Session 3-4

The Indian Industry and Manufacturing

Growth, Policy and Strategy

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 Composition of Indian Industry
Sector Weight (%) in IIP
(2011-12=100)
Mining 14.373
Manufacturing 77.633
Electricity 7.994
Total 100

Core Industries

Coal, Crude oil, Natural gas, Refinery products,

Fertilizers, Steel, Cement, and Electricity.

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 Structure

• Industrial Development and Policies

• Public and Private sectors
• MSME sector
• Competition Act, 2002
• Insolvency and Bankruptcy Code, 2016

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 Industrial Growth In India
Four Distinct Phases
 Phase I which covered the period of the first three phase (i.e. the period from
1951 to 1965)

 Phase II which covered the period from 1965 to 1980 was marked by
industrial deceleration and structural retrogression

 Phase III which covered the period of 1980’s (1980-81 to 1990-91) was
marked by industrial recovery

 Phase IV covering the post-reform period (i.e. the period 1991-92 onwards)

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 Phase IV: The Post Reform (1991-92 onwards)

Major liberalization measures to promote performance of the industrial sector

• wide-scale reduction in the scope of industrial licensing
• simplification of procedural rules and regulations
• reductions of areas exclusively for the public sector
• disinvestment of equity of selected public sector undertakings
• enhancing the limits of foreign equity participation in domestic industrial
undertakings
• liberalization of trade and exchange rate policies
• rationalization and reduction of customs and excise duties and personal and
corporate income tax etc.

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 Causes of Unsatisfactory Performance in the
Post–reform Period

The main causes for unsatisfactory performance of the industrial sector in the
post-reform period are as follows:
 Exposure to external competition
 Slowdown in investment
 The infrastructural constraints
 Difficulties in obtaining funds for expansion
 Contraction in consumer demand
 Sluggish growth in exports
 Anomalies in tariff structure etc.

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 Problems and Obstacles to
Industrial Development in India

 Poor capital formation

 Lack of Infrastructural facilities
 Poor performance of the agricultural sector
 Gaps between targets and achievements
 Dearth of skilled and efficient personnel
 Industrial Sickness
 Regional Imbalances
 Poor performance of the public sector
 Concentration of Wealth etc.

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INDUSTRIAL POLICY 1991: Objectives

• Govt . recognizes the need for

– social and economic justice, to end poverty and unemployment and to
build a modern, democratic, socialist, prosperous and forward-looking
India
– India to grow as part of the world economy and not in isolation
– Greater emphasis placed on building up ability to pay for imports through
our own foreign exchange
earnings
– development and utilization of indigenous capabilities in technology and
manufacturing as well as its
up gradation to world standards.

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• Sound policy framework encompassing encouragement of entrepreneurship,
development of indigenous technology through investment in research and
development, bringing in new technology, dismantling of the regulatory
system, development of the capital markets and increasing
competitiveness for the benefit of the common man.

• The spread of industrialization to backward areas of the country will be

actively promoted through appropriate incentives, institutions and
infrastructure investments.

• Government will provide enhanced support to the small-scale sector so that it

flourishes in an environment of economic efficiency and continuous
technological up gradation

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• Foreign investment and technology collaboration will be welcomed to obtain
higher technology, to increase exports and to expand the production base.

• Government will endeavor to abolish the monopoly of any sector or any

individual enterprise in any field of manufacture, except on strategic or
military considerations and open all manufacturing activity to competition.

• Government will ensure that the public sector is

run on business lines as envisaged in the Industrial Policy Resolution of 1956
and would continue to innovate and lead in strategic areas of national
importance.

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• Government will fully protect the interests of labour, enhance their welfare
and equip them in all respects to deal with the inevitability of technological
change. Labour will be made an equal partner in progress and prosperity

• Workers’ participation in management will be promoted

• Workers cooperatives will be encouraged to participate in packages designed

to turn around sick companies.

• The major objectives of the new industrial policy package will be to build
on the gains already made, correct the distortions or weaknesses that may
have crept in, maintain a sustained growth in productivity and gainful
employment and attain international competitiveness.
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INDUSTRIAL POLICY 1991: Policy Initiatives

1. Industrial Licensing

2. Foreign Investment

3. Foreign Technology Agreements

4. Public Sector Policy

5. MRTP Act.
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 INDUSTRIAL POLICY 1991
• Industrial licensing:
– Modified industrial licensing policy to ease restrictions on capacity creation,
respond to emerging domestic & global opportunities by improving productivity
– Abolished industrial licensing for most industries but for 18 categories
– Small scale sector reserved

• Foreign Investment:
– FDI (up to 51% foreign equity) permitted in high priority industries (high
investment and advanced technology) & export oriented companies

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INDUSTRIAL POLICY 1991
• Foreign Technology Agreements:
Towards technological dynamism, automatic approval for technological
agreements related to high priority industries; eased procedures for hiring
foreign technical expertise
• Public Sector Policy:
Restructuring pubic sector units, raise resources through pubic
participation PSUs, refer sick units to Board of Industrial & Financial
Reconstruction
• MRTP Act:
Abolished scrutiny of investment decision of MRTP companies etc.

