1991: ECONOMIC REFORMS
The strategy of reforms introduced in India in July 1991 presented a mixture of macroeconomic stabilization and structural adjustment. It was guided by short-term and long-term objectives. Stabilization was necessary in the short run to restore balance of payments equilibrium and to control inflation. At the same time changing the structure of institutions themselves through reforms was equally important from long term point of view.
The new government moved urgently to implement a programme of macroeconomic stabilization through fiscal correction. Besides this, structural reforms were initiated in the field of trade, industry and the public sector.
Objective of Reforms
As per the Discussion Paper on Economic Reforms brought out by the Ministry of Finance in July 1993, the objectives of the reforms were:
“…to bring about rapid and sustained improvement in the quality of the people of India. Central to this goal is the rapid growth in incomes and productive employment… The only durable solution to the curse of poverty is sustained growth of incomes and employment… Such growth requires investment: in farms, in roads, in irrigation, in industry, in power and, above all, in people. And this investment must be productive. Successful and sustained development depends on continuing increases in the productivity of our capital, our land and our labour. Within a generation, the countries of East Asia have transformed themselves. China, Indonesia, Korea, Thailand and Malaysia today have living standards much above ours… What they have achieved, we must strive for.”
Major Steps in the 1991 Reforms
The major policy initiatives taken by the Government to fundamentally address the balance of payments problem and the structural rigidities were as follows:
- Fiscal Reforms: A key element in the stabilization effort was to restore fiscal discipline. The data reveals that fiscal deficit during 1990-91 was as large as 8.4 percent of GDP. The budget for 1991-92 took a bold step in the direction of correcting fiscal imbalance. It envisaged a reduction in fiscal deficit by nearly two percentage points of GDP from 8.4 percent in 1990-91 to 6.5 percent in 1991-92.
The budget aimed at containing government expenditure and augmenting revenues; reversing the downtrend in the share of direct taxes to total tax revenues and curbing conspicuous consumption. Some of the important policy initiatives introduced in the budget for the year 1991-92 for correcting the fiscal imbalance were: reduction in fertilizer subsidy, abolition of subsidy on sugar, disinvestment of a part of the government’s equity holdings in select public sector undertakings, and acceptance of major recommendations of the Tax Reforms Committee headed by Raja Chelliah. These recommendations aimed to raise revenue through better compliance in case of income tax and excise and customs duties, and make the tax structure stable and transparent.
- Reforms in Capital Markets: Recommendations of the Narasimham Committee were initiated in order to reform capital markets, aimed at removing direct government control and replacing it with a regulatory framework based on transparency and disclosure supervised by an independent regulator. The Securities & Exchange Board of India (SEBI) which was set up in 1988 was given statutory recognition in 1992 on the basis of recommendations of the Narasimham Committee. SEBI has been mandated to create an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation.
- Industrial Policy Reforms: In order to consolidate the gains already achieved during the 1980s, and to provide greater competitive stimulus to the domestic industry, a series of reforms were introduced in the Industrial Policy. The government announced a New Industrial Policy on 24 July 1991. The New Industrial Policy established in 1991 sought substantially to deregulate industry so as to promote growth of a more efficient and competitive industrial economy. The central elements of industrial policy reforms were as follows:
- Industrial licensing was abolished for all projects except in 18 industries. With this, 80 percent of the industry was taken out of the licensing framework.
- The Monopolies & Restrictive Trade Practices (MRTP) Act was repealed to eliminate the need for prior approval by large companies for capacity expansion or diversification.
- Areas reserved for the public sector were narrowed down and greater participation by private sector was permitted in core and basic industries. The new policy reduced the number of areas reserved from 17 to 8. These eight are mainly those involving strategic and security concerns. (Example, railways, atomic energy etc.)
- The policy encouraged disinvestment of government holdings of equity share capital of public sector enterprises.
- The public sector units were provided greater autonomy and professional management that could be helpful for generating reasonable profits, through an MOU(Memorandum of Understanding) between the enterprise and the concerned Ministry, through which targets that the enterprise had to achieve were set up.
