Industrial Policies

Module 6: Industrial Policies
Industrial Policies of India, New Industrial Policy 1991;

Private Sector- Growth, Problems and Prospects,
SMEs –Significance in Indian economy-problems and prospects.
Fiscal policy and Monetary Policy.
Foreign Trade: Trends in India’s Foreign Trade, Impact of WTO on
India’s Foreign Trade
Dr. Sainath, Prof AIMS-IBS B-School 1

Industrial Policy

India’s Industrial Policy-Meaning
Industrial policy is Government action to influence the

ownership & structure of the industry and its performance. It
takes the form of paying subsidies or providing finance in
other ways, or of regulation.
It includes procedures, principles (i.e., the philosophy of a
given economy), policies, rules and regulations, incentives
and punishments, the tariff policy, the labour policy,
government’s attitude towards foreign capital, etc.

India’s Industrial Policy-Objectives
To maintain a sustained growth in productivity;

To enhance gainful employment;
To achieve optimal utilization of human resources;
To attain international competitiveness; and
To transform India into a major partner and player in
the global arena.

Industrial Policies in India since
Independence

Industrial Policy Resolution of 1948
Industrial Policy Resolution of 1948- It
defined the broad contours of the
policy delineating the role of the
State in industrial development both
as an entrepreneur and authority.
It made clear that India is going to
have a Mixed Economic Model.
Mixed economies typically maintain
private ownership of most of the
means of production, with the
government intervening through
regulations.
It classified industries into four broad areas:
1.Strategic Industries (Public Sector): It included three industries in
which Central Government had monopoly. These included Arms and
ammunition, Atomic energy and Rail transport.
2.Basic/Key Industries (Public-cum-Private Sector): 6 industries viz.
coal, iron & steel, aircraft manufacturing, ship-building, manufacture
of telephone, telegraph & wireless apparatus, and mineral oil were
designated as “Key Industries” or “Basic Industries”. These industries
were to be set-up by the Central Government. However, the existing
private sector enterprises were allowed to continue.

3.Important Industries (Controlled Private Sector): It included 18
industries including heavy chemicals, sugar, cotton textile & woolen
industry, cement, paper, salt, machine tools, fertilizer, rubber, air and
sea transport, motor, tractor, electricity etc.
These industries continue to remain under private sector however,
the central government, in consultation with the state government,
had general control over them.

4.Other Industries (Private and Cooperative Sector): All other
industries which were not included in the above mentioned three
categories were left open for the private sector.
The Industries (Development and Regulation) Act was passed in 1951
to implement the Industrial Policy Resolution, 1948.

Industrial Policy Statement of 1956

Government revised its first Industrial Policy (i.e. The policy
of 1948) through the Industrial Policy of 1956.
It was regarded as the “Economic Constitution of India” or
“The Bible of State Capitalism”.
The 1956 Policy emphasized the need to expand the public
sector, to build up a large and growing cooperative sector
and to encourage the separation of ownership and
management in private industries and, above all, prevent the
rise of private monopolies.
IPR, 1956 classified industries into three categories
Schedule A consisting of 17 industries was the exclusive
responsibility of the State. Out of these 17 industries, four
industries, namely arms and ammunition, atomic energy,
railways and air transport had Central Government
monopolies; new units in the remaining industries were
developed by the State Governments.
Schedule B consisting of 12 industries, was open to both the
private and public sectors; however, such industries were
progressively State-owned.
Schedule C All the other industries not included in these two
Schedules constituted the third category which was left open
to the private sector. However, the State reserved the right
to undertake any type of industrial production.
The IPR 1956, stressed the importance of cottage and small
scale industries for expanding employment opportunities
and for wider decentralization of economic power and
activity

The Resolution also called for efforts to maintain industrial
peace; a fair share of the proceeds of production was to be
given to the toiling mass in keeping with the avowed
objectives of democratic socialism.
Criticism: The IPR 1956 came in for sharp criticism from the
private sector since this Resolution reduced the scope for the
expansion of the private sector significantly.
The sector was kept under state control through a system of
licenses.
Industrial Policy Statement, 1977

Industrial Policy Statement, 1977- In December 1977,
the Janata Government announced its New Industrial
Policy through a statement in the Parliament.
The main thrust of this policy was the effective
promotion of cottage and small industries widely
dispersed in rural areas and small towns.

In this policy the small sector was classified into three
groups—cottage and household sector, tiny sector and small
scale industries.
The 1977 Industrial Policy prescribed different areas for
large scale industrial sector- Basic industries, Capital goods
industries, High technology industries and Other industries
outside the list of reserved items for the small scale sector.

The 1977 Industrial Policy restricted the scope of large
business houses so that no unit of the same business group
acquired a dominant and monopolistic position in the
market.
It put emphasis on reducing the occurrence of labour unrest.
The Government encouraged the worker’s participation in
management from shop floor level to board level.

Criticism: The industrial Policy 1977, was subjected to serious
criticism as there was an absence of effective measures to
curb the dominant position of large scale units and the policy
did not envisage any socioeconomic transformation of the
economy for curbing the role of big business houses and
multinationals.

