Indian 'Liberalisation': Perestroika or Salaami Tactics?

Author(s): H. K. Paranjape
Source: Economic and Political Weekly, Vol. 23, No. 45/47, Special Number (Nov., 1988), pp.
2343-2345+2347-2349+2351+2353+2355+2357-2358
Published by: Economic and Political Weekly
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 Indian 'Liberalisation
Perestroika or Salaami Tactics?
H K Paranjape

It is undoubtedly true that the Indian economy needs liberalisation from the vice-like grip of parasitic, 'rent'
seeking politicians and bureaucrats. This paper takes a retrospective look at the development of economic policy,
in particular, industrial licensing and monopolies legislation, and practiseiover the last two decades. This approach
lays bare the superficial character of the [iberalisation process so far, which is being implemented in small doses.
At most this may lead to a minor redistribution of power and incomes between the politicians/bureaucrats on
the one side and the traders/industrialists/big farmers on the other.
... the watchword constantly recurs, in business circles-and those who think like thorough study of the manner in which
the theme remains always the same, the ver- them-regarding these measures, and in the industrial licensing and other related
dict is ever feady and invariably reads: claims of the government's spokes-persons instruments (including public financial insti-
"Socialism"! Even bourgeois liberalism is of the great and bold changes they are tutions) had operated, made a number of
declared socialistic, bourgeois enlightenment making, perhaps a little retrospective look recommendations for a thorough overhaul
socialistic, bourgeois financial reform
at the development of the policy in this of the approach to industrial policy. Because
socialistic. -K Marx, The Eighteenth
respect over the last two decades might pro: the conclusions of this committee were un-
Brumaire of Louis Bonaparte (Moscow,
vide a small corrective. palatable, in some respect or the other,.to
1977), p 53.
almost all sections of the Establishment-
There are two entirely different methods
THE BACKGROUND politicians, bureaucrats and businessmen-
by which the economic intervention of the
the Report was not only maligned as a
state may proceed. The first is that of design- It may be recalled that the sixties saw a
negative one which set the country's
ing a 'legal framework' of protective institu- very vocal debate between those who felt
industrial progress back by quite a few years,
tions... . The second is that of empowering that our development planning had failed to
but even its recommendations were speedily
organs of the state to act-within certain
ensure the kind of structural changes which pushed under the carpet as soon as it was
limits-as they consider necessary for achiev-
were implied in the objective of a socialist politically convenient to do so. It would
ing the ends laid down. . . . Only the first,
pattern of society, and those who thought therefore be useful to briefly recapitulate
the institutional method... is long-term....
that it was the measures supposedly oriented what the Committee had suggested.
Discretionary decisions (of the second
towards socialism and planned development
type)... are short-term decisions, tran-
which had created both distortion and near- The approach of the Committee was that
sitory. . . The legal framework (of the first)
stagnation in our economy. Endorsing the industrial licensing and various other
can be known and understood by the indi-
latter view were some official reports- instruments should be used in co-ordination
vidual citizen. . . Its functioning is predic-
like the one made by the Swaminathan in such a manner that the goal of achieving
table... . As opposed to this, the method
Committee' -which suggested a stream- economic growth with justice was brought
of personal intervention must introduce an
nearer. Economic growth must lead to
ever-growing element of unpredictability into lining of the procedures and other require-
social life, and with it will develop the feeling ments as well as considerable delicensing.
greater opportunities for all and balanced
that social life is irrational and insecure... On the other side there had been the regional growth. The Committee's examina-
(and) the impression that there are hidden Mahalanobis report2 which supported the tion of the working of the industrial licens-
powers behind the scenes. . ." The failure of contention that inequalities had increased ing system, the other related controls and
governments to accept the institutional in the plan era, and the Report of the also the working of the public financial
method is due to the fact that "governments Monopolies Inquiry Commission3 which institutions had led it to the conclusion that
live from hand to mouth, and discretionary established both that the concentration of there were very inadequacies in the working
powers belong to this style of living-quite
economic power in the organised sector had of all these. In respect of industrial licens-
apart from the fact that rulers are inclined ing, the Committee had firmly concluded
continued to increase, and that trade and
to love those powers for their own sake"
industry were increasingly resorting to prac-that the system. had failed practically on all
[K R Popper: The open Society and Its counts, whether it was regional dispersal,
tices which were clearly against the interest
Enemies, Vol 2, Hegel and Marx (London import substitution or preventing concentra-
of the consumer and the general public. The
and Henley) 1977, pp 132-33]. tion of economic power. Licensing could not
report prepared by R K Hazari4 on in-
THE recent measures of what has been dustrial licensing which, among manyeven ensure the development of industries
other
called "liberalisation" in industrial policy are findings, not only stated that industrial mainly according to plan priorities.
bringing to fruition the changes which have licensing had assisted the growth of some Moreover, the licensing system could not at-
been under consideration and implementa- Large Business Houses but also that, in fact, tain even its specific objectives. "Licences
tion for quite some time. Business and some of them had succeeded in ensuring that were issued in excess of capacity targets even
industrial circles in the country have endors- in non-essential industries. Influential
the licensing mechanism helped them to pre-
ed with enthusiasm the measures like empt capacities and thus to prevent the parties and Large Houses were permitted to
removal from the scope of industrial licen- growth of competition in areas in which they pre-empt capacities. The follow-up of
sing of a large number of industries and evenwere interested. licences was unsystematic and licences re-
the units which were for a long time excepted mained unimplemented for long periods.. ."
from such measures, viz, the MRTP and Moreover, while the necessity to use the in-
THE DUTT COMMITTEE
FERA companies. The World Bank has dustrial licensing and various other control-
always advised the government of India in The furore arising out of a partial reading instruments in a well designed combination
favour of such changes and, ih their recent
of the Hazari study, with focus only on the was realised, "adequate operational methods
report for the Consortium meeting, they above mentioned finding, led to the appoint- for (the) co-ordinated use of these instru-
appear to have welcomed this continued ment of the Industrial Licensing Policy ments were never devised". Therefore "the
process. Inquiry Committee (Dutt Committee).5 licensing system has not contributed ade-
In the euphoria that has been generated This Committee, which was able to make a quately to the attainment of the social and

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economic objectives of the Industrial Policy to be used for preventing further develop- unsuited to the present stage of India's
Resolution and Plans".6 ment of large scale industrial units in loca- development" The Committees studies had
tions where there was already considerableindicated that- the authorities attempted to
LIMITED USE OF LICENSING industrial concentration. Positive guidance avoid such pitfalls through the use of licen-
regarding location could not be given by the sing but largely failed in their efforts. The
The Committee however pointed out that, licensing authority without detailed plan- Committee's conclusion was: "All these
with all its defects, the industrial licensing
ning. For the rest, all that was possible was mistakes can possibly occur in some
system did have a useful role to play though to issue negative guidelines through bans on industries to some extent, but these are risks
its limitations needed to be borne in view. further development of industry in already inherent in this approach ... our review of
An important conclusion which it had ar- industrialised localities. Of course, the licensing as well as the possibility of improv-
rived at was that many of the inadequacies Committee also contemplated the use of ing the system suggests that the maintenance
as well as abuses of the system arose because fiscal and other devices for the purpose of of licensing over the whole area is not
there were no clear-cut guidelines based on encouraging the location of industries in capable of preventing such mistakes. It is
adequate studies to help individual licens- very backward areas. State governments were also likely to perpetuate a number of abuses
ing decisions. Every case then became one also expected to take more interest in of the discretionary authority vested in
of ad hoc decision-making with all its con- this matter of locational incentives and government in areas where detailed (in-
sequences. Preparing detailed perspective disincentives. dustrial) planning is not possible!' 'Free'
plans for all manner of industries was licensing in this area would therefore be "less
neither necessary nor practicable. In view of "FREE LICENSING" harihful than the maintenance of licensing
this, the use of industrial licensing as a in its present form".8 The Committee
major and positive instrument should be The scheme envisaged by the Committee therefore reiterated its view that licensing
confined to industries in the basic, strategic thus contemplated a large middle area, and be confined to the core industries for
should
and critical sectors for which detailed in- the question was whether this should be which industry plans should and could be
dustry plans should be prepared. These completely delicensed. A suggestion has prepared.
should be treated as core industries,their list already been made by Hazari to raise the The Committee had also taken note of the
worked out for every plan period, and their exemption limit for industrial licensing from passage of the MRTP Bill through parlia-
growth as per the plan ensured. Industrial Rs 25 lakh to Rs 1 crore of investment so ment and suggested that it was the provisions
licences in these areas should then be grantedas automatically to eliminate from the field of this legislation which should be mainly
on the basis of such well-worked-out plans of licensing industries whose optimum scale relied upon for reducing and controlling
and the grant of an industrial licence should was comparatively small. The Planning concentration of economic power. Industrial
automatically ensure the availability of Commission in its Draft Fourth Plan had licensing could play only a very limited role
essential resources including foreign taken the view that the main criterion shouldin this respect.
exchange. be the requirement of foreign exchange.
At the other end of the scale, the Com- Where the requirement for capital goods or THE JOINT SECTOR
mittee contemplated the use of a system of maintenance imports would be high, in-
reservations and bans for the purpose of dustrial licensing should be used. The Another general point about industrial
preventing undesirable developments. Reser- Committee thought that monetary and fiscal licensing policy and government control was
vations were to be utilised, as was already devices could be used more effectively to the necessity to ensure a co-ordinated use of
being done to some extent, for protecting make the undue use of imports costly andregulations such as those over industrial
certain areas for development of production thus discourage it. Bans could take care of licensing, foreign trade, foreign exchange,
by small-scale industry. Here the point em- the non-essential or less-essential industries.and foreign collaborations, and the policy
phasised by the Committee, reiterating the There would however remain a large middleand working of the public financial institu-
Report of the earlier Karve Committee,' area which could be delicensed but for the tions. The Committee had specially em-
was that, after a certain period of protec- Committee's view that the Larger Industrial phasised the very usoful role which the
tion, with proper technical guidance and the Houses should, as far as possible, be financial institutions as very substantial
development of financial and marketing excluded from this area. These houses holders of equity in many important private
facilities, units in the small scale sector should concentrate on the more difficult, sector concerns could play. It had devoted
should be able to withstand competition and heavy investment, industries. Except for special attention to the possibility of using
from large scale units. Thus, reservation of the purpose of keeping out companies what it called the joint sector-covering
certain areas of production was to be for belonging to these houses-and foreign units "in which both public and private
limited periods of time, and not indefinitely. companies-licences should be freely investment has taken place and where the,
The Committee obviously envisaged appro- granted in this middle area. In this area, the state takes an active part in direction and
priate studies to indicate which areas of pro- Committee pointed out, "the licensing control". The financial institutions could
duction were potentially capable of standing system will operate essentially as a negativeeven insist on converting a part of their oans
on their feet after a period of protection. instrument, preventing the establishment ofinto equity at a certain stage. The equity hold
The use of bans on creating further units by the Larger Industrial Houses, andby all the institutions could be used for ob-
capacities was to be made for preventing foreign concerns, and leaving the area free
the taining proper representation on the boards
development of industries whose growth was for development by others. The grant of a of important private sector units. Thus, in-
considered undesirable for a period of time. licence in this area would obviously be onlystead of merely relying on formal controls,
The Committee emphasised that this should a permission and will not carry any approvalthe state should attempt, to bring about ap-
specially apply to the production of non- or guarantee regarding the grant of finan- propriate changes in the working of impor-
essential luxury goods which were likely to cial assistance, foreign exchange or other tant industrial units through their nominees
make-large drafts on scarce resources in- facilities" on the boards of directors of such concern.
cluding foreign exchange. It was also em- It was pointed out that such free grant ofSuch use of the joint sector could ensure that
phasised that such bans should normally industrial licenses in this middle area "may the management of the industry was con-
remain in force for a five-year period. The lead to wrong developments. There might beducted according to the overall policies laid
possibility of making short-period variations some waste of resources through excess down by government, so that public interest
in the banned lists, the Committee had capacities in some industries and inadequate and not merely private profit would guide
pointed out, would lead to many pressures capacities in others, the locational balance the operation of the large industrial uinder-
and lead to abuses which the Committee had may not be quite what it should be, and takings in the private sector. The Committee
observed in its examination. Bans were also technology either outdated or ultra-modern, thought that this instrument, if properly