- Promoting Foreign Investment: The government took several measures to promote foreign investment in India in the post-reform period. Some of the important measures are:
- In 1991, the government announced a specified list of high technology and high-investment priority industries wherein automatic permission was granted for foreign direct investment (FDI) up to 51 percent foreign equity. The limit was raised to 74 percent and subsequently to 100 percent for many of these industries. Moreover, many new industries have been added to the list over the years.
- Foreign Investment Promotion Board (FIPB) has been set up to negotiate with international firms and approve direct foreign investment in select areas.
- Steps were also taken from time to time to promote foreign institutional investment (FII) in India.
- Rationalization of Exchange Rate Policy: One of the important measures undertaken to improve the balance of payments situation was the devaluation of rupee. In the very first week of July 1991, the rupee was devalued by around 20 percent. The purpose was to bridge the gap between the real and the nominal exchange rates that had emerged on account of rising inflation and thereby to make the exports competitive. The 1991 economic reforms were focused primarily on the formal sector, and as a result, we have seen significant boom in those areas that were liberalized. Sectors such as telecom and civil aviation have benefited greatly from deregulation and subsequent reforms. However, liberalisation and economic reforms still have a long way to go, especially for the informal sector—including the urban poor who hold jobs as street vendors or rickshaw pullers, the agricultural sector, Micro, Small and Medium Enterprises (MSMEs) and tribals. The slow growth and stagnation in these sectors which have not seen any reform further highlights the significant role of the 1991 reforms in helping India’s economy become what it is today.
Industrial policy reforms were pushed further in the Union Budget (1999-2000).The major policy initiatives announced in the Budget include: (i) far-reaching rationalisation of the excise duty structure by reducing the existing eleven rates to only three (ii) restoration of 100 per cent MODVAT credit (iii) tax incentives for facilitating industrial restructuring through mergers and amalgamations (iv) removal of customs duty anomaly on steel (v) extension of Technology Upgradation Fund(TUF) scheme for textile industry to spinning industry (vi) support to domestic industry by imposing minimum 5 per cent customs duty on the majority of previously zero-duty imports and extending countervailing duty to capital project sectors (vii) extending infrastructure sector tax holiday to power transmission (viii) giving a strong thrust to road construction by imposing surcharge on diesel. The Budget declared a set of measures for the small scale sector including enhancement of eligibility limit for excise exemption, a new credit insurance scheme, extension of the scope of priority lending for the SSI sector etc. The Budget also announced review of Industries (Development and Regulations) Act, 1951, for shifting the focus of the legislation to development, instead of regulation.
Several measures have been taken for facilitating the inflow of foreign investment in the economy. The scope of the automatic approval scheme of the RBI has been significantly expanded. The Government has decided to place all items under the automatic route for Foreign Direct Investment/ NRI and OCB investment except for a small negative list. The negative list includes all proposals requiring industrial license under the Industries (Development and Regulation) Act, 1951; cases having foreign investment more than 24 per cent in the equity capital of units manufacturing items reserved for the SSI sector; and for all items requiring industrial license in terms of the locational policy notified under the New Industrial Policy, 1991. The negative list also includes proposals where the foreign collaborator has an existing venture / tie-up in India, proposals relating to acquisition of shares in an existing Indian company in favour of a foreign /NRI / OCB investor and all proposals falling outside the notified sectoral policy/caps or under sectors in which FDI is not permitted and/ or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route. The automatic approvals, however, would be subject to sector-specific ceilings on foreign investment. The Government has decided to set up a Group of Ministers for reviewing the existing sectoral policies and caps. Henceforth, subject to sectoral policies and caps, the automatic route will be available to all foreign and NRI investors with the facility to bring in 100 per cent FDI/NRI/OCB investment. All proposals for investment in public sector units, EOUs, EPZs, EHTPs (Electronic Hardware Technology Parks) and STPs (Software Technology Parks), would be eligible for automatic approval subject to the above parameters.