Industrial Policy of 1980

Industrial Policy of 1980 sought to promote the
concept of economic federation, to raise the efficiency
of the public sector and to reverse the trend of
industrial production of the past three years and
reaffirmed its faith in the Monopolies and Restrictive
Trade Practices (MRTP Act-Replaced by Completion Act-
2002) and the Foreign Exchange Regulation Act (FERA
Act Replaced by FEMA Act 2000).
The Industrial Policy Statement of 1980 addressed
the need for promoting competition in the
domestic market, modernization, selective
Liberalization, and technological up-gradation. It
liberalized licensing and provided for the
automatic expansion of capacity.

Industrial Policy Resolution (IPR) 1990

This policy emphasized on the need of modernization and technology
up gradation to meet the objectives of employment generation and
dispersal of industry in rural areas, and to enhance the contribution of
small scale industries to exports.
(i)The investment ceiling in plant and machinery for small-scale
industries (fixed in 1985) was raised from Rs. 35 lakhs to Rs. 60 lakhs
and correspondingly, for ancillary units from Rs. 45 lakhs to Rs. 75
lakhs.

(ii) Investment ceiling for tiny units had been increased from Rs. 2 lakhs
to Rs. 5 lakhs provided the unit is located in an area having a population
of 50,000 as per 1981 Census.
(iii) As many as 836 items were reserved for exclusive manufacture in
small- scale sector.
(iv) A new scheme of Central Investment Subsidy exclusively for small-
scale sector in rural and backward areas capable of generating more
employment at lower cost of capital had been mooted and
implemented.
(v) With a view, to improve the competitiveness of the products
manufactured in the smallscale sector; programmes of technology up
gradation will be implemented under the umbrella of an apex
Technology Development Centre in Small Industries Development
Organisation (SIDO).
(vi) To ensure both adequate and timely flow of credit facilities for the
small- scale industries, a new apex bank known as ‘Small Industries
Development Bank of India (SIDBI)’ was established in 1990.

(vii) Greater emphasis on training of women and youth under
Entrepreneurship Development Programme (EDP) and to establish a
special cell in SIDO for this purpose.
(viii) Implementation of delicensing of all new units with investment of
Rs. 25 crores in fixed assets in non-backward areas and Rs. 75 crores in
centrally notified backward areas. Similarly, delicensing shall be
implemented in the case of 100% Export Oriented Units (EOU) set up in
Export Processing Zones (EPZ) up to an investment ceiling of Rs. 75
lakhs.

New Industrial Policy During Economic Reforms of 1991

The long-awaited liberalized industrial policy was

announced by the Government of India in 1991 in the
midst of severe economic instability in the country. The
objective of the policy was to raise efficiency and
accelerate economic growth.

Features of New Industrial Policy:

1.De-reservation of Public sector: Sectors that were earlier exclusively
reserved for public sector were reduced. However, pre-eminent place
of public sector in 5 core areas like arms and ammunition, atomic
energy, mineral oils, rail transport and mining was continued. Presently,
only two sectors- Atomic Energy and Railway operations- are reserved
exclusively for the public sector.

Features of New Industrial Policy:

2.De-licensing: Abolition of Industrial Licensing for all projects except
for a short list of industries. There are only 4 industries at present
related to security, strategic and environmental concerns, where an
industrial license is currently required- Electronic aerospace and
defense equipment, Specified hazardous chemicals, Cigars and
cigarettes of tobacco and manufactured tobacco substitutes

3.Disinvestment of Public Sector: Government stakes in Public

Sector Enterprises were reduced to enhance their efficiency
and competitiveness.
4.Liberalization of Foreign Investment: This was the first
Industrial policy in which foreign companies were allowed to
have majority stake in India. In 47 high priority industries, upto
51% FDI was allowed. For export trading houses, FDI up to
74% was allowed.

Today, there are numerous sectors in the economy where

government allows 100% FDI.
Foreign Technology Agreement: Automatic approvals for technology
related agreements.
MRTP Act was amended to remove the threshold limits of assets in
respect of MRTP companies and dominant undertakings. MRTP Act
was replaced by the Competition Act 2002.

Outcomes of New Industrial Policies

The 1991 policy made ‘Licence, Permit and Quota Raj’ a thing of the
past. It attempted to liberalise the economy by removing bureaucratic
hurdles in industrial growth.
Limited role of Public sector reduced the burden of the Government.
The policy provided easier entry of multinational companies,
privatisation, removal of asset limit on MRTP companies, liberal
licensing.

Outcomes of New Industrial Policies

All this resulted in increased competition, that led to lower prices in
many goods such as electronics prices. This brought domestic as well
as foreign investment in almost every sector opened to private sector.
The policy was followed by special efforts to increase exports.
Concepts like Export Oriented Units, Export Processing Zones, Agri-
Export Zones, Special Economic Zones and lately National Investment
and Manufacturing Zones emerged. All these have benefitted the
export sector of the country.

New Industrial Policy During Economic Reforms of 1991-Way Forward
Industrial policies in India have taken a shift from predominantly

Socialistic pattern in 1956 to Capitalistic since 1991.
India now has a much liberalised industrial policy regime focusing on
increased foreign investment and lesser regulations.
India ranked 77th on World Bank’s Doing Business Report 2018.
Reforms related to insolvency resolution (Bankruptcy and Insolvency
Act, 2017) and the Goods and Services Taxes (GST) are impressive and
will result in long-term gains for the industrial sector.