2344 Economic and Political Weekly Special Number November 1988

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used, could be far more effective in bring-
ing about desirable changes in the working
of industries than industrial licensing.
DUTT REPORT REPUDIATED
Thus, at the very time when, as a result
of many social, political and economic
events, the whole question of an appropriate
policy for the next phase of India's planned
development was being debated, and when
the government of India under Indira
Gandhi was thought to be taking radical
steps to alter the economic structure of the
country, a well-worked-out basic approach
to managing industrial development had
been put forward by the Dutt Committee.
The approach was one which supported a
genuinely radical restructuring of industrial
ownership while, at the same time, ensuring
healthy and balanced regional growth, the
growth of small scale industries and also the
growth of very large units through the use
of the joint sector approach. Simultaneously,
the scope for discretionary controls was to
be drastically reduced so as to eliminate not
only unnecessary and wasteful delays in
decision-making but also minimise the
possibility of political and administrative
corruption. One would have thought that
such a well-worked-out overall approach
being suggested by a body which was
thought to be carrying the support of im-
portant personages in the government-the
chairman was a former foreign secretary and
known to be trusted by the prime minister,
and one member was known to be a leftist,
a radical, and was soon to be inducted into
the cabinet for a crucial portfolio-would
have been strongly endorsed and applied in
practice. Looking at the recommendations
which had -nen made by other bodies such
as the Administrative Reforms Commission,9
the Planning Commission and R K Hazari,
it could easily be said that there was much
basic commonality in the changes and im-
provements which were beingi suggested indetailed industry plans should be prepared,
the scheme of industrial licensing and related and that the Larger Industrial Houses and
controls; and this, while vigorously suppor-
ting a radical restructuring of ownership and on the development of such industries, was
control over industry.
But this was not to be. The Report of the
Dutt Committee raised a hornet's nest
among all sections of the Establishment. It
was dubbed as "a gutter-inspector's report"
by a former minister for industries. Big
business was up in arms against ideas like
the convertibility clause and the joint sector,they called free licensing-i e, except for the
and it was alarmed by the idea of the larger limited purpose
houses being increasingly asked to confine
themselves to the core sector, and that also government decided that in all these cases,
under a "joint sector" organisation. That
such an approach would enable the existing
large units to expand, and others to come
up at optimum scales of output, and that
they would be managed by the professional
managers who had grown up in the private
sector, though under the supervision of a
joint sector board, had obviously little ap-
peal to the spokes-persons of the larger
industrial groups. That this approach would
Economic and Political Weekly Special Number November 1988 2345
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also imply virtual delicensing in a vast area to develop to a minimum economic level
of industry also appeared to make little dif- which would ensure greater cost efficiency".
ference. Obviously the real interest of those Instead of thinking of the whole approach
who controlled big business lay in continu- to the Larger Industrial Houses in an
ing their exclusive control over management, integrated manner, it was merely stated that
and the various advantages which they could "the provisions of the MRTP Act will be
obtain through it. While they passed resolu- taken into account". Regarding the small
tions against the abuses of the control scale sector, no mention was made of the im-
system, they were obviously confident of portant point made by the Committee that
being able to manage to get their way. The the reservations should be looked upon as
bureaucrat and the politician were also temporary protection, and that the small
interested in continuing a large discretionary scale units should be expected to be able to
area of regulation which would have been do without such protection after a certain
substantially curtailed under the kind of gap of time. The only point made in the
approach which had been suggested. Why government press note was that the reserva-
this integrated franiework was set at naught tion will be applied "wherever production
can therefore be easily understood. in this sector can be expected to grow to
Of course, with the many expectations adequately meet demand"; there was no
which the Dutt Committee had aroused and mention of cost or quality. Regarding the ac-
also the overall euphoria of radicalism, the ceptance of the joint sector concept in
government could not just repudiate the principle, it was announced that in future
recommendations of the Committee. That there would be a greater degree of participa-
part of the Dutt Committee's work which tion in management particularly at policy
related to the manner in which the licensing levels. Regarding the use of the convertibility
mechanism had been 'used' by certain large clause-a recommendation which had
houses for their own ends had received aroused the most controversy-for past
maximum public attention. The government loans, the institutions were to use discretion
adopted the age-old device of appointing a to negotiate conversion only in cases of
commission of inquiry (the Sarkar Commis- default. In other cases, provision for con-
sion) to probe into some of these cases, vertibility was to be made in the loan
especially about Birla concerns.10 Thus agreements. No clear statement was made
having provided itself with a testimonial for about the use of the mechanism of the joint
its anti-big- business credentials, the govern- sector to ensure the workirng of large private
ment could go ahead on its own way to sector concerns according to the plan and
subscribe to the recommendations in generalin public interests, in place of the use of
while making them ineffective in practice. many regulations and controls from outside.
"Government has accepted the recommen- It can thus bc seen that, the government
dations" was the usual refrain of the govern-reftiscd to accept an integrated approach to
ment press note"1 about the decisions on in- controls and assistance relating to the private
dustrial licensing policy. But the operational-industrial sector which would have helped
ly most important aspects were either not to ensure the structural changes regarding
accepted, or so modified that they could ownership and management control which
not-and did not-serve the purpose which were so much spoken about, while at the
was contemplated. The approach that there same time removing a large area of vexatious
should be a list of core industries for which and delaying regulations which had been
seen to lead to many abuses. By keeping the
whole area of discretionary controls alive,
foreign concerns should mainly concentrate the life of the regime of controls was further
extended under the garb of radicalism and
accepted. So also the concept of the joint streamlining. The many measures of gradual
sector. The idea about reservations of cer-
"liberalisation" taken over the last eighteen
tain industries for the small scale sector years would have been largely unnecessary
being systematised was also accepted. But if such a logical and integrated approach had
there were important modifications.
been adopted in 1970 itself.
Regarding the large middle area, where the
Dutt Committee had recommended what
THE CORE SECTOR- APPENDIX I
of keeping out the Larger As mentioned above, the government
Industrial Houses wherever possible-the accepted the idea of a core sector, and even
a list of such industries-was announced in
licence application from other than larger consultation with the Planning Commission.
houses "shall be given special consideration The main objective of formulating such a
and shall be issued liberally, except where list was that, for this core group, detailed
foreign exchange implications necessitate industry plans were to be prepared, and all
careful scrutiny". This left the field open forfurther development was to take place
virtual continuation of industrial licensing accordingly. These industries were also to be
in its full rigour. Licence applications even given the maximum priority regarding thc
for this area from Larger Industrial Houses availability of scarce resources so that their
were also to be considered, but with the development took place as per the plans.
proviso- "where such expansion is necessary Industrial licensing in their case was also to
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be guided by these plans. The list was ob- sidered giving up the use of licensing powers
been very large-an inevitable consequence
viously carefully prepared. Targets were set for the very large "middle area", it could of keeping the assets limit low-came in
only for the core industries (numbering 35) have taken the logical step of using the handy. The government therefore did not
and, for the others, the Planning Commis- MRTP Act for the objective of curbing refer even 10 per cent of the cases arising
sion specifically pointed out the distinction concentration of economic power, and under Sections 21 and 22 of the MRTP Act
in the following words: "Definite targets are dei&censed all but the core industries. (setting
It did up new undertakings and substan-
proposed to be fixed only for industries in not do so. Thus the Larger Industrial Houses tial expansion) to the Commission. The
the "core" sector. In order to ensure the now came to face two sets of regulations Sachar'5 Committee which examined the
fulfilment of these targets, finance, supplies,
when they wanted to set up an industrial unitwhole matter in 1978 commented upon this,
and other facilities would be made available or to expand an existing one: those under and recommended that all important cases
to them on a priority basis. For the remain- the Industries (Development and Regula- should invariably be referred to the Com-
ing industries, estimates of requirements and tion) Act and those under the MRTP Act. mission. The government not only did not
production have been projected in consulta- In fact, the government went one step fur- do so but, during the last decade, has almost
tion with industrial associations and other ther by deciding in 1973 to include in the ceased to refer any cases about concentra-
inteisests. These projections do not represent Larger Industrial Houses all groups whose tion of economic power to the Commission.
targets or ceilings"'2 (emphasis added). But total capital assets exceeded Rs 20 crore- Thus the possibility that the decisions on
as no detailed industry plans came to be the limit prescribed in the MRTP Act-as industrial licensing cases relating to the
prepared, there was no question of a real against the limit of Rs 35 crore which had larger houses would cease to remain purely
distinction being drawn in the matter of been used by the Dutt Committee. As discretionary remained unfulfilled. It is of
industrial licensing between the core sector machinery values had gone up since 1965, course possible that the big business groups
and the remaining large industrial sector. a more logical course would have been to also preferred discretionary decisions by
Moreover, the government also decided that raise the limit further above Rs 35 crore. This
government to those being taken after open
all projects involving an investment above would also have helped to limit the restric- public inquiries!
Rs five crore were to be treated as belonging tions under the MRTP Act to a few really Similarly, even though "dominant" under-
to the "heavy investment sector" and this large business groups which represented real taking was an important concept in the
latter was to be equated to the core sector concentration of economic power. This MRTP Act and continued to be used in
regarding the grant of licences. Thus almost method would have hit the really large industrial licensing policy through this whole
the whole industrial sector remained subject groups, leaving others alone. Suggestions to period, little effort was made continuously
to discretionary decision-making. this effect had been made to the Select Com- to keep track of product dominance, and
mittee on the MRTP Bill.'4 But, as a partmake the situation publicly known from
LARGER HOUSES of the appearance of radicalism and anti- time to time. In fact, the product classifica-
big-business approach which the governmenttion which was announced by the govern-
About the Larger Industrial Houses, the
wanted to flaunt, not only were such sug- ment under the MRTP Act aggregatedi6 so
government had acce,pted the criteria for thegestions not accepted but in 1973 it was many what would normally be termed as
classification of industrial units belonging
decided that "the definition of larger independent products that a number of
to such Houses as evolved by the Dutt Com-
industrial houses to be adopted for licens- undertakings which were earlier considered
mittee. It was also stated that, as changes
ing restrictions should be in conformity in as dominant-rind registered as such-came
would take place, additions or deletions
all respects with that adopted in the MRTP to clahim that they were no longer dominant.
would be made by the Department of Com-
Act, 1969". By adopting a lower limit of On the other hand, it was quite obvious that
pany Affairs. It had already been- recognised
assets, it was claimed that there would be the concentration of economic power
that, with the abolition of the Managing
"a more effective control on the concentra- represented by such dominant undertakings
Agency System in April 1970, a major
tion of economic power". But the result was limited to a particular field of produc-
criterion used by the Dutt Committee no
merely was that the number of Houses, and tion; and the resulting economic power was
longer existed. There was, of course, the con-
therefore the companies, which would have qualitatively different from that represented
cept of "inter-connected undertakings"
to be excluded from the non-core sector by the Larger Industrial Houses. But the
introduced in the MRTP Act. This could
increased further. The number of applica- government hardly made any distinction bet-
have provided a more firm basis for such
tions to be considered under the MRTP Act ween the two categories of undertakings
classification, provided that some agency
(Sections 21 and 22) also increased signi- which were registered under the MRTP Act,
pursued this matter vigorously, as very
ficantly. Detailed scrutiny of all such ap- and this created quite unnecessary dif-
detailed investigations and analyses would plications under the procedure prescribed ficulties for the comparatively small under-
have been required to maintain up-to-date takings which were dominant in a particular
began to delay the disposal of applications
information about inter-connections and,
even further. The furore caused by this product.
where necessary, prove these before judicial
helped the government in deciding not The MRTP Act has continued to be on
bodies. Unfortunately, the general power to
merely to take an increasingly liberal ap- the statute book; but the idea of using it to
pursue such investigations was conferred
proach in the matter of applying the provi- bring about a radical restructuring has been
inder the MRTP Act only on the govern-
sions of the MRTP Act for curbing concen- put in cold storage. Section 27 of the Act
ment; and the government never set up a which provides for the break-up of monopo-
tration of economic power but also to
capable mechanism for this purpose. The ly concerns if such a course is found to be
exclude, wherever possible, the open and in-
MRTP Commission could only pursue such
dependent inquiry through the agency of the in public interest has remained a dead let-
an investigation in respect of cases referred
MRTP Commission. Inquiries by the Com- ter. Sections 21 and 22 have increasingly pro-
to it; and even here the matter could not pro-
mission would have made it difficult for vided merely one more hurdle for business
ceed far due to the Commission's own un-
purely discretionary-and not always proposals, but there is little that is different
willin&ness to pursue it.13 The result has
objective-decisions to be taken as, with a in the scrutiny or the outcome. The MRTP
been that, by and large, the classification
system of open inquiries and public reports, Commission has, for all practical purposes,
about the Larger Industrial Houses has
discretion would have been difficult to use now become the Trade Practices Commis-
essentially remained where it was left by the
in a blatantly partial or unreasonable man- sion, with hardly any role for it in curbing
Dutt Committee. This is obviously not very
ner. Probably the government never intended monopolies or reducing concentration of
satisfactory, noting the fact that the data
to use the machinery of the MRTP Commis- economic power. And the joint sector con-
used by the Dutt Committee related to the
sion for all, or even the most important, cept has been stood in its head, with private
year 1965-66.
cases arising under the MRTP Act. The fact and public sectors jointly investing in most
If the government had seriously con- that the number of such cases would have 'private sector' projects, but with decreas-

