to 24 percent equity participation will not be able to dominate the small-scale business. Second, the presence of large and international companies in small businesses will result in technology transfer from large to small businesses. 6.6.1 Recent Policies for Micro and Small Enterprises Sector: (a) Comprehensive Policy Package for small scale and tiny sector, 2000 The Government of India announced a comprehensive policy package for the development and promotion of small scale and tiny sector which aims to improve the competitiveness of the sector. The main focus of the policy package was: 142 CU IDOL SELF LEARNING MATERIAL (SLM)
(i) The exemption for excise duty limit rose from Rs.50 lakh to Rs. 1 crore. (ii) The limit of investment was increased in industry related service and business enterprises from Rs. 5 lakh to Rs. 10 lakh. (iii) The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to cover all areas in the country with 50 percent reservation for rural areas and 50 percent earmarking of plots for tiny sector. (iv)The family income eligibility limit of Rs. 24000 was enhanced to Rs. 40000 per annum under the Prime Minister Rozgar Yojana (PMRY). (v) The scheme of granting Rs. 75000 to each small scale enterprise for obtaining ISO 9000 certification was continued till the end of 10th plan. (b) Industrial Policy Packages for small scale industries, 2001-02 This policy emphasizes the following: (i) The investment limit was enhanced from Rs. 1 crore to Rs. 5 crore for units in hosiery and hand tool sub sectors. (ii) The corpus fund set up under the Credit Guarantee Fund Scheme was increased from Rs.125 crore to Rs.200 crore. (iii) Credit Guarantee cover was provided against an aggregate credit of Rs. 23 crore till December 2001. (iv) Fourteen items were de-reserved in June 2001 related to leather goods, shoes and toys. (v) Market Development Assistant Scheme was launched exclusively for SSI sector. (vi) Four UNIDO assisted projects were commissioned during the year under the Cluster Development Programme. (c) Policy Package for small and medium enterprises, 2005-06 During the year 2005-06 the Government announced a policy package for small and medium enterprises. The main features of this policy package were: (i) The Ministry of Small Scale Industries has identified 180 items for de-reservation. (ii) Small and Medium Enterprises were recognized in the services sector, and were treated at par with SSIs in the manufacturing sector. (iii) Insurance cover was extended to approximately 30,000 borrowers, identified as chief promoters in the small scale sector. 143 CU IDOL SELF LEARNING MATERIAL (SLM)
(iv) Emphasis was laid on Cluster Development model not only to promote manufacturing but also to renew industrial towns and build new industrial townships. The model is now being implemented, in nine sectors including khadi and village industries, handlooms, handicrafts, textiles, agricultural products and medicinal plants. (d) Enactment of Micro, Small and Medium Enterprises Development Act, 2006: In May’ 2006, the President has amended the Government of India (Allocation of Business) Rules, 1961; Ministry of Agro and Rural Industries and Ministry of Small Scale Industries have been merged into a single Ministry, namely, “Ministry of Micro, Small and Medium Enterprises. Consequently the Micro, Small and Medium enterprises Development (MSMED) Act was enacted, which provides the first ever legal framework for recognition of the concept ‘enterprises’ against ‘industries’ and integrating the three tiers of these enterprises viz. micro, small and medium and clearly fixed the investment limits for both manufacturing and service enterprises. It also provides for a statutory consultative mechanism at the national level with wide representation of all sections of stakeholders, particularly the three classes of enterprises. The Act also makes provisions for establishment of specific funds for the promotion, development and enhancement of competitiveness of these enterprises, progressive credit policies and practices, preference in Government procurements to products and services of the micro and small enterprises, more effective mechanism for mitigating the problems of delayed payments and simplification of the process of closure of business by all three categories of enterprises. 6.6.2 Measures Initiated by The Government for The Development of MSE Sectors In order to improve the technological competitiveness and tackle the problems faced by the Micro, Small and Medium Enterprise sector, Government has taken several promotional measures as follows: Micro & Small Enterprises Cluster Development Programme (MSECDP/SICDP): It is the flagship scheme of the Ministry of MSME for the development of clusters capacity building, technology upgradation of the enterprises, skill development, marketing and export support, improved credit delivery, setting up of common facility centres (CFCs), etc. The government assistance under the scheme was enhanced up to INRs. 80 million to support soft as well as hard intervention including setting up of CFCs for assisting technology improvements, quality standardization and testing. Till October 2007, 400 micro, village and small enterprise clusters have been developed by the Ministry of MSME. Also, other Ministries have promoted 800 more clusters. Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation: 144 CU IDOL SELF LEARNING MATERIAL (SLM)
