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UNIT -1 MEANING OF BUSINESS ENVIRONMENT As stated earlier, the success of every business depends on adapting itself to the environment within which it functions. For example, when there is a change in the government polices, the business has to make the necessary changes to adapt itself to the new policies. Similarly, a change in the technology may render the existing products obsolete, as we have seen that the introduction of computer has replaced the typewriters; the colour television has made the black and white television out of fashion. Again a change in the fashion or customers' taste may shift the demand in the market for a particular product, e.g., the demand for jeans reduced the sale of other traditional wear. All these aspects are external factors that are beyond the control of the business. So the business units must have to adapt themselves to these changes in order to survive and succeed in business. Hence, it is very necessary to have a clear understanding of the concept of business environment and the nature of its various components. The term 'business environment' connotes external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise. These include customers, competitors, suppliers, government, and the social, political, legal and technological factors etc. While some of these factors or forces may have direct influence over the business firm, others may operate indirectly. Thus, business environment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business. It may also be defined as the set of external factors, such as economic factors, social factors, political and legal factors, demographic factors, technical factors etc., which are uncontrollable in nature and affects the business decisions of a firm. FEATURES OF BUSINESS ENVIRONMENT On the basis of the above discussion the features of business environment can be summarised as follows. Business environment is the sum total of all factors external to the business firm and that greatly influence their functioning. It covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions. The business environment is dynamic in nature, that means, it keeps on changing. The changes in business environment are unpredictable. It is very difficult to predict the exact nature of future happenings and the changes in economic and social environment.
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Business Environment differs from place to place, region to region and country to country. Political conditions in India differ from those in Pakistan. Taste and values cherished by people in India and China vary considerably. IMPORTANCE OF BUSINESS ENVIRONMENT There is a close and continuous interaction between the business and its environment. This interaction helps in strengthening the business firm and using its resources more effectively. As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far-reaching impact on the survival and growth of the business. To be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways: (a) Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It helps the business enterprises for meeting the challenges successfully. (b) Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business firms. It enables the business to identify the areas for growth and expansion of their activities. (c) Continuous Learning: Environmental analysis makes the task of managers easier in dealing with business challenges. The managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business. (d) Image Building: Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power. (e) Meeting Competition: It helps the firms to analyse the competitors' strategies and formulate their own strategies accordingly. (f) Identifying Firm's Strength and Weakness: Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments. TYPES OF BUSINESS ENVIRONMENT Confining business environment to uncontrollable external factors, it may be classified as (a) Economic environment; and (b) Non-economic environment. The economic environment includes economic conditions, economic policies and economic system of the country. Noneconomic environment comprises social, political, legal, technological, demographic and natural
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environment. All these have a bearing on the strategies adopted by the firms and any change in these areas is likely to have a far-reaching impact on their operations. ECONOMIC ENVIRONMENT The survival and success of each and every business enterprise depend fully on its economic environment. The main factors that affect the economic environment are: (a)Economic Conditions: The economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. These include gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth. (b)Economic Policies: All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are: (i) Industrial policy (ii) Fiscal policy (iii) Monetary policy (iv) Foreign investment policy (v) Export -Import policy (Exim policy) The government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency and the changing requirement. Every business firm has to function strictly within the policy framework and respond to the changes therein. Important Economic Policies (i) Industrial policy: The Industrial policy of the government covers all those principles, policies, rules, regulations and procedures, which direct and control the industrial enterprises of the country and shape the pattern of industrial development. (ii) Fiscal policy: It includes government policy in respect of public expenditure, taxation and public debt.
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(iii) Monetary policy: It includes all those activities and interventions that aim at smooth supply of credit to the business and a boost to trade and industry. (iv) Foreign investment policy: This policy aims at regulating the inflow of foreign investment in various sectors for speeding up industrial development and take advantage of the modern technology. (v) Export-Import policy (Exim policy): It aims at increasing exports and bridge the gap between expert and import. Through this policy, the government announces various duties/levies. The focus now-a-days lies on removing barriers and controls and lowering the custom duties. (c) Economic System: The world economy is primarily governed by three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy. India has adopted the mixed economy system which implies co-existence of public sector and private sector. NON-ECONOMIC ENVIRONMENT The various elements of non-economic environment are as follow: SOCIAL ENVIRONMENT The social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. Due to change in family composition, more nuclear families with single child concepts have come up. This increases the demand for the different types of household goods. It may be noted that the consumption patterns, the dressing and living styles of people belonging to different social structures and culture vary significantly. POLITICAL ENVIRONMENT This includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. The stability of the government also influences business and related activities to a great extent. It sends a signal of strength, confidence to various interest groups and investors. Further, ideology of the political party also influences the business organisation and its
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operations. You may be aware that Coca-Cola, a cold drink widely used even now, had to wind up operations in India in late seventies. Again the trade union activities also influence the operation of business enterprises. Most of the labour unions in India are affiliated to various political parties. Strikes, lockouts and labour disputes etc. also adversely affect the business operations. However, with the competitive business environment, trade unions are now showing great maturity and started contributing positively to the success of the business organisation and its operations through workers participation in management. LEGAL ENVIRONMENT This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law. The important legislations that concern the business enterprises include: (i) Companies Act, 1956 (ii) Foreign Exchange Management Act, 1999 (iii) The Factories Act, 1948 (iv) Industrial Disputes Act, 1972 (v) Payment of Gratuity Act, 1972 (vi) Industries (Development and Regulation) Act, 1951 (vii) Prevention of Food Adulteration Act, 1954 (viii) Essential Commodities Act, 2002 (ix) The Standards of Weights and Measures Act, 1956 (x) Monopolies and Restrictive Trade Practices Act, 1969 (xi) Trade Marks Act, 1999 (xii) Bureau of Indian Standards Act, 1986 (xiii) Consumer Protection Act, 1986 (xiv) Environment Protection Act (xv) Competition Act, 2002 Besides, the above legislations, the following are also form part of the legal environment of business,
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(i) Provisions of the Constitution: The provisions of the Articles of the Indian Constitution, particularly directive principles, rights and duties of citizens, legislative powers of the central and state government also influence the operation of business enterprises. (ii) Judicial Decisions: The judiciary has to ensure that the legislature and the government function in the interest of the public and act within the boundaries of the constitution. The various judgments given by the court in different matters relating to trade and industry also influence the business activities. (d) Technological Environment Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. The varying technological environments of different countries affect the designing of products. For example, in USA and many other countries electrical appliances are designed for 110 volts. But when these are made for India, they have to be of 220 volts. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. It may be noted that scientific research for improvement and innovation in products and services is a regular activity in most of the big industrial organisations. Now a days infact, no firm can afford to persist with the outdated technologies. DEMOGRAPHIC ENVIRONMENT This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. For example a country where population rate is high and children constitute a large section of population, then there is more demand for baby products. Similarly the demand of the people of cities and towns are different than the people of rural areas. The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production. Moreover, availability of skill labour in certain areas motivates the firms to set up their units in such area. For example, the business units from America, Canada, Australia, Germany, UK, are coming to India due to easy availability of skilled manpower. Thus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.
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NATURAL ENVIRONMENT The natural environment includes geographical and ecological factors that influence the business operations. These factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. Business is greatly influenced by the nature of natural environment. For example, sugar factories are set up only at those places where sugarcane can be grown. It is always considered better to establish manufacturing unit near the sources of input. Further, government's policies to maintain ecological balance, conservation of natural resources etc. put additional responsibility on the business sector. EXTERNAL ENVIRONMENT: It is now unquestionably accepted that the prospects of a business depend not only on its resources but also on the environment. An analysis of strengths, weaknesses, opportunities and. Threats (SWOT) is very much essential for the business policy formulation. The external environment consist of a micro environment and a macro environment. MICRO-ENVIRONMENT: The micro environment consists of the factors in the company's immediate environment that affect the performance of the company. It is quite obvious that the micro environment factors are more intimately linked with,-'the company than the macro factors. These include the suppliers, marketing intermediaries, competitors, customers and the public. a) Suppliers:
An important force in the micro environment of a company is the suppliers i.e., those who supply the inputs to the company. The importance of reliable source/sources of supply to the smooth functioning of the business. Uncertainty regarding the supply often compel companies to maintain high inventories causing cost increases. When compared to Japan with our country Value Systems: The value systems of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and objectives of the organization business policies and practices for ex: After the BID parry group was taken by the Murugappa group. One of most profitable business (liquor) of the ailing parry group was sold off the liquor business did not fit into the value system of the Murugappa Group.
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b) Mission and Objectives: The business domain of the company, priorities, directions of development, business philosophy, business policy etc., are guided by the mission and objectives of the company. c) Management Structure and Nature: The organizational structure, the composition of the Board of Directors, extent of professionalisation of management etc., are important factors influencing business decisions. d) Internal Power Relationship: Factoi-b like amount of support the top management enjoys from different levels of employees. Share holders and Board of Directors have important influence on the decision and their implementation. e) Human Resources: The characteristics of human resources* like skill, quality morale commitment attitude etc. could contribute to the strength and weakness of an organization. Some organizations find it difficult to carry out restructuring or modernization because of resistance by employees whereas they are smoothly ? done in some others. d) Marketing Intermediaries: The immediate environment of a company may consist of a number of marketing intermediaries which are "firms that and the company in promoting, selling and distributing its goods to final buyers". The marketing intermediaries include middlemen such as agents and merchants who "help the company find customers or close sales with them". Marketing intermediaries are vital links between the company and the final consumers. A dislocation or disturbance of this link, or a wrong choice of th link may cost the company very heavily. e) Publics: A company may encounter certain publics in its environment "A. public is any group that has an actual or potential interest in or impact on an organization's ability to achieve its interests". Media publics citizens action publics and local publics are some examples.
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Many companies are also affected by local publics. Environmental poilution is an issue often taken up by a number of local publics actions by local publics on this issue have caused some companies to suspend operations and or take pollution abatement measures. Growth of consumer publics is an important development affecting business. It is wrong to think that all publics are threats to business some of the actions of the publics may cause problems for companies. However, some publics are an opportunity for the business. in maintaining indigeneous stock they maintain an average oka few hours to two weeks while we maintain 3-4 months stock. It is very risky to depend on single supplier because a strike or production problem with supplier may seriously affect the company. Hence multiple sources of supply often help reduce such risks. b) Customers: As it is often exhorted, the major task of a business is to create and sustain customers. A business exists only because of its customers. Monitoring the customer sensitivity is therefore a pre requisite for the business success. The choice of the customer segments should be made by considering a number of factors including the relative profitability, dependability stability of demand, growth prospects and the extent of competition. c) Competitors: A firm's competitors include not only the firms which market the same or similar products but also all those who compete for the discretionary income of the consumers. This competition among these products may be described as desire competition as the primary task here is to influence the basic desire of the consumer. Such desire competition is generally very high in countries characterized by limited disposable income and many unsatisfied desires. If the consumer decides to spend his discretionary income on recreation he will still be confronted with a number of alternatives to choose. "The competition among such alternatives which satisfy a particular category of desire is called generic competition".
