Indian Industry

SESSION 7, 8, 9
PGDM (PT) 2008-2011 by Biswa Swarup Misra

Industrial Scene at Independence

The Industrial Scene was characterized as (i) The industrial sector was extremely underdeveloped with a very weak infrastructure. (ii) The lack of government intervention in favour of the industrial sector was considered as an important cause of under-development. (iii)Export orientation had been against the country's interests. (iv)The structure of ownership was highly concentrated and (v) Technical and managerial skills were in short supply.

Organized Thinking Concerning the Direction of Industrial Development in India May be traced to The Statement of Industrial Policy, 1945, The Industrial Policy Resolution of 1948, The enactment of the Industries (Development and Regulation) Act, 1951, The First and Second Five Year Plan documents, and The Industrial Policy Resolution of 1956.

Organized Thinking Concerning the Direction of Industrial Development in India

The 1945 Statement of Industrial Policy of the then GOI is remarkable as a precursor of all the thinking that became enshrined in the key industrial policy resolutions after independence. The statement also mentioned the concept of industrial licensing. Special importance was given to the development of steel, heavy engineering, machine tools and heavy chemicals industries. This emphasis has been characteristic of Indian industrial policy thinking ever since.

The Industrial Policy Resolution of 1948

Identified a small number of industries to be reserved for production by the public sector. The production of arms and ammunition, production and control of atomic energy and ownership and management of railways were to be the sole preserve of the central government. However, coal, iron and steel, aircraft manufacturing, shipbuilding, manufacture of telegraph and wireless equipment (except radios) and minerals were reserved for production by central or state government undertakings. The 1956 list of industries reserved for the public sector is obviously based on this 1948 list but includes a number of additional industries.

Thinking in the1950s
The thinking concerning the public sector had changed during the course of the 1950s. As far as can be ascertained, the original thinking was concerned with the use of the public sector investment in industries which the private sector would find difficult to invest in. By 1956 this had changed towards an explicit preference for state ownership of industries that were termed as capturing the 'commanding heights of the economy'.

Why Industrial Licensing

Thinking resulting from the exigencies and requirements of a war situation Indian nationalistic aspirations and the socialistic leanings of some of the founding fathers of the country. The leaders of the private sector of the time were also in favour of strong governmental assertion.

 The Second Five Year Plan is always seen as the conceptual basis of Indian planning However, there was better appreciation of the need for indicative planning in the First Plan The Second Plan and later plans have been increasingly concerned with the allocation of public resources and much less with indications and policies to direct the whole economy in desired directions. (Rakesh Mohan, 1992)

Mechanisms for Control

1) 2) 3) 4) 5) Five Year Plan documents Import and export controls Control of capital issues; Control of foreign exchange Transport controls including allocation of raw materials 6) Price controls 7) Allocations of credit

Working of the Industrial Licensing System

Before making an investment, an entrepreneur had to first obtain approval in principle from the Ministry of Industry. Step 1 The granting of this approval resulted in the issuance of a Letter of Intent (LOI). Step 2 Armed with this LOI, the entrepreneur could then tie up other requirements for setting up the project. Step 3 If required to import a capital good, need to obtain a capital goods import license from the Chief Controller of Imports & Exports (CCI&E) in the Ministry of Commerce. Step 4 The approval for the import, however, was given by a committee set up in the Ministry of Industry. Step 5

Working of the Industrial Licensing System

If there was also need for a foreign technology collaboration agreement, the entrepreneur had to obtain a specific approval for this (a Foreign Collaboration FC - approval) from a committee chaired by the Finance Secretary but serviced by the Ministry of Industry. Step 6 In order to raise funds for the project, if an entrepreneur wanted to go to the capital market, he needed separate approval from the Controller of Capital Issues in the Ministry of Finance. Step 7

Working of the Industrial Licensing System

For imports of raw material and components, separate licenses had to be obtained on an annual basis from the CCI & E. Step 8 In each case, an 'essentiality' and indigenous nonavailability clearance had to be given by the technical wing of the Ministry of Industry (the Directorate General of technical Development DGTD). Once everything was tied up and the unit was about to go into production, the entrepreneur had to go back to the Ministry of Industry for an 'Industrial Licence. Step 9

Additional Restrictions
In addition to these approvals, since the enactment of the MRTP Act in 1969, the firms covered under this needed to obtain separate MRTP clearances from the Department of Company Affairs. Further, resulting from the desire to promote small-scale industries, 836 items have been reserved for production in small-scale enterprises. Since 1956, there has also been a list of industries reserved for exclusive production in the public sector. Since 1977, there has also been a ban on the location of industries in the largest twenty to thirty cities. In 1988, this ban was extended to include municipal areas of all towns and cities and to specified areas of influence around the largest twenty-one cities.

Outcome of Licensing
The system had failed practically on all counts, whether it was regional dispersal, import substitution, or preventing concentration of economic power. Licensing would not even ensure the development of industries mainly according to Plan priorities. Moreover, the licensing system could not attain even its specific objectives. Licenses were issued in excess of capacity targets even in non-essential industries. Influential parties and large houses were permitted to preempt capacities. The follow-up of licenses was unsystematic and licenses remained unimplemented for long periods... (Paranjape, 1988).

Why the Licensing System Continued?

It seems the promotion of a sheltered home market had a common appeal to the bureaucratic authoritarian state, urban manufacturers, and multinationals that supplied technology and capital. Protection also met the state's objectives pursuing revenue and expenditure maximising activities through maximum revenue tariffs and export tariffs. Thus the interests of politicians, bureaucrats, multinationals, as well as domestic industrial houses all coincided to keep Indian industry sheltered through the operation of the industrial control system.