New Industrial Policy During Economic Reforms of 1991-Way Forward
Campaigns such as Make in India and Start up India have helped to

enhance the business ecosystem in the country.
However, electricity shortages and high prices, credit constraints, high
unit labour costs due to labour regulations, political interference and
other regulatory burdens continue to remain challenges for firm
growth of the industrial sector in India.
There is a need for a new Industrial Policy to boost the manufacturing
sector in the country. Government in December 2018 also felt the
need to introduce a new Industrial Policy that would be a road map
for all business enterprises in the country.

Comparison of industrial policies based on
objectives
Objective
Industrial Policy Describe the role of the State in industrial development
Resolution of 1948 both as an entrepreneur and authority towards a Mixed
Economic Model.
Industrial Policy Emphasized the need to expand the public sector, to
Statement of 1956 build up a large and growing cooperative sector and to
encourage the separation of ownership and
management in private industries and, above all,
prevent the rise of private monopolies.

objectives
Industrial Policy of Promoting competition in the domestic market,
1980 modernization, selective Liberalization, and
technological up-gradation. It liberalized licensing and
provided for the automatic expansion of capacity.
Industrial Policy Effective promotion of cottage and small industries
Statement, 1977 widely dispersed in rural areas and small towns.

objectives
Objective
Industrial Policy This policy emphasized on the need of modernization
Resolution (IPR) 1990 and technology upgradation to meet the objectives of
employment generation and dispersal of industry in
rural areas, and to enhance the contribution of small
scale industries to exports.
New Industrial Policy To raise efficiency and accelerate economic growth.
During Economic
Reforms of 1991

Classification of industries
Classification of Industries
1.Strategic Industries (Public Sector): Three industries in which Central Government had
monopoly. (Arms and ammunition, Atomic energy and Rail transport).
2.Basic/Key Industries (Public-cum-Private Sector): 6 industries viz. coal, iron & steel,
aircraft manufacturing, ship-building, manufacture of telephone, telegraph & wireless
apparatus, and mineral oil were to be set-up by the Central Government. However, the
existing private sector enterprises were allowed to continue.
3.Important Industries (Controlled Private Sector): It included 18 industries including
heavy chemicals, sugar, cotton textile & woolen industry, cement, paper, salt, machine
tools, fertilizer, rubber, air and sea transport, motor, tractor, electricity etc.
4.Other Industries (Private and Cooperative Sector): All other industries which were not
included in the above mentioned three categories were left open for the private sector.

1.Schedule A consisting of 17 industries was the exclusive responsibility of the State. Out
of these 17 industries, four industries, namely arms and ammunition, atomic energy,
railways and air transport had Central Government monopolies; new units in the
remaining industries were developed by the State Governments.
2.Schedule B consisting of 12 industries, was open to both the private and public sectors;
however, such industries were progressively State-owned.
3.Schedule C All the other industries not included in these two Schedules constituted the
third category which was left open to the private sector. However, the State reserved the
right to undertake any type of industrial production.

Small sector was classified into three groups—cottage and household sector, tiny sector
and small scale industries.
The 1977 Industrial Policy prescribed different areas for large scale industrial sector-
Basic industries, Capital goods industries, High technology industries and Other
industries outside the list of reserved items for the small scale sector.

Promotion of Industries in Rural Area in order to correct regional imbalances
(i)The investment ceiling in plant and machinery for small-scale industries was raised
from Rs. 35 lakhs to Rs. 60 lakhs, for ancillary units from Rs. 45 lakhs to Rs. 75 lakhs and
for tiny units from Rs. 2 lakhs to Rs. 5 lakhs.
(iii) As many as 836 items were reserved for exclusive manufacture in small- scale sector.

1.De-reservation of Public sector: 5 core areas like arms and ammunition, atomic energy,
mineral oils, rail transport and mining was continued. Presently, only two sectors- Atomic
Energy and Railway operations- are reserved exclusively for the public sector.
2.De-licensing: There are only 4 industries at present where an industrial license is
currently required- Electronic, Aerospace & defense equipment, Specified hazardous
chemicals, Cigars & cigarettes of tobacco & manufactured tobacco substitutes.
3.Disinvestment of Public Sector: Government stakes in Public Sector Enterprises were
reduced to enhance their efficiency and competitiveness.
4.Liberalization of Foreign Investment: In 47 high priority industries, upto 51% FDI was
allowed. For export trading houses, FDI up to 74% was allowed.

Private Sector- Growth, Problems and Prospects,

Private Sector- Growth, Problems and Prospects,
Private Sector Growth: As per The World Economic Forum

In the past, India has shown strong resilience in the face of
global volatility and has continued to grow steadily, placing it
among the world’s fastest-growing economies. The Indian
economy grew at a rate of 6.8% during 2018 and is projected to
grow at a rate of 7% and 7.2% during 2019 and 2020,
respectively. The private sector has played a huge role in India’s
development and is largely responsible for the phenomenal
growth registered by the country since the economy was
opened up in 1991.
Private Sector Growth

Private Sector- Growth
Creating livelihoods:
With rapidly changing employment landscape, including 11-12
million youth entering the labour force every year, jobs need
to be created, the private sector plays a pivotal role in meeting
this challenge.
Investments in Education:
India has more than 900 universities and 39,000 colleges of
which 78% are privately managed.

