regulation and development india's policy experience of controls over industry 2nd edition

Regulation and DeveloPment

Kegulation and DeveloPmentlndia's Policy Ex;rerienceof Controls Over IndustrY

Second Edition

SHARAD S. ilITBATND

Under the Auspices of the Centre for Policy Rescmh

Sage flrblicatlonsNew Delhi /lter,vbury ParldLordon

Cop!'right @ Cenne for policy Reseamh, 1986Copyright @ Revised Etlition, Centrc lpr policy nesearllr, lgig

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Contents

Irorewordheface to the Second EditionI\eface to the First Editionlntroduction

1. Eyolution ofThinking on Policies for Industrialisation

2. Evolution of Industrial Policy - 1945-1973

3. t€gislative Mechanism4. Industrial Policy Since 1973

5. Industrial Policy and the Five-Year Plans

6. Import Substitution - Some Consequences

7. Public Sector as an Instrument of Growth

8. Dispersal oflnduslry - Growth and Removal

of Re$Onal DisParities

9. Pricing PolicY for Industry10, ConclusionsEpilogueippendix I Statement of Industrial Policy, April 1945

ippenitix lt Schedules A and B Attached to the IndustrialPolicY Resolulion' 1956

Appeltdix III Appendix I lndustries Listed in Pr€ss Note

dated 2 February 1973

Apryndix M;st of Special Regulation Industries (Industries

Requiring Special Regulation)

Appendix v Bureau of Industrial Costs and kicesBibliography

I10

11

13

23

3463

91

1331U180

203231255282308

323

325

327331335

Foreword

When we pitblished the first edition of the present study by Prof

S.S. Marathe in 1985, we took cognizance of the maior changes

taking place in the world economies and their impact on and

implications for India.ihe non-agricultural sector of the Indian economy already

accounts for two-thirds of the nation's GDP' The processes of

liberalisation which were initiated in the late 1970s, in which Prof

Marathe played an important role as Secretary, Industrial Devel-

opment, Government of India, were given consideralrle boost by

the Raiiv Gandhi Govemment in 1985'

A grEat deal has happened since the book was first released in1985 warranting a fresh Epilogue. Prof Manathe has, in this

second edition of the book, bmught the issues up-to-date' What

he has to say about the industrial and related economy of India of

the 1990s is thought provoking. As he says 'In the future Govem-

ment will have to be the agency for monitoring development and

as a catalyst of change.'Prof Marathe emphasises that the 1980s

'saw the emergence of competitive impulses' The 1990s will have

to be devoted to managing the consequences of ihat c.ompetition'

These will not be limited to the economics of liberalisation trut'

even more importantly, they will rclate to the politics of

liberalisation and management of its fallout.'Undoubtedly, $ven the techno-managerial manpower of India

today and othen crucial infrastmcture, the potential for grnwth ofIndia's industrial and related sectors is enorrnous' Prcf Marathe

has succinctly brought out the lessons ofthe past and the chal-

lenges of the future with several very useful policy ideas' Hope-

furly, policy-makers will consider them carcfully in the context of

the formulation of the Eighth Plan'

Centre for Policy ResearchNew DelhiJune 1989

V. ,4. Pai PanandikerDircctor

T

keface to the $econd Edition

Thie monogfaph n'ae first published in the last part of 1985. Itwas well neceived and widely and favourably revierved.

There has been a demand for a less expensive edition so as tomeet the rtquirements of students as well as institutrons con_ductin5l courses and seminars for middle level and semor person_nel in government and in industqy.

- A_ number of developments have also taken place since thebook was first published. Some of the comments or conclusionsof the book have aln:ady been reflected in the new policy initia-tives. I have, therefore, added a new concluding chapter whichtries to assess how far the hopes generated by ihe new govern_ment under Shri Raiiv Gandhi have been realised.and also whatthe outlook for the future is. Even though the liberalisation pro_cess has not been as drastic as some would have liked or itsbenefits as pervasive as one coulil have hoped for, there havebeen maior.-and even radical-changes in the industrial scene.However, the creation of a competitive, cost conscious envinon_ment not only in industry but in all spheres of economic activitlrwill require radical changes in our present pen:eptions and policies. Towards the end of the l98Ds we saw lhe emergence ofcompetitive impulses. The 1990s Will have to be devoted to man_aging the consequences of that competition. These will not belimited to the economics of liberallsation but, even more impor_tantly, they will relate to the poliltics of liberalisation and themanagement of its fallout.

I am grateful to the Centre for policy Research and to its Dir€c_tor, Dr V.A. Pai Panandiker, for all the assistance in updating thebook. Shri B.G. Shirgurkar undertodk not only the g,ping but alsohelped in researching the materiall needed for r-evisinq the con_cluding chapter. Without his help lhe Second Edition-could nothave been ready in such a short time.

June 1989 Sharad S. Marathe

Preface to the First Edition

A grcat deal has beelr writlen about industrial developnlent in

Lriir si.tce indeperldence. 'I'his volunte is addressed to but a

single and relaiively little discussed aspect of it' namely'

industrial policy. Yet, its aim is far from giving a comprehen-

sive and fully clocumented r€viel{' of the evolution of industrial

policy and the concomitant changes in p|ocedures; nor does it

un"-p, a detailed analvsis of the impact of these policies and

prrr".irl"", on the structule of Indian industry or its rate ol

gfo*ttt. What it seeks ro do is to trace the evolution of official

Ind non-official thinking on maior 'issues of industnial policy

and, in the context of our achievemenls and failures' I'aise

some importanl questlons with regard to the fbrmulation of a

policy appropriate for the next decade or tu'o'- rft. "ig"

to write on this subject was, in a sense' it'repress'

ible for nie and I considered my credentials lbr undertaking

the task to be more than adequate As an bconomist b-'- t|ain-

ing and as one closely associated with the administ|ative and

uolicv-making pnocesses in the Central G()vertlmPnt Ibr near'lv

u q,l..t." of icenrury, I had the rare opportunitv of observing

troiv tne system evolved and functioned lt is not corrtmon for

Indian civil servants to be tlealing -,vith the satne range of sul>

iects or issues over any length of time But nlofe by accident

itran ty design, during the last two decades of mv work u'iththe Government'of India, I was fairly closely cotlnected with

1Z PR!]FACI

the Ministru of Industry in one capacity o| another.

- l'o view the growth of industry in India and the policyframework in which ir took placb in its historical perspecrrveis not only interesting in itself but can also be of. somerelevance to other countries sim arly placed. The main oon_cern of this book, therefbre, is tO look back and view, to theextent possible, the developmenlts of the last two or threed:"ldg" in their perspective. No policy, and certainly no aspecrof Irrdian policy can be underst0od or assessed except in agiven sociopolitical context. It is, therefore, inevitable that theanalysis in this volume should deal not only with questionsnelating to industrial policy in the nrext one or two decades, butshould also consider certain baslc issues with regard to thesociopolilical choices for the future.