The Union Budget (1999-2000) permitted FDI upto 74 per cent, under the automatic route, in bulk drugs and pharmaceuticals. Foreign owned Indian companies have been allowed to make downstream investments within permissible equity limits under the automatic approval scheme. A Foreign Investment Implementation Authority (FIIA) has been set up for providing single point interface between foreign investors and the Government machinery. The FIIA, will be duly empowered to give composite/comprehensive approvals. A project monitoring unit has also been set up for facilitating implementation of projects having foreign equity of Rs.100 crore and above.
The Union Budget announced fiscal incentives and other measures for strengthening the capital markets and the banking system. These include: restructuring the US 64 scheme of UTI, a favourable tax treatment of incomes earned through mutual funds, abolition of stamp duty on transfer of debt instruments and taking up major programmes for reduction of NPAs in banks. Special thrust was given in the Budget to the housing sector, by announcing measures like raising tax deduction limit on interest on house loans for self-occupied houses, changes in foreclosure laws, increased depreciation to businesses for building houses for employees etc. Reforms, intending to restructure the public sector, were also carried forward in the Budget, by declaring the intention of the Government to encourage raising of market loans for VRS programmes, supported by interest subsidies or counter guarantees.
Introduction
The industrial policy resolutions adopted in India since Independence till eighties. Nineties marked a big departure fiom the old policy. The new policy was announced in two parts. The first part, announced on 24th July 1991, concerned the large industries including the medium-sized . ipdustries: The second part, announced on 6th August 1991, dealt with the small industries. Prior to this policy, several policy-statements governed the hctioning of New Industrial Polic) and 15conomic Reforms industries. The major policy formulation which has remained the building bloc, was, however, as discussed in the previous unit, the one announced in 1956, that followed the first policy-statement in 1948 immediately after the Independence. Subsequent announcements were by and large in the nature of minor changes in one or the other part or parts of the 1956 policy, largely to meet the problems faced in the years when these changes were made. These policy statements were made first in 1973, and then in 1977,1980,1985 and 1986. All these together did amount to some significant modification ofthe 1956 policy. But the essence ofthe 1956 policy was kept unchanged. However, the policies adopted were severely criticised. It was argued that these industrial policies have generated inefficiencies, under-utilisation of capacities, mismanagement, red-tapism etc. and a shift in the industrial policy was envisaged. Consequently we saw a new industrial policy in 199 1. It needs to be mentioned here that it was nut only the criticism but the surrounding international and national environment also led to shifts in policy towards liberalisation.
The Indian economy was in fact never under such severe strain as it was during 1990-9 1. The international factors like Gulf War, disruption of USSR and the uncertain political situation at the Centre brought about a considerable derating of India-s credit worthiness in world finance markets, which led to critical balance of payment position in the country. Foreign exchange reserves came down to an extremely critical level between July 1990 and June 1991 within the economy many disturbing factors like double-digit mflation along with delay in the implementation of the medium term adjustment package and the absence of the political stability on the domestic front further aggravated the strain to the Indian economy. Under such disconcerting features of the Indian economy, the Government took measures, one after another, and announced certain policy decisions in an attempt to redress the current economic difficulties. These included new industrial policy, exim policy, exim scrips, a policy for small scale and cottage industries, devaluation of the rupee and so on. All these policies represent as a full package policy reform to aim at quick revival of the momentum of the Indian economy.
Among the policies, which aim to liberalise the whole economy, the new industrial policy occupies the foremost place with an aim to raise industrial efficiency to the international level and, mainly through it, to accelerate industrial growth. The new industrial policy statement placed before the parliament on July 24,199 1, related to the following areas : industrial licensingpolicy, foreigninvestment, foreign technology agreements, public sector policy and Monopolies and Restrictive Trade Practices (MRTP) Act. The basic objectives of these policies, was to raise the eficiency and accelerate industrial growth.
Ends and Means of the Policy.