In House Training and Skills programs:
Most large, private enterprises have created in-house training and skills
programs to help build the capacities of young workers in line with
industry needs.
Model Career Centers:
CII's skills and livelihood initiatives aim to build an environment that
boosts employability. Aside from its policy advocacy work, CII actively
engages in training and increasing the skills of young individuals and
offers career matching and counselling through its Model Career
Centres (MCCs). Its various initiatives have an impact on an estimated 1
million-plus young people every year.
Driving investments:
Private investments by the corporate sector are critical to
higher growth rates and economic development. More
investment creates a multiplier effect in the economy by
generating both direct and indirect employment, boosting
consumption and fostering further development. The total
gross capital formation in India as a proportion of GDP during
2017-18 stood at around 31%. The private sector, including
small enterprises in the household sector, accounted for about
two-thirds of this.
Making use of technology
A focus on affordable technology to allow equal access is imperative for
inclusive development. Technology-enabled development in sectors such
as health and education go a long way in ensuring equitable development
in emerging economies, which the private sector is best equipped to
provide.
Fostering entrepreneurship and innovation
India has emerged as a significant player when it comes to converging
technology and entrepreneurship. It is the second-largest start-up nation
in the world, with more than 14,000 start-ups recognized under the
Startup India scheme.

Environmental efficiency
Scarcity of natural resources and environmental degradation pose
major threats to sustainable growth. Engaging the private sector has
become critical to ensuring environmental efficiency through its greater
adoption of cleaner, greener technologies and the adoption and sharing
of best practices. The private sector’s use of new technologies in
sustainable production, while coming at some cost, will promote
sustainability, efficiency and better use of inputs and raw materials.

Private Sector- Problems
1. Regulatory Procedure and Related Delays:
Too many regulatory measures imposed by the Government on the
private sector has resulted in lengthy procedure and delays in getting
final clearance of a new industrial project. On the Government level,
decision making system is so poor that it normally takes 7 to 8 years for
large investment project to complete its gestation period. Delegation of
decision making in the Government bureaucracy is so poor that even
the simple decisions are rolled back to the top level leading avoidable
procedural delays, huge cost escalation, increasing interest burden and
higher burden on consumers.

2. Unnecessary Control:
From the beginning, the private sector of the country is
subjected to unnecessary Government control. Price controls
imposed by the Government on certain goods has resulted in
disincentive to increase production. Rather competition
among the rival producers can enlarge the production base
and thereby can reduce the prices automatically. Price
controls,dual pricing etc. has resulted in black marketing and
hoarding of such commodities.
3. Inadequate Diversification:
The private sector has been suffering from inadequate
diversification as the Government did not allow them
to participate in those basic, heavy and infrastructural
sectors which were earlier reserved for the public
sector. It is only in post-1991 period, some of these
areas are now opened for the private sector
participation.

4. Reservation for the Small Sector:
From the initial stage of development, the Government
is providing necessary support to the small industrial
sector in the form of reservation of certain products
exclusively for the small sector so as to save it from
unfair competition of large units and also by providing
excise exemption or lower excise duties on the goods
produced by the small sector.

5. Lack of Finance and Credit:
Although the large scale industrial corporate
units of the private sector are mobilizing their
fund from banks, development financial
institutions and from the market through sale
of their equities or debentures but the small
scale units are facing acute problem in raising
fund for their expansion.
5. Lack of Finance and Credit:
Although the large scale industrial corporate units of
the private sector are mobilizing their fund from banks,
development financial institutions and from the market
through sale of their equities or debentures but the
small scale units are facing acute problem in raising
fund for their expansion.

6. Low Ratio of Profit:
Another important problem of the private sector
enterprises is the declining trend in its net profit ratio.
Accordingly, the net profit to turnover ratio of these total
Indian private sector enterprises has been declining from
6.1 per cent in 1994-95.
Net profit to net worth (NP/NW) reflecting on return on
investment, of the total private sector enterprises also
declined considerably from 15.2 per cent Is declining which
is a matter of great concern for the private sector
Future prospects of Private Sector in India
Post liberation, the private sector in India is poised for a
greater responsibility in the economic development of the
country.
1. Generate employment
The private sector plays an essential role in generating
employment opportunities. Usually, companies in this sector
provide many jobs and provide employees with many benefits.
Allowing private companies to enter the market is usually a
long-term strategy for reducing unemployment.
2.Impacting the economy
Typically, the private sector contributes a significant
amount to the national income. Apart from paying
taxes, companies in this sector ensure an adequate
flow of capital. These companies impact the economy
by delivering vital goods and services.

3.Fosters entrepreneurship and innovation
Private sector companies are an integral aspect of fostering
innovation and entrepreneurship and ensuring the future
progress of an economy. These companies are providing
sustainable infrastructure, use modern technology and create
new products and services. They also create new and innovative
business models and strategies. Often, these companies play a
significant role in conducting research, working with universities
and translating new research into the market.

4.Ensures environmental efficiency:
Private sector is essential for ensuring environmental efficiency
because private companies have an inclination towards greener
technologies. The sector uses new technologies to promote
sustainability and efficiency and ensures better use of raw
materials. Also, these companies enable more innovations and
mobilization of resources.