There ane so many persons who have directly or indirectlycontributed to the writing of this fook that it is not possible toacknowledge my debt to each one of them. The idea that Ishould attempt a review of induslr-ial policy was suggested byDr. V. A. Pai Panandiker, Director, Centre for policy Research,New Delhi. I am grateful to hinrt and the Centre for all theassistance which was ungrudgi4gty given and also for themany valuable suggestions made by Dr. pai panandiker andhis colleagues. I also lrcnefitecl fnbm the very perceptive com-ments of several eminent persons including Shri L. K. Jha,Shri S. Bhoothalingam, Dr. R. K. Hazari, Shri p. X. Dave andProfessor Rai Krishna. Many of mty friends and colleagues inGovernment and in private and plublic sector industries haveallowed me to use them as sounding boards for propositionsabout which I was not centain. Most of the research for thebook was done by Shubhada Tulpule whose services as Resean:h Assistant were made availdbkt lry the Centre fbr policyResearch. I owe her more than slhe thinks. R. S. Deshpande,Senior F'ellow, Centre for policv Research, took the trouble ofcarefully going thmgh the text for editorial and other correc_tions. Shir5;urkar not only did the typing but also took uponhimsell thc rvork of pr.eparing the section on ,Notes andBeferenr:tls'. Without his able assistance the book could nothave be r.'n ready for publication..

S. S. Marathe

Introduction

It mqy be uselul to begirr lrl dr:strlibing rvhat the sttttlyatternpts 10 do and even tlrorc so, pet'haps, lly making clearwhat it does not seek to do. lt is not intetrtled to be a cotn-prehensive and lully documented review of lhe evolution ofindustrial policy and of the concomitant prot:edural changes;nor does it seek to review, in any depth, the iurpact of thesepolicies on the structure and glowth of lndian industries overthe last three decades.

The main focus of the study is to trace the evolution ofnational thinking on malor issues of industrial policy, under-lining the continuity as rn'ell as the shilis in emphasis over a

period of tirne. An intenesting feature which ernerges in thiscontext is that beginning with the rvritings of ear-l"v Indiatreconomists like Daclahhoy Norvroii, G. V. Joshi and others a

strong undercurrent of thinking in lavour of State inlerventioncan be clearly obserwed. Over a period tlf vears, the natureand scope of intervention by the State was elalxrrated; buteven prior to independence, the dominant attcl legulatolw roleof the State with regard to industrial der elrtpmtrrtt had treen

accepted.'Ihe Industries (Development and Rcgulation) Act, 1U5t and

the rules framed under it provided the legislative lrunrewot'kfor the active role to be played by the State, antl itt paI'ticularby the Central Govet'nment. 'Ihe legislative ltiston of this

14 INTRODUCTION

rmponant stalute nrakes inter€stilrg rcadin51. The main thrust ofthe legislation was to vest the Ce4tral Governmerrt with powerswhich, in effect, extended well beyond what the lrarners of theConstitution had irr rninrl legardlng the distributiorr of powersbetween the Centre and the States. The parliamenlary debatepreceding lhe legislation brings out the fears and apprehen_sions- some of which were iustified later* expressed at thattime, and also the very clearly $tated assurances by Govern_rn€nt to ensure that the legislation would be a positive instru-.ment of development rather tharl of regulation.

Against this background it would be instructive to see how,oven a period, the legislation was amended largely in relationto sections included in Chapter III which gives Governmentthe power to takeover the management of a sick unit and howthe omerging problems of scarcity of foreign exchange con-tributed further to the extent of centralisation and the com-plexity of regulations. At the same time, the sections in the,legislation pertaining to the consultative framework withindustry progressively fell into disuse. This happened con-currently with an increase in the degree of detail in theregulatory provisions. Ihe Schedule to the Act was expanded,the lisl of industries under Specital Regulation increased andafter .he enactment of the Monopolies and Restrictive TradePractices Act, 1969, the larger investments or even minorinvestment decisions of bigger liusiness groups came withinthe purview of a separate and not always concurrent scrulinyand approval system. In short, r'egulation took precedenceover development, which was contrary to the verv obiectivesof the Act, which the title itself showed.

While this process was going on, there was, as seen fromsuccessive Policy Statements in the plan Documents and alsoreports of several expert committees, a growing recognition ofthe need to simpli$r the regulatory process. In pnacuce,however, the regulatoly momentum could not be checked; andthe changes introduced in policy and procedures from time totime were peripheral rather than raclical. I o what exrenr wasthis the result of the adminislrative conrpulsions in adminis-tering a regulatory system ? To what exlent was this allribut_able to the fact thal there was a strong vested interestin continuance of discretionary controls ? probably, there was

negulation and Development 75

no malice aforethought; but it is cefiainly true that over theyeai's, a formidable and pervasive vested interEst gy€w up inmaintaining the system of regulation. The bureaucnat, the politician and, to some extent, sections of the industry which dilectlybenefited from the prctective consequences of the regulation,constituted a combined lobby in favour of maintaining thesystem.

The regulatory system also received strcng suppoft at the pol-itical level including ftorn many Opposition parties. Influentialmembers of Parliament ftrcm the ruling party as well as theOppositioo academicians, and othens involved in mouldingpublic opinion demanded gr€ater and more effective regplationespecially in order to contnol the 'monopoly' of the large housesand to assist or protect the weak. Thus, the licensing system wasto be used to limit gnrwth of capacity so as to prevent unhealthycompetition and to encounage new entr€prEneurs by denyinglicences to 'large houses' in specified areas of activity. The costeffectiveness of investment decisions became secondary.

The nationalisation of the banking sysem in 1969 and thepassing of the Monopolies and Restrictive Trade Practices Actthe same year wer€ instruments which gave enough leverage topursue the obiective of curtailing the powen of the larger houses.The rapid growrh of the public sector, in any event/ was boundto rcduce the relative share of the private sector in industry andprovide 'countewailing power' against large business houses. Inthe circumstances, one would have expected that the growth oflange business in private hands would have effectively sloweddown.

In practice, however, the total assets controlled by the lalgehouses continued to grow even after 1970. This was, in laqge part,due to the fact that towa-rds the end of the 1960s and early part ofthe 1970sthe economywas under considerable strain. Early buoya n-cy in irwestments and output in the private sectorwas replaced bycaution and tardy and fluctuating growth in output. TherE were s€veral reasons for this. One consequence was that a kind ofdichotomy began to emerge between the public face' and the'private face' displayed by Govemment. TheIE was no change in theoffcial stancewhich maintained the old rhetoric against large busi-ness houses. The 'public face' remained stern and unbending. But inthe day-to-day management of policies and procedures, therewas a

gradual shifting of emphasis towards finding ways and means of

l6 rN'l RoDt.rct'loN

delermining and delining areas tn large houses coulrl fi'eelyfunction. lnevilably, tllese al€asinvestmellls. The soux,'es of

ones which required largeand particularly long-lerrn

finance, were by now entirely n:r The curious consequence, lherefore, was that e the rhetoric and indeed, inconfbrmitl, rvith the ollicially stated policy parameters, the'value of assets' controlled bV ' houses' in the private sectorincreased very substantially after the MRTP prcvisions came intoforce. To a large extent, this incre4se was based upon the largerhouses borrolving frum financial institutions. To what extenl wasthis a result of the emerging budgetary constraints which sloweddown the pace of new.investmenl in public sector industry ? Orwas it the result of the perceived limitations in the ability of thepublic sector to grow rapidly or mlke efficient use of the resour-ces available to it ? Or wasit, as sofire political analysts have sug-gested, a devious but effective arr4ngement by which the moneypower ofthe large business housescould be kepton a shontleashso that it could be utilised for the benefit of the |uling party?

