industrial sector reforms in globalization era doc

2 Industrial Sector Reforms in Globalization Era % To determine the nature of the machinery which will be necessary for securing, the successful implementation of each stage of the plan

‘The industrial development that took place in

India prior to independence and sometime

thereafter was originally unbalanced Not

‘only was it largely concentrated in a few

developed States, but within them it was

confined to a few cities Our first Prime

Minister Pandit Jawahar Lal Nehru initiated

‘major efforts towards making India self

sufficient towards Industrial Products Be-

cause he felt that without Industrialization

any country cannot become a developed

country The industrial reforms initiated by

him at that time although were slow but they

aved the path towards better tomorrow

iow India is said to be one of the

Industrialised countries in the world

Economic reforms have had a positive impact

on the investment climate in the country

They have also evoked a strong positive

response from foreign investors and portfolio

‘managers There has been an encouraging

trend in domestic investment The editor of

this book has tried to explore the Indian

economic reforms and its position in the

global context It is an academic excercise

hich is believed to benefit all section of the

Industrial Development Strategy and

Growth under Indian Planning

| Monetary and Fiscal Policies

5 Industrial Sickness

Concentration of Economic Power

‘Company Law in India

MRTP Act

Price and Distribution Controls

Money and Capital Markets,

Foreign Capital and Technology

GATT/WTO and Trade Liberalisation

Regulation and Promotion of Foreign

21 Strategic Management : An Introduction

22 Strategic Management Process

23 SWOT Analysis and Strategy Formulation

Industrial Sector Reforms in

Globalization Era

This one

Me

Industrial Sector Reforms

in

Globalization Era

P.K Jalan

SARUP & SONS

NEW DELHI - 110 002 (INDIA)

Sarup & Sons

Industrial Sector Reforms in Globalization Era

Published by Prabhat Kumar Sharma for Sarup & Sons, Laser typesetting at Manas Typesetter,

‘New Delhi Printed at Mehra Offset Press, Delhi

Preface

‘The Tenth Five Year Plan makes a break from the past in terms of development strategy Stikingly bold and original new initiatives are in hallmarks These measures are sure to unleash tremendous entrepreneurial energy leading to a quantum jump in India’s economic growth rate Inasmuch as this plan is not an undifferentiated continum of the past planning era, projections of growth rate rooted in historical data are passe It is therefore, quite surprizing to read and hear skepticism with regard to 8 per cent GDP growth rate targetted

in this plan

Driven, on the one hand, by rising economic and social aspirations and external conditions, predominantly WTO related market forces on the other hand a highly competitive environment is rapidly emerging Demand for enhanced value in terms of cost and quality; consumer tastes and preferences shifting perceptibly in favour of environment-friendly products; and regulatory pressures for sustainable industrial processes and practices based on life cycle analysis of impact on environment are some of the other important factors emphasising the need for continuous improvements in productivity and efficiency in the allocation of resources

In any case, no country can isolate itself competely from the forces being unleashed

by a rapidly globalizing community of nations A dynamic policy environment should not, however, be persived as a looming threat since it also offers immense oppertunities

to capture much more affluent market outside the country

The Tenth Plan envisages a comprehensive and coherent strategy for attaining rapid industrial growth Deepening and widening of economic reforms to create a positive investment climate condusive to a dominant private sector role not only in production of goods and services but also in the setting up and maintenance and operation of state-of- art infrastructure, capacity building in industry in order to make it internationally competitive, enforceing a level playing field with effective and transparent rules of fair play

‘The progress of Indian industry in the next decade would be pari passu with that of the government in creating truly competitive, hassle free and investor attractive policy environment backed up by world-class infrastructure on ground As we look ahead, an unfinished agenda awaits us At top of this the second generation economic reforms pick

up momentum, spread their benefits far and wide in visible reinforcing positive forces which will further accelerate the pace of development and economic growth

Contents

3- Tndustrial Development Strategy and Growth under Indian Planning 37

S Industrial Sickness

Tadeo

1 Planning in India

‘The pattern of economic development in India is very significantly affected by government planning The direction of the development pattern of the various sectors and the relative Priorities within each sector are determined by the Five Year Plans The scope and prospects of different industries and other business, therefore, depend, to a very large extent on the development planning, It may be noted that even the development plans for the agricultural sector have a number of implications for the industrial and commercial sectors For example, plans to boost agricultural production may increase the demand for agricultural machinery like pumpsets; inputs like fertilizers, pesticides and better seeds; materials like cement and steel (to build up irrigation systems etc.) and so on

‘The increase in the agricultural income in turn would increase the demand for the output

of the consumer goods industries, other industries and services

A lot of information needed for business decision-making like investment decision- making can be obtained by analyzing the development plans like the Five Year Plans

THE PLANNING MACHINERY

‘The Planning Commission

‘The Planning Commission was set up in March 1950, by a Resolution of the Government of India, with the following functions

() To make an assessment of the material, capital and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirements:

(W) To formulate a plan for the most effective and balanced utilisation of the country's resources:

(II) On a determination of priorities, to define the stages in which the plan should bbe carried out and propose the allocation of resources for the due completion

of each stage:

iv) To indicate the factors which tend to retard economic development, and determine the conditions which, in view of the current social and political situation, should bbe established for the successful execution of the plan;

2 Industrial Sector Reforms in Globalization Era (%) To determine the nature of the machinery which will be necessary for securing, the successful implementation of each stage of the plan in all tis aspects: (i) To appraise from time to time the progress achieved in the execution of each stage of the plan and recommend adjustments in policy and measures that such, appraisal may show to be necessary: and

(vii) To make such interim or ancillary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it, or ona consideration of the prevailing economic conditions, current policies, measures and development programmes, or on an examination of such specific problems

as may be referred to it for advice by Central or State Governments

From the beginning, the Prime Minister has been the Chairman of the Planning Commission It has a Deputy Chairman and full-time members who include eminent economists and experts in various fields At times the Deputy Chairman is also the Minister for Planning, who may be assisted by a Minister of State for Planning From

an early stage, the Minister of Finance has been a member of the Commission As regards the members of the Commission, the Administrative Reforms Committee's Study Team

on Planning Machinery had suggested that “the members should be chosen for their expertise, wisdom and knowledge of handling men and affairs, and what we need is not narrow specialization, but wide knowledge and experience in major areas of development, such as agriculture and rural economy The persons chosen should enjoy a reputation

In the country as a whole for their wisdom, impartiality, integrity, and objectivity.” For administrative purposes, the Commission has a Secretary who 1s assisted by a Joint Secretary and a Deputy Secretary

With a view to ensuring the investment decisions on the projects to be included in the Plan are taken after a thorough examination of project estimates and a consideration

of the other alternatives that are available, a Project Appraisal Division has been set up

In the Planning Commission, whose main functions are:

() To suggest standard formats for the submission of projects and procedures for their techno-economle evaluation;

(ii) To conduct an actual techno-economic evaluation on the strength of the cost- benefit analysis of selected major projects and programmes suggested to the Planning Commission:

() To assist State Governments and Central Ministries in giving effect to standardized formats and procedures for project evaluation:

(lv) To undertake and support research leading to a progressive refinement of the methodology and procedures of project evaluation; and

W9) To make an economic appraisal of projects which come up for government sanction

‘There is also a Programme Evaluation Organization attached to the Planning Commission Its main functions are:

() To study the progress of the programme and to measure its impact on the soclo- economic life of the rural people:

(i) To ascertain the reasons for the success or failure of different items of the programme: and

(iu) To indicate the direction in which improvements may be sought

‘The Programme Evaluation Organization has a number of evaluation units in differe

Planning in India 3 parts of the country and is increasingly devoting itself to studies and investigations bearing on specific problems

‘The Planning Commission functions with a serles of Divisions and Sections, cach headed by a senior officer designated usually as Adviser or Chief or Joint Secretary (depending partly upon the particular officia’s position in the general structure) A few

of the Divisions are headed by middle grade officers, known as Directors, who work generally in association with other senior officials The full-time members of the Planning Commission assume responsibility for the day-to-day work of particular Divisions or Sections although the Commission functions as a body and tenders advice jointly on all important policy matters The various Divisions may be divided broadly into two categories: (a) General Divisions, which are concerned with certain special aspects of the entire economy; and

(b) Subject Divisions, which are concerned with specified fields of development

‘The Planning Commission has a Division for Perspective Planning, which is expected

to provide general guidance for work on long-term development undertaken in detail in different Divisions Co-ordination of work and operations within the Planning Commission,

is undertaken by a Plan Co-ordination Section

‘The NDC

A number of Committees and Commissions are also working under or associated with the Planning Commission One of the most important, among them is the National Development Council (NDC) The NDC is presided over by the Prime Minister and Is composed of Union Cabinet Ministers, Chief Ministers of States and Union Territories (The Union Territory of Delhi is represented by the Lt Governor and Chief Executive Councillor), and Members of the Planning Commission The other Union and State Ministers may also be invited to participate in the deliberations of the Council The Secretary of the Planning Commission acts as Secretary of the NDC, and the Commission

is expected to provide such administrative and other support as may be necessary The main functions of the NDC are:

( To prescribe guidelines for the formulation of the National Plan, including the assessment of the resources for the plan:

(I) To consider the National Plan as formulated by the Planning Commission: (i) To consider important questions of social and economic policy affecting national development; and