The new industrial policy sets two main objectives for itself. First was to create an environment for a progressive economy. The second was to make use of the market to foster industrial growth.
The overall aim of the policy has been to achieve a sort of development, which makes industries dynamic in their growth and which renders justice to the people. According to the policy statement, it aims at building a society wherein India grows as part of the world economy and not in isolation. In terms of concrete economic tasks and programmes, the policy aims at such important areas as the following: utilising hlly the indigenous capabilities of entrepreneurs; fostering research and development efforts for the development of indigenous technologies; mising investments; improvements in efficiency and productivity; controlling monopolistic behaviour; assigning the right areas for the public sector undertakings; and ensuring welfare as also skills and facilities to the workers to enable them to deal with the inevitability of technological change. As for the external sector is concerned, while the policy continues to pursue the goal of self-reliance, it places greater emphasis on building up of our ability to pay for our imports through our own foreign exchange earnings.
In achieving the various aims, the policy envisages the use of market in a big way. It intends to dismantle the restrictive and regulatory system and thereby unshackle the industrial economy from the cobwebs of unnecessary bureaucratic control. The allocation of resources among industries in respect of type of industries, size of their scale and the nature of products, will be determined by the market prices. This fkeedom will also foster competition among the entrepreneurs. It is also intended to develop capital markets so as to provide avenues of financial resources for the entreprenem. This involves the emergence of a variety of financial instruments like loans, shares, debentures etc. The policy also provides an easy entry to the foreign. direct investments (i.e., equity capital) and technology. Even foreign private trading houses have been assigned an important role in the expansion of India's exports. Role of the public sector, however, is limited to some essential sectors of the industry. The upshot of the whole set of means is that the market and the private entrepreneur and not the bureaucrat will govern the industrial development, with public sector undertakings (PSUs) providing the support, albeit indirectly.
Features of the new Industrial Policy.
There are several salient features of the New Industrial Policy that dc:serveparticular attention. These include steps taken towards greater marketisation of the industrial economy by dismantling controls, in particular; to ensure decentralisation of the New Indust~.ial Policy and Ecor~omic Reforms industrial activities to rural and backward sectors of the economy; to redefmdpublic sector activities; and to create an environment conducive to direct foreign investment.
Strengthening Private Sector
A major step towards a greater marketisation of the industrial economy is the abolition of the licensing system for a large number and a large variety of industries. NIP changes the set-up of the country towards a greater role for the private sector.
a) Larger Scope
Besides the existing industries in the private sector, some provisions in the Policy amount to an enlargement of the field of operation for the private sector. The contraction in fields for the operation of the public sector, for example, leaves open more space for the private sector to operate. A number of activities, which have so far been exclusively in the realm of the public sector, have now been thrown open to the private sector. The public sector has now been left with only six reserved industries, with the remaining eleven having been thrown open to the private sector. These include aircraft manufacture, air transport, ship-building, processing of non-ferrous metals, iron and steel, generation and distribution of electricity, telephones and telephone-cables, telegraph and wireless apparatus, heavy castings and forgings of iron and steel, heavy plant and machinery required for iron and steel production for mining and heavy electrical plant, including large hydraulic and steam lubines. Besides these old industries, there will be new industries that will come up in the private sector. In addition to this the expansion in the private sector will take vlace on account of the increase in the number of industries wherein foreign equity or foreign direct investment is now allowed. The number of such group of industries 1,- 34, which includes hotels and tofism industry, all food-processing industries.
b) Dismantling of Controls
The privaie sector has further been strengthened as it has almost been fieed fiom the govenlment restrictions in respect ofits functioning. The industrial licensing reqwred for the creation of industrial capacities or investment, has been abolished for all projects except for 15 specified groups. These areas pertain to industries related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental reasons, and items of elitist consumption. The exemption from licensing also applies to all substantial expansion of existing units. There is again no restriction on broad banding or producing any product as long as additional investment in plant and machinery is not involved. As a consequence, the industries are not required to register themselves with the government. They are only required to file an information meniorandum on new projects and substantial expansion. Similar facilities are also available for other industries as well if agreements pertaining to the transfer of foreign technology do not require the expenditure of free foreign exchange. The entry of foreign investors in the country with equity share up to 5 1 per cent is allowed with no limitation. All this amounts to the use ofmarket-related prices and incentives, rather than government-administrative fiat for making commercial decisions. The private sector has thus been expanded and the activities have been marketised.