In any event, the dynamics of dapitalist growth distorted byan environment of socialist postpres has possibly led to sut>optimal results. India,n industry has tended to remain over-regulated but, except in some instances, there is little to showby way of altaining the otriectives of such regulation.

'Ihe opening chapter of this volume seeks to place in a lon-ger historical perspective the evotution of thinking on policiesfbr indust|ialisalion. An interesting observation is that evenbefore India attained independerlce there was almost univer-sal acceptance of a very impoltant regulatory role for theState. On this issue there was 4 remarkable congruence ofthinking. between those connectpd with industry and thoselesponsible tbr moulding public Qpinion; and both consideredthat the State must not only prescribe the panern of industrialdevelopment but also control the process of industrialchange. The one maior exception to this general consensus in'lavour of State intervention and the emphasis on largescaleindustry was Mahatma Gandhi. What he considered to be adesirable path for India was very ilifferent. No doubt the start-in€l point was the same, namely, thal poverty and stagnationin lrrdia wer€ the consequences Qf colonial rule. But Gandhiii,unlike Pandit Nehru and others, had grave distmst of the Statd

negulation and DeveloPment 77

which to him represented 'violence in a concentrated and

organised fonn.' Gandhiji's emphasis was on decentralised

p"i""""ing and manufacturing largely to meet th^e needs of

ih. lo"ul or limited area markets in his scheme of things the

*hol" f"u-u.tork of activity was to centre around local

resoutces to be processed locally for meeting local needs The

policies pursued by the successive Governments since 1950

placed inc".asing emphasis on the traditional decentralised

sector and on what is best called the modern small-scale sec-

tor. Though it must be noted that the pattern of growth and

support oi village and small-scale industries has been totally

diiferent from what Gandhiii had envisaged The State pat-

ronage and fiscal subsidisation were never a part of Gandhiii's

scheire of decentralised economic activity. But, in practice, by

the 1950s khadi and village industries including handlooms

and also the modern small-scale sector had become deeply

involved with the Stat€-apparatus. These activities depended

on State policies and counted on State support in numerous

ways. Pervasiveness of State involvement in economic and

particularly industrial activity had become complete'The following chapter traces the evolution of industrial

policy between 1945 and 1973 and Chapter 4 brings the story

up to aate. An interesting point which emerges is that most ilfthe important elements of the Industrial Policy Resolution of1956 and the subsequent Policy Statements can be traced hack

to the 'statement of Government's Industrial Policy' issued inApril 1945. This Statement issued by the Planning and Dev-

elopment Department nearly twoand-half years prior toindependence- and when discussions on the future status oftndii were still undecided-is a remarkable document whichno.t only anticipates in many ways the objectives but also, to a

considerable extent, the approach and the mechanisms whichwere to be adoPted in later Years.

An important point which emerges from the review of indus'

trial policy between 1945 and 1980 is that the successive Policy

Statemenis enunciating Government policies in the field ofindustrialisation were strong on statements of goals or objec-

tives but were ssrnewh at fttzzy with regard to the operatingslrategy and there was, virtually, no regular mechanism forthe appraisal of policies. 'fhere was also a certain amount of

T

18 INI'RODUCTION

reluctance to make major cha4rges in policies; and, by andlarge, the policy pronouncements tended to contine thern_selves to procedural changes. AS a result, over the years, thegap between objectives and achievernents, between what wasintended and what actually happened, and between what theparticular polic-v instruments wpre supposed to achreve, anclwhat, in fact, thel' dicl achieve ccjntinued to widen.

Chapter 3 lraces the history of whal is by far the mostimportant single piece of legislation having an impact on lhegrowth and structure of industrlal policy, namely, the Indus-tries (Development and Regulation) Act, 19g1..Ihe Industries(Development and Regulation) Aqt was intended to be a mech_anism for lhe early developmqnt of industries of nationalimportance. But before long it tprned into a much more ela_borate and administratively conlplex arrangement. The threemain elements of the legislation are : first, the setling up of aconsultative mechanism between the Government and indus_try with a view to providing a basis for planned deveiopmentof the industrial structure. Secon4 the establishment of alicensing system for regulating, creation of nerv capacity inmajor industries, substantial expansions of existing units insuch industries and the produrition of new articles in theindustrial categories covered by the Act. Third, the provisionof powers to the Central Government for the takeover of themanagement of industrial undertakings under certain cir_cumstances in order to safeguard public interest. The clrapterspells out in detail how the c4nsultative procedures wereallowed to fall into disuse. It alsq traces the process by whichthe licensing systern was changed beyond recoglrition. Interest_ingly enough, this was done not through legislativeamendments, but w4s more a cohsequence of the administra-tive compulsions in operating tlire system. The chapter alsolists the numenous amendments [o the Act which were madewith a view to strengthen the pfovisions regarding the take.over of managements so as to enlarge the options open tothe Government in dealing with Sick or closed units. In prac-tice, these powers were never used very effectivelv.

Chapter 5 analyses the evolqtion of industrial policy asreflected in the Five-Year plans. Successive plan Documentsand the reports of the ad hoc Committees stressed that the

Retulation and lbveloPmenr 79

regulatory framework-industrial licensing' recognition/regu-

laiisation of capacity, clearance under the Monopolies and

Restrictive Trade Practices (MRTP) Act, etc'-had become very

complex; and that the system as a whole had become counter-

proiuctivu. The approvals/clearances weFe, moDe often than

.rot, "equential

and not concurrent; and there was a considen

able accretion of discretionary or semi-discretionary powers

at the political and relatively iunior administrative levels'

There was also an increasing awareness of the power lnherent

in any regulatory mechanism, namely, the power to delay things'

There was little evidence, however, of aPpropriate correc-

tive action. Perhaps, it was difficult to do so in the early years

of Mrs. Gandhi's stewardship of the nation because of the problem of acute shortages in crucial spheres, namely, food-grains and tbreign exchange. It would apPear that by the early

iszos the .whole apparatus bf control and regulation of ihdus'

try had acquired a momentum of its own. It was seen that the

scope for conferring or denying favours meant considerable

accretion of power and patronage to the political system' The

ruling party or those in positions of authority wielded thispo*e.. But there was evidence that politicians of differenthues, businessmen and sections of the administration wer€

not averse to becoming active participants. One of the mafor

reasons why radical changes'in policies and procedures werenot either thougfrt of or rigorously pursued was the emergence

of the combined and powerful vested interests of politicians,

bureaucrats and businessmen'In the subsequent four chapters an attempt is made to

review the effeqtiveness of the policies in certain importantareas. These include :