Economic and Political Weekly Special Number November 1988 2347

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ing insistence on convertibility of loans in-
to equity, with no clear role for the represen-
tatives of the financial institutions on the
bdards of private sector concerns in guard-
ing public interest, or even in preventing such
concerns from becoming 'sick'. Thus the
final outcome of the Dutt Committee
recommendations and the government's pro-
fessed acceptance of them has been almost
a total zero. No wonder that the officially
published Guidelines for Industries have
long ceased to make any reference to that
Committee or the government's decisions on
its recommendations.
GRADUAL LIBERALISATION
The nature of the revised approach to
government's policy towards the private
sector-once the ultra radical and populist
phase was over-was set out in the "In-
dustrial Policy: Government's Decisions"
announced on February 2, 1973. The steps
which have been taken since then can be said
to be mainly by way of gradual extensions
of the steps towards liberalisation set out
then. There are a few exceptions-but of
these, later.
The concept of core industries, with the
particular overtones which the Dutt Com-
mittee had given to it, underwent a basic
change even in 1973. There was no longer
any idea that there would be detailed
industry plans for such industries, and that
the "core" would go on changing according
to the requirements of the particular five
scale unit, the unit should not be "a sub-
year plan. In 1973 it was stated that the
sidiary of or owned or controlled by any
intention in making amendments to the
licensing policy was to provide clarity whichother undertaking". What is not clear is, how take the form of throwing the more sophisti-
this condition can be enforced in practice
would help the investment climate and
without a major investigative machinery and open for the larger units. For example,
facilitate the priorities and production ob-
jectives in, the Fifth Plan. But when
publishing the consolidated list of industries
which were open to the Larger Irdustrial
Houses, no mention was made of the idea
of detailed industrial plans, and licensing
decisions being related to such plans. What
was attempted was to include in the list "the
core industries of importance to the national only that the owners are likely to be smaller
economy in the future, industries having
direct linkages with such core industries, and there is no mechanism through which this
industries with a long term export potential".
This list was put in Appendix I of the state-
ment and has come to be known since then
as "Appendix I list". It was also stated that
industries in this list would be open to the
Larger Industrial Houses along with other
applicants, "provided that the item of
manufacture is not one that is reserved for
production in the public sector or in the
small scale sector". Larger Industrial Houses
were ordinarily to be excluded from the in-
dustries not included in this list. Foreign con- used, only the process is broken up into what government. The idea of 'banned lists' itself
cerns and subsidiaries and branches of
foreign companies were also to be treated
similarly. The Appendix I list mainly con-
sisted not only of the basic, large-investment a unit producing a reserved item below the through appropriate action, discourage the
and complex-technology industries but also
others the reason for whose inclusion in the
list remains unclear. For example, a general
item "scientific instruments" was included;
2348 Economic and Political Weekly Svecial Number Novemher JQRR
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so also "synthetic detergents". The list has may be no advantage. Moreover, it is also
been added to and modified since then so well known that many small scale units treat
as specifically to include ceirtain items whichtheir employees badly, produce indifferent
have become important since then (e g, alter-quality goods-which can be quite dangerous
nate energy systems, turbines, optic fibers,when the items relate to eatables, drugs, elec-
energy efficient lamps, personal transporttric appliances or machine parts like chaff
vehicles, electromedical instruments, cutter blades-and do not pay any attention
industrial laminates, high technology to pollution effects. But reservation to small
reproduction and multiplication equipment,scale units has become a kind of
sacred sphere which is not investigated or
and carbon and carbon products). Otherwise,
the position continues as set out in 1973.17 questioned.
One reason for this state of affairs is that
SMALL SCALE SECTOR decisions about reservation of particular
The government's earlier announced ap- items-and any additions, deletions or
proach of encouraging "competent, small modifications-are taken at their discretion
by officials without any formal investigation
and medium entrepreneurs'.', preferring them
or open justification which can be examined
to Larger Industrial Houses and foreign
and questioned. Earlier, the proposals were
companies in the setting up of new capacity
put only by the development commissioner,
and also in the production of ancillaries
"wherever feasible and appropriate" was small scale industries, who apparently
reiterated in 1973, and this has continued. reported to a Standing Committee on
Changes since then have taken the form Reserved Items for the Small Scale Sector.
In 1984, an Advisory Committee was con-
mainly (i) of raising the investment limit for
stituted "with a view to determining the
distinguishing small scale from other in-
dustrial units, and (ii) of modifying the listnature of any article or class of articles that
of articles reserved for production in this may be xeserved for exclusive production by
sector. the ancillary or small scale industrial under-
takings". But it is a purely official body, with
The investment limit had been put at very busy officials as members, and whose
Rs 7.5 lakh (for ancillary industries, Rs 10 examination and decisions are, like all of-
lakh) in 1973. This was raised in stages to ficial committees, not open to the public.
Rs 10 and Rs 15 lakh (1975), Rs 20 and Rs 25
lakh (1979), and Rs 35 and Rs 45 lakh (1985). The notifications issued once or twice a
An important modification specifically laid year about the changes in the reserved list
down in 1980 states that to qualify as a small show a great deal of chopping and adjust-
ment. Usually, the modifications in the
formulation regarding a number of items
cated (or the more profitable?) sub-items
procedure. among the items dereserved, one finds
automotive fan-belts and hypodermic
Another peculiarity about the policy
needles (1982), nail cutters (!), electronic
towards the small scale sector is also worth
cigarette lighters, flash guns, hearing
noting. The criterion is purely in terms of
aids(1986), table fans, pickup cartridges,
the investment made in plant and machinery.
rear-view mirrors (auto) and cycle dynamos
The idea behind the policy of specially
(1987). In the item 'confectionery'. one finds
assisting the small scale units surely is not
modifications made more than once, finally
excluding from the scope of reservation,
entrepreneurs-though, as stated above,
chocolates, tof fees and chewing gum (1987)!
In any case, here continues to be another
can be checked-but also that, in a poor
major area where, in the name of pursuing
capital-scarce economy with a great deal of
very acclaimable objectives, vast discre-
unemployment, capital saving and labour-
tionary powers remain vested in the
intensive technology should be encouraged.
government.
The presumption is that the use of such ap-
propriate technology is more likely in small
BANNED LISTS
scale industrial units. But unless, in respect
of particular lines of production, this can The Dutt Committee's idea of regularly
be established on the basis of a proper publishing lists of items which would be
investigation, all that may continue to hap- banned for further licensing for, normally,
pen is that capital intensive technology is a five-year-period was not accepted by
may be legally-and only legally-a number was initially kept in suspense from 1970. It
of separate units. A premium is thus put on was however stated that "government will
somehow keeping the investment figure in watch the situation as it develops and will,
exemption limit. In terms of spread of en- undue flow of resources into the establish-
trepreneurship, or providing more employ- ment of manufacturing capacity for non-
ment or larger output through higher out- essential or luxury goods, or into industries
put/labour and output/capital ratios, there which would exert undue pressure on sup-
All use subject to http://about.jstor.org/terms
plies of relatively scarce raw materials, com- not to be available. Thus, instead of relying LOCATION
ponents, ete". The suspension continued till mainly on fiscal devices such as import
1971 and it was then stated that government's Certain locational incentives and disincen
duties for discouraging or eliminating units
which were in the less essential categories, tives have always been a part of the licens,
study showed that "the suspension of the
ing process. As mentioned earlier, the Dutt
banned lists (had) not resulted in undesirable and required too much foreign exchange,
Committee had suggested that, except in the
high investments in various sectors nor any industrial licensing was to be used for this
core sector, locational indications should
significant pressure (was) being felt on scarce purpose.
raw materials". It was therefore decided to only take the form of an announcement of
The subsequent changes in these provi-
dispense with banned lists for the future. banned locations, i e, locations in which no
sions have been mainly in the form of
Thus, no clear indication that no further further establishment of industrial units or
(i) increasing the limits, and (ii) additions
expansion of existing units were to be per-
capacities were to be created in certain and deletions in the lists. The basic exemp-
mitted. It was felt that the instrument of
industries of low priority, especially if they tion limit was raised to Rs 3 crore in 1980
licensing could be used negatively in this
could create a draft on scarce resources, and to Rs 5 crore in 1984. These were fur-
manner so as to avoid regionally unbalanced
especially foreign exchange, was to be given. ther raised in 1988 to Rs 50 crore (for loca-
Full scope was thus given for case-by-case industrial growth and metropolitan conges-
tions in centrally declared backward areas)
discretionary decision-making. tion. For helping the growth of particular
or Rs 15 crore (for locations in non-
backward locations, a system of incentives
backward areas but outside the urban limits
had been recommended. The government,
DELICENSING of large cities and towns). The foreign
as mentioned earlier, decided not to make
exchange limit was gradually raised and, in
One specific step taken in 1970 to reduce any trse of banned lists; similarly it did not
1988, it has been raised to 30 per cent of "the
the number of applications under. the announce any banned locations. But loca-
value of ex- factory production from the first
industrial licensing system was to raise the tional considerations gradually began to be
year of commercial production".
limit of investment in new industrial projects introduced in the process of delicensing. For
not subject to industrial licensing from the An important and new element was example, the delicensing regarding the cotton
earlier Rs 25 lakh to Rs 1 crore. But, as usual introduced in 1976 by delicensing any unit spinning units was to be available only if the
which would be set up on the basis of location was in areas other than towns with
in bureaucratic decisions, a large number of
provisos were also mentioned. Thus, not indigenous technology either developed by over 10 lakh population (1975). In 1979,
only were units belonging to the Larger the laboratories under the CSIR, or one when exemption from licensing for woollen
Industrial Houses (later, MRTP Companies) approved by the Department of Science and yarn units below 200 spindles was announced,
and foreign concerns(later, FERA Com- Technology. Another similar principle the exemption was not to be available if the
panies) not entitled to this facility, but also introduced in 1982 -"as regarding delicens- location of the unit was within the standard
those whose total investments exceeded Rs 5 ing for the production of equipment meant urban area limit of a city with over I million
crore. This latter condition in effect meant for the exploitation of alternate energy population, or if it was within the municipal
that all sizeable concerns-and not merely source such as solar energy, wind power, limit of a town with over 5 lakh population.
those which represented very large concen- biomass, or tidal power. Additional produc- In 1981, such limitation regarding delicens-
trations of economic power-were made tion for export was exempted from further ing was made generally applicable to all
subject to industrial licensing, whatever the licensing in 1981 provided that the whole of exempted items. It was also decided that
nature and size of the expansion proposed the production above the licensed capacity special consideration would be shown to
by them. was exported. This facility was made industrially backward areas and also to
Any proposal relating to an item reserved available also to MRTP and FERA com- industrially b,ackward states. 14 states were
for the small scale sector or the public sec- panies. The only exception in this export included in this category and also all union
tor (under the Industrial Policy Resolution exemption was regarding items reserved for territories except Delhi and Chandigarh. In
of 1956) was of course not entitled to such the small scale sector. This restriction has 1982, the 'no-industry district' concept was
exemption. Two new categories of units, one also later been removed. introduced, with the decision that these
which were governed by special regulations The lists of items exempted from licensing would get overriding preference in licensing.
such as those in industries like coal, textiles, as also those excepted under Schedules IV This decision was probably better than the
milk (later also malted) foods, edible oils and V have gone on changing from time to earlier one about 'backward states' for that
and vanaspati, leather, and alcoholic drinks, time. The exemption list has usually been would have excluded whole states like
and two, some 'other articles' were also not expanding while the changes in the litter twoBengal, Tamil Nadu, Maharashtra and
to be entitled to this exemption. These lists appear to show no clear pattern. The CGujarat from securing new industrial
categories were later formalised as Schedules position now is that there is a list of 82 items
licences. But the 1982 list also did not have
IV and V respectively. The latter consisted (1987) which have been delicensed. This list a single-what was called 'rao-ikndustry-
of items regarding which it was felt that is not applicable to MRTP and FERA com- district from Andhra Pradesh, Tamil Nadu
enough capacity already existed but, instead panies. The MRTP Act was amended in 1982 and Maharashtra. The approach also
of the straightforward approach of a to provide for the central government exemp- ignored the possibility that, due to historica
'banned' list, what was done was to except ting industries which it considers to be of reasons, the areas covered by districts were
these items from delicensing, the idea being high national priority from the provisions in no sense uniform in all states. The
again that the government could decide the under Sections 21 and 22 of the Act. A list inevitable result was that states tended to
matter on a case-by-case basis. of such exempted industries was announced break up some of the existing districts so as
Moreover, the exemption was also not to in 1983, though delicensing in respect to carve out new no-industry ones. Thus one
be available for any units which required of these-applicable also to MRTP now finds a number of districts in tIpis
foreign exchange exceeding Rs 10 lakh or 10companies-followed only in 1985; and that category which did not exist in 1982!
per cent of total proposed investment for also not for five among those. The list of Whether giving overriding priority to all no-
capitkl goods imports, and more than such MRTP exempted industries has been industry districts was itself a wise decision
marginal foreign exchange for maintenance added to since then and the announcement is questionable.'8 Areas which had not at-
imports. The government also made it clear about their delicensing has usually followed tracted any large scale industry at all would
that there would be no commitment to pro- later. This list contained 20 itemns in 1988. ordinarily be such that industrial location
vide foreign exchange for maintenance Schedules IV and V have now (1988) been there may pose some special difficulties.
imports. But in 1973, specific limits about replaced by a common excepted items list of Some of these handicaps would be removnable,
the foreign exchange requirement were laid 27 items (instead of a total of 56 items such as the lack of an infrastructure; others
down, exceeding which the exemption was earlier). would not. Some states have been attemp-