Dispersing Industries
ilnotlier feature of the NIP, which is significant for the economy bears upon the location of new industries. The provisions in respect of this aspect are to ensure dccentralisation of the industria I activities geographically. Tlic thrust ofthe policy is to shift industries away from big congested cities to the rural and backward areas. For example, in respect of locations other than cities of more than 1 million population, the industrialist will not be required to obtain industrial approval fiom the Central Government except for industries subject to compulsory licensing. However, regard to such cities (i.e., with population greater than 1 million), which require industrial regeneration, a flexible location policy would be adopted. In the big 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. Incentives (in the form of cheap land and credit) are also thought of as instruments to attract industries to village and backward regions. The new industrial policy also favours the expansion of agro-based industries near the fming areas. In the sphere of small industries and rural industries, a number of provisions have been made to ensure their development in small towns and villages.
Limiting the Role of Public Sector
In view of the many problems the public sector undertakings (PSUs) suffer from such as very low rate of return on the capital invested insufficient growth in productivity, poor management etc., the new industrial policy seeks to reexamine their placing in the economy. A broad fide has also been indicated within which the PSUs are to function.
a) Unsuitable Areas
The policy pinpoints the areas, which being not fit for the PSUs, are to be vacated by them. One is a set of sick industrial units, which the public sector took over and which accounts for almost one-third of the total losses of Central Public enterprises. There is another group ofpublic enterprises, quite large many in numbers, which are engaged in producing consumer goods and services. These do not fit into the original perception of PSUs, which are to be at the commanding heights of the economy. Besides, the policy promises to make a review of the existing portfolio of public investments with greaterrealism. It is mentioned that this review will be in respect of industries based on low technology, small scale and non-strategic areas, inefficient and unproductive areas, areas with little social considerations, and areas where the private sector has developed suficient expertise and resources.
b) Suitable Areas
The Policy at the same time identifies quite a few priority areas for growth ofpublic sector in the hture. These areas coverthe following: essential infrastructure goods and services; exploration and exploitation of oil and mineral resources; technology development and building ofmanufacturing capabilities in areas, which are crucial in the long-term development of the economy and where private sector investment is inadequate; manufacture of products where strategic considerations predominate such as defense equipment.
In this light, the policy has listed six industries, which are to be reserved for the public sector. These are: defense products, atomic energy, coal and lignite, mineral oils, railway transport, and minerials relating to the atomic energy. While these are the reserved areas, it is also stated in the policy that the public sector will not be barred from entering areas not specially reserved for it.
C) Improving Efficiency of PSUs
The major concern for PSUs expressed in the industrial policy has been their poor performances and low level of efficiency, Accordingly, it emphasised on measures to make these enterprises more growth-oriented and technically dynamic. Units that New Industrial Policy and Economic Reforn~smay be faltering at present but are potentially viable must be restructured and given anew lease of life. It is also emphasised that the government will strengthen those public enterprises, which fall in the reserved areas ofoperation or are in high priority areas or are generating good or reasonable profits. It is provided that such enterprises will get a much greater degree of management autonomy through the System of Memoranda ofunderstanding, specifjrlng the rights and obligations of the enterprises and the government. More importantly, it has been envisaged that competition will be inducted in these areas by permitting private sector also to participate in these activities. In the case of selected enterprises, part of government holdings in the equity will be disinvested in order to provide further market discipline to the performance of public enterprises.
d) Extending the MRTP Act
In an unprecedented move, the new policy extends the jurisdiction of MRTP Act to the public enterprises. This will be a legal safeguard against the working of PSUs to the detriment of public interest in respect of monopolistic, restrictive and unfair trade
Liberalisation of Foreign Investments
The new policy expects significant contributions fiom foreign entrepreneurs in the fields of investments, trade and technology. For this liberal provisions have been made for their easy entry into the industrial scene ofthe country.