1. Import contmls and import substitution for ensuring

speedier self-reliance in technologr and production and

the implications of these policies in terms of the cost

structure of the industrial economy.2. Public sector as an instrument of growth.3. Regional disPersal of industry.4. Price controls on manufacturing industry'5. The role of the small-scale sector includrng the decen-

tralised or household manufacturing activities'

I

M INTRODUCTIO[\I

Therc are two main conclusiong which emerge firm an analysisof the past policies. First, there is a need to define our obiectivesand to be clear about their relative importance. While wery demo-cratic government will have to keep in viav a multiplicit5z of objec-tives, it has to be rcco€nised that Some of the objectives could, inparticular cirrumstances, be mutulally conflicting and unless there

ties being used for the pupose pf achieving certain obicctives.Experience has sihorryn that this sbrt of monitoring is a precondi-tion for ensuring that the potential ofthe system is notinhibited or there is no grave in the use ofscarce nesouPces. In the abs€nce ofeftctive policies continued to bein force because theyhadbeenadminist'ative and proceduralsehaes even when the context

at some point oftime; andperpetuated them-

lesson which ernerges is thattotally alter€d. An importantwas right and relevant in the

sixties ceases to be so in the and more so in the nineties;

Nehru. In retrospec! there is clear Widence to suggest that some ofthe major assumptions of the Fabian tradition which influencedpolicy-making in the early years of our Independence were ofdqubtfr.rl validity. For instancg one of the major propositions con-stituting the Fablan tradition waq continuing extension of Stateournership and control. It was asslrmed that ownership and man-agement by the State of all crucial {ctivities as weH as the financialinfrastructure together with demfcracy based on adult suftagewould ensure a more equal socief5z. While the basic sFucture ofsocialistic democratic values whidh constitutes the value compo-nent of Pandit Nehm's ideologr c(rntinues to remain valid in the

is an awareness of a trade-off or an explicit acceptance of theprirnacy of one of the obiectives dhere is a danger of not movingtowards any of the obiectives hst enough in an attempt to achieveall ofthem over a period of time. Sdcon4 it is necessar5r to periodi-cally rwier,r, and rpassess both the ielatirrc importance of the objec-tives and the eftctivenegs of the mechanisms and instrumentali-

and newpmblemswouldrequire tler,vanswers if theyare not tobeallornzed to becortle urunanageable. The question to be asked is: Isthe objective still important and telenrant; and has the policy toachieve that obiective been effbctirlre?

The concluding chapter brings fogether some of the importantpoints emerging tom the earliel discussions. It also examinessome of the crucial elements of the ideolory wtrich forrns the basisof economic poliry-making sinc€ the days of Pandit Jawaharlal

Regulation and fbveloPment 2l

Indian context, the institutional forms or operating mechanisms

have friled to achiane the expected results' Indee4 a time has

co-e *hen in order to effectively pursue our comrnitment to the

basic elements of democratic socialism, i'e', growth' liberty and

.qrfiay, i it "ag*ntly

necessa4l for us to move aw-ay ftom some of

our raditional concepts Fegarding the efrcacy of State ownership

of the means of production and detailed r€guLation and contrcl

over the private sector'The thrust of lrolicy in the coming years has to be towards

removing systematicaily the constraints which have been inhibit-

ing efrciincy and pmductivity in the Indian economy and particu-

tuity itr the Indian industry, both public and private' For this

orr"po"" it would be necessary to make drastic and substantial

"hut g"t in the policy. This procesq rather than step-by-step

adjusltments in pbhcies and procedures as in the past, is likely to

achiwe better results. This is becaus€, over the years, the number

of agencies has grown so enormously that the whole process ofobtining governmental clearance or apprural has been tied up inknots. Any attempt to untie each of these knots separately would

be time-consuming and until there is adequate movement on

several ftontq worthryhile improvements would not be discerni-

ble. It is necessarJr', therefore, to take certain calculated risks and

make a concerted move towards simplification of pmcedures and

liberalisation of policies on several tpnts simultaneously'It is a matter of satisfaction that since the fiIst cdition was

published several sugigestions and conclusions in this monograph

have been acted upon. Even though the liberalisation pmcess may

not have been as drastic as some would harae liked or its benefits as

pewasive as one could have hoped for, therc have been very

sigrrificant changes in the industrial scene. There have been very

large quantitative increases in the output of maior industries such

u, i"^".rt, fertilisers, passenger fiurs, consumer and communica-

tion electronics, synthetic fibres and twowheelers' But equally

important is the qua-Iitative impnovement in a wide range of capital

goods and durabi" "on"rr-""

goods. The increased competition is

imposing a new discipline and culture on the Indian industr;r; and

tne focui of managerial effort is shifting away from manoeuwirgcontrols and procedures, and is moiing increasingly tor'vards

improvement in quali$, reduction in costs and establishing

mar{<et shares.

22 INTNODUCTION

While there has been some pmFr€ss towards creaung a morccompetitivq cost conscious -enviionmen! there are disturbing

trends on the resources ftont, both fntemal and extemal. The basicpmblem of ovenspending at home And not eaming enough abmadhas acquired menacing proportioris. The considJrable tighteningup of fiscal discipline is a pre-condJtion for domestic gawth in anenvimnment of reasonable price stability. tt i, U.J crucial forreducing the gmwing strains on the balance of pa5rments whichhave emerged in the last few years.

The latter part of the lg80switnessed the emergence ofcompetitive impulses. The pmcess of economic reform his started but thepace of change is stillvery slow. Thq tasks before the countr;r in thecoming decade ar€ going to be forr4idable- The maforissues of the1990swiil not be confined to the ecdnomic fall-out of the liberali sa-tion or the consequences ofopenin$ up the domestic economy toincreasing competrition both domesltic and, in due cource, interna_tional. There are indications that the next ferv years will aisowitness major problems of political rcstructuring. in the absenceofintegrating forces such as effectiVe party organisation with sen_sitive antennas at the grass-roots lqvel, there are gmwing fiustra_tions. Tladitiorral power relationsihips are beginning to breakdown but substitute structunes harre not .*"rgud to rcplace thetraditional ones. The major political challenge during thl corningdecade will be to ensur€ that the co4r"eqrrerrces of competitiondonot add to the ftustrations or re8ult in economic disparitiesamongst individuals or regions to such an extent as to place astrain on the social and political fatiric of the countv.