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MACRO-ENVIRONMENT Macro environment consists larger societal forces that affect all the factors in the company's macro .environment - namely, the demographic, economic, natural, technological, political and cultural forces. Macro environment is again divided into two environment those are 1. Economic Environment 1) Economic Environment: Economic Environment broadly covers the aspects relating to nature of the economy, anatomy of the economy, functioning of the economy, economic progress and programmes, economic policy statements and proposals, economic controls and regulations, economic legislations, economic problems and prospects and to understand all these, we should invariably discuss the concept of economic system. Economic environment of business refers to the broad characteristics of the economic system in which a business firm operates. An economic system defines the institutional frame work of environment. Once wTe are fully conversant with the different aspects of economic systems, they provide us an overall view about the economic environment under which the business unit has to function. 2) Non-Economic Environmental Factors: Non-economic environmental factors refer to social, political, legal, technological and cultural factors. Let us discuss briefly about those factors which itself influence the decisions of a business enterprise. a) Socio-cultural Environment: Business must have a social purpose & business concerns must discharge social responsibility, social obligations and social commitment without which business cannot enjoy social sanction. The following aspects are of much help of us: 1) Social Institutions and System: The caste system, the joint family system, the child marriage 2. Non-Economic Environment
etc. may be cited as illustrations under this head.
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2) Social Values and Attitudes: These are changing very fast in almost all the nations including India. The influence of western values of individualism has its bearing impact on the Indian population. The role of Indian women is not confined only to house hold duties. On the other hand, she has been competing equally with her counter part in all the fields similarly/ choosing a particular profession at present is not based on community or caste as it was 3) Education and Culture: Under this, we may refer to the attitude towards education need for business education, educational match with skill requirements of industry, business culture etc. 4) Role and Responsibility of Government: The role of government especially in a democracy is very significant in order to bridge the gap between the aspirations and achievements of the society. The government has a very responsible function of maintaining social order and harmony to protect the interests of the majority. 5) Social Groups and Movements: In a society individuals have groups basing on caste, creed, religion, language, trade & profession, etc., which may have direct business interests consumerism, trade-unionism, co-operative movement, shareholders association, Bank Depositors Association, may be mentioned as examples under this head. 6) Social Problems and Prospects: The excessive population growth rate in a country like India is a definite potential source of danger, as it results in growing.unemployment and poverty, poor housing and incidence of social tensions. That is the reason why the business enterprise must consider the problems while they take business decisions. b) Political-Legal Environment: In the present world, business of any type and size is influenced by government policies, programmes and legislations. The following aspects help us to understand more about politicallegal environment. 1) The Form of Government: Irrespective of the economy, government intervention in business activity all over the world is an existence in one form or the other. Therefore, the form and structure of government is very significant. Democratic government, Federal Form of Government etc. may be cited as examples. 2) Ideology of the Ruling Party: This factor influences much on the management, ownership structure and size of business. If the ruling party has the rightist ideology, it usually formulates
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pro-business policies on the other hand if it is inclined towards leftist ideology, it will adopt measures like nationalization and excessive centralization. 3) Strength of Opposition: In the democratic nations, the opposition has to play a significant role. The strength of the opposition to a greater extent depends on whether or not opposition parties are invited or divided. Though there may likely be ideological differences among different opposition parties. They must be united a judge the every more of the ruling party critically. If the opposition is fair, firm and consistent, it can initiate constructive criticism of the ruling parties policies affecting business. As a result, the government can not act irresponsibility with regard to the business sector. 4. Bureaucracy: In order to run the government administration without any break, bureaucracy is having a pivotal role to assume. It is meant to keep the continuity in government policy operations in connection with business and non-business sectors. In a system which is influenced more by government controls and regulations with regard to business, bureaucracy is very powerful in enforcing government rules and regulations, systems & procedures, licenses and restrictions. 5. Political Stability: This is another factor which governs business operations. Business flourishes in an economy which is politically stable. As we observed, whenever the nation becomes politically not stable, the flow of foreign capital and enterprise is adversely affected and this sends wrong signals to the business both national and multi-national. 6. Plans and Programmes of the Government: The Government formulates and executes a variety of policies and programmes. If the government frequently change its policies on industries, money, fiscal and other economic matters, it adversely affects the business sector. On the other hand, if government policies are stable, the business unit can plan their activities accordingly.
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UNIT - II STRUCTURE OF THE INDIAN ECONOMY Countries in the world are divided into developed and backward or developing countries. MEANING OF A DEVELOPING ECONOMY: There is no doubt that the distinction between developing and developed countries is rather loose and also arbitrary to a certain extent. The United Nations Group of experts states. "We have had some difficulty in interpreting the term. "Developing Countries". We use it to mean countries in which per capita real income is low when compared with the per capita real incomes of United States of America, Canada, Australia and Western Europe. BASIC CHARACTERISTICS OF THE INDIAN ECONOMY: India is an developing economy. There is no doubt that the bulk of its population lives in conditions of misery. Poverty is not acute but is also a chronic melody in India. At the same time there exist unutilized natural resources. It is therefore, quite important to understand the basic characteristics of Indian economy which are as follows: 1. General Poverty And Low Per Capita Income: Most of the under developed countries have majority of people living in poverty. This is because of low levels of income. The low levels of income are due to low levels of production. Hence, most of these countries remain backward. According to Cairn-Cross the poverty in under developed countries is reflected by the low level of per capita income when compared with developed countries. According to the estimates of the world development report in 1989 about 30 countries in the world have a per capita income which is less than 400 dollars. Out of this India is one. This is very low when compared with many of the European countries. Even the oil rich countries like Kuwait and U.A.E. possessed a per capital income of around of 14,000 dollars.,; The per capita income of United States of America and Switzerland are^till high. They are around 17,500 dollars. Due to the low per capita income of these undeveloped countries the standard of living and the consumption of food in calories is also very low. While in India 2,000 calories of food is consumed in U.S.A. 3,645 calories of food is consumed. Hence, most of the undeveloped There will be a visious circle o countries people are ill-fed, ill educated and also ill housed. poverty in these countries.
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2. Predominance Of Agriculture: Most of the under developed countries are predominantly; depended upon agriculture. They are either typically raw-material producers or primary good producers, anyway these economics are excessively depended on agriculture. This means higher percentage of people are concentrated in agriculture about 70% to 80% people depend on agiiculture. Hence, the secondary and the territory sectors are not developed properly. This feature can be seen in the case of Indian economy also. Agriculture is.the main sector in the Indian economy,. More than 70% of the people aire depended on agriculture, while the developed countries like U.S. A and U.K. only 4% of the people are engaged in agriculture. The other feature here is that almougfi&most of the people depend on agriculture, it remains still backward. Small sized land holdings, old methods of production, fragmentation of land and absence of mechanization in agriculture makes the productivity of agriculture very low. According to some estimates agricultural productivity per head of agricultural labourer is times less than that of New Zealand or West Germany. Therefore can be clearly said this is not conducible for economic development. 3. High Population Pressure: This feature is four in Indian economy also. There is high pressure by population growth. The population is increasing very rapidly. While according to 1981 census the total population in India was estimated 68.4 crores within 10 years i.e. by 1991 census it progressed rapidly to 84.3 crores. Most of the underdeveloped countries a facing the problem of population pressure. They have high population growth rate and less death rate. The birth rates per thousand are nearly abut 40, this is very high when compared with developed countries. The death rate which was high early is declining now due to extended medical facilities. At present India's population is estimated to be 16% o the worlds population. It is more than the population of whole Africa. It exceeds the combined population of U.S.A., Russia, England, Sweden, Australia and China. But when compared with this the total land area for India is only 2.4% of the total world area. The present rate of growth of population is around 2.5%. This is the main cause for economic under development in India as well as other un-developed countries. Although the countries are achieving growth in their G.N .P. it is being in ineffective due to high growth rate of population. 4. Capital Deficiency: This is another basic character of un-developed countries. While capital accumulation cause economic development these countries are capital deficient. This is because capital springs out of savings. But in these countries the per capital income is very low. Hence, the rate of savings is also very low. Low rate of savings is leading to capital deficiency in these
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countries. India the rate of capital formation is said to be around 10% -15% when compared with developed countries this is very low while incase of develop countries the capita formation is around to 255 to 305. According to Colin-Clark for every 1% growth rate of population threshold be an increase in capital formation by 5%. This is required to meet the necessaries of the grown population. Hence, for India as the annual growth rate of population is 2.5% an additional capital formation of 10% is required annually. Hence, we can say the under-developed countries are featured with the existence of capital deficiency. 5. Unemployment & Under Employment: The under developed economy is Moreover, Under
characterized
by- -the existence of unemployment and under employment. of lack
another feature is that there is disguised unemployment. caused because
The un-employment is being
of opportunities due to deficiency in capital formation.