Economic and Political Weekly Special Number November 1988 2349

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ting to build up necessary infrastructure in
some of. the industrially undeveloped
districts. N decisive step in that direction
has been taken by the decision taken in
June 1988 to develop a hundred growth
centres throughout the country over the next
five years. The idea is to select such loca-
tions in backward areas which have a good
potential for attracting industries. It is pro-
posed that they would then be endowed with
infrastructural facilities of a high order. This
is a far better approach than the earlier one
of merely giving preference to location in
any no-industry district. Similarly, the deci-
sion to clearly demarcate the urban areas
where specific disincentives in the matter of
delicensing are set (no delicensing if the pro-
ject is located within 50 kms of the periphery
of cities with populations exceeding 25 lakh,
or 30 kms with populations between 15 and
25 lakh, or 15 kms with populations between
7.5 and 15 lakh, and the standard urban area
or nmunicipal limits for the remainder) is a
clear improvement on the earlier limits set
for the purpose. A further step for locational
incentives has been taken (1985) with the
decision that the export obligation of 60 per
cent imposed on MRTP and FERA com-
panies if they took up the manufacturing of
items falling outside Appendix I industries
is to be reduced to 25 per cent for districts
included in categories B and C of backward-
ness (from 50 per cent decided in 1983), and
the export obligation would be done away
with if the location is in category A districts
(no-industry districts and special regions) (it
had been reduced to 30 per cent in 1983).
Locational incentives have thus been built-
in the licensing restriciions, and especially
in the items delicensed.
REGISTRATION
A point .worth noting is that all units
which are delicensed are expected only to
register with the authorities concerned with
that particular industry such as the DGTD,
or the Textile Commissioner. The registra-
backward districts or areas in backward
states, and (iii) notified backward districts
or areas in other states. In 1983, it was stated capacity, especially in important industries.
that the registering authorities had powers
to refuse registration if they were not in con- for dealing with such cases.
formity with the locational policy. While
there can be no objection to this last pro-
viso, one cannot quite see the logic behind
the priority in registration when the units are
of the said undertaking". Obviously this was
supposed to be delicensed, except if they are due to the realisation that, with all the
being located in not-permitted locations. changes and concessions announced from
REGULARISATION AND AUToMATIC
EXPANSION
A very major and persistent part of
the process of liberalisation has been to
recognise actual production capacity if it is
higher than the licensed capacity-post
facto-or to permit diversification or
addition to capacity without any specific
examination or permission. Already in 1966,
diversification up to 25 per cent of the
licensed capacity for the production of new
articles was permitted so as to ensure fuller
utilisation of capacity. In 1970, it was
decided that diversification up to 25 per cent
(by value) was to be permitted provided that
the articles to be so produced were allied to
the licensed item and involved the same
technique, and provided also that not less
than 50 per cent of the capacity was used
for the production of the article which was
originally licensed. The diversification was
to be so carried out as not to involve installa-
tion of additional plant and equipment ex-
ceeding 10 per cent (in value) of that already
installed, or Rs 10 lakh (whichever was less),
and no foreign exchange was required for the
import of raw materials or components.
Such diversification was however not per-
missible for the Larger Industrial Houses,
foreign companies, or companies whose
assets exceeded Rs 5 crore.
"As a major step to ensure fuller utilisa-
tion of capacity and to push up industrial
production as well as to increase the avail-
ability of consumer goods" it was decided
maximum utilisation basis. This was to be
done so as to ensure fuller utilisation of
A special speedy procedure was announced
In 1978, it was notified that all licencees
were to produce their registration certificates
"for entering therein the productive capacity
time to time, the whole concept of licensed
capacity had become some what nebulous
and the capacity of each undertaking needed
to be clearly specified.
In the period after 1973, the liberalised ap-
proach to licensed capacity has taken the
form of permitting diversification or crea-
tion of 'marginally' extra capacity through
the replacement of obsolete equipment, and
then regularisation of the extra capacity
which might actually have been built up to
levels much higher than 'marginal'. Thus in
1974-75, diversification was permitted to
units producing certain machinery items into
other machinery items, or for those produc-
ing certain types of electrical equipment or
steel castings into other types, but within the
overall licensed capacity. A list of industries
was also announced in which medium entre-
preneurs could set up extra capacity based
on indigenous equipment and raw materials,
and also utilise all the installed capacity
'without limits'. But MRTP and FERA com-
panies could use such a facility only if they
agreed to dispose of the extra output in ac-
cordance with any directions which the
government might give (!).Replacement of
obsolete equipment and modernisation of
plant was to be permitted even if this resulted
in increasing the capacity beyond what was
licensed. But it had to be approved, though
under a special procedure. Except for 'domi-
nant' undertakings, expansion of 5 per cent
per year or 25 per cent for the Fifth Plan
period as a whole was to be permitted above
the authorised capacity.

tion is obligatory and has to be done by the that additional production was to be permit- In 1980, it was again stated that, in many
undertaking before it commences produc- ted in respect of a number of specified industries, the productive capacity endorsed
tion. The Dutt Committee had pointed out industries (1972). If the industrial licences on the original licences or even as amended
that the registration procedure itself had specifically mentioned a single or double might not reflect the full productive poten-
gradually become so elaborate that it was shift basis, the capacity was to be redefined tial of the unit. Capacities might have in-
almost like industrial licensing, and involved in terms of the maximum utilisation of plant creased due to technological improvements
both delay and harassment. It was therefore and machinery and up to 100 per cent ad- or increased productivity. To help maximise
suggested that the registration procedure ditional output (instead of the 25 per cent production, such capacities were to be
should be so simplified as to eliminate these normally permitted) was to be approved. But recognised "on a selective basis"! The con-
difficulties so that registration should serve this permission was not to be used for items cession of 25 per cent automatic expansion
only the real purpose of registration, viz, reserved for the small scale sector, or for over a five year period announced in 1975
that information was available for statistical those reserved exclusively for the public was now extended tQ a larger group of
purpose. It appears however that there con- sector. Regarding the MRTP and FERA industries. It was also decided that in im-
tinues to be a lack of clarity about this mat- companies, the permission was to be given portant industries such as metallurgy, prime
ter even though the government's approach only on a special application. The idea being movers, electronic equipment, dry cell
as announced continues to be that registra- to utilise already existing capacity more fully, batteries, GLS Lamps, bicycles as well as two
tion is not meant to serve any purpose other this facility was to be available only for and three wheelers, substantial expansion
than statistical. Thus, in 1982, it was stated existing units and not for new units which was to be freely permitted if no additional
that, even in the registration of undertakings, were yet to come up. In that sense, it was machinery was required to be installed, But
preference would be given by the registering different from delicensing. this facility was not available for items
authorities in the same order of priority as As a further measure of 'rationalisation', reserved for the small scale sector, and to the
.is observed in the grant of industrial licences: it was announced in 1975 that capacities in MRTP and FERA companies. In July 1982,
(i) no industry districts; (ii) notified many cases were still not clearly based on on account of what was announced as the