5.Ensures diversification in a business:
The sector is extremely rich in opportunities because it
allows new companies to deliver new products and
services to the public. The private sector provides new
companies with the opportunity to develop, regardless
of the type of business they want to do. With such
freedom, private companies can diversify their business
operations.
6.Ensures economic and community development
Private companies launch new equipment,
commodities, machinery and technology to ensure
economic development. This helps attract potential
investors who can then promote and scale up the
company. Also, the private sector ensures community
development by promoting cooperatives and
community businesses.
7.Provides high-quality goods and services
Industries working in the private sector are competitive
and they constantly focus on innovation to develop
new products and services. These innovations can help
in gaining customers' trust. With customer satisfaction,
companies can manufacture more products and
innovate services by producing goods that satisfy the
market requirement.
SMEs –Significance in Indian economy-
problems and prospects

MSMEs –Significance in Indian economy-
MSMEs –Significance in Indian economy:
The MSMED Act 2006 (Micro, Small and Medium Enterprises Development),
was enacted to provide enabling policy environment for promotion and
development of the sector by way of:
Defining MSMEs,
Putting in place a framework for developing and enhancing
competitiveness of the MSME enterprises,
Ensuring flow of credit to the sector and paving the way for preference in
Government procurement to products and services of the MSEs,
Address the issue of delayed payments, etc.
MSMEs –Significance in Indian economy-
It is expected that the new law will be able to address the major
challenges, relating to physical infrastructural bottlenecks, absence of
formalization, technology adoption, capacity building, backward and
forward linkages, lack of access to credit, risk capital, perennial
problem of delayed payments, etc. These problems are hindering the
development of a conducive business environment for expansion of
the sector.
The Ministry of MSME noted that a thriving entrepreneurial eco-
system is a policy imperative for realizing the potential of the sector
and ensuring sustainable growth of the sector.

Classification of Micro, Small and Medium Enterprise (MSME) as per new criteria from 1st
July 2020
Composite Criteria
Investment in Plant & Machinery/equipment and Annual Turnover
Classifi
cation Micro Small Medium
Investment in Plant
Manufactur Investment in Plant Investment in Plant and and Machinery or
ing and and Machinery or Machinery or Equipment upto
Service Equipment upto Equipment upto Rs.50 crore and
Sector Rs.1 crore and Rs.10 crore and Annual Turnover does
Enterprises Annual Turnover does Annual Turnover does not exceed Rs. 250
not exceed Rs. 5 crore not exceed Rs. 50 crore crore

Significance of MSMEs in Indian economy

Micro, Small and Medium Enterprises (MSME) are the backbone of
the socio-economic development of our country.
MSME accounts for 45 % of total industrial production,
MSME account for 40% of total exports
MSME contributes very significantly to the GDP. Manufacturing
segment within the MSME contributes to 7.09% of GDP. MSMEs also
contribute to 30.50% of services. The total contribution of MSMEs to
the GDP is 37.54%

MSME employs about 60 million people in India.
MSME creates 1.3 million jobs every year.
MSME produces more than 9,000 quality products for Indian and
international markets.
30 million MSMEs are in the country and
MSME is growing at a rate of 8% per year.

Problems of MSMEs in Indian economy-
problems
1.Financial & Regulatory issues
Access to finance is a significant hurdle for MSMEs, with only 16%
receiving timely finance. This forces them to rely on their own
resources, hindering their growth prospects. Even larger firms struggle
to access cheaper credit from formal banks. MSMEs face challenges
with tax compliance and labour law changes, which have proven costly.
Despite attempts to make the sector more competitive, compliance
with regulations and tax registration remains difficult, leading to low
capital and business closures.

problems
2. Infrastructure
India's infrastructure is crucial for the MSME sector, especially in the outsourcing
industry. However, inadequate infrastructure affects their efficiency and ability to
compete globally, limiting their growth potential.
3.Low productivity & Lack of innovation
MSMEs may lack high productivity but offer value through cost efficiency and
providing goods at lower prices. However, their small-scale production and low
margins put them at a disadvantage compared to larger firms. Indian MSMEs
often rely on outdated technologies and lack entrepreneurs who embrace new
tools and technologies. This hampers their productivity and competitiveness,
especially when compared to larger firms in sectors like e-commerce and call
centers.
problems
4.Technical changes:
MSMEs have faced significant technical changes over time, impacting their
growth potential. Changes in land ownership rights have led to mismanagement
and reduced productivity, highlighting the need for adaptability.
5.Competition & Skills:
MSMEs face fierce competition from larger firms, exacerbated by the rise of e-
commerce and globalization. While competition is not new, MSMEs struggle to
withstand the pressure in areas such as agriculture, garments, and tourism.
MSMEs lag behind in terms of skills compared to their counterparts in other
countries. Dependence on informal workers with limited technical skills hampers
productivity and forces smaller firms into low-skilled jobs, hindering long-term
growth.
problems
6.Lack of professionalism
Many Indian MSMEs lack professionalism, making them vulnerable to
corruption and abuse of power. This significantly impacts their business
productivity and overall growth.
7. Lack of standardized policies
India lacks consistent MSME policies, resulting in inconsistent
development and entrepreneurship promotion programs. While
progress has been made in Delhi, nationwide efforts are necessary for
Indian firms to compete globally.