employment..is. due to lack of technology to utilize the natural resources. The another feature of disguised un-employment is seen in these countries. This is because of over crowding unemployment is seen in these countries. This is because of over crowding un-employed in the primary sector means that although the labourers seemed to be employed in the primary sector the productivity of that sector will not fall even if some labour force is removed. This means that the marginal productivity of these disguisedly employed people is 'O' In India this; situation is being caused due to lack of alternative employment opportunities. 6. Low Level Of Technology: Technological backwardness is another common feature of developing countries. This means that the under developed or the developing countries are backward in their "economic performance as compared to the developed countries. This is because due to lack of capital, they use backward and out dated technology. Due to this the labour productivity is very low. Moreover the cost of production becomes .high. Hence, when compared with the developed countries the goods produced by these countries are not only of inferior quality but are also high priced. Hence, they become uncompetitive in the international markets. This feature is seen in the ease of Indian economy also. In India lack of scientific research, absence of skilled labour force and trained technicians are some of the constraints for introducing modern technology. Even in the primary sector also the methods of production are very olds and primitive. This is casing lower productivity in that sector also. 7. Utilisation And Under Utilised Natural Resources: the natural resources in land, water, minerals,
underdeveloped or developing countries are either unutilized or remain under utilized. Although these countries are not deficient in natural resources like
forests etc., most of them remain unutilized or under utilized. This is because they are not
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able to overcome the natural resources by making the necessary institutional and technological changes. This is seen in the case of Indian economy also. It is aptly said that India is a rich country inhabited by poor people. This is because the resources are not being utilized properly which is the main cause of poverty in the country. For example in India 17 million hectares of land is still remaining unutilized. We have not yet utilized more than 25% of our water
resources. Moreover the forest wealth in our country is also mis-utilised. Wastage of resources is the .main cause for underdevelopment. For any country to achieve development not only it should have resources but they have to be utilized completely. , 8. Poor Quality Of Human Resources: Poor quality of human resources in another character which is the main cause of underdevelopment in underdeveloped countries. Lack of education is leading to low of efficiency in labour. Moreover they are notable to suit the demands of the new technological changes. Moreover most of these countries have less dynamic entrepreneurs. They do not take initiative. This is because of the social system which is not conducible for development. In India only 36% of the population are literate, 64% of the population are illiterate. Moreover cast'eism, joint family system, regionalism and the philosophic trends sharing Karma Siddantham are the main causes for low of mobility of labour and the efficiency of labour becoming very low. Hence poor quality of human resources is not only the cause but also the effect of economic backwardness of these countries. 9. Defective Economic Organisation: Economic organization plays an important role in
the economic development in any country. - But the underdeveloped countries kick in such organization. Most of taxes like customs, central excise and other indirect taxes are very high. They are regressive. Moreover economic institutions such as banks, credit institutions ,, are not also well develope4d. This is a feature of Indian economy also. There is no scientific economic organizations for the Indian economy. Financial institution are not sufficiently developed for
financing agriculture. Moreover in case of industrial structure Managing Agency System which as several defects dominates the Industrial organization. In case of agriculture land reforms are not properly implemented. These are the fundamental causes for lack of economic development. 10. Foreign Trade Orientation: Most of the underdeveloped countries were found to be They import consumer goods and machinery
foreign trade oriented according to a study. However this foreign trade is dome mainly through the complete expert of primary commodities. from other countries. Forex in 1951 80% of the foreign exchange earnings have been accounted for by exporting rice. Even in case of India most of the agricultural products are exported to other countries. They are the main source of earning foreign exchange. This dependence on
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foreign trade has serious effects on the economy as a whole. The economy becomes vulnerable to trade cycles and also. International price fluctuations which may either yield profit or damage the whole economy. Moreover these countries without utilizing the available labour force they export raw materials and import consumer goods. Moreover the economy becomes vulnerable to importing foreign nations. 11. Other Miscellaneous Factors: Besides the above causes there are many other features like. a. Lack of infrastructural facilities like banks, financial institutions, transport,
communication etc., b. Low labour, efficiency due to lack of mobility of labour and social structure. c. Lack of entrepreneurship and political awakening conducive for economic
development etc., d. Moreover inefficient, corrupt, inexperienced bureaucratic setup are some features found in the economy of under developed countries. ECONOMIC PLANNING India, which embarked on a programme of structural reforms in June 1991 after four decades of planning, is currently attracting significant attention throughout the world. Its large economy and population, vast natural resources and, above all, its highly educated, skilled and scientific labour force mean that India is destined to play a major role in the community of nations. With a per caput income of about US$310 in 1994, India is one of the world's low-income countries. Unlike those of most East Asian countries, the economy in India was characterized by slow growth during most of the period since the Second World War. It was only during the 1980s that the GDP growth rate accelerated to 5.4 percent and per caput income grew by 3.3 percent per annum. This decade of high growth was followed in 1990 by one of the severest foreign exchange crises in the history of the country. In response, India initiated radical stabilization measures and a structural adjustment programme in June 1991. Soon after independence, India adopted the path of planned development where the public sector was to play a dominant role in fostering growth at both the central and state levels. The First Five-Year Plan, which was launched in 1950-51, was based on the Harrod-Domar model and primarily concentrated on raising the level of investment in irrigation, power and other
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infrastructure for accelerating growth. The development strategy was changed radically in 1956 with the initiation of the Nehru-Mahalanobis model of industrial development that emphasized the development of heavy industry under the public sector. Domestic industry was protected from foreign competition through high tariff walls, exchange-rate management, controls and licences. This strategy of import substitution and heavy-industry promotion has been criticized for having created a non-competitive, inefficient, capital-intensive and high-cost industrial structure. It is further argued that this policy discriminated against labour-intensive tradable agriculture and resulted in unwarranted export pessimism because of excessive concern about self-sufficiency. The criticism, however, must be balanced against the fact that during this period India built a large infrastructure not only in heavy and machine goods industries, but also in the areas of power, irrigation, credit, higher education, scientific research and training. The mid-1960s and early 1970s were characterized by serious economic problems. First, because of wars with neighbours, large resources were diverted towards defence, resulting in a sharp decline in public investment that adversely affected the growth of the economy. Second, the foreign exchange situation forced India to devalue its currency in 1966. Finally, food production failed to keep pace with demand and the country became increasingly dependent on food imports under the United States Government's PL 480. The situation became critical in the mid1960s with the failure of two consecutive crops in 1964/65 and 1965/66 and the country had to import large quantities of food-grains under PL 480. In the late 1960s, agricultural growth revived with the adoption of green revolution technology in some regions. Coincidentally, the manufacturing sector which had seen a notable deceleration in growth from 1964-65 to 1975-76, began registering far higher growth from 1977 to 1978. During the 1980s, the Indian economy witnessed an unprecedented growth rate of 5.4 percent per annum. The 1980s was also a period when limited liberalization measures were initiated and steps were taken to modernize some of the most important industries, such as cement, steel, aluminium and power generation equipment. The genesis and causes of the 1990 crisis From 1950 to 1980, while the Indian economy was growing at a relatively slow rate of 3.6 percent, domestic investment exceeded domestic savings by only a small margin. The gap could be bridged through foreign borrowing on a small scale. However, during the period 1979 to 1990, when the growth rate of GDP accelerated to 5.4 percent, the gap between savings and investment widened substantially. The need to finance large capital expenditures and imports of
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machinery and raw materials, including oil, necessitated heavy borrowing from abroad. The result was a cumulative increase in foreign debt and in repayment liability. Foreign debt increased from US$23.5 billion in 1980 to $63.40 billion in 1991. In 1991, nearly 28 percent of total export revenues went to service the debt. The most important reason for the internal savings rate falling increasingly short of investment requirements was the expanding fiscal deficit of the government which had risen from an average of 6.3 percent of GDP during the Seventh FiveYear Plan to 8.2 percent by 1990-91. Large fiscal deficits arose for a number of reasons: exorbitant expenditures were incurred by the central government's subsidies of fertilizers, food and exports and by the state governments' of power, transport and irrigation. The inefficient functioning of many of the central and state public sector enterprises further burdened the government budget. Finally, in addition to the current account deficit, mounting capital account expenditures by the government and public enterprises had to be financed through public borrowing. By 1990, internal debt liabilities had increased to 53 percent of GDP compared with 35 percent in 1980, and interest payments accounted for as much as 24 percent of total government expenditure. In addition, the sources of foreign borrowing underwent some important changes, as soft International Development Association (IDA) and government-to-government loans dried up and high-cost commercial loans from the banks and non-resident Indians had to fill the gap. As long as the international credibility of India was high, loans were forthcoming and the country could go on living on foreign borrowing. However, the combination of a number of factors, including the sharp rise in import prices of oil and the downgrading of India's credit rating, led to a loss of confidence that resulted in the drying up of short-term credit along with a net outflow of non-resident Indian deposits. Thus, in spite of borrowing from the International Monetary Fund (IMF), the foreign exchange reserves declined. It was against this background that the new economic policy was introduced. The multilateral agencies such as IMF and the World Bank insisted that the policymakers undertake structural reforms before they agreed to salvage the country from the foreign exchange crisis. The main components of new economic policy The aim of the new policy was to bring about a realignment of domestic demand with available resources and to initiate changes in supply and production structures with a view to eliminating the external imbalance. The economy was to be liberalized and gradually integrated with the
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world economy by the dismantling of tariff walls, the protection of foreign direct investment and upgrading the technology of production in various fields. The broad thrusts of the programmes were financial stability, outward-looking policies and deregulation of domestic markets. The reforms consisted of two components. The short-term immediate stabilization measures focused on correcting the disequilibrium in the foreign exchange market through demand reduction, reforms in trade policy, a reduction in the fiscal deficit and the dismantling of barriers to the free flow of capital. External competitiveness was to be improved through a large nominal depreciation of the exchange rate. The medium-term structural adjustment programme introduced reforms in fiscal, exchange rate, trade and industrial policy as well as policies concerning the public sector, the financial sector and the capital market. These reforms included elements such as deregulation of prices and investments, changes in the structure of taxation and public expenditure, moderation in wage increases, privatization of public enterprises and greater integration with the world economy. The adjustment policies introduced were not specific to the agricultural sector, but concerned the entire economy. Nevertheless, keeping in view the importance and predominance of the agricultural sector in the Indian economy, in terms of both income generation and employment and its intimate relationship with other sectors of the economy through input-output and consumption linkages, the macroeconomic and other changes implied in the stabilization and structural adjustment programme had a significant impact on the sector. A general review of agricultural development since independence helps to provide the necessary basis for understanding the full implications of structural reform for the agricultural sector of India. PLANNING in India derives its objectives and social premises from the Directive Principles of State Policy enshrined in the Constitution. Public and private sectors are viewed as complementary. The private sector covers not only organised industry but also small-scale industries, agriculture, trade and a great deal of activity in housing, construction and other fields. Individual effort and private initiative are considered necessary and desirable in national endeavour for development with optimum voluntary cooperation. Although in the past, economic planning did envisage a growing public sector with massive investments in basic and heavy industries, now the emphasis on the public sector is less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature.