1Evolution of Thinking on

Poticies for IndustriaHsation

tnd.ustrialisation as an instrumenl lor mitigation of povertl'

and creation of productive employmenl is a comnlon tneme

in writings and public discussions in India even before the

lurn of the last century. Early wlitin6ls on Indian economic

problems by eminent men like Dadabhby Nowroii or M' G'

Ra.rad" "ti:e"sed the irnportalrce of industrialisation'

Dadabhol' Nowroii, for instance, was the first to draw atten-

tion to ttre declirre of rraditional industries in India as a result

oi the policies pursued by British rulers Against the back-

ground of this de-in dustrialisation thesis there were others

like M.G. Ranade who stressed the importance of industrialisa-

tion as a remedy for poverty G'V Joshi a very perceptive

obserwer was the first to talk about intercccupational

imbalance and probably the first to use the term'enfbrced idle

ness'. B.IC Sircar, Lala Hal Kishen and Vithaldas Thackersey

were amon€lst the many who were active proponents of the

Swadeshi -ou"-"r,t which gave impetus to the demand for the

establishment of modern industry owned' financed and

managed bY Indians.To the extent that the declrne of the traditional Indian

indrrstt ,' was attributed to-or deemed to be the consequence

?4 EVOLUTION OF THINKING ON POI-ICIES FOR INDUSTRIALISATION

of-polices pursr,red by the alien Government there was consider_able emphasis on the need for active stut" n.ff i-i.,dustrialisa_tion. By the turn of the nineteenth century a.rj it " n.*, *odecades of the twentieth century, there was a plea fbr Indianprivate investment to be actively promoted and prctected by thecovemment ftDm an unequal and lrnfair foreign ctmfetition. fhistook various forms over the years; for exampie, scep'ticism aboutthe virtues of ftree-trade; ,drain theory,which attributld the povergzand backwardness of India to the farge outflows by way ot homecharges, inter'sts, dividends, etc., r,rjtriih constituti a drain on theIndian.economy; the plea for dJspriminatory prutection and,somewhat later, the contnoveNy regarding the exchange rate; andthe IndiSn view on the question of tFrperial Aeference. Under\dngthe nationalist basis of all these i$zues was the conviction thatGovernment policies and, to some extent, direct Government helpwas a precondition for industrial {eveloprnent.

The impetus to local industrialisatio-n provided by the FirstWorld War and the gprwth of certain industries like sugar andcement, as a result of the policy of discrimjnatory proiection,helped create during the inter-wa_r years a small b"ut influentialindustrial community. Unlike in lafer years, there was a remgrk_able congruence of thinking on inpusiriat issues between thoseconnectedwith industry and those tesponsible for moulding pub-lic opinion.

Whilst the attitude of the Goverhment towards industry wasinitially one of lars sez-fafue, th..-rew4s a noticeable change after theFirst World War. A formal recognitilon of the change is seen in adespatch to the Govemment of Indi6 by the SecretJ)z of Stare Mr.Edwin Montague, in 1919. While cotnmenting on thi Fiscal Com_mission Report,. he elaborated thq new poiicy in the folowingwords:

If the active participation by Gqvernment in industrial dever-opment is to be accepted as one odits legitirnate functions a newpolicy is rEquir€d.,With

^the quickening of potitical life rhat wi follow thegrant of constitutional reforms, fhe demand for progness inadministration and social ref$rms may be eif ected tobecome insistent, and if progresF is not to be hampered by

negulation and DeveloPment z5

want of funds the taxallle capacitv of the people rvill have

to be increased. To this end the natufal resotlrces of lndia

must be effectively utilized, as new opportunities for the

i,-,.,""1-e,tt of capital prcsent themselves in order that the

stanclard of comfort of the people mav be raised and the

"lono-i" strength of the countrv mav increase F'urther' as

the experience of the past few vears has short'n that in time

of -ot trtalu cannot rely on outside sources fbr her needs'

the matter is one in n'hich politi'cal expediencv' economic

advantage, and military securitv are coincidenl and accord

with the interests of the Empire as a whole'

I accept the t\,vo fundamental principles' underlving the

recommJndations of the Commission; first' that in future

Government should play an active part in the industrial

development of the country; secondly' that Go\' ernment

cannot- undertake this work unless provided with adequate

administrative equipment and forearmed with reliable

scientific and technical advice

This despatch was soon followed b1z the Government or

India Act, lgtg, under which industries became a provincial

subiect; and the Government of India, therclbre' no longer

had a direct interest in industrial clevelopment The British

tndian provinces had neither financial nor technical resour-

ces to stimulate industdal development on anv significant

scale, Therefore, Mr. Edwin Montague's acceptance of the pre

uosition that in future the Government should play 'an active

i""f i" the industrial development of the courltlY was onlv

of acaclemic interest.Nevertheless, the inter-war years and needs of the war

effort saw the growth of industrial activitv and further

strengthening of the Indian industrial class The r /ritings on

economic or industrial problems during the inter-war years

did not mention any possible conflict between the desirable

obiective of industrialisation and the kind of industrialisation

taking place under Indian entrepreneurship The're was no

talk if planning for industrial development and even the

noted ecrrnomisi, Professor D R' Gadgil, in his ear'lier rvritings

did not go into the need for planning for development' But by

the miJ-thirties, mainlv uncler the inspiration of Pandit

I

26 EVOLTJ'rION Ot 'THINKIN-G ON pOLtC tES !-OR INDUS].RIALTSA]]ON

Jarvaharlal Nehru, some earlv beginnings were macle in think_ing in terms of a national policlr. lbr Jevelopmerrt of whichpolicies relating to industriar dtvelopment .r""o ,o firrm aJ)art. In 1tt38, a National planning Committee was constituteclrrnder the

- chairmanship of pan-dit .Iawaharlal Nehru"at thernstance of the Inclian National Ccingress. The Committee had

a mixed mcmbership and included 'wel-known incru striarists,financiers, econonrists, professord, scientisls as rvell as rel'resentatives of tlie Trade Union Congress and the VillageIndustries Associations. I{ard heatled b1g business was thereas well as people r.vho were calredl idearists and doctrinailes,and socialists and near comrnunislts.,3 pandit Nehru, as Chair_rran of the National planning Comnittee, appears to havedeliberately avoicled discussions ort frasic sociai poticy on prin_ciples of social organisations that woulcl necessaritv split theCommittee. Instead, his main emphasis was on oblarnlng a con-sensus on lhe need for ccnll.ai economic plarrning. His'reason_ing u'as that the Ccrnmittee,s en{lorsement for tie principlesof planning rvould inevitatrtv leacl India ,torvards establishingof some of the tundamentals of rhc socialist structufe.,4 On thequestion of inrh.rstriiilisation the Cohl mittee noted,

'Ihe pr.oblems of povertl, and unempioymel)t, ol. nationaldefence and of economic regenetration in general calnot besolved w.ithout inrlustlializalion. As a siep torvards suchindustrializalion, a compreherisive scheme of narionalplanning should be fbrmulated. This scheme should pro.vide for the development of hea-vy key industries, medium_scale industries and cottage industries.5

While Nehru's interest in natiorlal planning can be traceclback to ltis visit to the Soviet Union cluring which he liacl beenexposed to the methodologr of the Soviet F.ive_year plans, thefirst att€mpt at Frlanning in the Indihn contexi appearcd in thefotrn of a book Planned Econonry .for India [ry'Sir II. Visr es_varaya, a distinguished engine€r-adFninish.ator lvho had beenresponsible for the trrlanning and ekectrtion of, several imoor:tant irrigation and power projeLtr;. The book was based on theploposition that the country wnu_lct relquire a blueplint lbr actionin the way an engineer needs his dtNawings to implt;ment lris


proieci. His starting point was, 'there ttas been no reasoned policy'