(iv) To review the working of the plan from time to time and to recommend such measures as are necessary for achieving the aims and targets set out in the National Plan, including measures to secure the active participation and co: operation of the people, improve the efficiency of the administrative services, ensures the fullest development of the less advanced region and sections of the community, and through sacrifice borne equally by all the citizens, build up resources for national development

From the functions mentioned above, it is quite obvious that the NDC has a decisive role in the formulation and follow up of the execution of the National Plan Its role signifies, the federal and democratic nature of the Indian planning,

4 Industrial Sector Reforms in Globalization Era

STATE PLANS

State Plans account for about one-half of the total outlay of the Government under

a Five Year Plan The subjects that come under State jurisdiction include such vital sectors of development as agriculture, small industries, irrigation and power, roads and road transport and education and social services

‘Asuccessful implementation of major national policy objectives calls for an organisation

at the State level which can co-ordinate effectively and provide guidance to local democratic bodies, and take a wider view of development than is generally possible for individual departments The States have Planning Boards and Departments which coordinate the work of other departments for the preparation of development plans, and present reports

on the execution of State Plans State Planning generally receives dircetions from a committee of the State cabined and is supported by the State Statistical Bureau

FORMULATION OF THE PLAN*

‘The preparation of a Five Year is usually spread over a period of two to three years

“The first stage is the consideration of the general approach to the formulation, involving

an examination of the state of the economy, an appraisal of past trends in production, and the rate of growth in relation to the long-term view of the economy Preliminary conclusions on these and related matters are submitted by the Commission to the Central Cabinet and to the National Development Council On their approval, these are published

ân the form of a document and circulated widely for country-wide debate

The second stage consists of studies which are intended to lead to a consideration

of the physical content ofthe plan While these studies proceed, the Planning Commission Constitutes groups for each sector, composed of its own specialists and those of Ministries and non-official experts, which review the situatjon in their respective flelds and make the assumption to be made in the formulation of the plan, and indicate the targets of production to be achieved

While preliminary documents are being debated throughout the country, the Commission holds detatled discussions with the Union Ministers, State Governments and Union Territories at the highest level The Consultative Committee of Members of Parliament

on Planning keeps in close touch with plan formulation constantly by periodic meetings and informal discussions

On the basis of the preliminary studies undertaken by the groups and discussions with the various Interests, the Commission presents the main features of the plan under formulation in the form of a draft plan, which is discussed in detail by the Cabinet and

ts placed again before the National Development Council With the approval of the Council, the Draft Plan is published for public consideration and country-wide debate

“The comments and suggestions on the Draft Plan offered by Members of Parliament and people from different walks of life are taken into consideration in the preparation

of the final document of the plan This document prepared by the Planning Commission, outlines the objectives, policies and programmes of the plan It is once again submitted

to the Cabined and the National Development Council

With such modifications as the National Development Couneil might suggest, the document Is presented to Parliament for final approval

Adopted from “How A Plan is Formulated,” Yojana, 15th August 1980, p 45,

Planning in India 5

REVIEW OF THE PLANS

‘The era of planned development dawned in India with the launching of the First Five Year Plan on April 1, 1951 The process of implementation of Five Year Plans was, however, interrupted in 1966, after the completion of the Third Five Year Plan by the end of March

1966, The Fourth Plan, which should have, in normal course, commenced in April 1966 did not get off on schedule due to some problems during the Third Plan which seriously disrupted the development process, like the aggressions by China and Pakistan and the severs drought in the country, particularly in the last year of the Third Plan, 1965-66 (and also the year that followed) resulting in fall income, sharp rise in prices and fall {in savings: serious balance of payments problems which led to the devaluation of the Rupee by 36.5 percent in June 1966 ete

‘The Fourth Five Year Plan was put off by three years The intervening period between the Third and the Fourth Plans (Le 1966-67 to 1968-69) had Annual Plans This period

is referred to by some people as Plan Holiday

‘The Political change at the Center led to a premature end to the Fifth Five Year Plan,

‘The Janatha Government which assumed power in 1977 terminated the Fifth Plan at the end of the fourth year, Le In March 1978 instead of March 1979 and formulated

a Draft Five Year Plan for 1978-83

‘The Janatha Government also introduced the Rolling Plan Under the rolling plan, when one year elapses another year is added to the planning horizon so that we will always have a ‘Five Year Plan’ The main advantage claimed for the rolling plain Is that plan performance can be reviewed and targets revised on the basis of the changing situation However, the success of rolling plain in a county like India ts constrained by the non-availability of up-to-date data needed for such revisions

‘The fall of the Janatha Government also led to the end of the Five Year Plan formulated

by them The Congress Government which came to power in 1980 terminated the Five- Year Plan formulated by the Previous government at the end of its second year and formulated a Five Year Plan for 1980-85 (the Sixth Plan} On the Completion of the Sixth Plan, the Seventh Five year Plan was launched in April 1985

‘The main objectives of the Indian plans have been:

( Alleviation and ultimate removal of unemployment and poverty

(W) Improvement in the standard of living

(i) Optimum utilization of the national resources

‘The avowed objectives of planning like rapid increase in income, generation of employment, social of re distributive justice, self-reliance etc are obviously means to achieve the objectives or aspects of tite objectives mentioned above

‘There have been changes in the priorities of development and emphasis on objectives through the plans For example, the development priority shifted from agriculture in the First Plan to basic and heavy industries in the Second Plan The Third Plan recognized the importance of export promotion and the Fourth Plan emphasized self-reliance as an objective of development ‘Growth with Social Justice’ has been recetving added emphasis since the Fifth Plan The Fifth Plan, which realized that ‘a direct attack on poverty’ was necessary for rapid eradication of poverty, formulated-a specific package of programmes, known as the minimum needs programmes, to improve the living conditions of the poor and these programmes have been continued, with modifications, in the subsequent plans

6 Industrial Sector Reforms in Globalization Era

A significant step-up in the rate of growth of the economy, strengthening the re distributive bias of the public policies and services In favour of the poor were among the major objectives of the Sixth Plan The focus of the Seventh Plan is on food, work and productivity

Performance

Although the Plans have mostly failed to achieve the targets and shortfalls are conspicuous in several areas, India has made, undoubtedly, very significant progress With about 30 per cent of the population still below the poverty line, India is one of the largest industrial powers in the world and has the third largest stock of scientific

‘manpower

‘When compared to the modest targets, the performance of the First Plan was satisfactory Though the industrial sector failed to grow up to the targets, the Sixth Plan could achieve the overall growth target because of the better performance of the agricultural and service sectors Performance of all other plans was rather unsatisfactory, judged by the achievement of the growth targets

‘The long-term average annual growth rate of the economy was only about 3.5 percent and of the per capita income about 1.5 per cent There has, however, been an acceleration

of the growth rates since the Sixth Plan

It is common to criticize the Indian planning for its failures, pointing out the magnitude of poverty, unemployment, housing problem etc Prevailing today despite nearly four decades of planning According to the estimates of the Planning Commission, even at the end of the Seventh Plan (March 1990) about 211 Million people would still

be below the poverty line The total population of only a few countries like China, the USSR and the USA is more that the size of the Indian population below the poverty line Similarly the number of people unemployed in India is larger than the labour force of

‘many countries; the number of households in India without satisfactory housing is larger than the total number of household in most countries In fact, the number being added

to the Indian population during the decade of 1980's Is larger than the total population

in most of the countries All these highlight the gigantic task facing a poor nation It 1s, therefore, not right to view the prevalence of certain problems of large magnitude only

as a reflection of the failure of the planning: they should also be viewed as alarming problems of the magnitude which no other country in the world, except perhaps China faces To solve the basic problems, the additional employment to be created, the additional houses to be bullt, the additional number of children to be educated, the additional number of people to be provided with medical facilities and so on during one Five Year 1Plan in India are more than what most nations have had done over centuries Yes, that

is the magnitude of the development challenges India is facing!

Despite many odds, significant progress was made in almost all-important spheres Between the beginning of the First Plan (1951) and the end of the Seventh Plan (1990), the Gross Domestic Product (GDP) at 1980-81 constant prices increased 3.6 times, per capita income nearly doubled, index of agricultural output doubled, index of industrial production registered a ten fold increase, production of coal increased nearly seven fold, output of crude oll rose form 0.26 billion to over 34 billion tones, electricity generation

‘went up from 5.3 billion kwh to over 245 billion kwh and domestic savings increased from about 10 percent of the GDP to 22 percent During the same period, the number

Planning in dia ?