The scheme aims at facilitating technology upgradation by providing upfront capital subsidy to SSI units, including tiny, khadi, village and coir industrial units, on institutional finance availed of by them to promote new and appropriate technology for MSMEs assessing present level of technology and their forecasting, setting up technology information centres /data banks and IT portal for information dissemination, carrying out detailed technology audit, modernization of production equipment and techniques. The subsidy is up to 15 percent with a ceiling of INRs. 10 million loan amount for availing the benefit under this scheme. So far, 2620 units have been assisted with a total amount of INRs. 743 million. Support for ISO-9000/14001 Certification Fee Reimbursement: Reimbursement of fees is made to the extent of 75 percent or Rs. 75,000 whichever is lower in order to encourage technology upgradation, quality improvement and better environment management. So far, 13,433 units have been supported with an amount of Rs. 709 million. Infrastructural and Support Facilities: Ministry of MSME has undertaken following programmes to provide infrastructural services to MSME sector as given below: Programme Objectives Established Units Technology Resource To help SSIs to upgrade and 30 TRCs/ SISIs. modernise technology, and 28 branch SISIs. Centres (TRCs) & Small provide information on latest technologies, machinery and Industry Service Institutes raw material suppliers, quality standards, etc. (SISIs) Product cum process For R & D, product design 6 PPDCs development Centres (PPDCs) and innovation, product and process improvement and development of improved packaging techniques, common facility centre and manpower development and training Regional Testing Centres To provide testing facilities 4 RTCs (RTCs) so that SSIs can be able to maintain production and 145 CU IDOL SELF LEARNING MATERIAL (SLM)
storage conforming to specifications. Also provide one time capital grant to industry association upto 50% or Rs. 5 million whichever is less for international level testing Field Testing Stations 7FTSs (FTSs) Mini Tool Rooms Assistance upto 90% or Rs. 90 million whichever is less, for setting up new mini tool rooms or upgradation of existing tool rooms National Manufacturing Competitiveness Programme: As one of the Policy initiatives, the Government of India has set up the National Manufacturing Council (NMCC), under which a national Manufacturing Competitive Programme (NMCP) has been announced particularly to support the SME sector in their endeavor to become competitive. A ten component scheme was approved under the programme that include, application of lean manufacturing, design clinic, promotion of ICT in manufacturing sector, setting up mini tool rooms, technology and quality management support to SMEs, etc. a package for various services e.g. legislative back-up, credit support, fiscal measures; support for cluster based development, technological and quality upgradation, marketing, entrepreneurial and managerial development and empowerment of women owned enterprises; strengthening of Prime Minister’s Rozgar Yojana (employment scheme) and strengthening of database for MSME sector. 6.7 SUMMARY Since Independence, Indian economy has grown to an extent that it is recognized as one of the biggest economies in the World. With the implementation of different economic reforms and industrial policies especially after 1991, the face of an Industrial sector and its contribution in the Indian economy growth and development has tremendously changed with a great velocity. India as a country has grown with amazing development in IT, Engineering, Communication, Manufacturing, BFSI, Service sector with a positive change in the lifestyles and habits of citizens and society. Different measures initiated by the government under various policies are acting as a building block for strong base for growth of different sector 146 CU IDOL SELF LEARNING MATERIAL (SLM)
especially the small and medium sector. Even the backdrops of recession and economic slowdown have been recovered with the help of strong base of economic policies. Thus, a strong and robust systems of policies and initiatives to achieve the designed objectives gives a concrete platform for the development and growth of Indian economy. The main objectives of Industrial Policy are: 1. Liberalization of the Economy: It means removing unnecessary trade restrictions and making the economy more competitive. It aims to free the private sector from rigorous controls and licensing thus encouraging the private sector to flourish. 2. Privatization: It means removing strict control over the private sector and allowing them to take necessary decisions. In our country, since independence public sector and its development is top priority but along with it strong private sector is essential to bring about the balance economic development. 3. Globalization of the Economy: Free interaction among economies of the world in the field of trade, finance, production, technologies and investment is termed as globalization of the economy. It encourages foreign trade, private and institutional foreign investment. It practically removes all hindrances and restrictions of foreign trade. 4. Modernization of the Economy: The new economic policy accords top priority to modern techniques and technology. It also promotes computers and electronics industries. 