Prospects of MSMEs in Indian economy
Micro, Small and Medium Enterprise (MSME) sector has emerged as a very
important sector of the Indian economy, contributing significantly to
employment generation, innovation, exports, and inclusive growth of the
economy.
The SME sector, comprising of IT, manufacturing, infrastructure, service
industry, food processing, packaging, and chemicals, has emerged as the most
vibrant and dynamic engine of growth of Indian economy over the past few
decades.
The sector is considered as the backbone of the Indian economy, contributing
to 45% of the industrial output and 40% of India’s exports, employing 60
million people, creating 1.3 million jobs every year, and producing more than
9,000 quality products for Indian and international markets.
According to the MSME report of FY 21-22, there are 30 million SMEs
in the country and 12 million more workforce are expected to join the
SME sector in the next three years. Additionally, the sector is growing
at a rate of 8% per year.
With the Indian economy expected to touch $5 trillion by 2025, and
with revolutionary economic reforms kicking in, SMEs are expected to
play a vital role in sectors like ecommerce, food processing, defense,
pharma, security, etc.

The MSME and manufacturing sector are the backbone of a resilient
national economy and their ability to stimulate demand, create jobs,
drive innovation, and establish competition make them an integral
part of the economic construct. Hence, prioritizing their development
is critical for the future of the country.
The government’s recent announcement to provide 15% equity
investment in listing of new SMEs through a government pool is a
step in the right direction. We need more such measures to show that
MSMEs in India have full-fledged backing of the government.

Especially in the current environment, the government’s push to
MSME and manufacturing sector can play an important role in
providing capital to the productive segments of the economy. An
increased reliance on capital market funding will ensure that in the
long-term, MSME growth is not constrained due to any short-term
setbacks and the growth momentum can be sustained for a long
period of time.

Schemes for MSMEs in India
A few initiatives by the central government have given a boost to SMEs. Let’s
take a look at these schemes in detail:
1. Make in India: The Central government’s ‘Make in India’ initiative has played
a key role in promoting businesses and pushing Indian SMEs to manufacture,
develop, and assemble products made in the country.
2. Financial assistance to SMEs in the ZED Certification Scheme: The scheme
aims to instill Zero Defect & Zero Effect (ZED) principles in Indian MSMEs’
manufacturing. Under this scheme, the government grants up to an 80%
subsidy to MSMEs.
3. The Prime Minister’s Employment Generation Programme: This scheme, set
up by Khadi and Village Industries Commission (KVIC), was to finance MSMEs.

Schemes for MSMEs in India
4. Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE):
This scheme was implemented by the Centre to eradicate the financing issues
faced by Indian SMEs and provides collateral-free loans to individual, micro
and small enterprises.
5. Government Initiatives for Technology Advancement and Innovation: The
central government is trying to improve the conditions of MSMEs in India and
has implemented several initiatives to help advance the technology and
promote innovation among Indian SMEs. It also helps to promote innovation,
national manufacturing competitiveness programme (NMCP), rural industry
& entrepreneurship (ASPIRE), etc. These initiatives by the central
government are helping SMEs overcome issues like financing, technology,
etc.
Fiscal policy

Fiscal policy
The government of the country manages the flow of tax income and
public expenditure to guide the economy by fiscal policy. A surplus
occurs when the government collects more income than it spends,
whereas a deficit occurs when the government is spending more than
tax & non-tax collections. The government will have to borrow money
from inside the country or from outside to cover increased expenses.
Alternatively, the government might tap into foreign exchange reserves
or create more currency.

Fiscal policy
During a recession, for example, the government may opt to spend
more on infrastructure projects, social programmes, and corporate
incentives, among other things. The goal is to assist in making greater
productive money accessible to individuals, freeing up some income for
consumers to spend elsewhere, and encouraging companies to invest.
simultaneously, the government may opt to tax firms and individuals
less, resulting in lower income for the government.

Fiscal Policy’s Significance in India
Fiscal policy, in a nation like India, is critical in increasing capital

formation in both the private and public sectors.
The fiscal policy is intended to mobilise a significant amount of
resources towards financing its varied programmes through taxes.
Fiscal policy also contributes to raising the savings rate by providing
stimulation.
Fiscal policy strives to reduce the imbalance in the distribution of
income and wealth by providing enough incentives to the private
sector to grow its operations.
Elements/Objectives of fiscal policy in India
The three main elements/objectives of fiscal policy in India are:
1. Price stability: It regulates the country’s price level so that prices

can be adjusted when inflation becomes too high.
2. Full employment: It tries to reach 100 % employment, or near 100
% employment, as a means of regaining economic activity following
a period of low activity.
3. Economic growth: It aids in the maintenance of the economy’s
growth rate, allowing specific economic goals to be met.

Methods to achieve objectives of fiscal policy
in India
The following methods are used to achieve the stated objectives:
1. Consumption Control — This raises the savings-to-income ratio.
2. Increasing the investment rate.
3. Building infrastructure and its development as well as taxation.
4. Progressive taxation.
5. The underprivileged groups are exempt from paying taxes.
6. Excessive VAT/GST on high-end items.
7. Preventing unearned income.