.ro plao .ro p*gramme in the past to improve the income aDd the

*"utttr ottf," p"ople.'s His booh therefore, was in two parts; trst' a

kind of economic suruey, and the other, a reconstn:ction and dwel-

opment plan. The main thrust of Sir M' Visvesvaraya s worklvas on

tt. .r"gent need for rapirl industrialisation;4pd, writing as he did

before the country's independencewas imminent, he empha$ised

the need for Indian contncl of cumency and finance, railway

administration, railway fteight, purchase policy of railways'

Reserve Bank of India and gold/foreign exchange reserves nf the

country. Apart fitm this he waltted, first of all, a comprehensive

,.,-"y of th" *soutres to trc undertaken and he stressed the need

for cilection of statistics 'according to international standards''7

He also eurphasised the need to concentrate on the dweloprnent

of hea,vy industry. His proposals envisaged a six-fuld increase inthe net value of industrial output over a period of ten years; but

even mone arnbitious was his emplo;rment tarBet-raising indus-

trial emploSrment fi.om one-and-hal{ million ro ten rnillion arrd

ftum fifteen million to fifty million. The$e tar€lets, however, were

not based on even a mugh estimate of demand, and his estimales

of increases in agricultural output werc relatir'"ely modest'

While Sir M. Vi$vesvaraya was the first to suggest a bluepdnt fordevelopment, the need for a plan for the economic dwelopment of&ee India was beginning to be generally accepted' There were' infact, in the early and mid-fbrties several pians by persons withdifferent persuasions-Gandhian Plans author€d by late Strirnan

Narayan Agarwal, and the left-wing blueprint under the guidance

of late u.ru. noy.e significantly enough, the need fior planning under

the aegis ofthe Statewas accepted also by the industrial elite ofthe

country.A gmup of leading industrialists including J'R'D' Tata, G'fJ' Bida

andLla Sri Ram worked out wtrat came to be known as the

Bombay Pianlo soon after the end of Wor{d War II' The Plan 'urged

that Govemment intervention lvas necessar]r' to cop€ with the

huge task of pushing through the extensive industrial prngrarnme

in a short period of time.' To quote frrom the Plan:

ZA EVOLUTION OF THINKING ON POLICIES FOR INDLISTRIALISATION

... We have indicated that no economic development of thekind proposed bv us woulcl be possible

"*""pf or., the basisof a central directing authorittv, and further measures ofState control would be required to prevent an inequitabledistribution of the financial burdens involved in ir. Anenlargement of the positive as well as preventive functionsof the State is essential to any large-scale economic plan_ning. This is inherent in thp idea of planning and itsimplications must be fulh' sflrri;11s6. r t

The important point that emeFges is that even before Indiaattained independence there was almost universal acceptanceof a very important regulatoru rdle for the State which mustnot only prescribe the patterlt bult also control the process ofindustrial change.

The one major exception lo this general consensus rnfavour of planning wilh its emphasis on large-scale industrywas Mahatma Gandhi. It is interesting in this context toobserve in the writings of Mahatnta Gandhi, over a number ofyears, a very different but cohelent view of what he con_sidered a desirable path.for India. He, like others, began withthe proposition thal poverty and stagnatton in India was theconsequence of British rule. In young India he wrote .

The Englishman has risen upoh the ruins of India,s com-merce and industry. The talk of no discrimination betweenIndian interests and European is to perpetuate the Indianhelotage. Before one can think of eq"ality between anyclasses, the dwarf must be raised to the heighl of the giant.Before we reach the state of eguality the levelling processwill have to be gone through.l2

The Congress Working Committee t-rnder Gandhiir,s aegistried to fbrmulate an approach which woulcl contribute tothis levelling process. The main points of the Congress Wor.kingCommittee's Resolution wele :

1. The companies owned and managed by foreigners butincorporated in India when repaid the capital hacl theeffect of robbing India of such advantages as one expected

Regulation and Development 29

from the policy of discriminating protection.2. India had ihe righl to discriminate against non-national

interest whenever and whelever the interests of Indiademanded or required it.

3. Foreign capital or talent might be used if they were notavailable in India and when India needed them.

4. Swarleshi entelprise is one which is controlled, directedand managed by Indians. Such Swadeshi spirit is essen-

tial for economic indePendence.

Candhiii firmlv held the view

Economic independence is not the product of industrializa-tion of the modern or western type lt means to me the

economic uplift of every individual ." I do not share the

socialist belief that centralization of production of the

necessities of life will conduce to common welfare, when

the centralized industries are planned and owned by the

State.l3

Of course, contrary to the popular belief that Gandhiji and

Nehru presented two completely diverse versions of what

constituled an appropriate economic policy, there was a fairlylarge common ground, though with major differences ofemphasis between the two leaders in many critical areas ofeconomic policy. More important issues of economic policl'

are, usually, those involving the determination of the right prcportion in which diffqrent forms of investment and organisa-

iior," rnuy be combined. There is, for instance, always the

question of combining agricultural and industrial investment;oi within industry, the emphasis on heary, light and small

industry; or, again there ls the issue of proper mixing of State

owned, capitalist, cooperative or mixed forms of ownershipor organisations. A careful study of the thoughts of Gandhiii

and Nehru on specific issues would show that in most instan-

ces the two leaders were, in effect, arguing about proportions

and not choosing extremes.There were, however, very important differences between

them. The basic difference was with regard to what each con-

sidered to be the desirable level of consumption' Gandhili

explicitly believed intion.

this belief to lay more emsimple technologies and

He {who had made the idealhis being) would reduce hisin mind the poverty of India...,Civilisation, in the real sensemultiplication of wants, buttary restriction.

material consump

distribution a part ofa minimum bearing

equalants to

Nehru, on the other hand, believed.in a good life, anaesthetically and hedonistically good

.life-a position which

was radically different ftom the Gandhian view.

Not having thri religious terqper and disliking the repressions of religion ... the aesthetic bide of life-appealed tome and the idea of ... making ttre most of it and living a fulland many sided life attracted me.rs

Different attitudes to necessarily implied dif-policy. If one believes inferent positions in related fields

auslere consumplion, as Gan

the term, consists not in thetheir deliberate and volun-

did, it is consistent withon small unit productionself-sufficiency. But the

moment the idea of austerity on a mass scale is abandone{there are clear limits to r.tllage sellf-sufficiency and the choiceof the scale and techniques of prpduction become important.This is the reason why Nehrtr did not believe in thedesirability of self-sufficiency to the same exient as Gandhiii:In fact, Nehru wanted a distinction to be made between theidea of decentralisation and tlie concept of village self-sufficiency. While he sfessed thE importance of PanchayatiRai as a desirable form of decentrnlisation, he was opposed toself-sufficiency of the village beqause,if it. leads to old andrather primitive methods of produ0tion ... we remain'poor.'.16 Itis to be noted, however, that while the two leaders held sutrstantially different views on vill4ge self-sufficiency they hadan identical position with regard to national self-reliance.

The lundamental driTerence bbtween Gandhiji and PanditNehru and others is in relation tp their attitude to the State.