‘of hospital beds per 10,000 population increased from 3.2 years to 9.4, the average life expectancy at birth increased from 82 years to about 59 years and the literacy rate improved from tess than 17 per cent to nearly 52 per cent

Of course, it would have been possible to achieve better results with better planning, more efficient implementation of the programmes and pragmatic policies

In the Foreword to the Seventh Five Year Plan, Prime Minister Rajiv Gandhi observed Planning has given us a strong base for building a modern, self-reliant industrial economy Indian industry today is highly diversified, producing a wide range of products, many embodying a high level of technology The public sector has a commanding presence and has played a pioneering role in many areas We have a broad entrepreneurial base and ample technological and managerial manpower But some weakness have also become evident Much of our industry suffers from high cost There 1s inadequate attention to quality In many areas we are working with technology that is obsolete We have reached a watershed in our industrial development, and in the next phase we must focus on overcoming these problems Our emphasis must be on greater efficiency, reduction of cost and improvement of quality This calls of absorption of new technology greater attention to economies of scale and greater competitions.” It may be noted that efforts are being made In these directions

EIGHTH FIVE YEAR PLAN

‘The National Development Council (NDC) approved the objectives and the document

of Thrusts and Macro Economic Dimensions of the Eighth Five Year Plan in December

1991 The Plan which commenced on April 1, 1992, gives priority to the following objectives:

() Generating adequate employment to achieve near full employment by the turn

Human resource development will be the main focus of the Bighth plan It is towards this ultimate goal that employment generation; population control, literacy, education, health, drinking water and provision of adequate food and basic infrastructure are considered as the priorities of the plan Provision of the basic elements which help development of human capital will remain the primary responsibility of the Government

8 Industrial Sector Reforms in Globalization Era

‘The Bight Plan aims at an average growth of 5.6 per cent per annum and Incremental Capital-output Ratio (ICOR) is assumed to remain more or less at the same level as in the Seventh Plan (4.1) For achieving the targeted growth, the average rate of domestic savings required during the Eighth Plan will be 21.6 per cent GDP The corresponding investment rate will be 23 percent of GDP A total investment of Rs 7,92,000 crore at 1991-92 prices is envisaged for the Eighth out of which the shares of public sector Investment will amount to Rs 3,42,000 crores or 43.2 per cent of the total investment

‘as compared with 45.7 per cent realized in the Seventh Plan This allows a larger scope for the private sector than that given hitherto Public Sector outlay is Rs 4,00,000 crore Inclusive of the current outlay component The plan envisages a perceptible change in the manner of financing practised so far, which was neither envisaged nor healthy for the economy Draft on foreign savings is estimated at 1.4 per cent of GDP amounting

to Rs 49000 crores The public sector investment will be financed to the extent of 70 percent from household savings, 20 percent form own savings and 10 percent from the rest of the world Determined efforts are called for on the part of the Central and State Governments and their enterprises to make their respective contributions to savings, so that the projected public sector outlay of Rs 4,00,000 crore is realised

TABLE 1.1 Macro Aggregates for the Eighth Plan (1992-97)

Note: Forelgn trade figures for 1991-92 estimated as normalized base for projections during the Eighth

e ‘The abnormally low imports in 1991-92 compared to 1990-91 resulted in lower foreign

‘savings than the normal base which ls showm here Preliminary RBI data indicates foreign savings

‘of Re, 9000 erores, but the national accounts data is not yet avallabe for the year

“exports and Imports projections for 1991-99 are the normalized projections, aince the actuals are expected to be exceptionally low in this year

It Is also considered necessary to reorient the process of planning so as to

(a) weed out projects which are not economically sound;

Planning in India ° (by rationalize plan expenditure by a process of consolidation and coordination of schemes:

(€) generate net additional resources to the extent possible through non-inflationary measures, particularly in the sectors which claim higher outlays; and

(@) divert some funds from the sectors which have surpluses largely due to the Government policies (administered prices), to the needy sectors, which cannot, raise resources out of their own activities,

TABLE 1.2

‘Macro-Parameters for the Eighth Plan (1992-97)

(1885-90) Seventh (1992.97)

Phan 1985-92)

Rate of Growth in GDP (per cent per annum) 58 58 56

Current Account Deficit (per cent of GDP) 24 24 16

Growth Rate in: Exports of Goods (% per annum) ar Ban 136

© Inthe Seventh Plan, the interest pald on NRI depostis was not included as part of Current Account Defieit (CAD) since RBI released the NRI capital inflow data after accounting for the interest paid The CAD projection for Eighth Plan Includes the interest paid on NRI deposits, a an item of import of non factor Services, Current Account Deficit and the rate of domestic saving do not exactly add up to rate of twestinent

Im this Table beeause of rounding up errors

+ This 1s estimated on the ais of National Accounts Stasis for five years of the Seventh Plan period 4s per D.G-C1 & S quantum index The estimates are 7.6 per cent for plan period and 11.6 per cent during the last four years of the Seventh Plan,

+ These represent only six years since the year 1991-92 has been an abnormal year in respect of foreign trade

Sectoral Pattern of Investment

Gross investment during the Eighth Plan distributed according to broad sectors of economic activity is presented in Table 1,2 Agrriculture, Irrigation and allied sectors of economic activity Is presented in Table 1.2, Agrriculture, irrigation and allied sectors will account for 18,65 per cent of total investment, Mining and Manufacturing will get 28.57 per cent; Electricity, Transport and Communication will get 26.54 per cent of the total and the remaining investment will be in the construction and services sectors The sectoral investment in the five year period (1992-97) include the requirements for sustaining the growth in output in the post-plan period

Distribution of Investment between public and private sectors at the sectoral level

ts based on the proposed reorientation in the relative roles of the private and the public

10 Industrial Sector Reforms in Globalization Era sector objectives The borad industrial groups where private sector is expected to have

‘a much larger share than hithero are electricity, communications, mining and quarrying particularly oll and coal, large industries in manufacturing sector (petro-chemicals, metals, fertilizers and heavy capital goods) and the organized segment of commercial services

‘The distribution of public outlay between center and states is determined by the respective resources generation capabilities, on the one hand, and the distribution of the developmental responsibilities between the center and the states, on the other The state's own resources (Rs 101,485 crores) will be augmented by making available central Assistance for their plan at a level of Rs 78'500 crores In some of the developmental heads and programmes, such as, family welfare, eradication of disease/epidecics, reduction

of illiteracy poverty alleviation, etc., the centrally sponsored schemes may continue However, the number of such schemes will have to be kept to the minimum most essential

In some sectors such as power, roads/highways, large industries, village and small Industries and science and technology, the investments made through the Central Plan over the past 10 to 15 years have been significant, giving adequate leverage to the Center for influencing the outcomes in these sectors Further, expansion of the Center's role

‘will be at the expenses of the initiatives expected from the states and local authorities

TABLE 1.3 Sectoral Investment During the Eighth Plan (1992-93 to 1996-97)

(Rs, crores at 1991-92 prices)

‘Sectoral Distribution

‘Sector Public Private ‘Total Shaeof SNH Seventh Eighth

‘Sector

In Total Investment by

Planning in India "

‘The central sector bears a residual responsIbillty for the plan objectives to the extent, that these could not be realized through the State Plans or through private sector initiatives At the same time it needs to be admitted that the traditional accounting and supervision mechanisms for keeping watch on public sector spending have not been fully effective A more purposive identification of beneficiaries and focussed targeting in respect

of public sector expenditure is essential if the Government has to perform its role in the face of severe resources shortages Programmes need to be evaluated by organisations other than those which administered them Programme Evaluation Organisation in the Planning Commission, National Sample Survey Organisation and well reputed research Institutions will have to be constantly involved with the task of evaluation of programmes and preference

TABLE 1.4 Sectoral Value Added and Employment Growth During the

Eighth Plan (1992-97)

Achieved Achieved Target for Uing 197-78t0 198816 Si Phan Elasticity

in manufacturing and other sectors Services will also have to play a major role in generating employment

2 Industrial Sector Reforms in Globalization Era

TABLE 1.5 Sectoral Growth Rates of Gross Values Added at Factor Cost

(GVA) and Value of Gross Output

Projected Growth Rate ‘Sectoral Share in 1992-99 to 1996-97 ‘GDP (percent per annum) Ipereeny

1981-82 to 1990-91 Outpue (10 Years)

2 Industrial Policy

‘The Industrial Policy of the Government of India and the regulatory measures introduced

to achieve the policy objectives have always been matters of serve controversy While the industrialists and many others in India and abroad and many foreign governments and international development organisations regarded the policy as too restrictive and the regulations and procedures too cumbersome and perplexing, the leftists in India were demanding a more restrictive regime

‘The industrial policy and regulation had grown more and more restrictive until about the mid Seventies Having realised the deleterious effects of the restrictive regime, the 1980s saw a very slow process of liberalisation

‘The era of deregulation ushered in by the Narasimha Rao government in 1991 is an

‘open acknowledgement of the failure of the control regime to deliver the goods The Indian planners were fascinated and influenced by the Russian model so that the development strategy in India was directed towards creating a socialist pattern of soclety It was interesting to note that the Soviet newspaper Izvestia, which observed that many elements

of the Indian economic system were borrowed from the Soviet model, stated that the main culprit for the present economic crisis in India was the obsolete economic system based

on socialism,

‘The following pages provide the salient features of the industrial policy of India up

to 1991, very briefly, and the new policy A detailed account of the policy until 1991 {s available in the old editions of the author's Business and Government and Business Environment

INDUSTRIAL POLICY UP TO 1991

“The Industrial Policy of India prior to the liberalisation ushered in 1991 was characterised

by the following features:

4 Industrial Sector Reforms in Globalization Era Dominance of Public Sector

‘The policy of the government was to ensure that the public sector gained control over the commanding heights of the economy The Industrial Policy Resolution of 1948 established public sector monopoly/near monopoly in 9 industries

‘The Industrial Policy Resolution of 1956, brought out in the light of the adoption

by the Parliament of the socialist pattern of society as the national goal and the Second Five Year Plan model which gave emphasis to the basic and heavy industries, further expanded substantially the role of the public sector Future development of seventeen