5. Fiscal Reforms (Tax and Public Expenditure Reforms): It is mean to control the public expenditures and increasing revenue in order to discipline expenditure. 6. Investment Policy Reforms: Open the door for foreign investment and technology transfer. 7. Foreign Exchange Reforms: It helps to increase the flow of foreign exchange and which is important to correct the deficit in the balance of trade. 6.8 KEYWORDS Industrial policy- is a statement which defines the role of government in industrial development Lopsided - leaning to one side Regional imbalances or disparities means wide differences in per capita income, literacy. Rates, health and education services, levels of industrialization, etc. between different regions. Regulation- a rule or directive made and maintained by an authority. Substantial Expansion means increase in the investment in the plant and machinery 147 CU IDOL SELF LEARNING MATERIAL (SLM)
by at least twenty-five per cent. of the book value of plant and machinery 6.9 LEARNING ACTIVITY 1. What were the measures suggested for the promotion of small- scale cottage industries as per Industrial Policy, 1977? ________________________________________________________________________ ________________________________________________________________________ 2. State the purpose for appointing a Monopolies Inquiry Commission by government of India in April,1964. ________________________________________________________________________ ________________________________________________________________________ 6.10 UNIT END QUESTIONS: A. Descriptive Questions Short Questions 1. What is an Industrial Policy? 2. List the measures of Industrial Policy, 1980. 3. Discuss the important highlights of Industrial Policy 1977. 4. Explain the features of industries categorized under Schedule B of Industrial Policy, 1956. 5. What was the important provision related toforeign investment and Technology agreements as per new Industrial Policy? Long Questions 1. State the major objective of Industrial Policy. 2. Explain the main objectives of Industrial Policies accepted after 1956. 3. Discuss the objectives, features and important amendment of Industrial Policy, 1948. 4. The Industrial Policy Resolution of 1956 classified the entire industrial sector into three Schedules. Discuss. 5. Enlist all the important features of New Industrial Policy with its impact. B. Multiple Choice Questions 1. What is the main objective of the Industrial Policy? a. To increase the imports of goods and services 148 CU IDOL SELF LEARNING MATERIAL (SLM)
b. To increase the flow of foreign exchange c. To increase the public expenditure d. Prevention of Absorption of Economic Power. 2. The main thrust of the _________________was to lay the foundation of a mixed economy where both the private and public enterprises were to be given importance and work together to develop economy to accelerate the pace of industrial development. a. 1948 Industrial Policy b. 1956 Industrial Policy c. Industrial Policy d. 1980 Industrial Policy 3. The __________________also allowed foreign capital participation in Indian economic development but the major share should belong to India. a. 1948 Industrial Policy Resolution b. 1951 Industrial Policy Resolution c. 1977 Industrial Policy Resolution d. 1956 Industrial Policy Resolution 4. Important objective of the Industrial Policy 1980 is ____________ a. Revamping the Khadi and Village Industries Commission b. Removal of regional disparities c. Highest priority to the generation and transmission of power d. All of these 5. As per new Industrial Policy, to provide access to capital markets by allowing _________ percent equity participation by other industrial undertakings. a. 18 b. 24 c. 34 d. 100 149 CU IDOL SELF LEARNING MATERIAL (SLM)
Answer 1-d, 2-a, 3-c, 4-b, 5-b 6.11 REFERENCES Text Books: Francis Cherunilam, Business and Environment, Text and Cases, [Himalaya Publishing House], C. Fernando, Business Environment Kindle Edition, Pearson K.Aswathappa, Essentials Of Business Environment, Himalaya Publishing House SHAIKH SALEEM, BUSINESS ENVIRONMENT, Pearson Ian Worthington, Chris Britton, The Business Environment, Financial Times/ Prentice Hall. Justin Paul, “Business Environment”, Tata McGraw Hill Publications P.K.Ghosh : “Business Environment”, Sultan Chand Publishers, New Delhi Reference Books: Engineering Economic-Dr. Rajan Mishra by University Science Press The Gazette of India, Ministry of Law and Justice, New Delhi. No.311, June’16, 2006. Morrison J, The International Business Environment, Palgrave MISHRA AND PURI, Indian Economy, Himalaya Publishing House, New Delhi Business Environment Raj Aggarwal Excel Books, Delhi Strategic Planning for Corporate Ramaswamy V McMillan, New Delhi Dahl Modern political analysis. Englewood Cliffs, N.J: Prentice-Hall. Open Text Source: Dhamija, Dr. Ashok (2009). Prevention of Corruption Act. LexisNexis India. p. 2049. ISBN 9788180385926. Subrata K. Mitra and V.B. Singh. 1999. Democracy and Social Change in India: A Cross-Sectional Analysis of the National Electorate. New Delhi: Sage Publications. ISBN 81-7036-809-X (India HB) ISBN 0-7619-9344-4 (U.S. HB). Bakshi; P M (2010). Constitution Of India, 10/e. Universal Law Publishing Company Limited. pp. 48–.ISBN 978-81-7534-840-0. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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