Monetary policy

Monetary policy
The federal bank’s(RBI in case of India) macroeconomic policy is

referred to as monetary policy.
It is a demand-side economic strategy in which the government of a
nation manages the supply of money and interest rate to accomplish
macroeconomic goals such as inflation, growth, consumption and
liquidity.

India’s Monetary Policy: Key Elements and Goals
The Reserve Bank of India formulates and implements India’s monetary

policy to attain specified goals.
1. To Control Supply Of money in the economy: Money supply refers to

the amount of money in circulation as well as the amount of credit
created by banks. Credit expansion or contraction is used in monetary
policy to manage the money supply in the economy.
2. Maintaining Price Stability: Maintaining price stability in India is a
significant goal of monetary policy. It means that inflation is under
control. Money supply has an impact on price levels. To preserve price
stability, monetary policy controls the money supply.
Monetary policy
3. To Stimulate Economic Growth: One of the most important goa of

monetary policy is to provide the appropriate amount of money and
loans for the country’s economic growth. Credit is made available in
sufficient amounts to those industries that are critical to economic
growth.
4. To Encourage Exports & Substitute Imports: Monetary policy stimulates
export-oriented and import-substitute businesses by granting
concessional loans. This enhances the balance of payments situation.
5. To Guarantee Greater Credit for Priority Sectors: Monetary policy
attempts to maximize money available to priority sectors by decreasing
interest rates. Agriculture, small-scale industries, and the weakest parts of
society are examples of priority sectors.
Monetary policy
6. To Encourage Employment: Monetary policy supports

employment by offering loan facilities to profitable ventures, small
and medium firms, and special credit schemes for unemployed youth.
7. Banking Regulation and Expansion: The Reserve Bank of India
(RBI) oversees the economy’s financial system. RBI sends
guidelines to various banks for the establishment of rural
branches to promote agricultural lending through monetary policy.
Apart from that, the government has established regional rural
banks and cooperative banks

Foreign Trade: Trends in India’s Foreign
Trade

Trade
India used to be a protectionist state for a long time, but the
country has become progressively more open to
international trade.
Currently, trade represents 45.3% of the country's GDP.
The country mainly exports petroleum oils (Refined oil)
(13.7%), diamonds (6.3%), medicaments (4.3%), articles of
jewellery (2.7%), and rice (2.4%),

Trade
while it imports petroleum oils (Crude oils) (18.7%), gold (9.8%),
diamonds (4.6%), coal and similar solid fuels (4.5%), petroleum
gas and other gaseous hydrocarbons (4.2%).
According to IMF Foreign Trade Forecasts, the volume of exports
of goods and services increased by 3.9% in 2022 and is expected
to further increase in 2023, reaching at 4.9%,
while the volume of imports of goods and services increased by
10.1% in 2022 and is expected to increase by 7.2% in 2023.

India's exports & imports (Source: World Trade Organization-WTO)
Foreign Trade Values 2017 2018 2019 2020 2021

Imports of 449,925 514,464 486,059 372,854 572,909
Goods (million USD)
Exports of 299,241 324,778 324,340 276,302 395,425
Goods (million USD)
Imports of 153,960 174,925 178,322 152,860 195,956
Services (million USD)
Exports of 184,673 204,323 214,128 202,600 240,657
Services (million USD)

Foreign Trade Indicators(Source: World Bank)
Foreign Trade Indicators 2017 2018 2019 2020 2021

Foreign Trade (in % of GDP) 40.7 43.6 40.0 37.8 45.3
Trade Balance (million USD) -148,134 -186,692 -157,678 -95,450 -176,721
Trade Balance (Including Service) (million USD) -72,212 -105,918 -73,452 -8,342 -74,039
Imports of Goods and Services (Annual % Change) 17.4 8.8 -0.8 -13.8 35.5
Exports of Goods and Services (Annual % Change) 4.6 11.9 -3.4 -9.2 24.3
Imports of Goods and Services (in % of GDP) 22.0 23.7 21.3 19.1 23.9
Exports of Goods and Services (in % of GDP) 18.8 19.9 18.7 18.7 21.4

Main Partner Countries-Exports
(Source Comtrade)
Main Customers (% of Exports) 2022
United States 17.7%
United Arab Emirates 6.9%
Netherlands 4.1%
China 3.3%
Bangladesh 3.1%
Singapore 2.6%
United Kingdom 2.5%
Germany 2.3%
Saudi Arabia 2.2%
Türkiye 2.2%

Main Partner Countries-Imports
(Source Comtrade)
Main Suppliers (% of Imports) 2022
China 14.0%
United Arab Emirates 7.4%
United States 7.1%
Saudi Arabia 6.3%
Russia 5.5%
Indonesia 3.9%
Singapore 3.3%
South Korea 2.8%
Australia 2.7%
Hong Kong SAR, China 2.7%

Main products-Exports
(Source: United Nations Statistics Division)
452.7 bn USD of products exported in 2022
Petroleum oils & oils obtained from bituminous (by produce of crude) 20.9%
Diamonds, whether or not worked, but not mounted 5.3%
Medicaments (substance used for medical treatment) 3.9%
Articles of jewellery and parts thereof 2.7%
Telephone sets, incl. telephones for cellular 2.4%
Rice 2.4%
Unwrought aluminium 1.6%
Parts and accessories for tractors, motor vehicles 1.5%
Motor cars and other motor vehicles principally 1.5%
Cane or beet sugar and chemically pure sucrose, 1.3%