,dccording to Gandhiji, 'State represents violence in a concen-trated and organised form.' It is a 'soul-less machine whichcan never be weaned from the violence to which it owes itsvery existence.' This dislike and distrust of the State madeGandhiii declare at one stage that 'violence of privateownership is less iniurious than the violbnce of the State.'17

Thus, in Gandhiji's scheme of things with its highly decen-tralised economic and political i system the centre-piece wasthe individual; and the role of the State was to be niinimal.Pandit Nehru, on the other hand, with his Fabian orientationenvisaged a dominant role for the State bringing aboutsocialist development of the country and wanted the means ofproduction to be owned, or at least controlled, by the State.

In the Gandhian view' the emphasis was on decentralisedprocessinpl and manufacturing largely to meet the needs ofthe local or limited area markets. With the emphasis on localself-sufficiency to the extent possible the whole framework ofactivity centred round the local resources to be processedlocally for meeting local needs. It is important to note thatGandhiji's economic philosophy was not accepted in itsentirety at any stage, either by those in charge of the CongressGovernment in the Provinces in 1937 or later, by the InterimGovernment of independent Indi:i. The only elements whichwere accepted or in varying degrees pursued actively as offi-cial policies were State support for khadi, handloom andsome of the traditional village industries and crafts. The suppont to these activities, however, was not as in the case ofGandhiji a part of a total coherent economic philosophy, butrather as a matter of economic (or political) expediency. Thus,the support to these activities was not so much out of convic-tion that the India of the future w€uld continue to need a thrivingdecentralised sector processing local resources for meetinglocal needs. It was mainly because of the need for a holdingoperation in terms of maintaining employment, which was aneconomic and political imperdtive. The thrust of policy withregard to the traditional decentralised sector was, thus, dic-tated by the need to minimise displacefnent or ercision ofexisting employment, however partial.

As distinct from the traditional {ecentralised sector thepolicy-makers, and indeed, the efforts of Government adminis-

32 EVOLUTION OF THINKING ON POLIQIES FOR INDUSTRIALISATION

tnation were increasingly addres$ed to the establishment andsupport of what is best called thE modern small-scale sector.There is a basic difference betwben this new sector and thetraditional decentralised industry, although in public dis-cussions very often the and village industries are

the very inportant distinc-lumped together. This tends to btion between these two sector6. The modern small-scaleindustrial sector, definedother than land and

of fixed capital employedis, in many "ur"", ,r"in!

technologies and production which are not qualita-tively different even though there wofld be a very significantscale difference as compared to modern medium- or large.scale industry. Second, the small-scale sector neither de-,pends on locally available raw lnaterials nor is it predical-ed upon meeting local needs. Third, a significant part of thesmail-scale industry is not engdged in producing an end.product-either a co'nsumer prodhct or a piece of equipment,but is essentially subcontracting materials on com.ponents needed by a larger unit, h concept which has little OIno place in decenlralised tra industries. The conse-

te of what Gandhiji hadquence of this has been almostenvisaged. The decenbalised industries and, to a

industrial sector hasgl€ater extent, the modernnot only received support in t of Government's accepted

been built up on the basispolicies but has, in varyingof State patronage and fiscal su n. The essential pointhere is that the pattern of growth of and support to the small-scale and village industries been at variance withGandhian thought. This sector his become as nruch involvedwith the State apparatus, depenfling on State policies, and,counting on the State support iri numerous ways. The pen

to the -issues of industrial policy.

vasiveness of State involvement pvith economic activity andespecially industrial aetivity, wa$ complete by the time thetirst covernment of independent lndia began to address itself

Regulat.ion and DeveloPment 33

NOTES AND REFERENCES

1. India, Fiscal commission, 1s27, neport of the Indian Fiscal CommissionSimla: Central Government Press, 1922.

2. India, Planning and Development Depaitment, Statement ofGovernment'sIndustrial Policy 1945.

3. Jawaharlal Nehru, Discovery otlndia Calcutta: Signet Pr€ss, 19'+E, p.331.

4. K.T. Shah, ed., neport ofthe National Planning Committee. Bombay: Vora

&. Co.. l9-ll, l).35, Appendit ll.s. lbid., p. s6. Sir M. t/isvesvataya, Planned Economy -for India. Bangalore: Bangalore

Press, 1934.

7 . Ibid., p. vi, see also pp. 59 and 65.

8. shriman Narayan Agarwal, The Gandhian Plan for Economic DevelopmentoJfIndia, Bombay: Padma Publications, 1944.

g. People'6 Plan for Economic Development o/- /ndia. Delhi: Federation ofIndian Labour, 1944. This Plan which was popularly known as thePeople's Plan was drafted by the post-war Reconstruction Commitlee ofthe Federation of Indian Labour under the leadership of M.N. Ro!,, andamongst its aulhors was the noted eaonomist, Professor G.D. Parikh ofBombay. Lhlike the Bombay Plan lsee nole 31, tbe People's Plan pliced irs

main reliance on the surplus of nationalised production arid'laid downagriculture and other essential consumer goods as its priorities.

10. Sir Purshottamdas Thakurdas et al., A Plan of Economic Development forlndia. Bombay: New Book Co., 1944, Part II, p. 23. This Plan came to beknown as the Bombav Plan and was in two parts. Part I was published inJanuary 1944 and Part ll in December 19214.

77. Ibid., p. 24.

12. B.N. Ganguli, Indian Edlnomic Thought: Nineaeenah Century Perspectives.New Delhi: Tata Mccraw Hill, 1977 ) p. 239-

13. Rai Krishna, Nehru-candhi Polarity and Economic policy. Mainslr€am,Vol. 16, No. 49, 5 August 197E, pp. 8-12.

14. Ibid.7s. Ibid.16. tbid.17. rbid-

In the broaQ.est sense, the industrial policy ol a r:ountry wouldcover all policy measures intendpd to influence and controlthe pace and direction of industfial development. An Indus-trial Policy Statement would also try to spell out the long-termgoal and strate6y of industrialisation in the context of thestage of economic development of the country, the sociopolitical set-up, and the econonlic institutional framework.T'he two elements of any industrial policy enunciated by theGovernment wor-rkl, therefore, be a clear statement about thegoals which are to be achieved antd the operating strategy preposed to be pursued to realise these goals. Thus, among theissues which will figure in any dlscussion of industrial policyare : the role and weightage to be assigned to hear,y, light andmedium industries, the ownership pattern to be aimed at fordifferent industries in the procqss of industrialisatiort andespecially the role of foreign capi{al and imported technology,sources of finance to be demarcated for various sectors ofindustry and the role to be assigqred to internal yersus exter-nal resources, reliance on instiftutional finance as againstrecourse to the capital market, etb. An effective policy framework would also have tir take inlo account the technological


options involved, locational guidelines for establishing newunits and for ensuring a fair regional dispersal of industrialgrowth. At the microlevel, the policy would have to addressitself to issues such as operating size of the units, minimumor maximurn scale of production so as to ensure iost effective-ness taking into account the prevailing local c'onditions andfactor availability. Finally, an important elen\ent of a viableindustrial policy would include an appraisal mechanism sothat periodically it is possible to review the progress made,the extent to which the stated obiectives of the policy arebeing approached or achieved, and to assess whether anychanges in the stated objectives andr,or in the operatingstrategy to achieve these objectives are necessary.