‘most important industries was exclusively reserved for the public sector Further, public sector was assigned priority for establishment of new units in 12 most important of the remaining industries The public sector also established its monopoly or dominance in several other industries which did not belong to any of the above two categories of industries This was done by the government by not giving licence to the private enterprises or by nationalisation The insurance business was completely nationalised and mighty dominance of the public sector was established in the commercial banking sector by successive natlonalisations

Entry and Growth Restrictions

‘There were number of entry and growth restrictions on the private sector (particularly

on the large firms and foreign firms) even in respect of industries where the private sector was allowed A licence was mandatory for establishing new units with investments above

a specified limit, for manufacturing new products and for substantial expansion of existing undertakings Large firms (having assets, including those of interconnected undertakings, of Rs.100 crores or more) and dominant undertaking (Le., those having

a market share of 25 percent or more) had to obtain clearance under the Monopolies and Restrictive Trade Practices (MRTP) Act, in addition to the industrial licence, for establishment new undertaking, substantial expansions and manufacture of new items

‘There were also restrictions on import of capital goods etc

Restrictions on Foreign Capital and Technology

‘The scope of use of foreign capital and technology was limited Even in industries where foreign capital was allowed, it was normally subject to a ceiling of 40 percent of the total equity, although exceptions were allowed in deserving cases Operations of foreign companies in India and issue of securities abroad by Indian companies were regulated under the Foreign Exchange Regulation Act (FERA), 1973

‘THE NEW INDUSTRIAL POLICY

‘The industrial policy announced on July 24, 1991, which heralded the economic reforms in India, has enormously expanded the scope of the private sector by opening

up most of the industries for the private sector and substantially dismantling the entry and growth restrictions The salient features of the new policy are the following:

Objectives

‘The major objectives of the new industrial policy package are:

Industrial Policy 15 i) to build on the gains already made;

(I) to correct the distortions or weaknesses that may have crept in:

(MU) to maintain a sustained growth in productivity and gainfull employment; and Wy) to attain international competitiveness

It has been stated that the pursuit of these objectives will be tempered by the need

to preserve the environment and ensure the efficient use of available resources All sectors

of industry, whether small, medium or large, belonging to the public, private or co- operative sectors will be encouraged to grow and improve on their past performance Redefinition of the Role of the Public Sector

‘The role of the public sector was redefined and the scope of the public sector has been drastically abridged

‘The number of industries reserved for the public sector was reduced to eight and

it was later pruned to six (defence products, atomic energy, coal and lignite, mineral oils, railway transport and minerals specified in the Schedule to the Atomic Energy Order, 1953) Even in some of these industries, participation of the private sector may be allowed

on a selective basis

‘The policy also seeks selective privatisation and withdrawal of the public sector from industries which do not confirm to its redefined role See the chapter on public sector for more details

Dismantling of Entry and Growth Restrictions

The scope of private sector has been expanded enormously by drastically reducing the industries reserved for the public sector and by substantially dismantling the barriers

to entry and growth,

Delicensing

All but 18 industries were freed from licensing The number was later reduced to

15 and further to 14 These industries subject to industrial licensing account for only less than 15 percent of the value added in the manufacturing sector The list of industries subject to licensing is likely to be pruned further

Removal of MRTPA Restrictions

Most of the provisions of the MRTP Act pertaining to concentration of economic power (te., those requiring prior permission for establishment of new undertaking, substantial expansion, manufacture of new items and mergers and acquisitions) were scrapped Liberalisation of Foreign Investment

The policy towards foreign capital and technology was modified very sinificanty

‘Automatic approval (Le., no prior approval from the government is required) for foreign Investment up to 51 percent of the total equity was granted in 95 priority industries specified by the Government These industries contributed nearly 50 percent of the value added in the manufacturing sector In December 1996, the number of these priority Industries was increased to 48, three industries related to mining activity were made

16 Industral Sector Reforms in Globalization Era eligible for automatic approval up to 50 percent of foreign equity and another set of nine industries related to key infrastructure sectors like electricity, roads, bridges, ports, harbours, runways, waterways, exploration and production of POL etc were made eligible for automatic approval for foreign investment up to 74 percent of the total equity Foreign investment in other industries and foreign investment above the specified ceilings in the priority industries may also be considered by the government (but no automatic approval)

Since 1992-93, the Indian stock market is open for investment by Foreign Institutional Investors (Flls) and Indian companies satisfying certain conditions may access foreign capital market by Euro issues The chapter on foreign capital and technology provides more details

‘Another very significant change was the reform of the foreign exchange rate policy

‘The Rupee was made partially convertible on current account and later it was made fully convertible The capital account convertibility may not be far away

Progressive integration of the Indian economy with the global economy has been acknowledged as one the objectives of the Exim Policy

‘The Capital Issues Control Act and the office of the Controller of Capital Issues were scrapped and policy towards capital issues and their pricing have been made liberal Price controls have been gradually eased

‘Several Restrictions imposed in respect of foreign investment, like phased manufacturing programme, foreign exchange balancing etc have been liberalised

AN EVALUATION OF THE NEW POLICY

“The economic reforms ushered In since 1991 are revolutionary indeed in comparison with the policy and procedural reforms hitherto attempted in India It, undoubtedly, is

a bold step in the direction of freeing the Indian industry from the shackles of abortive and cripping controls Although further policy changes and reforms are needed changes already introduced, if implemented in real earnest, will certainly provide a considerable

‘growth impetus However, real debureaucrating will be challenging task The bureaucracy has a tendency to attempt to defeat the measures aimed at deregulations

‘A strong mandate and political will and bold administrative measures are essential for implementing several of the proposals, The government, however, often shows signs

of confusion and lack of boldness on the face of opposition from trade unions, politicians and bureaucrats There will certainly be strong opposition from these groups to protect their vested interests For example, in the face of the strong opposition from the trade unions, the government's stand on privatisation is not clear In our country the might

of the organised minority often gets prominence over the rights and welfare of the unorganised majority

‘The proposal for privatisation itself appears to be half-hearted Transferring a part

Industrial Policy 7

of the share-holding to the public sector financial institutions ts not going to make any significant impact Privatisation of an enterprise will not be meaningful unless itis real and substantial,

The proposal to close down sick public sector units has also naturally come in for strong opposition One should, of course, have sympathy to the workers who lose their Job But should the society go on bearing the burden of the heavy losses to provide employment? To the extent possible the problem should be solved by retraining and redeployment of the workers The workers with their experience should be encouraged

to take up employment elsewhere They could also be encouraged to start something of their own with the sum of money that get while they quit

The policy environment now in India is much more conducive for both domestic and foreign investments than in the past However, there are now a host of countries trying

to woo foreign investment with much more conducive economic environment than tn India Further, cultural factors also tilt the balance in favour of other nations as far as foreign investment is concerned Many multinationals are busy establishing footholds

in the newly opened markets of the ‘communist’ world Further, foreign business still regard the policy and procedural system in India preplexing Because of these factors one should not expect wonders out of the belated measures

However, for the frst time the domestic industry has been given a considerable leeway

to prove its mettle This dynamism coupled with an enhanced external collaboration and competition should be expected to provide a considerable momentum for development

‘At the same time, the government should strive to remove the remaining lacunae and

to implement the proposed reforms in letter and spirit

Although the economic policy liberalisation of 1991 came in for scathing criticism

by the opposition parties, when these parties drew up their election manifestoes in April

1996, their anti-liberalisation stand was conspicuous by its inconspicuousness More Interestingly, when the short lived BJP government and the United Front Government announced their economic policies, they amounted not only to endorsing the economic policy of the Narasimha Rao Government but also to carrying further forward the process

‘of deregulation and decontrol to achieve faster economic growth The Congress I manifesto stated that it would carry forward economic reforms and restructure policies to achieve eight to nine percent annual growth in GDP The economic poliey of the United Front (UF) government as expressed in the Common Minimum Programme (CMP), which observes that there fs no substitute for growth, and that the country’s GDP needs to

‘grow at over seven percent in the next 10 years in order to abolish endemic poverty and unemployment, states that the UF government is committed to faster economic growth The document on the CMP observes that further deregulation and decontrol may be required in the agricultural, industrial and other sectors to accelerate economie development

In short, India’s economic liberalisation is almost unanimously accepted by all political parties so that it is irreversible Whichever political Party or combine comes to power

in future, the difference will be, at the most, in its fine-tuning In other words, the major Aifferences between the political parties in India will no more be related to economic policies or ideologies: the differences will pertain rather to ethnic and related factors (including the issue of secularism and regional factors)

‘The ubiquitous support to liberalisation seen now is due to the good liberalisation can do for the economic development of the country Developments since 1991 have

6 Industrial Sector Reforms in Globalization Era demonstrated the growth and competitive impulses that the liberalisation can generate

IMPACT OF LIBERALISATION

“The restrictive policies of the past had resulted in slow growth of the industry and the economy and lack of competition causing lack of choice, high prices, poor quality, lack of innovation and disregard for the consumer The competitive forces unleashed by the liberalisation, however are changing the scenario

‘The liberalisation has enormously expanded the scope ofthe private sector Now only

a small number of industries are reserved for the public sector and even in some of these industries selective entry of the private sector is allowed As a result of these and the dismantling of the entry and growth restrictions, the private enterprises can now enter and grow in most of the industries The liberalisation of the policies towards foreign capital and technology and import liberalisation have given further impetus to growth and competition