The entry of foreign investors in the form ofdirectlequity investment has been allowed up to 5 1 per cent of the total investment in a project (as against 40 per cent before). This majority ownership will enable foreigners to control the working ofthe enterprises in which they invest. The areas in which these investments are to be invited are high priority industries, requiring large resources and advanced technology. The agreements between foreigners and Indians in respect of these projects will get automatic approval fiom the government. The entry of foreign investors in these industries up till now has been given (up to 40 per cent of equity) but only on a case by case basis, that is on adiscretionary basis. Now the entry will face no bottlenecks. Th~s will make the Indian policy on foreign investment transparent, and it is hoped that such a flamework will make it attractive for companies to invest in India.
Apart from foreign direct investments, the new policy also seeks help from foreign trading companies in the field of exports fiom India. It is stressed in the policy that the promotion of exports of Indian products calls for a systematic exploration of world markets, which is possible only through intensive and highly professional marketing activities. The policy further states that to the extent the expertise ofthis nature is not well developed so far in India, the Government will encourage foreign trading companies to assist us in our export activities. To get an access to the world markets as also to attract foreign investments and advanced technology, the Govermnent is to appoint a special board to negotiate with the worlds7 largest industrial manufacturing and marketing firms.
The industries in which the approvals of foreign investments and foreign technology have been made automatic are important ones for the Indian economy. These industries are: metallurgical industries; boilers and steam generatmg plants; electrical equipment; teleconnmunication equipments; transportation; industnal machinery; agricultural machinery; industrial instruments and chemicals; other fertilisers. These industries are largely in the nature of those producing capital goods as also those basic materials, which are relevant strengthening the productive capacity of the economy as also in injecting new and most modem products. These require large investments and the most advanced technologies.
Foreign Technology
The entry of foreign technology too has been made easy in the new industrial policy. There is a provision that allows automatic approval fortechnology agreements related to high priority industries. Similar facilities will also be available for other industries if such agreements do not require the expenditure of free foreign exchange. Further, it is also provided that no prior clearance would be required for the hiring of foreign technicians and foreign testing of indigenously developed technologies. With no interference by the government, it is hoped that Indian business will develop relationshp with the supplias of foreign technology (as also foreign investors) on a continuing basis and make their decisions on the bases of commercial considerations. It is hrther hoped that the Indian businesses will make necessary efforts to absorb foreign technologies by devoting larger hds to research and development.
Controlling Monopolies
The restrictions on the functioning of monopolies, embodied in the Monopolistic and Restrictive Trade Practices Act (MRTP Act) in operation since June 1970, have also been removed. Instead emphasis now is on tackling the undesirable monopolistic activities.
a) Removal of Asset Limit
ln terms of the position so far, the companies with assets of Rs. 100 crores or more were required to seek government's prior approval in respect of a number of their activities. These activities pertain to the expansion of existing firms, the establishment of new undertakings, mergers, amalgamations, and takeovers. They had even to seek permission from the government for appointment of certain directors of these companies. Restrictions also existed in respect of the acquisition of and transfer of shares of these companies, The new industrial policy does away with the concept of asset limit itself. This eliminates the requirements of prior approval of the Central Government in respect of the activities concerning expansion, new undertakings etc. This change only removes procedural delays because in the past MRTP companies were rarely rehed to set up new project or expand the existing ones etc. The change thus conforms to the reality. But in doing so, the companies have been saved fkom the time-consuming procedures, involving heavy costs in seeking and getting approvals for their proposals.