Assessing the Industrial Licensing System

The government appointed many committee in the 1960s to assess the System Swaminathan Committee, 1964; Mahalanobis Committee, 1964; Hazari Report, 1967; Dull Committee Report, 1969; and Administrative Reform Commission, 1969). Despite the findings of most of these early committees, that the licensing mechanism was not serving its purpose of channelizing investments into desired directions, there seems to have been a continuing inability of the government, until recently, to bring any substantative changes to the industrial licensing system.

Hazari Committee's Findings

That industrial-licensing has served to channelize investment into desired directions appears extremely doubtful. The gains in terms of balanced regional development and wider distribution of entrepreneurship were at best moderate. There is very little follow-up of licensing to see that approved projects fructify in time. In attempting to cover almost the whole range of largescale industrial development licensing, the Act inevitably loses sight of the relative importance of different projects/products, i.e. whether critical to the economy or otherwise, all applications will undergo similar processing.

Hazari Committee's Findings

'with all its defects the industrial licensing system did have a useful role to play though its limitations needed to be borne in view.' 1. The committee recommended that:
There should be a list of reservations for small scale industry production. Bans on further capacity creation should be utilized to prevent the creation of 'undesirable industries', particularly the production of 'non-essential luxury goods'.

The committee went on to recommend a whole host of other measures which would lead to more detailed rather than reduced control of industry.

What Changed the Course of History?

The stagnation of Indian industrial production between the mid-1960s up to the late 1970s induced some serious new thinking. Towards the end of the 1970s and by the early 1980s there emerged a growing consensus that Indian industry was exhibiting a slowdown in industrial growth due to low productivity, high costs, low quality of production and obsolete technology (Ahluwalia, 1985). Three important committees were set up in the early 1980s - the Abid Hussain Committee on trade policy, the Narasimham Committee on the shift from physical to fiscal controls and the Sengupta Committee on the public sector.

Recommendation of the three Committees

An easing up of trade policy, The substitution of physical and quantitative controls by fiscal and other means of macroeconomic management, The promotion of greater public sector autonomy in business and operating decisions and The need for measures for enhancing productivity efficiency and modernization. The result of such thinking was that there was some progress in the process of deregulation during the 1980s, though perhaps not as significant as is often believed.

Delicensing Activity in the 1980s

Two kinds of Delicensing took place. First, thirty-two groups of industries were delicensed without any investment limit. Second, in 1988, all industries were exempted from licensing except for a specified negative list of twenty-six industries. This exemption from licensing was, however, subject to investment and location limitations. On the trade policy front, the key change was increasing access of exporters to inputs at international prices. However, it seems that tariff protection to industry increased significantly during the 1980s relative to previous decades.

Industrial Scene in the Post Reform Phase

New Industrial Policy - 1991 FEMA to replace FERA Competition commission

New Industrial Policy - 1991

i) Enhancement of domestic competition through virtual abolition of industrial licencing except for a short list of industries related to security and strategic concerns, social reasons, hazarduous chemicals and overriding environmental concerns; ii) Reforms in the Monopolies and Restrictive Trade Practices (MRTP) Act to remove threshold limit of assets and elimination of requirement of prior approval for establishment of new undertakings, expansion, merger or amalgamations: iii) Enhancement of external competition through substantial deregulation of import procedure, virtual elimination of quantitative restrictions on capital goods and raw material and reduction in tariff rates;

New Industrial Policy - 1991

iv) Liberalisation of foreign investment approvals and foreign technology agreements; and v) Public sector reform including substantial dereservation of industries earlier re served exclusively for the public sector. The National Renewal Fund (NRF) was set up by a Government in1992 to protect the interest of workers affected by industrial restructuring. In terms of the approved guidelines, the NRF has two components viz. National Renewal Grant Fund (NRGF); and Employment Generation Fund (E G F).

NRGF
Provides assistance mainly for (i) worker counselling, retraining and redeployment; (ii) worker compensation packages in both the public and private sectors, and (iii) Interest subsidies to financial institutions offering loans at concessional rates for labour rationalisation. Funds were made available to Central Public Sector Units (CPSUs) to implement the Voluntary Retirement Scheme (VRS) as a mechanism for reducing their surplus labour force.

EGF
Provides assistance mainly to: (i) area regeneration schemes sponsored by the State Governments; and (ii) employment generation schemes in both formal and nonformal sectors. Employee Resource Centre (ERCs) have been set up by 20 CPSUs and workers retraining schemes are being implemented by Employee Assistance Centres (EACs) at five places. Besides, Ministry of Labour has made retraining facilities available for rationalised workers in 15 ITIs and 6 ATIs.

Regulation of Combinations
Section 5 of the Act, which deals with combinations, considers only those acquisitions, mergers or amalgamations which results in assets or turnover above the specified threshold limits or control of enterprises with assets or turnover above the specified threshold limits.

Threshold Limits
The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if
- In India, the asset value of more than rupees four thousands crores or turnover more than rupees twelve thousand crores; or outside India, in aggregate, the assets of more than two billion US dollars or turnover more than six billion US dollars; - Merger or acquisition of similar industries with assets greater than 1000 crores or turnover of 3000 crores . - post merger size

Such Mergers are void if they have an appreciable adverse affect on competition.

Power to Exempt
The central government is empowered to exempt from the application of this act, or any provision thereof, and for such period as it may specify;

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