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The Prime Minister Atal Bihari Vajpayee is the Chairman of the Planning Commission and K.C. Pant, Deputy Chairman, Planning Commission. Members of the Planning Commission include Shri Jaswant Singh, Minister of External Affairs and Minister of Electronics; Shri Yashwant Sinha, Minister of Finance; Shri Ram Naik, Minister of State for Planning and Programme Implementation ; Shri Montek Singh Ahluwalia, Dr S.P. Gupta, Dr S.R. Hashim and Dr D.N. Tiwari. FIRST PLAN Keeping in view the large-scale imports of foodgrain in 1951 and inflationary pressures on the economy, the First Plan (1951-56) accorded the highest priority to agriculture including irrigation and power projects. About 44.6 per cent of the total outlay of Rs 2,069 crore in the public sector (later raised to Rs 2,378 crore) was allotted for its development. The Plan also aimed at increasing the rate of investment from five to about seven per cent of national income. SECOND PLAN The Second Five Year Plan (1956-57 to 1960-61) sought to promote a pattern of development which would ultimately lead to the establishment of a socialistic pattern of society in India. Its main aims were: (i) an increase of 25 per cent in the national income; (ii) rapid industrialisation with particular emphasis on the development of basic and heavy industries; (iii) large expansion of employment opportunities; and (iv) reduction of inequalities in income and wealth and a more even distribution of economic power. The Plan also aimed at increasing the rate of investment from about seven per cent of the national income to 11 per cent by 1960-61. The Plan laid special stress on industrialisation, increased production of iron and steel, heavy chemicals including nitrogenous fertilizers and development of heavy engineering and machine-building industry. THIRD PLAN The Third Plan (1961-62 to 1965-66) aimed at securing a marked advance towards self-sustaining growth. Its immediate objectives were to : (i) secure an increase in the national income of over five per cent per annum and at the same time ensure a pattern of investment which could sustain this rate of growth during subsequent Plan periods; (ii) achieve self-sufficiency in foodgrains and increase agricultural production to meet the requirements of industry and exports; (iii) expand basic industries like steel, chemicals, fuel and power and to establish machine-building capacity so that the requirements of further industrialisation could be met within a period of 10 years or
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so mainly from the country's own resources; (iv) utilise fully the manpower resources of the country and ensure substantial expansion in employment opportunities; and (v) establish progressively greater equality of opportunity and bring about reduction in disparities of income and wealth and a more even distribution of economic power. The Plan aimed at increasing the national income by about 30 per cent from Rs 14,500 crore in 1960-61 to about Rs 19,000 crore by 1965-66 (at 1960-61 prices) and per capita income by about 17 per cent from Rs 330 to Rs 385 during the same period. ANNUAL PLANS The situation created by the Indo-Pakistan conflict in 1965, two successive years of severe drought, devaluation of the currency, general rise in prices and erosion of resources available for Plan purposes delayed finalisation of the Fourth Five Year Plan. Instead, between 1966 and 1969, three Annual Plans were formulated within the framework of the draft outline of the Fourth Plan. FOURTH PLAN The Fourth Plan (1969-74) aimed at accelerating the tempo of development and reducing fluctuations in agricultural production as well as the impact of uncertainties of foreign aid. It sought to raise the standard of living through programmes designed to promote equality and social justice. The Plan laid particular emphasis on improving the condition of the less privileged and weaker sections especially through provision of employment were also directed towards reduction and education. Efforts of concentration of wealth, income and economic
power to promote equity. The Plan aimed at increasing net domestic product (at 1968-69 factor cost) from Rs 29,071 crore in 1969-70 to Rs 38,306 crore in 1973-74. Average annual compound rate of growth envisaged was 5.7 per cent. FIFTH PLAN The Fifth Plan (1974-79) was formulated against the backdrop of severe inflationary pressures. The major objectives of the Plan were to achieve selfPlanning reliance and adopt measures for raising the consumption standard of people living below the poverty-line. This Plan also gave high priority to bringing inflation under control and to achieving stability in the economic situation. It targeted an annual growth rate of 5.5 per cent in national income. Four Annual Plans pertaining to the Fifth Plan period were completed. It was subsequently decided to end the Fifth
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Plan period with the close of Annual Plan 1978-79 and initiate work for a new Plan for the next five years with new priorities and programmes. SIXTH PLAN Removal of poverty was the foremost objective of the Sixth Plan (1980-85). The strategy adopted for the Plan consisted essentially in moving simultaneously towards strengthening infrastructure for both agriculture and industry. Stress was laid on dealing with inter-related problems through a systematic approach with greater management, efficiency and intensive monitoring in all sectors and active involvement of people in formulating specific schemes of development at the local level and securing their speedy and effective implementation. The actual expenditure in the Sixth Plan stood at Rs 1,09,291.7 crore (current price) as against the envisaged total public sector outlay of Rs 97,500 crore (1970-80 prices) accounting for a 12 per cent increase in nominal terms. Average annual growth rate targeted for the Plan was 5.2 per cent. SEVENTH PLAN The Seventh Plan (1985-90) emphasised policies and programmes which aimed at rapid growth in foodgrains production, increase in employment opportunities and productivity within the framework of basic tenets of planning, namely, growth, modernisation, self-reliance and social justice. Foodgrains production during the Seventh Plan grew by 3.23 per cent as compared to a long-term growth rate of 2.68 percent during 1967-68 to 1988- 89 and a growth rate of 2.55 per cent in the eighties due to overall favourable weather conditions, implementation of various thrust programmes and with concerted efforts of the Government and the farmers. To reduce unemployment and consequently, the incidence of poverty, special programmes like Jawahar Rozgar Yojana were initiated in addition to the already existing programmes. Due recognition was also accorded to the role small scale and food processing industries can play in this regard. The total expenditure during the entire Seventh Plan stood at Rs 2,18,729.62 crore (current prices) as against the envisaged total public sector outlay of Rs 1,80,000 crore, resulting in a 21.52 per cent increase in nominal terms. During this Plan period, the Gross Domestic Product (GDP) grew at an average rate of 5.6 per cent exceeding the targeted growth rate by 0.6 per cent. ANNUAL PLANS
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The Eighth Five Year Plan (1990-95) could not take off due to the fastchanging political situation at the Centre. The new Government which Planning assumed power at the Centre by June 1991 decided that the Eighth Five Year Plan would commence on 1 April 1992 and that 1990-91 and 1991-92 should be treated as separate Annual Plans. Formulated within the framework of the earlier Approach to the Eighth Five Year Plan (1990-95), the basic thrust of these Annual Plans was on maximisation of employment and social transformation. EIGHTH PLAN The Eighth Five Year Plan (1992-97) was launched immediately after the initiation of structural adjustment policies and macro stabilisation policies which were necessitated by the worsening Balance of Payments position and inflation position during 1990-91. The various structural adjustment policies were introduced gradually so that the economy could be pushed to a higher growth path and to improve its strength and thus prevent the Balance of Payments and inflation crisis in future. The Eighth Plan took note of some of these policy changes which were to come about due to these reforms. The Eighth Plan aimed at an average annual growth rate of 5.6 per cent and an average industrial growth rate of about 7.5 per cent. These growth targets were planned to be achieved with relative price stability and substantial improvement in the country's Balance of Payments. Some of the salient features of economic performance during the Eighth Five Year Plan indicate, among other things, (a) faster economic growth, (b) faster growth of manufacturing sector and agriculture and allied sector, (c) significant growth rates in exports and imports, improvement in trade and current account deficit, and significant reduction in the Central Government's fiscal deficit. However, shortfall in expenditure in the Central sector due to inadequate mobilisation of internal and extra budgetary resources by the PSUs and various departments was witnessed. In the States sector, the reason for shortfall was lack of mobilisation of adequate resources due to deterioration in the balance of current revenues, erosion in the contribution of state electricity boards and state road transport corporations, negative opening balance, mounting non-Plan expenditure and shortfalls in the collection of small savings, etc. The total expenditure during the entire Eighth Plan stood at Rs 4,95,669 crore (by taking 1996-97 (RE) as actual) at current prices as against envisaged total public sector outlay of Rs 4,34,100 crore (1991-92 prices) resulting in a 14.2 per cent increase in nominal terms. During the Eighth Plan, the GDP grew at an average rate of 6.8 per cent exceeding the targeted growth rate of 5.6 per cent.
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NINTH PLAN The Ninth Five Year Plan (1997-2002) launched in the 50th year of India's Independence is based on a careful stock taking of the strengths and weaknesses of past development strategies and seeks to provide appropriate direction and balance for the socioeconomic development of the country. The principal task of the Ninth Plan is to usher in a new era of growth with Planning social justice in which not only the Government at the Centre and States, but the people at large, particularly the poor can become effective institutions of a participatory planning process. Quality of life, generation of productive employment and regional balance summarise the main dimensions of State Policy. It focuses on accelerated growth, recognising a special role for agriculture for its stronger poverty reducing and employment generating effects and for ensuring food and nutritional security. The objectives of the Ninth Plan include : (i) priority to agriculture and rural development with a view to generating adequate productive employment and eradication of poverty; (ii) accelerating the growth rate of the economy with stable prices; (iii) ensuring food and nutritional security for all, particularly the vulnerable sections of society; (iv) providing the basic minimum services of safe drinking water, primary health care facilities, universal primary education, shelter and connectivity to all in a time bound manner; (v) containing the growth rate of population; (vi) ensuring environmental sustainability of the development process through social mobilisation and participation of people at all levels; (vii) empowerment of women and socially disadvantaged groups such as scheduled castes, scheduled tribes and other backward classes and minorities as agents of socio-economic change and development; (viii) promoting and developing people's participatory institutions like Panchayati Raj institutions, cooperatives and self-help groups; and (ix) strengthening efforts to build selfreliance. The process of reforms which has yielded many good results will be continued and strengthened during the Ninth Plan. The reforms involve a major reorientation of role of the State and the contribution of the private sector. A vigorous private sector operating under the discipline of competition is central to the attainment of the Ninth Plan objectives. It also must increase its involvement in the areas of social development and economic infrastructure. Export performance will be critical to the attainment of high growth rates and achieving selfreliance. The foreign trade and investment policies should facilitate greater integration with the world economy. There is an imperative need to motivate the private sector to participate in the development process, if the infrastructure gap has to be bridged. However, public sector investment in infrastructure will continue to be crucial in this area. As the second largest developing economy in Asia, India can be a major destination for foreign investment and policies in the Ninth Plan have been designed to take advantage of this possibility.
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ANNUAL PLANS The envisaged total public sector outlay of Rs 1,12,197 crore for the Annual Plan 1994-95, was revised to Rs 1,05,085 crore. In the states and the UTs sector the approved outlay was Rs 42,056 crore which was revised to Rs 36,769 crore. The share of the states and UTs in the total provision (RE) was 35.0 per cent. The Annual Plan 1995-96 provides for the public sector an outlay of Rs 1,27,383 crore at current prices. The states and UTs plan outlay at current prices is Rs 48,534 crore, which works out to 38.1 per cent of actual public sector outlay for the year. The public sector outlay for Annual Plan 1995-96 Planning was revised to Rs 1,18,566 crore. In the states and UTs sector, the approved outlay was revised to Rs 43,972 crore. The share of the states and UTs in total plan provision (RE) was 37.1 per cent. The Annual Plan 1996-97 envisaged a total public-sector outlay of Rs 1,44,798 crore comprising Rs 87,086 crore for the Centre, Rs 54,984 crore for the States and Rs 2,728 crore for the UTs. This represents an increase of 10.4 per cent for the Centre and 18.9 per cent each in the case of States and the UTs over the budget estimates of 1995-96. The total public sector outlay for Annual Plan 1996-97 was revised to Rs 1,29,189 crore. In the State and UTs sector, the approved outlay was revised to Rs 51,670 crore. The share of the States and UTs in the total plan provision (RE) was 40 per cent. The overall public sector plan outlay during the Eighth Five Year Plan (1992-97) amounts to Rs 4,34,100 crore at 1991-92 prices. The share of the Central Plan in this amount is Rs 2,47,865 crore or 57.1 per cent whereas the share of State Plans accounts for Rs 1,79,985 crore or 41.5 per cent. The Plans of the Union Territories account for the remaining share of Rs 6,250 crore or 1.4 per cent of the overall Eighth Plan Public Sector outlay. A review in real terms (i.e. after allowing for inflation) has shown that the Plan performance in financial terms during the Eighth Plan (199297) accounts for about 92 per cent of the approved Eighth Plan outlay in the Central Sector. The corresponding proportion works out to about 79 per cent and 104 per cent for State Plans and UT Plans respectively. Thus, in the case of the Centre, the shortfall in anticipated Plan expenditure during the Eighth Plan period has been marginal vis-a-vis the approved Eighth Plan outlay. Whereas there is no shortfall in the case of UT Plans, major shortfall was likely to occur in the Plan provision as well as expenditure of States vis-a-vis their Eighth Plan approved outlays. During 1997-98, the first year of the Ninth Five Year Plan, the total public sector outlay for the Annual Plan was Rs 1,55,905 crore at current prices. The States and UTs plan outlay at current
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prices is Rs 64,066 crore. The share of States and UTs in total plan provision (RE) was 41.1 per cent. The total public sector outlay for annual plan 1997-98 was revised to Rs 1,39,626 crore. In the states and UTs sector, the approved outlay was revised to Rs 58,592 crore. The share of the States and UTs in the total plan provision (RE) is 42 per cent. The public sector outlay envisaged for the Annual Plan 1998-99 is Rs 1,85,907 crore at current prices comprising Rs 1,05,187 crore for the Centre, Rs 77,192 crore for States and Rs 3,528 crore for UTs. INDUSTRIAL POLICY OF THE GOVERNMENT POLICY RESOLUTION AND POLICY STATEMENTS: The concept of "Industrial Policy" is comprehensive and it covers all those procedures, principles, policies, rules and regulations which control the industrial undertakings of a country and shape the pattern of industrialization. INDUSTRIAL POLICY 1948: Attainment of Independence by India on 15th August 1947 made a tremendous difference to the industrial landscape. Production in India had declined but population was increasing. Inflation was worsened by the economic upheaval of the partition of the country and the need to set up production and counter inflationary tendencies, it was essential to announce an industrial policy which would create conditions of economic security so very vital for the growth of the industry and thus produce a climate for stimulating investment in industry. SALIENT FEATURES OF THE INDUSTRIAL POLICY OF 1948: The first Industrial policy resolution has been announced in India on April 6th 1948 thus policy aimed at creating a mixed economy in the country with the existence of both private and public sectors. This policy envisaged that "state should play a progressively active role in the development of industries". This policy aimed at providing equal opportunities to all improvement standard of living of ali increasing the production and also providing employment opportunities in whole community. FEATURES OF THE POLICY: The industries were classified by the Government into 4 categories. I. Category industries which are an exclusive monopoly of the state.