{As a result of the liberalisation, investment has been surging, competition has been Increasing, growth rate has been picking up, supply has been expanding in quantity and variety, industrial efficiency has been improving and export growth has accelerates), No

‘wonder, the BJP and the United Front proclaimed that they would not reverse the reform

‘The liberalisation has given an enormous boost to private investment in the industrial sector In 1990-91, the year prior to liberalisation, the total capital mobilised by the private cooperate sector by equity issues was Rs.1, 261 crores In 1994-95, i.e, four years since the liberalisation, the equity capital mobilised increased to about Rs.27, 621 crores

‘Added to this was the increasing flow of foreign capital in the 1970s, the average annual

‘amount of capital raised by the corporate sector from the primary market was below Rs.100 crores In 1995, a single organisation (IDB!) had an issue of over Rs 2000 crores which was over-subscribed

‘The expansion plans of many Indian corporates, both in the public and private sectors, are impressive indeed The public sector giant SAIL which has been performing fairly well for sometime now has a massive investment plan, Rs.15,000 crores for the Ninth Plan The IPCL was carrying out an expansion plan’of Rs 5,000 crores The

‘Nagarjuna group plans an investment of Rs 1,000 crores in five years The Jindal Strips would be investing about Rs 2,000 crores The Naleo, which Is Asia's largest aluminium company, is planning an additional investment of Rs 2,450 crores The Murugappa group has a plan to invest Rs 700 crores Three Tata companies (TISCO, TELCO and TATA Power) have drawn up plans to raise Rs 20, 000 crores over the next four years to fund hhuge expansion plans The Nirma Is Investing about Rs 1,860 crores These are but some examples which indicate the spurt in investment taking place under the impetus of liberalisation The massiveness of the size of the investment plans of the companies or conglomerates becomes more obvious when they are compared with the total investment

in the Industrial sector in the past The proposed public sector investment on industry during the First Five Year Plan was only Rs 173 crorers The overall fixed investment, both in the publfe and private sectors taken together during the Second Five Year Plan (1956-61) was only Rs 1,620 crores ‘The turnover of many companies Is witnessing a high-jump The turnover of the Reliance was projected to more than double from Rs 5,800 crores to Rs, 12, 000 crores

sn a short span of 3 to 4 years The Murugappa group's turnover was estimated to double

Industrial Policy 19 from about Rs 2,500 crores in 1955 to Rs 5,000 crores by the turn of the century and

of the Modern group to more than double from Rs 525 crores to Rs 1, 135 crores in two years The Kirlosker group's turnover is projected to leapfrog from Rs 1, 300 crores

to Rs 7,000 crores by 2000 Ranbaxy’s sales may increase from over Rs 600 in 1955

to about $ 1 billion by the turn of the century The turnover of Arvind Mills is estimated

to more than triple from Rs 1,100 crores in 1996-97 to about $ 1 billion by the turn

of the century

‘Many industries will witness unprecedented and manifold output growth in the near future For example, between 1995 and 2000 the production of motor cars is estimated

to increase from 2.6 million to about 6.5 million, of colour television sets from less than

2 million to about 11 million (4million of which is expected to be exported) and of refrigerators from 1.8 million to 4.5 million,

It will take sometime for the new investment to get fully reflected in the industrial growth rate, Indications of the impact, however, are already very visible

‘There has been a conspicious acceleration in the industrial growth rate Industrial growth rate was 6.8 percent in 1993-94, 9.4 percent in 1994-95, 11.6 percent in 1995-

96 (the highest in the last 20 years) and was estimated to be between 8-9 percent in 1996-97,

‘The overall growth in the industrial sector was largely due to the impressive growth

of the manufacturing sector which has grown almost 2 percent points faster per year {n the Eight Plan than in the Seventh Plan While the mining sector also grew satisfactorily, the performance of the electricity sector was disappointing Unless measures are taken for the fast development of the infrastructural sectors, growth of other sector will suffer seriously

‘The GDP growth rates have also been very impressive in recent years Between 1992-

93 and 1996-97, it ranged between 6 and 7.2 percent It may be noted that, prior to the reforms growth rates above 6 percent were typically a recovery from poor growth

in the preceding year, the only exception to this being the year 1989-90

‘Some of the performance indicators suggest that under Iberalisation the Indian industry has strengthened itself and has become more competitive, contrary to the fear that the liberalisation and the resultant foreign competition would weaken and even strangle down the industry Indian companies could substantially increase their sales and profits in the last few years The increase in competition is reflected in the increase

in marketing costs and fall in profitability; but total profits have been up because of higher sales, Medium size companies have, in general, been growing very fast

‘Another indication of the strengthening competitiveness of the Indian companies is the rise in their export intesity (e., the ratio of exports to total sales) The estimates

of export intensity show that it has moved up to 11 percent in 1994-95 from than 8 percent four years ago

‘The export-GDP ratio (Le., the ratio of the value of exports to GDP) shows a corresponding, reinforcing, trend The export-GDP ratio normally rises when an economy develops For nearly four decades since the commencement of planning, India presented

a peculiar case of the export-GDP ratio remaining more or less stagnant at a very low level (even in comparison with other developing countries) of 5 to 6 percent The Uberalisation has, however, pulled up this ratio from the long held trap It was about

12 percent recently

20 Industrial Sector Reforms in Globalization Era

‘The growth impulses provided by the liberalisation, increasing competition in the domestic market and growing business opportunities abroad are encouraging many Indian companies to enter foreign market/expand foreign business A number of them have established wholly-owned subsidiaries or joint ventures abroad Indian companies hhave also taken over a number of companies in the foreign countries Several Indian firms have entered into licensing agreements and strategic alliances to foster business abroad

A substantial step up in the investment is required to accelerate the growth rate of the Indian economy As domestic savings has its own limitations in achieving this, foreign investment assumes importance In 1994-95, India’s savings rate, which was an all time- high was only 24.4 percent of the GDP

‘The liberalisation had the effect of boosting Foreign Direct Investment (FD) in India

‘The total FDI in India during the entire decade of the 1980s was less than $ 1 billion

It shot up from about $ 0.3 billion in 1991 to about $ 1 billion in 1994 and $ 2 billion

in 1995 Yet, FDI accounted for just 2.1 percent of India's gross domestic investment last year compared with the 20 plus percent share of FDI in China's gross domestic investment In 1994-95, according to quick estimates, FDI was less than 0.4 percent

of Indian's GDP In 1995-'96, it could be near one percent Given the incremental capital- output ratio of 4.1, an FDI investment of one percent of GDP will add only about 0.2 percent to the economy's growth rate According to the estimates of Business Today if India has to manage a GDP growth rate of over 8 percent over the next two years — assuming a savings rate of 25 percent of GDP — FDI inflow of over 6 percent of the GDP will be required It may be noted that China has been able to maintain a GDP growth rate of over 8 percent for a long time because of a high savings rate (40 percent of GDP)

‘and huge inflow of FDI (about 20 percent of the domestic investment) Only about one- fifth of the FDIs cleared by the Government of India has materialised For instance, the clearance amounted to about $ 4.5 billion in 1994 and $ 10 billion in 1995 In comparison with countries like China, foreign investors find the Indian policy and procedural system perplexing and time consuming

It is very intresting to note the UF government, made up of and supported by some political parties which were staunch critics of opening up of the Indian economy to multinationals and foreign investment, cries for an annual foreign direct investment of

at least $ 10 billion, compared to about $ 2 billion achieved in 1995 The UF government's policy is very soft even in respect of multinationals in low priority areas The CMP contemplates only to discourage (not to ban) the entry of multinationals into low priority areas through fiscal and other measures

‘An alarming development under the liberalisation was the unscrupulous way the government was implementing the policy as well as the foreign compantes have been behaving The government policy would have given the public an impression that even

in the priority industries foreign equity participation would be limited to 51 percent However, a number of foreign companies, after having jacked up their equity holding in the Indian subsidiaries for a long, through perferntial issue, to 51 percent, are setting

up new fully owned subsidiaries to do businesses which their existing subsidiaries could

do, Most of these are in non-priority areas This was a covert deception by the government

= multinational collusion using the saving clauses and exceptions of the polity This could cause large foreign exchange outgo by way of dividend repatriation Foreign investment should be discouraged in non-priority areas

Industrial Policy a

‘A major obstacle to the fast development of the economy has been the infrastructural bottlenecks As the CMP rightly observes, the economy cannot grow and the needs of the people cannot be met without more capacity in power, oll, telecom, railway, roads and ports It is heartening to note that the UF government stipulates a stepping up of the investment in infrastructure from the present 3.5 to 4 percent of GDP to at least

6 percent in the next few years The cumulative requirement of the infrastructure sectors over the next five years 1s estimated to be $ 200 billion (RS 7,00,000 crores) at the very minimum The CMP which acknowledged the role of foreign investment in this context, proposed a review of the scope, functions and the procedures of the Foreign Investment Board in order to make it an effective and credible instrument to foreign investment in India (and the UF government has done it) What a change from the pre-1991 regime

of not allowing even the domestic private capital in most of the vital sectors!