Economic and Political Weekly Special Number November 1988 2351

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"productivity year", expansion of capacity outgo of foreign exchange, and about items such addition to capacity should not involve
without a licence was to be freely permitted reserved for the small scale sector. In 1987, any substantial addition to plant! Automatic
in items other than those reserved for small it was announced that, in order to help additions to capacities were only permitted
scale industries and those included in exports, no industrial licence would be in driblets like this, while a clear substan-
Schedules IV and V. This facility was to be necessary to fulfil a firm export order "on tial addition would involve elaborate licen-
available only if the concerned undertaking a one-time export basis" (!) Only a permis- sing formalities. No wonder that many en-
had already achieved 94 per cent of the sion from the administrative ministry was trepreneurs found it more convenient to
licensed capacity in any of the five finan- required. Of course, it was clarified, this was
, uild up substantial margins when creating
cial years preceding April 1, 1982, the addi- not to be used for regular export orders; forcapacities in different parts especially of a
tional capacity being limited to the highest that, a regular licence would be required complex plant; they were confident of
production which had been achieved in any This discussion about the 'liberalisation' getting these regularised later. May be this
of the preceding five years. This facility was in respect of licensed capacity brings out involved some delay, waste, and probably
to be available to the MRTP and FERA some very peculiar features of the licensing palm-greasing. But this was easier than
companies only if they were not dominant mechanism. The basic difficulty in applying going through the full rigmarole of obtain-
in the particular line of production, and that this mechanism in this respect is that the ing a fresh licence.
too only in Appendix I industries. Balancing concept of 'capacity' itself is quite nebulous. Thus this whole system of 'regularisation'
equipment was to be permitted to be Right at the beginning of the application of put a premium on 'cleverness' or mani-
installed provided the increase in capacity the IDRA, the Planning Commission had pulative ability. Moreover, it served little
did not exceed 25 per cent. The concession pointed out the difficulties in calculating purpose. With so much opportunity to the
(1980) regarding the licence being endorsed capacity. 9 The Dutt Committee had men-existing producers to add to their capacity
for a capacity equal to highest production tioned that a sample survey had come to the without a full scale scrutiny, there might as
reached was further enhanced in 1982 to pro- conclusion that the effective capacity createdwell have been no licensing for many of these
vide for an addition of 1/3 to the actual pro- in many industries was much larger than the
industries. No subterfuge like "the year of
duction reached. And if the unit again at- licensed capacity. The concept therefore productivity", or the importance of meeting
tained higher production, the licensed remains unclear and ambiguous. "Not only urgent consumer needs, would then have
capacity was again to be enhanced to the are there difficulties regarding the possibilitybeen necessary. And the establishment or
level reached plus one third. of multi-shift operations, but there are also expansion of a plant would probably have
A policy announcement in 1984 was sup- difficulties regarding the capacities of dif- taken place on a more efficient technical and
posed to remove all constraints on produc- ferent sections, as it is unusual for the financial basis.
tion to the maximum possible extent so as capacities of all sections in a unit to be
to give a production orientation to the perfectly evenly matched' 20 When licen- MRTP AND FERA COMPANIES
economy. Such a facility was to be available sing capacities, there were no clear assump-
to the MRTP and FERA companies only in tions about the possibility of sub-contracting,Many of the liberalised facilities were at
a number of essential items such as commer- and also about the extent of stand-by plantleast initially not available to MRTP and
which should be permitted. With all this FERA companies. Many FERA companies
cial vehicles, passenger cars, three wheelers,
ambiguity, there is no wonder that many gradually got out of this difficulty by reduc-
two wheelers (subject to 25 per cent export
units actually built up capacities far larger ing the foreign controlled equity to less than
obligation), automobile components, syn-
than what was licensed to them. They could 40 per cent. Many times this meant no reduc-
thetic detergents, cement, tractors and many
then rightly claim that output could be tion in the total equity held and, in almost
types of machinery. As usual, articles
increased by them without any significant all cases, the control remained in the hands
reserved for the small scale were not to be
additions to plant and machinery. Case of the foreign company. Regarding MRTP
available for such free expansion; and the
studies regarding a number of industrial companies, the enhancement of the exemp-
facility was also not available to a unit which
units, and especially about some Birla tion limit, under Sec 20(a) of the MRTP Act
was a 'dominant' undertaking under the
units,21 made by the Committee had clear- in 1983 to Rs 100 crore (from Rs 20 crore)
MRTP Act. The facility, as in 1982, was to
ly shown how this possibility can be used automatically released a number of com-
be available only to units which had achieved
by clever managements to hoodwink licen- panies from the MRTP restrictions. There
an output equal to or above 94 per cent of
has still been (August 1, 1988) no change in
the licensed capacity in any of the previous sing restrictions, establish larger than licens-
ed capacities, and then get them regularis- the exemption limit of Rs one crore for
five years. The re-endorsement of the
capacity was to be limited to the highest pro-ed in one way or the other. In fact, this fin- 'dominant' undertakings under Sec 20(b) of
duction in any of the five years preceding ding was one of the important reasons why the Act, though it appears that it will soon
1984 plus one third. Only balancing equip- the Committee favoured"free" licensing ex- be raised to Rs five crore. What has already
cept in a small number of core industries. been done is that all the dominant under-
ment was to be added to the plant and
takings registered under this provision have
machinery for creating additional capacity The non-acceptance of that approach has
been released from the constraints applicable
to the extent of 25 per cent. The policy of had the inevitable effect that the facade of
to MRTP companies under the liberalisation
such re-endorsement has been extended from capacity control with the continuous
policy, except in respect of the item where
time to time since then, first to 1985, then regularisation of what actually existed had
they are 'dominant'. Thus a number of the
for the Seventh Plan period. The facility is to continue. The decision to express all companies which could not benefit from the
now available to units who have attained licensed capacities on a uniform basis regar-
liberalisation facilities earlier can do so now.
80 per cent capacity utilisation. It was ding operational shifts had been taken by the
The increasing usc of Sec 22 A to exempt
extended even to MRTP Companies- even Licensing Committee as early as 1961.22
industries from the application of Sec 21 and
if dominance increased-except for specified But this was apparently not actually done;
22 also serves the same end.
industries in vhose case such addition might and so we find repeated attempts to
lead to acute shortage of raw materials, recognise capacities on a two-shift or
BROAD-BANDING
increase pollution, create severe infrastruc- maximum utilisation basis. Later was
adopted the approach of recognising
tural constraints, "etc" (!) In 1986, the fur- A major change,almost an innovation,
ther facility "to encourage modernisation" capacity on the basis of the best productionin the approach to industrial licensing was
was announced that, when old plant was obtained, even when it was much higher than the introduction in 1983 of 'broad-banding.
being replacd, additional capacity up to 49 the licensed capacity, with an addition Of of course, even earlier, permission to diver-
per cent of the original could be endorsed; one-third as an incentive! But, at the same sify in related lines of production in areas
the limitations were regarding any additional time, a condition was usually imposed that like machinery and electronic plant had been