Arms ammunition defence atomic energy industries which are of strategic importance.
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II. Category industries which include basic and key industries. They consists of non and steel telephone telegraph ship building, transport, power etc. The new units will be in private sector for the next 10 years. After 10 years they will be nationalized. III. Category industries which also included certain basic industries like automobiles, fertilizers, chemicals, tractors, heavy machines, machine tools etc., The new industries in this category will be started by the private sector. But the state can also start progressively the new units in this category. The IV category industries which are remaining industries such as : 1. Small scale industries: The 1948 industrial @@ resolution emphasis @@@@ of small scale industries in co-operative basis and also as comliments @@@@ industries. 2. workers participation in management: This policy gave importance for good relations between the Labour and management of various industries for ensuring this policy stressed the need for workers participation in management. 3. This policy explained the important role to be played by the foreign capital in the industrialization. 4. To prevent unhealthy competition from foreign industrial units the policy assured the implementation of a sound and suitable tariff policy. REVIEW OF INDUSTRIAL POLICY RESOLUTION OF 1948: The first industrial policy resolutions announced by the Government of India in 1948 had a mixed reaction from the public. Some thinkers expressed great satisfaction over the policy. While others criticized it. Prof. Kawchal termed this policy as the most useful one Minoo Masani said that this policy said the foundation for democratic socialism. However, may others criticized it on the following grounds. 1. This Government has taken up great responsibility by separating some industries from private sectors. 2. This policy has mixed two opposite lines. It backed the Industries and also promised protection to labourers which cannot happen.
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3. There was always a fear of nationalism to private enterprise. Hence private enterprise could not develop. 4. There was a doubt about the co-ordination of private sector and public sector.
INDUSTRIAL POLICY RESOLUTION OF 1956: The Industrial Policy Resolution of 1948 announced by the government faced several criticisms. It was criticized that the threat of nationalization which was proposed in that policy has effected the growth of private enterprise. Moreover in 1950 we have drafted our constitution and decided to move towards establishing a socialistic pattern of society. The directive principles of state policy were announced and the second plan started as the first plan was over by 1956. All of these above factors made the government to announce another industrial policy within 8 years of the announcement of first policy. That was the industrial policy resolution of 1956. INDUSTRIAL POLICY RESOLUTION OF 1956: a. New classification of industries: The 1956 industrial policy resolution gave a new classification of industries consisting of three categories. i) Exclusive responsibility of states: 17 industries are included in this schedule. They are arms and ammunition, atomic energy, iron and steel, minerals like copper, transport, telephone, telegraph and radio equipment, generation and distribution of electricity. ii) Progressively state owned: Which includes industries, machine tools, ferro alloys, antibiotics, essential drugs, fertilizers road transport and sea transport. iii) Other Industries: All the remaining industries were left to initiative and enterprise of the private sector. These industries were also subject to the control and regulation of the state. b; Role of small scale and cottage industries: These are having higher employment potential ensure more equitable distribution of income and wealth. Hence Government could support actively these industries through various ways by giving direct assistance and indirect assistance. c. The need for removing regional disparities: The industrial x^olicy resolution of 1956
suggested that one of the aims of national. INDUSTRIAL POLICY (1990):
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The Janatha Dal Government announced its new industrial policy on May 31" 1990. FEATURES OF POLICY: 1. PROMOTION OF SMALL SCALE INDUSTRIES:
1. The investment ceiling in plant and machinery for small - scale industry of 1985 was revised from the present Rs.35 lakhs to 60 lakhs. 2a. Presently 836 items have been reserved for exclusive manufacture in the small - scale sector. Efforts would be made to certify some more items amendable to similar reservation. c. Programmes for modernization and upgration of technology would be implemented. A
number of technology centers, tool rooms, process and product development centers, testing centers etc. will be set up under the umbrella of an apex technology. Development center in small industries development organization. d. To ensure adequate and timely flow of credit for the small scale industries a new apex
bank known as SIDBI has already been established. e. An exercise will be undertaken to identify location in rural areas endowed With
adequate power supply and intensive campaigns would be launched to attract suitable entrepreneurs provide all other inputs and faster small scale and tiny industries. f. An exercise will be undertaken to identify the locations in rural areas endowed with
adequate power supply and intensive campaigns would be launched to attract suitable entrepreneurs provide all other input. And foster small scale and tiny industries. g. One of the persistent complaints of the small scale units in their being subjected to a large
number of acts laws, being required to maintain a number of registers, submit plethora of returns and face an army of inspectors, particularly in the field of labour legislations. These bureaucratic controls will be reduced so that unnecessary interference is cheminated. II. Promotion of Agro - Based Industries
i. In order to assist the large number of artisans engaged in the rural and cottage industries, the activities of Khadi, Village Industries (KVI) boards would be expanded and these organizations would be strengthened to discharge the responsibility more effectively. Special marketing
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organizations at centered and states levels shall be created to these industries to market their products. ii. In agro-processing industries greater success has been achieves where growers and processors have been integrated as in the case of sugar. For the success of other agro - based, industries also close links must be forged between the growers are processor units. iii. Agro processing industry would receive high priority in credit allocation from the
financial institution. III. PROCEDURES FOR INDUSTRIAL APPROVALS: Indian Industry must be made more competitive internationally. It also needs to be released from unnecessary bureaucratic shackles by reducing the government would continue to examine large projects in view of resource constraints, decision in respect of medium sized investments would be left to the entrepreneurs. To achieve these objectives the following decision have been taken. a. Delicensing: All new units up to an investment of Rs.25 crores in fixed assets in non-
backward areas and Rs.75 crores in centrally notified backward areas would be exempted from requirement of obtaining licence/registration. b. Import of capital goods: Import of capital goods the entrepreneur would have
entitlement to import upto a landed value of 30% of the total value of plaint and machinery required for the unit. c. Import of raw material: Raw material and components, imports would be permissible
upto a landed value of 30% of the ex-factory value of annual production. The ex-factory value of production will exclude, the exercise duty on the item of production. d. foreign Collaboration: In respect of transfer of technology, if import of techn&logy is
considered necessary by the entrepreneur, he can conclude an agreement with the collaborator without obtaining any clearance from the government provided that royalty payment does not exceed 5% on domestic sales and 8% on exports e. Foreign Investment: Investment upto 40% of equity will be allowed on an automatic basis. In such proposals also the landed value of imported capital goods shall not exceed 30% of value of plant and machinery.
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IV. LOCATION POLICY AND ENVIRONMENT CLEARANCES:
The location policy would be applied to such industries by the center except for the location in and around metropolitan cities with population above four million. For these cities location will not be permissible within 20 km. Calculated from the periphery of the metropolitan area except in prior designated industrial areas and for non-polluting industries such as electronics computers software.
V.
EXPORT - ORIENTED UNITS: 100 per cent export oriented units (EQUS) and units to be set up in export processing/ ones
(EPZ's) are also being deli censed under the scheme up to an investment limit of Rs.75 crores. AN EVALUATION OF INDUSTRIAL POLICY: Industrial Minister Mr. Ajit Singh announcing the new industrial policy made a case for the growth of the small scale industries just on the lines of the Janata party Government in 1979 the new industrial policy is a curious amalgam of the philosophy of the Janata Dal and the philosophy of indiscriminate liberalisation followed by the congress(I). The new industrial policy intends to identify more items amendable to reservation besides the 836 items included in the list. Although the minister made a brave assertion that encroachments would be effectively Jealt with, but the experience of the past reveals that through tooth paste was reserved for the small scale sector, but after more than a decade, 90 per cent tooth paste was produced by multinationals not only these but footwear, domestic appliances, safety matches soap etc. are reserved for small sector as for back as 1967 but in all these items big business sectors still dominates. Therefore the question is not of enlarging the list make it impressive but to improve market share of small scale sector by phasing out the large sector from this area. The initiatives proposed in the new industrial policy to modernize the small scale sector is welcome. This is to increase the competitive strength of small units by improving their quality of output and reducing their costs. The government should therefore take a bold stand not in worlds but in action so that the professed goal of generating more employment and dispersal of industry can be achieved. NEW INDUSTRIAL POLICY 1991:
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The congress (1) government led by Mr. P.V. Narasimha Rao announced the new industrial policy on July 24, 1991. The main aim o the new industrial policy is to unshackle the Indian industrial econcruv with the world economy to remove restrictions on direct foreign investments as also free the domestic entrepreneur from the industrial of MRTP Act. All these refpfms of industrial policy have led the government to take a series of initiatives in respect of policies in the following areas. a. Industrial Licensing. b. Foreign Investment. c. Foreign Technology Policy
d. Public Sector Policy e. MRTP Act. .
a. Industrial Licensing: In the Sphere of industrial licensing, the role of the government was to be changed from that of only exercising control to one of providing help and guidance by making essential procedures fully transparent and by eliminating delay. This calls for bold and imaginative decisions designed to remove restraints on capacity creation, which at the same time ensure that over - riding national interests are not jeopardized. Industrial licencing will henceforth be abolished for all industries, except those specified irrespective of levels of investment. These specified industries will continue to be subject to compulsory licensing for reasons related to security and strategic concerns, social reasons, problems related to safety and over riding environmental issues, manufacture of products of hazardous nature and articles of elitist consumption. b. Foreign Investment: In order to invite foreign investment in high priority industries requiring large investments and advanced technology, it-has been decided to provide approval for direct foreign investment upto 51 percent foreign equity in such industries. For the promotion of exports of Indian products in world markets the government will encourage foreign trading companies to assist Indian exporters in export activities. Beside this the government will appoint a special board to negotiate with such firms so that purposive negotiations can be carried out with such large firms, which provide the avenues for Targe investments in the development of industries and technology in the national interest.