IDRA and Industrial Licensing INDUSTRIES (DEVELOPMENT AND REGULATION ACT, 1951

‘The industrial policy resolution lays down the national objectives to be achieved by Industrialisation It indicates the priorities, patterns and directions of development To achieve these objectives, the government should inevitably have the power to direct, regulate and control factors like industrial investment, location expansion and growth, management, etc The Industries (Development and Regulation) Act, 1951, amended from time to time, 1s one of the most effective weapons the government possesses in this respect It arms the government with sweeping powers to regulate the development and control the activities of the industrial sector

‘The object of the Act is to provide the Central Government with the means of implementing its industrial policy The Act brings under Central control the development and regulation of a number of important industries, the activities of which affect the country as a whole and the development of which must be governed by economic factors

of all-India import It confers on the Central Government power to make rules for the registration of existing undertakings The planning of future development on sound and balanced lines is sought to be secured by the licensing of all new undertakings by the Central Government The Act also confers on the Government the power to make rules for regulating the production and development of Industries in the “Schedule” and for consultation with Provincial Government on these matters Provision has also been made for the Constitution of a Central Advisory Council, prior consultation with which will

be obligatory before the Central Government takes certain mieasures, such as the revocation of a licence or taking over the control and management of any industrial concern

Coverage of the Act

‘The Act extends to the whole of India Its provisions apply to all * industrial undertakings”

‘manufacturing any of the items included in the "Scheduled Industries" The “scheduled industries” are those industries which are included in the First Schedule to the Act

‘The Act applies only to those “industrial undertakings” which are defined as such under the Act The Act defines an industrial undertaking as any undertaking pertaining toa scheduled industry carried on in one or more * factories” by any person or authority including the government

2 Industrial Sector Reforms in Globalization Era

For the purpose of the Act, a “factory” means any premises including the precincts thereof, in any part of which a manufacturing process is being carried on or is ordinarily

so carried on:

(i) With the aid of power, provided that fifty or more workers are working or were working thereon on any day of the preceding twelve months: or

(i) Without the aid power, provided that one hundred or more workers are working

or were working thereon on any day of the preceding twelve months and provided further that in no part of such premises any manufacturing process is being carried on with the ald of power

Exemptions from the Act

Section 29-B of the Act empowers the Central Government to grant exemption to this Act in certain cases If the Central Government is of the opinion, having regard to the number of workers employed or to the amount invested in any industrial undertaking

or to the desirability of encouraging small undertakings generally or to the stage of development of any scheduled industry, that it would not be in public interest to apply all or any of the provisions of the Act it may, by notification in the Official Gazette,

‘exempt, subject to such conditions as it may think fit to impose, any industrial undertaking,

or class of industrial undertakings any scheduled industry or class of scheduled industries,

‘as it may specify in the notification, from the operation of all or any of the provisions

of this Act or any rule or order made thereunder

Central Advisory Council and Development Councils

Section 5 of the Act provides that the Central Government may establish a Central

‘Advisory Council for the purpose of advising it on matters concerning the development and regulation of the scheduled industries The Advisory Council shall consist of a Chairman and other members, not exceeding thirty in number all of whom shall be appointed by the Central Government from among persons who are in its opinion capable

of representing the interests of the owners, employees, consumers, primary suppliers, ete., of the industrial undertaking in the scheduled industries

‘The Act provides that the Central Government may establish for any scheduled industry or group of scheduled industries Development Council which shall consist of members who, in the opinion of the Central Government, are capable of representing the interest of owners, employees and consumers of the industrial undertakings in the scheduled industry or groups of scheduled industries and persons having special knowledge

of matters relating to the technical or other aspects of the scheduled industry or group

Industrial Policy 2B

(W) Promoting arrangements for better marketing and helping in the devising of a system of a system of distribution and sale of the produce of the industry which would be satisfactory to the consumer:

(v) Promoting standardisation of products:

(oi) Assisting in the distribution of controlled materials and promoting arrangements for obtaining materials for the industry:

(vit) Promoting or undertaking inquiry as to materials and equipment and as to methods of production, management and labour utilisation including the discovery and development of new materials equipment and methods of improvements in those already in use: the assessment of the advantages of different alternatives and the conduct of experimental establishments and of tests on a commercial (vit) Promoting the training of persons engaged or proposing engagement in the industry and their education in technical or artistic subjects relevant thereto; (0) Promoting the re-training in alternative occupations of personnel engaged in or retrenched from the industry:

(&) Promoting or undertaking scientific and industrial research, research into matters affecting industrial psychology and research into matters relating to the production and the consumption or use of the goods and services supplied by the industry: (i) Promoting improvements and standardisation of accounting and costing methods and practices:

(ii) Promoting or undertaking the collection and formulation of statistics:

(cit) Investigating possibilities of decentralising stages and processes of production with a view to encouraging the growth of allied small-scale and cottage industries: (xiv) Promoting the adoption of measures for increasing the productivity of labour, including measures for ensuring safer and better working conditions and the provision and improvement of amenities and Incentives for worker:

(v) Advising on any matters relating to the industry (other than remuneration and conditions of employment) on which the Central Government may request the Development Council to advise it and undertaking inquiries for the purpose of enabling the Development Council to advise: and

(xvi) Undertaking arrangements for making available to the industry information obtained and for advising on matters with which the Development Council is, concerned in the exercise of any of their functions

A development council shall also perform such other functions as it may he required

to perform under any other provision of this Act

Regulation of Scheduled Industries

(Registration of undertakings: The Act provided that all the industrial undertakings that existed, including the industrial undertakings of which the government was the owner, in the scheduled industries which were listed in the First Schedule to the Act, should be registered with the government within the prescribed period and issued with

a certificate of registration containing the productive capacity of the undertaking and such other details as may be prescribed

(i) Industrial licensing: After the commencement of the Act, no person or authority (other than the Central Government and other Governments with the previous permission

24 Industrial Sector Reforms in Globalization Era

of the Central Government ) can establish any new industrial undertaking except under, and in accordance with, a licence issued in that behalf by the Central Government However, as stated earlier, the government can grant exemptions in this regard

If the Central Government is satisfied that any person or authority to whom or to which a licence has been issued under Section II, has, without reasonable cause, failed

to establish or to take effective steps to establish the new industrial undertaking in respect of which the licence has been issued, with in the time specified therefore or within such extended time as the Central Government may think fit to grant in any case, it

‘may revoke the licence The Central Government may also vary or amend any licence issued under Section II, subject to any rules that may be made in this behalf But no such power shall be exercised after effective steps have been taken to establish the new industrial undertaking in accordance with the licence issued in this behalf

Power to Investigate, Exercise Control, Take — over Management, ete

“The Act empowers the Central Government to make or cause to be made a full and complete investigation where it is of the opinion that in respect of any scheduled industry

or undertaking, there has been, or likely to be, an unjustifiable or a substantial fall in the output or a marked deterioration in the quality of the output or an unjustifiable rise

in the price of the output

If, ater any such investigation, the Central Government is satisfied that action under Section 16 1s desirable, it may Issue such directions to the industrial undertaking or undertakings concerned as may be appropriate in the circumstances for all or any of the following purposes, namely—

(a) Regulating the production of any article or class of articles by the industrial undertaking or undertakings and fixing the standards of production;

(b) Requiring the industrial undertaking or undertakings to take such steps as the Central Government may consider necessary to stimulate the development of the industry to which the undertaking or undertakings relates or relate:

Prohibiting the industrial undertaking or undertakings from resorting to any act,

or practice which might reduce its or their production, capacity or economic value;

(@) Controlting the prices, or regulating the distribution, of any article or class of articles which have been the subject-matter of investigation

‘The Act also provides that any directive of the above nature may be issued by the Central Government at any time when a case relating to any industry or industrial undertaking or undertakings is under investigation Such a directive shall have effect until it is amended or revoked by the Central Government

Ifthe industrial undertaking to which any of the abovementioned directives have been

‘issued has failed to comply with such directives, the Central Government is empowered

to authorise, by a notified order, any person or body of persons to take over the management of the whole or any part of the undertaking or to exercise in respect of the whole or any part of the undertaking such functions of control as may be specified

In the order

‘This Act also provides that a full and complete investigation may be made if the

ic

Industrial Policy ? Central Government is of the opinion that any industrial undertaking is managed in a manner highly detrimental to the scheduled industry concerned or to the public interest

If the Central Government is satisfied, as a result of the investigation, that the industrial undertaking 1s managed in a manner highly detrimental to the scheduled industry

“concerned or to the public interest, it may authorise any person to take over the management or exercise any control as described in the preceding paragraph

‘Any such notified order shall have effect for such period not exceeding five years as may be specified in the order, However, the act also provides that, if the Central Government is of the opinion that it is expedient in the public interest that any such notified order should continue to have effect after the expiry of the period of five years aforesaid, it may, from time to time, issue a directive for such continuance for such period, not exceeding two years at a time, as may be specified in the directive, provided that the total period of such continuance (after the expiry of the said period of five years) does not exceed twelve years

‘The Central Government may, by a notified order, cancel the order of taking over

of the management or exercise control if at any time it appears to the government, on the application of the owner of the industrial undertaking or otherwise, that the purpose

of the order has been fulfilled or that for any other reason it is not necessary that the order should remain in force On the cancellation of the order, the management or the control, as the case may be, of the industrial undertaking shall vest in the owner of the undertaking

‘The Central Government may authorise any person to take over the management

or exercise the functions of control of any undertaking if it is satisfied, in relation to the industrial undertaking, that;