Economic and Political Weekly Special Number November 1988 2353

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given. But this approach was systematically sanctioning an economic size of operation industrial licensing in the last 18 years shows
introdddced only after 1983. The permission when considering expansion of capacity for how the government's policy in this matter
granted by the industrial licences was scooters was turned down both by his has tended to take the shape of chopping
hitherto restricted to particular items which majority colleagues, and the government. It and changing instead of through the pursuit
were usually specified in detail. This was ob- is interesting to note that the plea to sanc- of a well defined strategy. While we have
viously inappropriate as it did not take intotion a capacity of 1,00,000 scooters was then mainly confined ourselves here to measures
account the fact that the same plant and turned down and only a capacity of 48,000 relating to industrial licensing, a similar
machinery, maybe with some slight additions sanctioned. This was in 1972.23 Now the stor, can be told about other aspects of
and variations, was capable of producing government has thought of a capacity of controls which affect industry vitally such
various related items of production. Preven- 2,00,000 as appropriate economic size-with as those relating to imports and exports,
ting a producer from varying his output so one of 5,00,000 for exporting units. In credit, taxation or capital issues. Many
as to satisfy the changed market conditions, another case-Telerad-the Commission's eamples can also be given of changes intro-
at the same time utilising his production recommendation to permit a capacity of duced from time to time which suggest
capacity fully, was obviously a wasteful 50,000 each for tape recorders and record- a reversal of or major modification in
restriction. It was therefore only appropriateplayers was modified by government which decisions taken a short time previously.
that this concept was introduced in the licen-only sanctioned a capacity of 50,00t for Moreover, one also finds that there has been
sing system "with a view to optimise sic record-players and 20,000 for tape recorders, a persistent tendency to make bold an-
utilisation of capacity and encourage large with an export obligation of 60 per cent in nouncements of changes of policy but modi-
volumes of production so as to secure the record-players and of 40 per cent in fyiTig them with a number of conditions and
benefits of economies of scale and stream- taperecorders! The Commission had made exceptions. The many changes announced
lining licensing procedures, and to provide a strong plea that only on the basis of from time to time cannot but obfuscate the
flexibility to the manufacturers to adjust economic sizes could such units make head- picture so much that even well organised en-
their product-mix depending upon the way in the export field. "Mere insistence on trepreneurs may find it difficult to under-
market demand". 33 groups of industries export obligation is not enough". the Reportstand what exactly the policy about par-
have been identified for this purpose; these had pleaded; "what we need is to help ticular items or particular types of capacity
include groups like machine tools, motorised development of an industry which in terms is.25
two-wheelers and three-wheelers, motorised of technology and economics is inherently
capable of enjoying a strong position in the What one finds is that the kind of
four-wheelers, agricultural machinery, elec-
trical equipment, electronic industry, auto (internationally) highly competitive market liberalisation which could have been easily
for consumer electronics". But government be introduced in respect of a very large area
ancillaries and textile machinery.
of industry in 1970 (what the Dutt Commit-
was adamant. The then chairman of the
tee had called 'the middle area' has taken 18
MINIMUM SCALE Electronics Commission stated that govern-
ment wanted to encourage small scale units long years to materialise. Even then, the
Another important and very appropriate and therefore would not agree to larger necessity to make applications to the con-
concept newly introduced in the industrial capacities. This was in 1973-74.24 The cerned government agencies, and to obtain
licensing area has been that of minimum sanctions and endorgements, is kept alive.
dominant company in this field, viz, Peico,
economic level of operation. This was As mentioned earlier, even registration of
had a licensed capacity of 2.08 million,
introduced in 1986. The idea was that an delicensed units appears to involve pro-
installed capacity of 1.38 million and out-
industrial undertaking should be encouraged cedures and discretionary decisions which
put of 1.18 million in 1987 for radio sets, tape
to achieve the economies of scale in the best recorders, combination sets and record- result in delay and harassment. While the
possible manner. A list of 72 industries has importance of replacing physical controls by
players! But it took the government a long
been announced in respect of which expan- macro-economic controls has been mooted
time to think of this economic size concept,
sion of capacities would be encouraged to and some potentially good Indian producers a number of times,'the government seems
the minimum economic level of operation had to suffer as a result.
to be even now quite relictant to accept such
if the existing installed capacity falls short an approach. As explained earlier, it had
of such a scale. Minimum economic scales been suggested in 1969 by the Dutt Commit-
POLLUTION
have been prescribed for these industries, tee that the area of discretionary decisions
some of the more interesting ones being Another aspect of industrialisation which in industrial licensing should be minimised
LAB (60,000 tons), STPP (30,000 tons), pic- has come into prominence in the last few through detailed industrial planning for the
ture tubes for TVs (5 lakh), VCRsand VCPs years is that of pollution. Government has most critical industries on the one side, and
(assembly operation 50,000 and, with been using the licensing mechanism for the the system of bans-for the protection of
manufacture of tape deck mechanism, 0.3 purpose of insisting that, in the case of the small scale sector, or for preventing
million), commercial vehicles (25,000), industries which are likely to affect the en- undue regional concentration-on the other.
passenger cars (50,O0), synthetic detergentsvironnment adversely, special restrictions have The bans were also to be used for preven-
(30,000 tons) and two-wheelers (2 lakh). It to be imposed to prevent such effects. The ting the growth of'low priority industries
has however been stated regarding the last position now is that a clearance from the' which would take up an undue share of
item: "where the unit is expected to export, state government is necessary before an scarce resources including foreign exchange.
the capacity is 5,00,000"! How the minimum industrial licence is granted in the case of But the government has persistently shown
economic scale can be different in the cases industries like paper, leather, and various reluctance to accept such an approach. The
of production for the domestic market, and types of chemicals which can create en- bans in favour of small scale have shown no
of production including exports, it is dif- vironmental hazards. The union department clear logic, and there has been no insistence
ficult to understand. dealing with environment has also to give that they would only be used by way of tem-
In this context it is interesting to note that, its clearance. As there are no clear-cut porary protection. While the position is
only some years back, government was ada- criteria laid down, and a balance of con- better now regarding locational controls as
mant in not giving much importance to siderations is involved, the decision is well as incentives, there is no doubt that a
economies of scale when considering ap- discretionary. great deal of discretion is left even in this
plications under the IDRA or the MRTPA. matter to the decision-makers, the result
This author had to write a dissenting note LIBERALISATION IN SMALL DOSES
being that those at the helm can use this
as a member of the MRTP Commission in power to favour locations in areas in which
a case which had been referred to the Com- This resume of the various measures they are politically interested. The Report of
mission, that of Bajaj Auto; his plea for which have been taken in the field of the Narasimhan Committee which had been