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Current Scenario
• Substantial changes:
– Only six industries require compulsory licensing
– Only three industries reserved for the public sector
– Relation of restriction on FDI: FDI up to 100 % under automatic route for
most manufacturing activities in Special Economic Zones; FDI ceiling in
pvt banking sector up to 74%; oil exploration (100%); natural gas and LNG
pipelines (100%); telecom (74%)

• Small Scale industries sector: reduced # of items reserved from 821 (1991) to
506 (2005)

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Lessons from India
• Industrial Policy should not be about:
– Controlling Prices
– Controlling Quantity
– Specifying Geographical Location of Activity
– Preemption by Public Sector
– Policy Body, Regulatory Body and Service Provider being Government
Agencies

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Public and Private Sectors

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 Strengths and Weaknesses of Markets

• Keep Prices in check • Provide public good

What markets cannot do?

What markets can do?

• Use resources efficiently • Prevent abuse of monopoly power

• Encourage innovation • Internalise externalities
• Increase consumer choice • Overcome information asymmetry
• Create wealth • Distribute wealth equitably
• Maximise aggregate welfare • Ensure ethical practices

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 Governement Vs Markets in India
• Indian economy is replete with examples where govt intervenes and thereby underestimates markets
unnecessarily, i.e., even in areas where there are no “market failures”.
• Frequent and unpredictable imposition of blanket stock limits on commodities under Essential
Commodities Act, 1955 distorts the incentives for the creation of storage infrastructure by the pvt
sector.
• Regulation of prices of drugs, through the DPCO 2013, has led to increase in the price of the
regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated.
• Govt policies in the foodgrain markets has led to the emergence of govt as the largest procurer and
hoarder of rice and wheat crowding out. This has led to burgeoning food subsidy burden and
inefficiencies in the markets.
• Analysis of debt waivers shows that full waiver beneficiaries consume less, save less, invest less and
are less productive after the waiver when compared to the partial beneficiaries. Debt waivers disrupt
the credit culture.
• Therefore, govt must systematically examine areas where the govt needlessly intervenes and
undermines markets.

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 Public Sector

Classification
• CPSEs: Cos where the direct holding of the GoI or of other CPSEs is 51% or
more;

• PSBs: Banks where the direct holding of the Central/state govt or other PSEs is
51% or more;

• State Level (SLPEs): Cos where the direct holding of the state govt or other
SLPEs is 51% or more.

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 Performance of Public Sector

• Capital formation and Dvt of Infrastructure

• Strong industrial base
• Removal of regional disparities
• Earner and saver of foreign exchange
• Check over economic concentration
• Promoting public welfare

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 Problems
• Wrong price policy
• Inefficiency
• Underutilization of capacity
• Failures in planning and execution of projects

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 Private Sector in India
The role of Private Sector in Indian Economy

• Contributions to
National output
Gross domestic savings
Gross capital formation

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 The Twin Balance Sheet Problem
The financial vulnerability of banks (in terms of NPA) and the
corporate debt (debt-equity ratio) are closely related.

Corporations borrow and over expand during boom period, and

default during slow-down and crisis period, leaving bank balance
sheet impaired.

Sources are domestic borrowing and foreign borrowings (ECBs

including FCCBs)

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 MSME Sector
• Removed the distinction between manufacturing and service MSMEs.
Category Investment in plant and Annual turnover
machinery or equipment
Micro < 1 crore < 5 crore
Small < 10 crore < 50 crore
Medium < 50 crore < 250 crore
Economic Survey 2021-22, p 37

• Increases market access to MSEs under public procurement policy.

• All central ministries, government departments and CPSEs are required to procure 25 % of
their annual requirements of goods and services from MSEs.
• No global tenders for procurement up to 200 crore.

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 Challenges of MSMEs

• Finance
• Infrastructure
• Competition
• Technology
• Marketing and promotion
• GST related
• Nascent start-up ecosystem

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 Key Initiatives for MSME’s Growth
Initiatives
In-principle approval for loans up to 1 crore within 59 minutes
through online portal.
Interest subvention of 2% for all GST registered MSMEs on
incremental credit up to 1 crore.
All companies with a turnover of more than 500 crore to be
mandatorily on TReDS platform to enable entrepreneurs to access
credit from banks, based on their upcoming receivables.
All CPSUs to compulsorily procure at least 25 % from MSEs.
Out of 25% procurement mandated from MSE, 3% reserved for
women entrepreneurs.
All CPSUs to compulsorily procure through GeM portal.
20 Technology Centers and 100 Extension Centers to be established
at the cost of 6000 crore.
Govt of India to bear 70% of the cost for establishing Pharma
clusters.
Status
1,38,646 number of loans, involving 37,106 crore have been
disbursed up to Oct, 2019.
SIDBI has received and settled the claims of 18 crore during Nov.
2018 – Mar. 2019.
329 companies have registered on TReDS portal by Mar. 2020.
During 2019-20 (upto Oct 2019) CPSUs have procured goods and
services worth 15936.39 crore from 59903 MSEs.
During 2019-20 (upto Oct 2019) procurement from 1471 women
MSEs is of 242.12 crore
258 CPSUs have been registered on GeM portal and 50.30% of
orders value on GeM portal is from MSEs.
Six locations have been identified for TCs.
Four districts viz., Solan, Indore, Aurangabad and Pune were
selected.
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 Insolvency and Bankruptcy Code, 2016
• Objectives
To solve the twin balance sheet (TBS) problem
To develop a robust corporate bond market
To improve the credit environment
To streamline the corporate insolvency resolution process
To prevent value destruction in the presence of distress.

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Reference
• Economic Survey, various issues.
• NITI Aayog, “Strategy for New India @75”, 2018, chapter 4.

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