b) Curbs on anti-social activities
The emphasis has now shifted to taking appropriate action against monopolistic, reqtrictive and unfair trade practices on the part of monopolies. These dominant uddertakings or monopolies have now been identified as those who control over 25 per cent share of the market. In fact, from this angle the new industrial policy has widened and strengthened the provisions of the MRTP Act, and their implementation through the Monopoly Cornmlssion. For example, the public sector undertalungs, hitherto outside the purview of this Act, have been brought within the orbit ofthis law. The shares too have been included within the definition of 'goods'. Further, chit funds and dealings in real estate have also been brought within the definition of services. This way the malpractices in these fields will get another avenue ofredressal, besides regular courts. The new policy also provides for the st;engthening ofthe MRTP commission so that it can undertake more effectively the investigation of malpractices on its own or on complaints received from industrial consumers or other classes of consumers or other classes of consumers.
Promoting Small Sector Industries
The new industrial policy for the small sector industries. Announced on 6 August 1991, envisages a number of changes in the old policy, with a view to making them strong and viable units.
In this connection it may be useful to have an idea of the constituents of the small sector. These are of varied nature but have been put together under one head Small Scale Industries (SSI). Sometimes these are grouped under the title small scale, khadi and village industries. The constituents ofthis sector are : small industrial units (with investment in piant and machinery up to Rs. 60 lakhs; ancillary units with investment in plant and machinery up to 75 lakhs; tiny industrial units with investment in plant and machinery up to Rs. 5 lakhs); handloom; handicrafts; khadi and village industries.
The most important feature ofthe policy is the four-point scheme to provide financial support to the SSI sector. First of all, it tries to ensure the supply of adequate flow of credit to these industries to meet their entire needs on a normative basis, i.e., in terms ofwhat ought to be,their needs. It marks a departure from the old policy of concentrating on providing cheap credit. Besides providing credit-needs of industrial units, this provision also includes identification of select industries in large clusters, which would be provided financial support by Small Industries Development Bank of India (SIDBI).
Second, the new policy allows equity participation by other or non-SSI industrial undertakings in the SSI-sector, up to 24 per cent of the total shareholding. This is being done to provide small units access to the capital market and to encourage modeinisation, technical upgradation, ancillarisation (i.e., producing for the nonSSI firms) and sub-contracting (i.e., taking on the work in parts on contract basis from the main contractor).
Third, a limited partnership is to be allowed which would limit the financial liability of the new and non-active partnerslentrepreneurs to the extent of capital invested. This would enhance the supply of risk capital to the SSI sector.
Fourth, provisions have been made to ensure speedy payments arising fiom the sale ofproducts of the SSI sector. One such provision, called factoring service, involves payments to the SSI by SIDBI and/or by agenkies to be operated by commercial banks' before these are collected from the buyers by these agencies. This will, to a great extent, solve the problems of the delayed payments to the small sector by the large units.
The new policy also provides for the supply of raw materials and marketing facilities to the SSI units. As far as indigenous raw materials are concerned, the SSI units would be accorded priority by the government while allocating these materials. It is also to be ensured that the small sector gets adequate and fair shai-e of the raw maiirials available, both indigenous and imported. However, it will be seen that in so doing the entry of new units in the small sector is not adversely affected. As for marketing, the policy envisages market promotion of their products to be undertaken by cooperatives, public secto; institutions and other professional agencies.
Special Measures for Handloom, Handicrafts, Khadi and Village Industries
For the first time these sectors of the small industries have been treated with special measures. Conceived as a package, these consist of several schemes and facilities. The existing schemes for the handloom sector are, for example, proposed to be revised under three major heads: project package scheme under which the area-based approach will be adopted to improve technology and marketing facility; welfare package scheme under which the number of welfare schemes will be increased and the hds earmarked for them substantially augmented; schemesforparticipation in the share capital will be redrawn for imparting a better management system.
As for the "handicd sector", the policy envisages setting up of "C& Development Centres'' to offer the following facilities: supply ofraw materials, design and technical guidance, marketing support, training and procuring ofrelated inputs in an integrated and area-based manner. Measures are also proposed to increase exports of handicrafts through new marketing channels like trading companies, departmental stores etc. In respect of khadi and village industries, the policy promises to initiate measures to encourage activities related to Research and Development and better flow of credit from the financial institutions. In promoting all these activities the policy lays greater emphasis on the qdty and marketability ofproducts in accordance with the consumer preference, rather than merely on rebates and subsidies.