Economic and Political Weekly Special Number November 1988 2355

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appointed to examine the questioni of replac-
ing discretionary controls by macro-
economic ones hias ilot been released. We
have tiherei"ore no means of knowing what
was recommended. But government has per-
sistently shown its inclination, even while
taking steps towards liberalisation, of main-
taining adequate discretionary powers in its
hand so that the politicians and the
bureaucrats can continue to operate like
toll-gate-keepers, and grant (and receive)
favours.
It is true that, very so often, government
also announces streamlining of procedures,
with a special machinery for time-bound
disposal of applications. The machinery
usually ends up with a top-level committee
whose members just cannot find enough
time to dispose of the large number of cases
in the announced time. Moreover, the sanc-
tions required are so many that whatever the
streamlining announced "fast track" is the
current term-the industrial undertakings
find that they have to face long delays and
frustration. 26
AMBIVALENCE ABOUT MONOPOLIES
At the same time, the major objective
which underlay the industrial policy ap-
proach in 1970, that of curbing concentra-
tion of economic power in private hands as
a measure to move towards a socialist
society, has hardly been furthered. The
MRTP Act and the MRTP Commission have
gradually lost all real importance, with the
commission's action concentrated now
almost entirely on the curbing of unfair and
restrictive trade practices in certain limited
fields. The government continues to have
considerable power under the Act; but the
concerned department in reality operates
parallel with the industrial development
department, and mainly along the same
lines. The convertibility clause has been all
but forgotten. The joint sector concept has
been so distorted that the institutional
representatives on the boards of directors in elections. Hence the continued two-faced
most cases only fall in line with whatever the policy of keeping the MRTP Act on the
controlling business groups want to do. It
is revealing that, in many cases where private big business on the one side, while helping comes, between the politician-bureaucrats on
sector units have turned sick, there have been them gradually to grow, and not doing
institutional representatives on their boards anything positively to affect their vital
for quite many years, and they have hardly
taken any effective measures to prevent such
sickness. In fact, the joint sector is coming
to mean a situation where finance as well
as support is provided by the public finan-
cial institutions for the benefit of the con-
trolling family groups which increasingly
tend to be content'with having only a small sions by way of liberalisation.
equity participation and making their
incomes mostly out of the control that they
exercise over management. The institutional
direqtors appear to be indifferent to this
tendency.
The concentration of ecpnomic power in
the hands of large business groups has not
decreased; it has gone on increasing.27 In
fact, no one in authority, whether in the
Economic and Political Weekly Special Number November 1988 2357
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government or the Planning Commissioni groups and foreign capital on the other. All
now gives much importance to this objec- efforts at 'liberalisation' since 197a have
tive. And the fact that public sector finan- inevitably been caught up in this dilemma.
cial institutions hold a vert substantial part Hence the "two-steps-forxsard, one-step-
of the equity and contribute even a larger backward" manner of implementing it.
proportion of investment resources makes
little difference to the control exercised by NOT PERESTROIKA BUT SALAAM11
the big business groups over their empires. SLICING28
At the same time, the watchword continues
This manner of liberalisation in doses,
to be 'socialism', and the government con-
sometimes small, sometimes large, also
tinues to swear by the Industrial Policy
serves the purpose of keeping the discre-
Resolution of 1956 with its insistence on the
tionary powers of the government largely
private sector units fitting into "the
intact. Every time a basic structural change
framework of the social and economic policy
which would lay down clear-cut guidelines
of the state" and "subject to control and
and rely on macro-instruments has been sug-
regulation in terms of the Industries
gested, those in power have dtfeated it.
(Development and Regulation) Act and
Whether it was the Dutt Committee in
other relevant legislation"; and the statement
1969-70, or the Narasimhan Committee in
that "it is urgent to reduce disparities in
1983-84, the bureaucracy makes sure that its
income and wealth which exist today, to pre-
power and authority do not suffer; and those
vent private monopolies and the concentra-
in political authority agee, for they benefit
tion of economic power in different fields
probably even more as a result.
in the hands of small numbers of indi-
It is undoubtedly true that we badly need
viduals". In fact, there is no such effort. Why
liberalisation from the vice-like grip which
then this ambivalence in policy?
politicians and bureaucrats have come to
The real problem is that those in power have on our economy. But such liberalisa-
at Delhi have been caught in a trap of their tion has to be a part of a purposeful struc-
own making. Wanting to cash in on the tural change, which will rapidly reduce the
legacy of Jawaharlal Nehru, and also under enormous inequalities in wealth and in-
the impression-right or wrong is really comes, the unjust concentration of economic
uncertain-that a leftist, anti-capitalist, power in the hands of a few business groups
stance pays electoral dividends, they have in the organised sector, and the skewed
wanted to keep up an anti-big-business distribution of land ownership in agriculture.
posture. It is possible that, in the early 70s, Only then can the market be expected more
Indira Gandhi-or at least some of her then or less to give the right signals regarding
advisors-really wanted to bring about a what is to be produced; and income distribu-
radical restructuring in the ownership and tion can then take place on the principle of
control of large private sector industry in the "from each accoruing to his capacity, and
country. But Indira Gandhi was soon to each according to his work". The 'rents'
persuaded-if that was not her own of various kinds which take away a signifi-
inclination-that without the active par- cant part of the national product, and which
ticipation of the Larger Industrial Houses constitute the basis of the high living of the
and foreign concerns, the industrial progress top few, whether in politics, bureaucracy,
of the country would be impeded. At the professions or business, will then wither
same time, Indira Gandhi had found that the away, and the price mechanism can be relied
radical facade which she had maintained upon to guide production decisions.
from 1969 had paid her well in the 1970-71 Without such 'perestroika', relevant in our
own context, superficial 'liberalisation' in
small doses will merely mean a little bit of
statute-book and making statements againstredistribution of power, and therefore of in-
the one side, and the traders-industrialists-
big farmers on the other. It will not help sort
interests adversely on the other. The short- out the contradictions that continue in the
lived Janata government was in a similar economy, and therefore the series of crises
dilemma. By 1980 Indira Gandhi apparently which are enveloping it. It may however
felt a little more emboldened about the satisfy the 'aid-givers', whether from the
people-at-large not really being too much World Bank, or from the richer countries
botheredl about anti-monopoly measures;
like the US, West Germany and Japan, from
henceThe more open and frequent conces-
whom the Indian government and big
business are seeking assistance. That perhaps
is the only real motive behind such Salaami-
Rajiv Gandhi probably thought that his
team could carry the policy of liberalisation tactics liberalisation.
It is probably nothing but wishful think-
to its logical limits. But the sharp reaction
at the Bombay meeting of the AICC in 1985 ing to hope that the present Indian leader-
probably made him cautious. Hence the con- ship which mainly represents what Marx