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c. Foreign Technology: With a view to injecting the desired level of technological dynamism in Indian Industry government will provide automatic approval for technology agreements related to high priority industries with in specified parameters. d. Public Sector Policy: Public enterprises have shown a very low rate of returns on capital invested. The result is that many of the public enterprises have became a burden rather than being an asset to the government. The most striking example is to take over of sick units from the private sector. This category of public sector units accounts for almost one third of the total losses of centered public enterprises. It is time therefore that the government adopt a new approach to public enterprises. Units which may be faltering at present but are potentially viable must be structured and given a new lease of life. The priority areas of growth of public enterprises in the future will be the following. i. ii. Essential infrastructure goods and services. Exploration and exploitation of oil and mineral resources.
iii. Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inadequate. a. Manufacture of products where strategic consideration predominate such as defence equipment. e. Monopoly And Restrictive Trade Practices Act (MRTP Act): With the .growing in the international market, the
complexity of industrial structure and the need for achieving ; ecdrvomics of scale for ensuring higher productivity and competitive advantage
interference of the government through MRTP Act in investment decisions of large companies has become delirious in its effects on Indian industrial growth. The pre-entry scrutiny of investment decisions by so-called MRTP companies will no longer be required. Instead emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade practices rather than making in necessary for the monopoly houses to obtain prior approval of central government for expansion, establishment of new undertakings, merger take over and amalgamation and appointment of certain directors. The trust of policy will be more on controlling unfair or restrictive business practices.
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Decisions of government: In the view of the considerations outlines above government decides to take a series of measures to unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic control. These measures being taken by government in the areas of trade policy, exchange rate management, fiscal policy, financial sector reform and overall macro-economic management. Industrial Licensing Policy: i. Industrial Licensing will be abolished for all projects except for a short list of industries related to security and strategic concern, social reasons, hazardous chemicals and overriding environmental reasons and items of elitists consumption. Industries reserved for the small scale sector will continue o be reserved. ii. Areas where security and strategic concerns predominate will be continue to be reserved
for the public sector. iii. In locations other than cities of more than one million population there;^ will be no requirement of obtaining industrial approvals from the central government except for industries subject to compulsory licensing. In respect of cities will population great than one million industries other than those non-polluting nature such as electronics will be located outside 25 km of the periphery except in prior designated industrial areas. iv. v. vi. b. Existing units will be provided a new broad banding facility to enable them to produce any The exemption from licensing will apply to all substantial expansions of existing units. All existing registration schemes will be abolished. Foreign Investment: article without additional investment.
i. Approval will be given for direct foreign investment upto 51% foreign equity in high priority industries. Clearance will be available if foreign equity covers the foreign exchange requirement for imported capital goods. ii. The payment of dividends would be monitored through the reserve bank of Indian so as to ensure that outflows on account of dividend payments are balanced by export earnings over a period of time. iii. Other foreign equity proposal which do not meet criteria (i) will continue to need prior clearance.
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c. Foreign Technology Agreements:
i. Automatic permission will be given for foreign agreements in high priority industries upto a lump sum payment of Rs.l Crore 5% of royalty of domestic sales and 8% for export sales. The prescribed royalty rates are not of laxes^4rA4rwill be calculated according to stand and procedures. ii. Automatic permission will be given subject to the same guidelines as above if no free foreign exchange is required for any payments. iii. No permission will be necessary for hiring of foreign technicians foreign testing of
indigenously developed technologies, d. Public Sector:
i. Portfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high-tech and essential infrastructure. Whereas some reservation for the public sector is being retained there would be no bar for areas of exclusively to be opened up to the private sector selectively. Similarly the public sector will all be allowed entry in areas not reserved for it. ii. Public enterprises which are chronically sick and which are unlikely to be turned around will for the formulation of revival rehabilitation schemes be retried to the board for industrial and financial reconstruction (BIFR) or other similar high level institutions created for the purpose. iii. In order to raise resources and encourage wider public participants a part of government a shareholdings in the public would be offered to mutual funds financial institutions general public and workers. iv. There will be a greater trust on performance improvement through the Memorandum (MOU) system through Of
Understanding
which managements would be granted and will
be held accountable. e. i. MRTP ACT: The MRTP act will be amended to remove the threshold limit of assets in respect of MRTP
Companies and dominant undertakings. This eliminates the requirement of prior approval of central government for establishment of new undertakings etc.
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ii. Emphasis will be placed on controlling and regulating monopolistic restrictive and "unfair empowered MRTP commission will be authorized to complaints received from individual consumers or classes of trade practices simultaneously newly initiate investigations on
consumers in regard to monopolistic, restrictive and unfair trade practices. A. CRITIQUE OF THE NEW INDUSTRIAL POLICY: The new industrial policy announced by the government of India on 24th 1991 fulfils a long felt demand of industry. Licencing has been abolished for all industries except 18 industries. Besides this all industrial policy proposes to remove the limit of assets fixed for MRTP companies and dominant undertakings numerous cases of bottlenecks created by the bureaucracy are given a go-bye by this singular decisions of the government. However, there are several other areas which have come in for sharp criticism. It should be desirable to take a few points. 1. POLICY REGARDING FOREIGN CAPITAL: The new industrial policy goes all out to foreign capital. It has been decided to provide approval for. direct foreign investment upto 51% foreign equity in high priority industries The government has further clarified that it will permit 100% foreign equity incase the entire output is exported. All this is done in the belief that foreign investment is crucial to our development. But events have not turns the way Nehru would have endeavoured to build the Indian economy. The idea of free flow of foreign capital is being sold with the understanding that it shall provide the much - needed foreign exchange and secondly that it shall lead to injecting a heavy doze of investment in high priority sector. So government should therefore should be very careful about the hidden implication reverse outflow of foreign exchange in the coming Moreover the government has also assured majority foreign equity holdings upto 51% even for trading companies primarily engaged in export activities. It does not seem justified as to whether Indian trading companies cannot probe foreign market effectively, this area does not require model technology .then why should government add additional burden by permitting foreign equity in trading companies. PUBLIC SECTOR POLICY:
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Industrial policy very rightly classifies public enterprises in to three categories. i. Those which fall in the reserved areas of operations.
ii. Public units which may be faltering at present but are potentially viable must be restructured and given a new life and iii. Those public enterprises which are chronically sick and incur heavy losses, operating in a competitive market and serve little or no public purpose. These enterprises the government either intends to close down or pass their ownership to the private sector. DEVELOPMENT AND REGULATION ACT OF 1951 The Industrial Development and Regulation Act of 1951 was passed for securing a planned industrial development in the country for regulating controlling and developing the industries prescribed in schedule A of the Act. Regulation of industries is done by means of registration of existing industrial undertakings and licensing o substantial expansion, production of new articles change of location of undertakings etc., Control of industrial undertaking can be achieved by investigation into the affairs of industrial under-takings. Development of industries is sought to be achieved through Central Advisory Councils and Development Council by offering various facilities. OBJECTIVES OF THE ACT: The act has three important objectives. 1. Implementation of Industrial Policy: The Act provides the necessary means to the central
government for implementation the industrial policy. 2. Regulation and Development Industries: The act provides that the imported, industries which are mentioned in the first schedule should be brought under the control of the Central Government. The development and regulation of such industries is important for the country. Hence, the development of such industries should be considered by taking the economic factors on all India basis. 3. Planning and Development of Future Undertakings: The Act provides a system of licensing to regulate planning and future development of new undertakings on sound and balanced lines as may be deemed necessary in the opinion of central government for achieving this act.
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a. b. c. Confers powers on the central government to make rules for the regulation of For regulating the production and development of industries specified in the first The act also provides for constitution .of Central Advisory Councils and development existing undertakings. schedule.
councils. SCOPE OF THE ACT: This act applies to whole of India including the states of Jammu and Kashmir. It is applicable to all the industries and undertakings manufacturing goods specified in the first schedule. According to the provisions of Act an industrial undertaking is said to be one. a. b. Which carries on the process of manufacture with the aid of power and having 50 or Carrying on the process of manufacture without aid of power with 100 or more workers more workers in the preceeding 12 months.
in the preceding 12 months. The act exempts certain industries which in the opinion of the central government deserve exemption. PROVISIONS OF THE ACT: The provisions in this act may be broadly classified into 3 categories. (1) Preventive provisions (2) Curative Provisions and (3) Creative provisions. PREVENTIVE PROVISIONS: The preventive provisions provided in the act are (a) Registration of undertakings and licensing of undertakings, (b) Investigation, (c) Revocation of licence. a. Registration of Undertakings: Section 10 of the Act provided that the owner of any industrial undertaking other than the central government shall get registered within a specified period. However, the central government may also cause every industrial undertaking under the government also to get registered. However, as a consequence of the new industrial policy of 1991 the registration system has been abolished. Licensing of undertakings: Section 11, 11A, 13 of this Act provides that licence is required for establishing a new undertaking for raanufacturing a new article by an existing undertaking for effecting a substantial expansion by existing, unit for changing location of an existing
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undertaking and to carry on business by an existing undertaking. However, these provisions have become inoperative from 25th July, 1991 wide: G.O. No.4771E. b. Investigation: Section 15 of this Act give powers to the central government to investigate into the industrial undertaking on the happening of (a) substantial fall in the volume of production of any article produced by these undertakings (b) deterioration of the quality of the product which could have been avoided (c) rise or likely rise in the price of product (d) for the conservation of natural resources of national importance conserved by this undertaking (e) where the industrial undertaking is being managed by person who are highly detrimental to the public interest. Section 16 of the Act. Empowers the central government to give directions regarding regulating the production of articles controlling the price of any article regulating the distribution of any article produced by this undptaking after investigation. *
c. Revocation of Registration and Licence; Section 10 of the Act provides powers to the central government for revoking the registration of any industrial undertaking whose registration has been obtained by misrepresentation or got an exemption under the Act or has become useless. II. CURATIVE PROVISIONS: The curative provisions include power to takeover management and power to control supply and price of certain articles. POWER TO TAKE OVER MANAGEMENT AND CONTROL: Section 18A of the Act provides that the central government may by notification takeover the management or exercise control over any industrial undertaking if it has failed to comply with the directions issued under 16A of the Act or if affairs of the undertaking are being managed by persons in such a manner which are detrimental to the public interest Section 18A also authorizes the central government the power to take over any industry without ir^e-stigation if it thinks fit. POWER CONTROL SUPPLY AND PRICE OF CERTAIN ARTICLES: In order to secure equitable distribution and availability at fair prices or any article or class of articles the central government may by a notification order to any scheduled industry regulate supply and the distribution of anyarticle produced by that industry.