Main products-Imports
732.6 bn USD of products imported in 2022
Petroleum oils and oils obtained from bituminous 23.7%
Coal; briquettes, ovoid's and similar solid fuels 6.7%
Gold, incl. gold plated with platinum, unwrought 5.0%
Petroleum gas and other gaseous hydrocarbons 4.4%
Diamonds, whether or not worked, but not mounted 3.7%
Telephone sets, incl. telephones for cellular 2.4%
Electronic integrated circuits; parts thereof 2.2%
Petroleum oils and oils obtained from bituminous 2.0%
Palm oil and its fractions, whether or not refined 1.6%
Automatic data-processing machines and units 1.5%

Main Services-Exports
204.5 bn USD of services exported in 2020
Computer and information services 47.30%
Other business services 24.20%
Transportation 10.14%
Travel 6.37%
Government services 4.61%
Financial services 1.80%
Construction services 1.37%
Communications services 1.36%
Insurance services 1.15%
Cultural and recreational services 1.07%
Royalties and license fees 0.61%
Main Services-Imported
112.6 bn USD of services imported in 2020
Other business services 43.17%
Transportation 17.46%
Travel 11.17%
Computer and information services 8.54%
Royalties and license fees 6.43%
Government services 3.45%
Cultural and recreational services 2.44%
Construction services 2.31%
Financial services 1.89%
Insurance services 1.70%
Communications services 1.43%
The World Trade Organization (WTO)
What is WTO?

The World Trade Organization (WTO)
What is WTO?
WTO is an intergovernmental organization that regulates and facilitates
international trade. The WTO is the world's largest international
economic organization, with 164 member states representing over 98%
of global trade and global GDP.
It officially commenced operations on 1 January 1995, pursuant to the
1994 Marrakesh Agreement, thus replacing the General Agreement on
Tariffs and Trade (GATT) that had been established in 1948.
With effective cooperation in the United Nations System, governments
use the organization to establish, revise, and enforce the rules that
govern international trade.

Impact of WTO on India’s Foreign Trade
Positive Impacts:
Increased trade: India's trade has increased significantly after joining the WTO. It has
enabled India to access global markets for its goods and services.
Foreign investment: Foreign companies have invested more in India. This is due to lower
tariffs and the easing of restrictions. This has helped create jobs and boost the Indian
economy.
Technology transfer: Foreign companies have brought the latest technology to India. This
has helped Indian companies to upgrade and innovate.
Competition: There is increased competition from foreign companies. This has forced Indian
companies to improve quality, efficiency, and productivity. This has benefited consumers.
Economic growth: WTO membership has helped sustain India's economic growth. This is
mainly through promoting exports and foreign investment. It has created more jobs and
opportunities.
Negative Impacts:
Loss of tariff revenue: India had to reduce import duties. This has reduced tariff
revenues for the government.
Farmers issue: Subsidies to Indian farmers have come under scrutiny due to WTO
rules. This has affected the livelihood of small and marginal farmers.
Intellectual property rights: India had to amend its IP laws as per WTO rules. This
has benefitted foreign companies more than Indian companies.
Agriculture dumping: India has faced agricultural dumping from countries like
Australia and New Zealand. This has affected Indian farmers.
Loss of policy space: Some policies of the government to protect domestic
industries are now considered trade barriers by WTO. This has reduced India's
policy space.
WTO Challenges Before India
Concerns have recently been raised that several countries are providing
direct tax reductions or tax breaks to encourage their
exports/international trade.
Taxation disputes have become more common, involving contradictions
between WTO agreements and various country tax regulations.
It has become critical for India to not only design its tax laws in
accordance with WTO agreements but also to study the tax policies of
competing countries in order to save and improve trade by flagging WTO
agreement infractions by any member country.

WTO Challenges Before India
Several countries blatantly violate WTO agreements. China now has the most tax
investigations, including those involving tax vacations, tax reductions, or tax
concessions related to import or export.
Similarly, because the revenues of foreign subsidiaries of US companies are not
taxed until they are repatriated or transferred to the domestic parent company,
US tax laws encourage corporations to direct greater investment abroad.
Given that foreign subsidiaries file expenses on royalty payments/IP assignments
to their parent in tax conduit countries, the amount almost always ends up in tax-
free jurisdictions with negligible tax.
This particular structure ensures a continuous cash flow and massive reserves to
eliminate competition for these MNCs.

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Module 6: Industrial Policies

Industrial Policies of India, New Industrial Policy 1991;

Dr. Sainath, Prof AIMS-IBS B-School 1

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Industrial policy is Government action to influence the

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To maintain a sustained growth in productivity;

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The long-awaited liberalized industrial policy was

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Features of New Industrial Policy:

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Features of New Industrial Policy:

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3.Disinvestment of Public Sector: Government stakes in Public

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Today, there are numerous sectors in the economy where

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Outcomes of New Industrial Policies

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Outcomes of New Industrial Policies

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Industrial policies in India have taken a shift from predominantly

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Campaigns such as Make in India and Start up India have helped to

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Private Sector Growth: As per The World Economic Forum

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