Shortcomings
While the NIP has much to promote growth and efficiency, it has paid little attention to a number of serious problems. As such the industrial scene still continues to be New Industrial Policy and Economic Reforms marked by some highly unsatisfactory features. These include setting no target for employment growth, absence of exit policy for the entrepreneurs, and making no effort for inducing R&D. In this section we discuss these shortcomings at length.
Overlooking Employment
The important aspect of the economy, which has beenneglected in the NIP is that of generation of employment to match the increase in the labour-force. This is particularly so in the organised sector comprising of large and medium industries. The NIP seems to turn its focus away from this problem and displays the same fetish for growth alone, as has been the case during the eighties. The industries like the petrochemicals, chemicals and allied products and electrical machinery and appliances, which were the prime movers of industrial growth in the eighties continued to be in the lead even at present. These industries are technologically rigid in terms of factor proportions. Hence employment-generating capacity of these industries is limited. Again, the industrial growth in the eighties has been more capital-intensive, energy-intensive and import-intensive. All these characteristics indicate the low labour absorption capacity of the industrial growth.
Unfortunately, the NIP is almost silent in specifjlingmeasures to rectifL this lopsided industrial structure, which is marked by chemical-based industries and consumer durable industries. These are the industries in which we do not have comparative advantage. Equally importantly, there is little provision to shift the emphasis on to industries related to basic metals and alloys and machinery and machine tools. These are the industries in which we have comparative advantage and which are employment intensive. Rather than increasing employment, the NIP may actually nrorsen it. The foreign investments, along with foreign technologies that the NIP allows almost fi-eely, can do little in this regard because these are capital-intensive in nature. Expressed in terms of the lack ofspecific measures for increasing employment, it amounts to saying that as before the employment will be a byproduct of industrial growth of the type, which prevailed during the eighties.
Neglect of Linkages Between Industry and Agriculture
In its rather over-concern for liberalisation, the NIP seems to have ignored some very important matters about the pattern of industrial development. One is the need to reorient the industrial production so as to conform it to the country's endowments or potentials. Another important matter, overlooked by the NIP, concerns the linkages between the industry and agriculture. The petrochemicals, and chemical-based industries, which at present occupy a high position in the industrial scenario, have little to offa by way ofproviding links with agriculture. This brings in the question of agriculture-based industries, which take machines fi-om industrial sector and raw materials and manpower from the rural sector, and gives to both a variety of items of consumption. Besides, these industries can produce much for exports. But unfortunately this industry has not received any special mention in the NIP.
No Exit Policy
One serious drawback of the NIP is the lack ofprovisions facilitating exit for the entrepreneurs. You will learn about the exit baniers in detail in Unit-33, Block- 10. There are many removals/relaxations of restrictions, which make for easy entry into industry. But there is very little to get out if the business goes into losses and there is no hope ofrecovery. This facility to stage exit is all the more necessary for the old , weak units because with the entry of large many new industries they will be under great strain. An exit policy is, in fact, essential also for the new entrants, for no rational producer can be expected to enter a market, which he may not be able to exit, when going is not good, or when he wants to change over to a more profitable line.
Little Incentives for R&D
The NIP seems to confine to the liberalisation of the environment for dynamic industrial development. This, no doubt, is important. But no less important is the role ofresearch and development in making industry innovative in respect of the resource-use, processes and products and their marketing. Two key factors in this field have been left out. One is in respect of the size of resource and sources from which these activities are to be financed. In these fields both the private and the public sectors have to contribute a lot, with greaterparticipation by the latter. There is, however, nothing about it that has been included in the NLP. Another issue in this field concerns the question of the intellectual property rights i.e., protection of the inventions in the form of patent, trade mark, and copyright.