(a) The persons in charge of such industrial undertaking have, by reckless investments,

of creation of encumbrances on the assets of the industrial undertaking, or by diversion of funds, brought about a situation which is likely to affect the production

of articles manufactured or produced in the industrial undertaking and that immediate action Is necessary to prevent such a situation; or

(©) Ithas been closed for a period of not less than three months (whether by reason

of the voluntary winding up of the company owning the industrial undertaking

or for any other reason) and such closure is prejudicial to the concerned scheduled industry and that the financial condition of the company owning the industrial undertaking and the condition of the plant and machinery of such undertaking are such that it 1s possible to restart the undertaking and such restarting is necessary in the interest of the general public

‘The Act also empowers the government to take over the management or exercise the functions of control, with the permission of the High Court, of any undertaking owned bya company in liquidation, ifit is satisfied that the running or restarting of the industrial undertaking is necessary in the public interest

Power to Provide Relief to Certain Industrial Undertakings

We have seen above that, in certain cases, the Central Government may take over the management or exercise the functions of control of the whole or part of an industrial undertaking, The ID & R Act empowers the Central Government to provide certain relief

26 Industrial Sector Reforms in Globalization Eva

to an industrial undertaking or any part thereof, the management or control of which has been taken over by the Government In the interest of the general public, with a view to preventing a fall in the volume of production of any scheduled industry, it may

by a notified order, declare that—

(a) All or any of the enactment specified in the Third Schedule shall not apply or shall apply with such adaptations, to such industrial undertaking, as may be specified in the notified order [The Third Schedule to the Act includes: (I) The Industrial Employment (Standing Orders) Act, 1946; (ti) The Industrial Disputes Act, 1947; and (it!) the Minimum Wages Act, 1948).|;

(b) The operation of all or any of the contracts, assurances of property, agreements, settlements, awards, standing orders or other instruments in force {to which such industrial undertaking or the company owning such undertaking is a party or which may be applicable to such industrial undertaking or company) immediately before the date of issue of such notified order shall remain suspended or that all or any of the rights, privileges, obligations and liabilities accruing >r arising thereunder before the said date, shall remain suspended or shall be enforceabler with such adaptations and in such manner as may be specified in the notified order

‘The notified order shall remain in force, in the first instance, for a period of one year, but the duration of such order may be extended from time to time by a further notified order by a period not exceeding one year at a time But no such order shall remain in force after the expiry of the period for which the management of the industrial undertaking was taken over, or for more than eight years in the aggregate from the date of the issue

of the first notified order, whichever is earlier

Sale or Reconstruction

Where the management or control of an industrial undertaking has been taken over

by the Central Government, it may, at any time during the continuance of such management

oF control, call for a report from the authorised person of the affairs and working of the industrial undertaking, and in submitting the report the authorised person shall take into account the inventory and the lists of members and creditors

On receipt of such a report

(a) The industrial undertaking may be sold as a running concern if the government considers it necessary or expedient in the interest of the general public so to do: (b) Reconstruct the company owning the industrial undertaking if the government

Is satisfied that it is necessary so to do in the interest of the general public or the shareholders, or to secure proper management of the company owning the industrial undertaking

Price and Distribution Controls

For securing an equitable distribution and availability at a fair price of any article

or class of articles relating to any scheduled industry, the Central Government may, under Section 18-G, by a notified order, provide for regulating the supply and distribution

Industrial Policy 2 thereof and trade and commerce therein, notwithstanding anything contained in any other provision of this Act,

A notified order made in this respect may provide for—

(@) Controlling the price at which any such article, or class of articles thereof, may

be bought or sold:

(©) Regulating by licences, permits, or otherwise the distribution, transport, disposal, acquisition, possession, use or comsumption of any such article or class thereof: Prohibiting the withholding from sale of any such article or class thereof ordinarily kept for sale;

(@) Requiring any person manufacturing, producing or holding in stock such article

or class of articles thereof to sell the whole or a part of the articles to such person

or class of persons and in such circumstances as may be specified in the order; (where the price can, consistently with the controlled price, if any, be fixed

by agreement, the price so agreed upon;

(i) where no such agreement can be reached, the price calculated with reference

to the control price, if any, fixed under this section:

(i) where neither clause (1) nor clause (i) applies, the price calculated at the market rate prevailing in the locality at that date:

(e) Regulating or prohibiting any class of commercial or financial transactions relating to such articles or class thereof which, if unregulated, are likely to be detrimental to the public interest;

(9 Requiring persons enaged in the distribution and trade and commerce in any such article or class thereof to exhibit statement of the stock and price of the articles

(@) Collecting any information or statistics with a view to regulating or prohibiting any of the aforesaid matters: and

Any incidental or supplementary matters including in particular, the grant of {issue of licences, permits or other documents and charging fees therefor

No order made in exercise of any power conferred by this Section (18-G) shall be called in question in any court

In this Section (18-G), the expression “article or class of articles relatable to any scheduled industry includes any article or class of articles imported into India which 4s of the same nature or description as the article or class of articles manufactured or produced in the scheduled industry

a

Powers of Inspection

For the purpose of ascertaining the position of working of any industrial undertakings,

or for any other purpose mentioned in this Act or the rules made thereunder, any person authorised by the Central Government in this behalf shall have the right to—

() Enter and inspect any premises:

(i) Order the production of any document, book, register or record in the possession

or power of any person having the control of, or employed in connection with, any industrial undertaking: and

(ii) Examine any person having the control of, or employed in connection with, any industrial undertaking (Sec.19)

” Industrial Sector Reforms in Globalization Era Decision of Central Government Final on Certain Matters

Section 23 of the Act provides that, if, for the purpose of this Act, any question arises

‘as to whether—

() there has been a substantial expansion of an industrial undertaking, or (i) an industrial undertaking is producing or manufacturing any new article, the decision of the Central Government thereon shall be final

Letter of Intent and Licence

A licence is a written permission from the government to an industrial undertaking

to manufacture specified articles included in the schedule If a new company has to be formed, the industrial licence instance, be issued in the name of the applicant, and later when the company has been formed, the necessary endorsement to that effect will be made in the licence

A licence contains particulars of the industrial undertaking, its location, the articles

to be manufactured, its capacity on the basis of the maximum utilisation of plant and machinery, and other appropriate conditions which are enforceable under the Act It is also subject to a validity period within which the licensed capacity should be established

If an application for licence 1s approved and further clearances (such as foreign collaboration and capital goods import) are not involved and no other prior conditions have to be fulfilled, an industrial licence is issued to the applicant In other cases, a letter be intent is issued, which will later be converted into a licence on fulfilling the conditions stipulated in the letter of intent

In other words, a letter of intent conveys the intention of the government to grant allicence subject to the fulfilment of certain conditions The conditions to be fulfilled relate

to the approval of foreign investment proposal, import of capital goods, application to

be made to the financial institutions, taking of steps to control pollution, etc A letter

of intent enables the applicant to finalise and formulate the proposals on matters relating

to the terms of foreign collaboration, import of capital equipment and/or issue of capital with the assurance that if the proposals are otherwise found satisfactory an industrial icence will be issued

‘On fulfilment of the prescribed conditions, the holder of the letter of intent is required

to approach the concerned administrative ministry for getting the LI converted into industrial licence

Objectives of Licensing

Licensing is a means to help achieve some of the objectives of the industrial policy

‘An examination of the type of regulations exercised by licensing under the Industries (Development and Regulating) Act indicates that the objectives of industrial licensing in

Industrial Policy 2 India were the following:

() To achieve the desired pattern of industrial dispersal, particularly by promoting industries in the backward areas,

() To encourage new entrepreneurs and wider dispersal of industrial ownership (iu) To prevent concentration of economic power

iv) To protect and promote the small-scale sector

(v) To regulate foreign capital and technology

(vi) To ensure the use of proper technology and scale economies

(vi) To ensure control of industrial pollution

(vill) To maintain/achieve demand-supply balance

(b9 To encourage exports and import substitution

(9 To ensure socioeconomic and commercial viability of projects

(xi) To conserve foreign exchange

(xii) To support employment generation

Activities Requiring Licence

Before the policy beralisation announced on 24-7-91, a licence was required for the following purposes:

(Establishment of new undertaking: No person or authority other than the Central Government was permitted to establish any new industrial undertaking, except under and in accordance with a licence issued by the Central Government However, a Government, other than the Central Government may with the previous permission of the Central Government, establish a new industrial undertaking

‘A licence or permission to establish a new undertaking may contain such conditions including, in particular, conditions as to the location of the undertaking and the minimum standards of size to be provided therein as the Central Government may deem fit to Impose in accordance with the rules in this respect

() Manufacture of new item: Licence was required for production or manufacture

of a ‘new article’ in an existing industrial undertaking New article means any item of manufacture in a scheduled industry other than those specified in the registration certificate or licence issued to the undertaking It also includes any article which bears

a mark as defined in the Trade Marks Act,1940, or which is the subject of a patent if,

at the date of registration or issue of the licence or permission, as the case may be, the industrial undertaking was not manufacturing or producing such article bearing that mark or which is the subject of that patent