tinuance of the two-faced approach: harp- called the "third class" in a pre-capitalist
ing on the Nehruvian legacy, the 1956 transitional society-or their Neta-babu raj
Industrial Policy and 'socialism' on the one as Raj Krishn a had termed it29-will be
side, and increasing scope for monopoly either interested in or capable of such
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genuine structural changes. For that to come Backwvard Regions: A Study of Maharashtranot a fortnight attack but a slow and
about, a different concatenation of socio- and Gujarat', Economic and Political gradual cutting up.
29 As Raj Krishna had pointed out,
political forces will have to arise. Of that, i'ek lI, February 13, 1988, pp 321-330.
at the moment, there is no sign. 19 Government of India, Planning Commis- bureaucracy in a mature capitalist economy
sion: The First Fiv e Year Platn, Delhi, 1951, is completely subordinate to bourgeois
p 432. power and becomes a subaltern social
Notes
20 Op cit, pp 37-38. system. But in pre-capitalist transitional
I T Swaminathan (Chairman): Industrial
Desvelopment Procedures Comnmittee,
21 Report oJ the Industrial Licensing Policysocieties, an autonomous bureaucracy can
Inquiry Coin mittee on Certain Allegations exist as a class, caste or estate. Marx had
Government of India, Delhi, 1964.
against Birla Group of Industries Contained criticised the notion of the bureaucracy as
2 P C Mahalanobis (Chairman): Report of
in Shri Chandra Shekhar's Memoranda, a universal class representing the society as
the Committee on Distribution of Income
Delhi, 1969. a whole. Marx and Engels had characterised
and Levels of Living, Government of India,
22 DuLt Committee, Main Report, op cit, p 37. the transitional bureaucracy, according to
Delhi, 1964.
23 See, Reports of the MRTP Commission andRaj Krishna, as "a third class" between the
3 Government of India: Report of the
Orders Thereupon of the Central Govern- aristocracy and the petty bourgeois, and a
Monopolies Inquiry Commission, Delhi,
ment under Sections 21, 22 and 23 of the parasite "a fetter on the development of
1965. MRTP Act, Vol 1, Delhi, 1981, pp 151-240. the progressive class, the bourgeois. Its
.4 Hazari R K: Industrial Planning and Licen- 24 See, Reports of the MRTP Commission and interference is irksome and manufacturers
sing Policy, Final Report, Government of Orders Thereupon the Central Government have to keep it off their necks by bribery".
India, Delhi, 1967. The benefits of state power in India thus
under Sections 21, 22 and 23 of the MRTP
5 Government of India: Report of the Act, Vol 1, Delhi, 1981, pp 401-456. go to those who control state power, the
Industrial Licensing Policy Inquiry Com- 25 It has recently been pointe7d out that with bourgeois, the large capitalist farmers, and
mittee (Chairman: S Dutt), Delhi, 1969. The changes being announced frequently in bits the bureaucracy (including the politicians).
present author was a member of the and piec&s, even the officials of the Ministry It is the neglect of this logic of the use of
Committee. state power which has been wrong in the
of Industrial DSvelopment appear occa-
6 Ibid, p 184. Nehruvian view of socialism. See Raj
sionally to be unsure about which in-
7 D G Karve (Chairman): Report of the Krishna: 'Ideology and Economic Policy',
dustries, for ^xample, have bee"n delicensed!
lP-!lage and Small Scale Industries Commit-
See, Business Standard, August 15, 1988, Indian Economic Review, January-June
tee, Government of India, Delhi, 1955.
p 5. 1988, Vol XXIII No 1, pp 1-26.
8 Dutt Committee, op cit, pp 190-191.
26 A recent example reported in the press is
9 Administrative Reforms Commission:
about two companies of the TVS Group
Report of the Study Team on Economic Ad-
which have already received permission
ministration, Government of India, Delhi,
under Sec 22 of the MRTP Act to set up
1969. Attracting Foreign Investment:
a new unit-Turbo Energy Ltd-which have
10 The Sarkar Commission got entangled in
been asked also to seek permission under Vietnam
legal wrangles raised by the concerned
Sec 23 of the Act, to 'take over' the new
business groups, found itself shunned by the
company which they are floating, under VIETNAM has established new guidelines
official agencies which refused to co-
Sec 30 to purchase equity in another com- for attracting foreign investment. Money
operate, and was finally wound up without
pany, and also under Sec 372 of the Com- is not pouring in yet, but the new law
achieving anything.
panies Act about intercorporate investment. represents a significant liberalisation from
11 Government of India's Press Note of
See Business Standard, August 1, 1988 p 5.
February 18, 1970: 'Industrial Licensing previous investment laws. It seeks to pro-
Also, like all bureaucrats, members of th-!se
Policy-Government's Decisions'.
special committees tend to be cautious. For mote manufacturing in the country to
12 Planning Commission: 7he Fourth Five Year help eradicate Vietnam's chronic un-
an example regarding the Projects Ap-
Plan, 1969- 74, Government of India, Delhi,
provals Board, see, Business Standard, employment and includes guarantees
p 309.
13 See, H K Paranjape: 'The MRTP Amend-
August 15, p 5. against expatriation of investment capital
27 The assets of the House of Birlas, for ex- and nationalisation. It also permits tax
ment Bill-A Trojan Horse', Economic and
ample, have increased from Rs 905 crore in
Political Weekly, April 28, 1984, pp 715-729. moratoriums for up to two years on joint
1975 to Rs 4266 crore in 1986 and Rs 4771
14 See Report of the Joint Committee on the
crore by 1986-87; of the Tatas from Rs 924 ventures, the repatriation of profits (sub-
Monopolies and Restrictive Rade Practices
crore to Rs 4515 crore and Rs 4939 crore; ject to up to 10 per cent tax), and indepen-
Bill, 1967, Evidence (Vol I and II), New
and so on for all the large houses. See, Com- dent management of foreign-owned
Delhi, 1969.
pany News and Notes, March 1985, August enterprises.
15 R Sachar (Chairman): Report of the High-
1987, and March 1988; and Economic
Powered Expert Committee on Companies Problems remain in attracting foreign
Times; August 4, 1988.
and MRTP Acts, Government of India, ivestment, however. The dong, Vietnam's
Delhi, 1978. 28 'Perestroika' (restructuring), M Gorbachev
currency, is weak in the foreign exchanges,
16 See A N Oza: 'Recent Amendments to the has emphasised, arises out of the processes
MRTP Act' Economic and Political Weekly, of development in the Soviet socialist having four different exchange rates at any
October 16, 1982, pp 1697-1705; also society. This society is ripe for change; it given time, depending on the transaction.
H K Paranjape: 'The Vanishing MRTP Mt: yearns for it. But this improvement "is not Although Vietnam has asked the Inter-
Wil only the Grin Remain?', Economic and a spontaneous process, but a job requiring national Monetary Fund (IMF) for
Pohkel Rekly, June 5, 1982, pp 955-961. tremendous attention, a truthful and un-
assistance in stabilising its foreign
17 For details regarding changes in industrial biased analysis of problems, and a resolute
exchange, the country's cur-,rncy problems
licensing policy and related aunouncements, rejection of anything outdated. We have
use has been made mainly of government come to see that half-hearted measures will are sure to impede investment. Arother
notifications and press-notes published in not work here. We must act on a wide front, problem revolves around import-epr'rt
the publications of the Indian Investment consistently and energetically, without fail- taxes. A companion law designed to ad-
Centre, New Delhi, such as Industrial Licen- ing to take the boldest steps" (emphasis dress this issue is fraught with ambiguous
sing Policy, and Guidelines for Industries added). Mikhail Gorbachev: Perestroika- language and has yet to be fully in-
(earlier published by the government itself). New Thinking for Our Country and the
plemented, raising concerns among poten
For more recent changes, announcements World, New York, 1987. "Salaami tactics"
was the term made famous by M Rakosi in tial investors.
as reported in the press have been used.
16 For a discussion of this, see Jyotsna Hungary to mean the progressive slicing up
(Multinational Monitor, May 1988).
P.ranjape: 'Inducing Industrial Location inand debilitation of an existing structure-

2358 Economic and Political Week'y Special Number November 1988

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