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III. CREATIVE PROVISIONS:
They include the following: a. Constituting Development councils: The central government by a notifying order
establish development councils in respect of any industry or a group of indusiiie's. The development council consists of persons representing the owners, persons having technical knowledge, person representing the employees and persons not belonging to any of the above categories. These development councils perform many functions. They are: i. ii. iii. iv. Commanding targets of production. Suggesting norms of efficiency eliminating waste. Recommending measures for achieving fuller utilization of installed capacities. Promoting arrangements for better marketing of products. '
Assisting industries in obtaining raw materials and advising the industries regarding methods of production, increasing the productivity of labour, training of persons, standardization of products etc. Sec 9 of the Act provides that central government may collect cess on the products which may be levied as an excise duty. This amount is remitted to the development councils. Central Advisory Council : Section 5 of the Act provides for the establishment of a central advisory council. It advises the central government regarding development and regulation of scheduled ? industries. The central advisory6 council consists of a Chairman and members not exceeding 13 members representing various goods.
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INDUSTRIAL POLICY RESOLUTION - 1956 2011-09-14 19:09:43 GKToday The Industrial Policy Resolution was based upon the Mahalanobis Model of growth. This Model suggested that there should be an emphasis on the heavy industries, which can lead the Indian Economy to a long term higher growth path. The most important outcomes of the Industrial Policy Resolution - 1956 were: 1. Scope of the Public Sector in India got widened. 2. The Governments aim to achieve a socialistic pattern of growth was reiterated. 3. A clear Cut classification of industries was done in India for the first time. 4. All the industries of basic and strategic importance and the industries which had a nature of public utility of services and all those which required large scale investment were strictly kept under the Government sector. 5. Provision of Compulsory Licensing was cemented. 6. The policy paved the way of development of Public Sector in India. Classification of Industries: In the Industrial Policy Resolution - 1956, industries were classified into three categories named as Schedule A, Schedule B & Schedule C. Schedule A referred to the industries in which Central Government kept the Monopoly. Schedule B referred to the industries in which State Governments were given the duty to take measures and; Whatever was left was put in Schedule C which was open to the private enterprises. Schedule A: This comprised 17 industrial areas which were strictly under the Central Government. The companies of this area were known as CPSE (central Public
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Sector Undertakings). The CPSUs later became popular as PSUs. The 17 areas were: 1. Arms and ammunition and allied items of defense equipment. 2. Atomic energy. 3. Iron and Steel. 4. Heavy castings and forgings of iron and steel. 5 . Heavy plant and machinery required for iron and steel production, for mining, for machine tool manufacture and for such other basic industries as may be specified by the Central Government. 6. Heavy electrical plant including large hydraulic and steam turbines. 7. Coal and lignite. 8. Mineral oils. 9. Mining of iron ore, manganese ore, chrome-ore, gypsum, sulphur, gold and diamond. 10. Mining and processing of copper, lead, zinc, tin, molybdenum and wolfram. 11. Minerals specified in the Schedule to the Atomic Energy (Control of Production and Use) Order, 12. 1953. 13. Aircraft. 14. Air transport. 15. Railway Transport. 16. Ship Building. 17 . Telephones and telephone cables telegraph and wireless apparatus (excluding radio receiving sets). 18. Generation and distribution of electricity.
Schedule B: This comprised 12 industrial areas which were put to the State Governments to take measures and was left to the state government to follow up with the private sector with provisions of compulsory licensing. However, Schedule B DID NOT gave Monopoly to State Governments, as monopoly given to centre in Schedule A. They
CHANGING IMPRESSIONS, Opp. Samata College, Besides Chowdary Mess Sector 9, Appughar Road, MVP Colony Page 42
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had to be State owned but private sector was expected to supplement the efforts of the State. States were expected to facilitate and encourage development of these industries in the private sector, in accordance with the programmes formulated under the Five Year Plans. The areas of Schedule B were: 1. All other minerals except minor minerals as defined in Section 3 of the Minerals Concession Rules 1949. 2 . Aluminum and other non-ferrous metals not included in Schedule A. 3. Machine tools. 4. Ferro-alloys and tool steels. 5 . Basic and intermediate products required by chemical industries such as the manufacture of drugs, dye-stuffs and plastics. 6. 7. 8. 9. 10. 11. Antibiotics and other essential drugs. Fertilizers Synthetic rubber. Carbonization of coal. Chemical pulp. Road transport.
12. Sea transport. (Words in bold mean nothing except that the author considers them important for objective tests) Schedule C: The Industrial areas which were left out of the Schedule A & B were left with the private sectors with provisions of licensing and subject to regulation under the IDR Act. Some more features of Industrial Policy Resolution 1956: All the Schedule B and many of the Schedule C came under provisions of compulsory licensing and thus Industrial Policy established License Raj In India. Public sector for heavy industries was made the main vehicle for Industrial growth
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To tackle the regional disparity, PSUs were to be established in backward regions. Small Scale Industries and Agriculture sector was given priority in development.
1991 INDUSTRIAL POLICY AND ECONOMIC POLICY During the mid 1980s, the Congress Government headed by Rajiv Gandhi made a move to change its policies regarding business, licenses and permits, as also its attitude towards multinational companies (MNCs) operating in India. However, it was only during the succeeding government of Narasimha Rao (1991-96) that a strategy was actually formulated in this direction and marketed both in India and abroad. The strategy aimed to bring the Indian economy into the mainstream of the global economy, and, at the same time allow a whiff of competition and growth to India business. This, it was hoped would bring a new dimension to the concepts of quality, productivity and growth. Inevitably, the winds of liberalization that swept through the nation opened a variable Pandora's box, with far-reaching implications for human resource management. It brought in a new era of technology, quality consciousness and competition, which compelled Indian business to wake up from its somnambulism and reassess its assumptions 'compete-or-perish' situation. for dealing with the
The Preref orm Scenario In the pre-liberalization period India had pursued a shortsighted policy in the name of selfreliance, blocking out the rest of the world in the manufacturing and services sectors. Relying on bureaucratic controls, through licensing and centralized planning, the government had imposed restrictions on the capacity of business units, their location, choice and source of raw materials and so on. It had also kept a check on corporate take-overs and mergers, through the monopolies and Restrictive Trade Practices Commission (MRTP). India had actively discouraged foreign investments in its capital markets to protect domestic industries. It had also denied itself access to international capital, technology and markets; Unlike the Asian Tigers who went on to beat the first World nations at their own game. However, as seen by the recent downslide in the South Asian economy and the currency crisis in Indonesia, this access to international capital and markets has been a mixed blessing for these
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countries. Notwithstanding this, the tremendous progress made by the Asian Tigers during the last three decades can certainly serve as an example to developing countries such as India. Not that socialistic state planning did not have its benefits in India. Heavy industries were established and significant strides were made in the field of agriculture, Industrial growth rose from 7 per cent in the early 1950s to 9% in the early 1960s. However the inevitable problems of socialism outweighed the benefits. Protected employment led to loss making units where as the License Raj worked against competitive forces. The Reform Process and Imperatives After 1991 there was a two fold shift in the Indian economic policy-at the global level as also the national level. 1. At the global level, it sough to integrate the Indian economy with the world economy by
allowing free movement of capital investment, both into and from India. This exchange would also expose India to new technology There has been a significant time lag between foreign direct investment (FDI) approvals and actual in-flows. This has been possibly due to the government's failure to ensure a smooth single-window clearance for projects. Other factors have been the government's tendency to backtrack on its own policy, and lack of congruity in Center-state clearance for FDI inflows. 2. At the national level, it envisaged a decontrolled business environment where free market forces would be given more freedom to operate and state control would be reduced or eliminated. The omnipotent role of public sector corporations would be redefined, allowing disinvestments of their equity holdings by the government. One of the desired effects of such a major restructuring of the economy was growth and generation of employment which, it was hoped would lead to more purchasing power for the common man. The central government's reform package was a mix of policy and administrative changes. The budget was used as a major instrument for altering the financial policies. The 1996 budget, which was awaited with both skepticism and hope proved to be turnaround in many wayscustom duties applicable to core industries were reduced, excise duty was rationalized and a commitment was made towards disinvestments of PSUs. The budget identified the existing infrastructure as inadequate for growth and indicated efforts to encourage investment in this critical area. Further it took cognizance of the aspirations of farmers and the poor, offering schemes and subsidies to uplift these neglected sections. Unfortunately the budget elicited a
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lukewarm response and failed to energies the capital market. This resulted in a slow down of economic reforms and loss of investor confidence in the Indian economy. In February 1997, the budget presented by the formed finance minister, Mr. P.Chidambaram, tried to firmly establish India's commitment to the reform process and managed to enthuse both Indian and Foreign business. The budget showed a spirit of optimism and growth. Market-men were amply encouraged and share indices recorded their biggest jump in any post budget session in the last two decades. The budget reformed India's tax structure in line with the structure in developed countries; significantly reduced tariffs; rationalized excise rates; encouraged investment in infrastructure; and also opened up the insurance sector partially. On the negative side, however the budget paid more lip-service to reduction in government expenditure and remained silent on the huge oil-pool deficit. (This was subsequently tackled by an administrative decision). One of the imperatives of the environment is to have a skilled and educated workforce, which can understand and cope with the requirements of IT and other technologies in the manufacturing and services sectors. Therefore, the state has to make heavy investments in education. It is worth noting that Yashwant Sinha, minister of finance, in his 1998 budget speech, stressed on the importance of education as a key vehicle for social transformation and provided total budgetary allocation of Rs70, 470 million to the sector. This was an increase of 50% over the preceding year's allocation. Here, it must, however, be pointed out that a significant share of this increase would go into paying the increases in salaries. The finance minister also expressed the government's intention to eventually raise total resource allocation for education to 6% of GDP, in a phased manner. He further stated the government's plan to implement the constitutional provision for making primary education free and compulsory up to fifth standard, and also to go beyond and provide free education for girls up to the college level. Mahajan (1998) estimates that the central government's expenditure on human resource development (HRD), which was Rs 32,410 million in 1989-90, dropped to Rs28, 910 million in 1992-93. The expenditure by the states was Rs 1,23,100 million in 1989-90, which marginally improved to Rs 1,29,020 million in 1992-93. Given India's vast population, the number of poor and school drop-outs (turned child laborers), it is indeed a critical situation. Unfortunately, not much has gone into the National Renewal Fund (NRF) either, which was originally created to impart training, retrain workers whose skills has become inadequate or redundant as a result of technology up gradation. The new economic programme has opened up the economy to a greater degree of international participation and investments. The service industry has taken significant strides in areas such as
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tourism, hospitalize or medicine, banking and financial services. Consequently, not only have more players come into India, but mergers and acquisitions of a large number of India companies have also taken place. This has compelled Indian companies to sit up and re-examine their strategies and practices, as also the type of business they are in. Such a shake-out is indeed in stark contrast to their attitude in the recent past, where cornering a license mattered more than a company's product or competence. Liberalization has thus resulted in paradigmatic shift. ECONOMIC SITUATION AT THE BEGINNING OF THE DECADE OF NINETIES We learnt in the previous lesson that the economic, planning in India was a mixture of achievements and failures. While the rate of economic growth showed some increase, it was slower than anticipated. There was not enough reduction in economic inequalities. Poverty continued to persist and mote than one-third of the population lived below the poverty line. The improvement in the 4uality of life was not satisfactory. Industrial growth, modernisation, technological developments were quite satisfactory. But there was more scope for achievements even in these areas. The economy had made satisfactory progress in the area of building up social and economic infrastructure. (a) Problems Some of the problems that the Indian economy was facing at the beginning of the decade of nineties were as follows: 1. Inflationary pressure Indian economy was facing a strong inflationary pressure. Prices of essential commodities were rising rapidly. Since this raised the cost of living of the working class, they asked for higher wages which raised industrial costs. The industrial costs were also rising because of the rising costs of materials. High industrial costs and prices were leading to stagnation in the demand for their products both in the domestic market as well as abroad. 2. Shortage of finance The economy was experiencing shortages of finance for industrialisation etc. There were also shortages emerging in the economy in the area of transportation, communication. These shortages were suppressing industrial growth. 3. Shortage of foreign exchange One of the most important areas of shortages was that of foreign exchange. Indian economy had experienced some rise in exports in the preceding decade. But the rise in imports was far more. Thus the economy demanded more foreign exchange than was available. The prices of 'foreign currencies' were, therefore, rising persistently.