(iti) Substantial expansion of capacity: Licence was required for substantial expansion

of the capacity of an industrial undertaking in an existing line of manufacture Substantial expansion means the expansion of an existing industrial undertaking which substantially increase the productive capacity of the undertaking or which is of such a nature as to amount virtually to a new industrial undertaking, but does not include any such expansion as is normal to the undertaking having regard to its nature and the circumstances relating to such expansion

iv) Continuation of business in certain cases: An industrial undertaking to which the provision of the IDRA did not originally apply but became applicable thereafter for any reason (like cancellation of an exemption granted under the Act) should obtain a

3 Industrial Sector Reforms in Globalization Era

licence to carry on the business of the undertaking after the expiry of three months from the date on which the provision of the Act became so applicable Such a licence was known as COB (carry on business) licence

() Change of location: As stated earlier the location of an industrial undertaking {s specified in the licence A,change of the location so specified could not be made without the general or specific permission of the Central Government

However, no prior permission of the Central Government was needed to shift a part

or the whole of the manufacturing activity of an undertaking from a forward area to a backward area within the same State provided that the prior permission of the State Government concerned is obtained by the industrial undertaking However, the industrial undertaking was required to inform the administrative ministry, technical authority concerned and the SIA about the change of location The same rules were also applicable {n respect to such changes to location from one notified backward area to another notified backward area within the same State

Where an industrial licence was granted subject to the condition that the industrial undertaking would be set up only in a no industry district, a change of location to any other area, including a notified backward area would not normally be allowed

Power to Revoke/Amend Licence

‘The Central Government is empowered to revoke the licence if it is satisfied that any person or authority to whom a licence has been issued, failed, without reasonable cause,

to establish or to take effective steps to established the new industrial undertaking, in respect of which the licence has been issued, within the time permitted The Central Government may also vary or amend any licence Issued, subject to any rules that may

be made in this regard But, no such power shall be exercised after effective steps have been taken to establish the new industrial undertaking in accordance with the licence Issued

Exemptions from Licensing

Projects involving investment up to specified limits were exempted from licensing, subject to certain conditions The exemption limit was periodically revised upwards Before the announcement of the new policy in July 1991, this limit was Rs.15 crores

in non-backward areas and Rs.50 crores backward areas

‘The New Policy

‘The new industrial policy has abolished industrial licensing, irrespective of the levels

of investment, for all industries exempt 18 specified industries which will continue to

be subject to compulsory licensing for reasons related to security, strategic or environmental concerns and certain items of luxury consumption that have a high proportion of imported inputs

Protection of Patents and Trademarks

PATENT

A patent is a monopoly right, granted by the law, to commercial use of an invention that is new and is useful and that 1s adequately disclosed

Industral Policy at Most governments have regulations to protect intellectual property rights like patents, copyrights and other protective forms governing industrial and artistic creations

‘The main objective of patents protection is to encourage research and development Patents:

i) encourage research and invention;

(ii) induce an inventor to disclose his discoveries instead of keeping them as a secret: (ii) offer a reward for the expenses of developing inventions to the state at which they are commercially practicable; and

iv) provide an inducement to invest capital in new lines of production which might not appear profitable if many compete simultaneously

‘The main purpose of the patent system, thus, Is to benefit the society Patents by providing an opportunity to recoup the cost of invention, which is quite substantial in many cases, and to make profit out of the invention, encourage research and development and thereby contribute to the well being of the society

Indian Patents of Law and Uruguay Round Agreement

One of the major controversy regarding the Uruguay Round Agreement* under the General Agreement on Tariffs and Trade (proposed to be transformed into World Trade Organisation (WTO) with effect from January 1,195) is about the Trade Related aspects

of Intellectual Property Rights (TRIPs)

‘The TRIPs Agreement of the Uruguay Round encompasses seven areas of intellectual property rights, namely, copy rights trademarks, trade secrets, industrial designs,

‘geographical appellations, integrated circuits and patents It may be noted that of these seven areas, it Is only in the area of patents that India's policies, laws and regulations are not in conformity with the TRIPs Agreement

Under the Indian Patents Act, 1970, for food, pharmaceuticals and agrochemicals there is only process patent, no product patent This means that one can produce a product similar to the patented to product through a different process or method than the patented one This practice has been very prevalent in the Indian pharmaceutical industry Further, under the existing patent law in India, the duration of the patent protection for the above products is seven years and for other products 14 years According to the TRIPs agreement of the Uruguay Round, there shall be both process and product patents and the period of patent protection shall be 20 years

‘The fears of monopolisation and resultant sharp increase in prices if product patent

is accepted seems to be exaggerated A study shows that the patented drug segment of the Indian pharmaceutical sector is currently below 16 percent of the total market and within this segment more than half of the drugs have other therapeutic equivalents Extrapolation of these results of the future shows that only seven percent of the total pharmaceutical market would constitute patented inventions with few or no substitutes + As the frst Draft embodying the resulirs of the Uniguay Round negotiations was presented by Arthur Dunkel, the then Director General of GATT this came to be popularly known as the Dunkel Drat The Final Act was agreed upon by the member countries of GATT on December 15, 1993 and was signed

by 125 nations on Apri 18, 1994

32 Industrial Sector Reforms in Globalization Era

Even in respect of these drugs it would not be easy to jack up prices to very high levels,

as government could prevent monopoly abuse by price controls and other means It is also pointed out that “today the lack of patent protection has made foreign firms shy away from producing most of them in India, and without any compulsion to do so, Indian companies have shown no interest in sub-licensing their manufacture As a result, Indians forced to buy life-saving drugs like those for cancer have to pay ruinous prices Once patent protection Is available, many of the drugs now being imported will start being made here, and their prices will fall

It may also be noted that the TRIPs agreement permits public non-commercial use

of a patent by the government without authorisation of the patent owner That is, the agreement permits governments to look after the interests of the poor by making the patented drug available through government hospitals or other public institutions Further, the agreement also provides for the selective and judicious use of compulsory licensing provisions to safeguard public interest

“The Indian Patents Act, 1970, excludes methods of agriculture and horticulture and bio-technological processes and products from patentability plants and animals other than microorganisms, and essentially biological processes for the production of plants

or animals other than non-biological and microbiological processes However, member countries shall provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof These provisions are subject

to review after four years

Its clear that the Uruguay Round Agreement does not compel any country to extend patentability to plan varieties Instead a country can opt for an effective sui generis system There is, however, a lot of ambiguity here The Agreement does not make clear

‘what Is meant by an effective sul generis system Again, even the exact definition of the

‘sul generis system is not given, Interpretations of the term range from “a system of your own’ to "a system complete in itself It is unfortunate that such serious ambiguities should be allowed to prevail in such an important agreement

‘The Indian Patents Act, 1970, excludes methods of agriculture and horticulture and biotechnological processes and products from patentability These will be patentable according to Uruguay Round Agreement

However, contrary to the propaganda unleashed in India, the Uruguay Round Agreement does not prohibit the retaining of patented seeds for their own use The agreement may not also come in the way of farmers exchanging seeds among themselves

The Uruguay Round Final Act says that a country may exclude from patent ability plants and animals other than microorganisms, and essentially biological processes for the production of plants or animals other than non-biological and microbiological processes However, member countries shall provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof These provisions are subject to review after four years

tis clear that the Uruguay Round Agreement does not compel any country to extend patent ability to plant varieties Instead, a country can opt for an effective sui generis system There is, however a lot of ambiguity here The Agreement does not make clear what is meant by an effective suf generis system Again, even the exact definition of the sul generis system is not given Interpretations of the term range from “a system of your own’ {o “a system of your own” to “a system complete in itself Its unfortunate that such serious ambiguities should be allowed to prevail in such an important agreement.

Industrial Policy 3 Government of India is proposing to bring out a sul generis legislation to protect plant varieties According to Government sources, under the proposed legislation, farmer's right

to retain and exchange seeds will not be affected

‘TRADEMARKS

Brands and trade marks, used very extensively in modern marketing to maintain product identity and to help product promotion, have become very popular terms The definitions of some the important terms given in Marketing Definitions: A Glossary of Marketing Terms, published by the American Marketing Association, are given below

Brand: A brand is a name, term, sign, symbol, or design or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors

Brand Name: Brand name is that part of the brand which can be vocalised — the utterable,

‘Brand Mark: Brand mark is that part of a brand which can be recognised but is not a utterable, such as symbol design or distinctive colouring or lettering

Trademark: A trademark is a brand or part of a brand that is given legal protection, because itis capable of exclusive appropriation A trademark protects the seller's exclusive rights to use the brand name and/or brand mark

‘THE TRADE AND MERCHANDISE MARKS ACT, 1958

‘The Trade and Merchandise Marks Act, 1958, is the law governing Trademarks in India This Act enables the registration of trademarks so that the proprietor of the trade- mark gets legal right to the exclusive use of the trademark

‘The objectives of the Act are to provide for:

( the registration and better protection of trademarks, and

(I) the prevention of the use of fraudulent marks on merchandise

‘The Trade and Merchandise Marks Act lays down the procedures for registration of trademarks, rights conferred by registration and the punishment for infringement of trademarks

Meaning of Trademark

According to the Trade and Merchandise Marks Act, a trademark is a mark which establishes a connection between certain goods and the proprietor or the registered user

of the trademark It may also include a certification trademark

‘According to the definition given in the Trade and Merchandise Marks Act, 1958, ( Trademark means “a registered trade-mark or a mark used in relation to goods for the purpose of indicating or so as to indicate a connection In the course of trade between the goods and some person having the right as a proprietor to use the mark; and