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4. Unemployment Even ihough industrial growth was taking place, employment hi industry was not increasing proportionately. 5. Decline in the share In the world trade In the world economy India's share in the world trade was declining. At the beginning of the era of economic planning India had 2 per cent share in the world trade. By the beginning of the decade of nineties, this share had declined to less than half a percent i.e. 0.5 percent. Further, in the past few decades, India was experiencing an expansion of trade with former Soviet Union and other socialist countries of Europe. After the political changes in these countries, they were opening up their economies to the other European and industrially advanced economies. It was quite clear that India will have to compete with some of the industrially advanced economies of the world if it has to expand its share in the world trade. 6. Higher rate of economic growth in other countries Some of the other developing countries like South Korea, Philippines, Hong Kong, Singapore, Malaysia, Indonesia, China were experiencing a far higher rate of economic and industrial growth than India. (b) Policies responsible for problems It may also be noteworthy that some of the policy measures followed in the pasAwere considered responsible for these problems of the Indian economy. We may enumerate some of these policy measures: 1. System of licensing Government was controlling and regulating the growth of industry through a system of licensing. 2. Some industries in the hands of government only A number of industries were meant to be developed only by the government Some of these industries notably power-generation and transmission, transportation and communication, mining, heavy machinery etc. were to be expanded only by the government 3. Restrictions on foreign technology Government had placed several restrictions on the import of foreign technology and prior approval of the government was required if an industrial enterprise was to import technology from a foreign firm. 4. ' ' Restrictions on foreign investment
There were several restrictions on the participation by foreign investors in the Indian industries. They were not allowed to invest in any one enterprise more than 25 percent of the total capital.
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Prices of foreign currencies in terms of the Indian rupee were fixed. This was known as the ' official exchange rate. Since the demand for foreign currencies was more than their supply and the demand for these currencies was increasing more than the increase in their supply. Their open market what is known as black market in our country prices were increasing.; The growing gap between the officially fixed exchange rate and the market demand and ; supply determined exchange rate was leading to growing black market in foreign exchange, Those who earned foreign exchange through exports of goods or services did not report their entire earnings of foreign exchange. Those who wanted to import from abroad would prefer to obtain all me foreign exchange from the Reserve Bank of India because the official rate was lower. Hence the earnings of foreign exchange were not enough but the withdrawals were far more. 5. Protection from foreign competition Indian industry had been protected from competition with foreignindusuy by imposing heavy, import duties on competing foreign goods. Indian industry had, however, not increased its competitive strength in view of this protection that it received through high import duties. For increasing exports, Indian industry was demanding'more and more of subsidies from the government ;
CRISIS OF 1991 AND ECONOMIC POLICY REFORMS At the beginning of 1991, India faced a severe foreign exchange shortage. As you have learnt in the earlier section, there was a growing gap in the officially fixed exchange rate of the rupee with other currencies and the market determined rate. Since die market determined rate was very high and was rising, there was growing incentive not to report the foreign exchange earned to the official agencies Le. Reserve Bank of India. At the same time there was an increasing demand for withdrawal of foreign exchange from official sources because it was cheaper. The foreign exchange reserves were, therefore, depleting rapidly. At the beginning of 1991, because of a war between Kuwait and Iraq, there was a shortage of petroieum products. Their prices rose. India's earnings from these and other Gulf countries were suddenly blocked as Indian's workers in these countries were not allowed to transfer incomes to India. Moreover, there was 8 large number of workers who returned to India because of the war. Indian political situation was also not very stable. There was a minority government at the centre. Those depositors who had deposited their foreign currency in India started withdrawing their deposits. There was, therefore, a growing withdrawal of foreign exchange.
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The situation became so difficult that India had to take drastic measures to meet the foreign exchange requirements. Reserve Bank of India mortgaged its gold reserves to borrow foreign currencies to meet the requirements of the country. India also sought loans from the International Monetary fund. In the domestic economy also the situation called for a change. Indian industry needed to become more competitive and efficient so that it could compete in the world market. Dependence of exports on subsidies was a burden on the government. The government, therefore, thought of bringing about a massive change in its policy. Industrial policy was modified. Foreign exchange control system was changed. Government's role in the economy was reduced considerably. We may note some of the policy measures that were taken. (a) Industrial Policy Changes Delicensing of industries (i) There was a delicensing of all industries except a few whose growth had harmful impact on the environment. This introduced an element of competition within the economy. It was expected that there will be expansion of industry and industrial efficency would improve. (ii) Freedom to import technology Indian industry was given freedom to import technology from abroad. It was expected that the best technology will be imported and there will be continuing improvement in technology. (iii) Freedom of foreign investment
Foreign investors were given freedom to enter into selected industries with upto 51 percent of the total capital. This would not only bring finance from other countries but will also help bring the latest technology, management methods etc. in Indian industry. (iv) Restriction on large industry removed Restrictions placed on large industry m order to prevent the growth of monopoly were removed. Large industrial houses were free to expand their activities in several directions. (v) Industries reserved for government open for the private sector
Industries which were reserved for development by government were now opened up for the private sector except for some of the industries producing defence goods and other similar industries. (b) (i) Trade and Foreign Exchange Policy Changes Reduction in import duties
There was systematic reduction in import duties on several items of imports. This increased the competition between the domestic producers and foreign producers. (ii) Import licensing liberalized
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Many of the items of imports were put on the category which did not require any license for imports. (iii) Controls on foreign exchange removed Initially the price of foreign currencies in terms of the Indian rupee was raised officially. Later controls on foreign exchange were removed. Now foreign exchange is available in the open market only and there are no differences between the official and market rates. This would compel the importers to keep the actual cost of foreign exchange in view while planning for imports. Moreover, variations in the prices of foreign exchange will bring about a balance between the supply and demand for foreign exchange. (c) Fiscal Policy Changes Government also brought about several changes in fiscal policy. (i) Reduction in excise duties There was a reduction in excise duties on a number of items. This enabled to increase their competitiveness with imported goods for which the import duties were reduced. (ii) Reduction in the rates of direct taxes There was a gradual reduction of direct tax rates to improve the compliance of tax payment. It was expected to raise the total tax revenue as it was expected that the evasion of taxes will not be beneficial any more. (iii) invest (iv) Sale of government capital Reduction in government expenditures The government was expected to reduce its avoidable expenditure so as to increase its ability to
The government also decided to. sell a part of the capital of some of its enterprises. This was done to mobilise resources for meeting die expenditure requirements of the government. On the whole there was a general environment of relaxation of controls, opening the sectors reserved for government, investment to private sector, opening up the economy to foreign investment and technology inflow, reduction of taxes, etc. This has been given the nomenclature of 'liberalisation* although the government statements called the entire policy framework as the 'structural adjustment programme*. The objective of introducing more competition among producers was to increase the efficiency of resource use, improve the quality of products and bring it to the international standards. The relaxation of controls on imports, opening up of industries to foreign investment and measures to encourage the foreign capital to build up industries in India has been called
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'globalisation' programme. Ten objective of these measures is to make the Indian industry competitive in the world market and find more and more avenues for export ECONOMIC REFORMS AND THE ROLE OF ECONOMIC PLANNING In this part of this lesson, we shall learn about the effects of the new economic policy adopted in 1991 and later on the role of economic planning in India. Let us recall the economic planning in India had certain objectives before it We have also learnt that the achievement of these objectives was a mixed bag of successes and failure. It is, therefore, important for us to ask whether the new economic policy will facilitate the. achievement of those objectives at a greater speed? We have noted that the new policy or the economic reform is aiming at acceleration in growth of the industrial sector. The new policy aims at reducing and eliminating all the difficulties that may have been created by government controls on the growth of the Indian industry. Once again the emphasis is rapid industrial growth so that economic growth also becomes rapid. By reducing the controls and regulation of the economy the government is expecting that the economic progress will be faster. The need for fast economic progress is as strong as it was in the decade of fifties when economic planning was started. The only change is the change in policy to ensure fast economic progress. It is, therefore, that the then Finance Minister, called die new industrial policy as a 'policy of change with continuity'. (a) Role of the government reduced Since the role of government in the economy has been considerably reduced, it is now limited to indicate the targets to be achieved during each five year plan. The fulfilment of those targets is now the task of private sector. It is, therefore, that the eighth five year plan stated that now the nature of economic planning in India is 'indicative planning'. But as we have already learnt that economic planning does not aim at securing a higher growth rate. The. basic objectives of reduction of economic inequalities, self-reliance, modernisation, reduction of unemployment and balanced regional growth are equally important. Economic growth without the fulfilment of these other objectives will not result in the economic progress that the economy needs. (b) Private sector to take initiative The new policy is leaving the economic growth to the initiative of the private sector. Since private sector is motivated by 'the desire for profit making' the rate of economic growth will depend upon its ability and capacity to earn profits. But such a policy can lead to the inequalities increasing over time rather than reducing. Government will, therefore, have to step in to reduce inequalities.
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(c) The new role of government The need for eradication of poverty is as strong as ever. The role of economic planning to start and cany on programmes for the elimination of poverty and improvement in the quality of life will now be the responsibility of the government. The new policy also does not ensure that unemployment will be reduced. The private industry will adopt technology which enables it to earn more profits and not necessarily create more employment opportunities. Reduction of unemployment will, therefore, depend upon how quickly does industry expand and how far does it spread. Government will have to take steps to encourage industry to spread rapidly and into various states as well as rural areas. Thus, the role of economic planning is not reduced by the adoption of the new economic policy. It is only changed. The government will not be concentrating on increasing industrial production itself now. It will be concerned with making plans such that industrial progress is accompanied by reduction of inequalities, removal of poverty, reduction of unemployment and balanced regional growth.
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etc. may be cited as illustrations under this head.

by- -the existence of unemployment and under employment. of lack

another feature is that there is disguised unemployment. caused because

The un-employment is being

of opportunities due to deficiency in capital formation.

suggested that one of the aims of national. INDUSTRIAL POLICY (1990):

d. Public Sector Policy e. MRTP Act. .

indigenously developed technologies, d. Public Sector:

which managements would be granted and will

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