It will be seen from the analysis of the successive policyStatements that the enunciation of Government policies wasrelatively strong on statement of goals or objectives, muchweaker on the elaboration of operating strategies and therewas, virtually, no regular mechanism for the appraisal ofpolicy. The appraisals undeftaken as part of the ptinning process in the country were often inadequate in assessing theeffectiveness of the strategies adopted for achieving partiiular.objectives in order to decide whether the policies neededmodifications at the margin or whether a more basic changein direction was necessary. Further, such reviews as wereundertaken, for example, Dr. Hazari,sl Report on IndustrialLicensing, Subimal Dutts Inquiry Committee Report on Indus_trial Licensing policy t7962),2 Report of the Study Group onIndustrial Regulations and procedunes (G.V. nimakrishna,February 1978),3 and the periodic reviews of developments insuccessive Five-year plans, do not appear to have beenfollowed up with. a view to either modifzing policies orimpmving the mechanisms to achieve the stated obiectlves. Asa result, .over the years, the gap between obiectives andachievements, between what was intended and what actuallyhappened, and between what the particular policy instru_ments were supposed to achieve and what, in fact, they didachieve continued to widen. There was a reluctance to mod_if' or even to change the emphasis with regard to the variousgoals which a pluralist strategy of advancing on all fronts inpur"suit of multiple objectives of growth_equity, employment

36 EVOLUTION oF INDUSTRIAI, PoLIcM _ 1945-1973

and self-reliance-inevitably involves. At the same time theelaborate structure of regulatipn and controls-industriallicensing import controls, price and distribution controls,foreign exchange regulations, control over induction offoreign capital or technology and FERA/MRTP approvals,etc.-had a dynamics of its own. This system interacting withthe social, political milieu of the country tended to create apowerful lobby of bureaucrats, politicians and industrialists,each having a vested interest in 4voiding any major modifica-tion of the prevailing system. Thds is reflected in the policiesenunciated from time to time and in the unwillingness to acton the advice or recommendallions contained in the PlanDocuments or reports of varflous committees includingParliamentary Committees.

It is commonly assumed, that planned industrial development in which there was a signifrcant role for the public sec-tor was a policy orientation whiqh originated and crystallisedrn the post-independencp pqdod. The Industrial PolicyResolution of 19564 which was formulated. after Parliamenthad accepted the socialistic pattern of society as the objectiveof social and economic policies, io generally taken as the start-ing point for what constituted th$ main contours of industrialpolicy over the last two or three decades. However, this is notthe case. Apart from a fairly long history of nationalistthinking- later supported by some degree of officialendorsement-which gave the St4te a highly active and promi-nent role in industrial development, the official thinking evenprior to independence anticipated many of the importantelements of the Industrial Policy Resolution of 1956.

The statement of Governmentf s Industrial Policy issued bythe Planning and Development Dppartment in April 1945 is, inmany ways, a remarkable docUment. The Stateinent wasissued in the context of 'condititlrns in which India will findherself after the war...',s and no doubt, its contents wereSXeatly influenced by the detrate and discussions on post-warreconstruction problems in Euiope and elsewhere whichallotted to the State a much l{rger role than in the past.Nevertheless, it is quite remarkable to see how the 1945

Regulation and DeveloPment 37

'Statement* of Government Policy anticipates in many ways the

obiectives, and to some extent, the approach and mechanismsouilined in subsequent Policy Statements.

The Industrial Policy Statement begins with the premisethat the development of industries is, under the Governmentof India Ac! 1935, a provincial subiect' However, it is open to

the Centre to declare by law that the development of certainindustries under Central control is expedient in publicinterest and, thereupon, the development of such industriesbecomes a Central subiect. Till 1945 no such Act was passed

by the Central Legislature with the consequence that thedevelopment of industries was entirely a provincial subject.The Policy Statement gives two reasons why the Governmentof India, nevertheless, felt the need for issuing the Statementof their Industrial Policy. Firsl the general economic policyhad a profound influence on industrial development and tothat extent the Central Government was involved in, and con-cerned about industrial development. Second, certain industries should be taken over under Central control in theihterest of caordinated development. This was, in fact, con-templated by Parliament (in Britain) when the Government ofIndia Act was passed. Against this background the Govern-ment Policy Starement issued a list of industries whichshould be centralisedr

1. Iron and steel.2. Manufacture of prime movers.3. Automobiles and tractors and transpon vehicles.4. Aircraft.5. Shipbuilding and marine engineering.6. Electrical machinery.7. Heavy machinery such as textiles, sugat paper, rnining

cement and chemicals8. Machine tools.9. Hea4v chemicals and fine chemicals, chemical dyes,

fertilisers and pharmaceutical drugs.10. ElectrGchemical industrv.

' The text of Statement of covernr4ent's Industrial Policy is now not readilyayailable and is, therefore, reproduCed in Appenr.lix I at the end.

1945-1973

13. Power alcohol.14. Sugar.15 Motor and aviation fuer.16. Rubber manufacture.12. Non-ferrous industry.18. Electric power.19. Coal.20. Radio engineering.

Of course, very correctly, the Statement adds that 'beforecoming to our final decision Government will consult provin-ces and the leading Indian Statesl'G It will be seen than this listbears a fairly close resemblance to the original Schedule ofIndustries brought under the purview of the Central Govern-ment by the enactment of the Industries lDevelopment andRegulation) Act of 1951.

But this is not all. As stated earlier, the 1945 Statementanticipares rn rnany ways the appnoach, objectives, andmechanisms which are embodied in the subsequent PolicyResolutions. For instance, the Industrial Policy Statement,1945 specifically states, 'It is axiofnatic in Government's policythat the additional wealth created by industrial developmentshould be distributed in a manner that may be regarded associally equitable. Powers musf be taken and consciouslyused to secure this purpose.'7 The Statement rcco€(nises that

... continuance of their existing policy, in the conditions inwhich India will find herself after this war will not meetthe obiectives of sound post-waf development.s ...Governmenthave decided to take positive steps to encourage and pro.mote the rapid industrialisatiOn of the country to the fullestextent possible. They attach particular importance to thedevelopment of those industries which constitute the foun-dation of modern industrial life, such as the iron and steelindustry, the heary engineerlng indu$tries. the machinetool industry, the heavy chernlical industry and so on. Butwhile development of these industries must take high

. priority, it must form part of a balanced plan in which due


place is given to consumption goods industries. It is ctearthat if progress is to be achieved development of industrymust be planned by Government in cooperation withindustry and every effort mdde to make the plan effective.s

Referring to the question of the exteltt to which the Statewould take part in industrial enterprise, public utilities andrailways . which forrned a considerable portion of the totalindustrial enterprises were already largely State owned andState operated. Il had also been decided that the generation ofelectric power should, as far as possible, be a State concern.]'he Statement goes on to say that apart from ordnance fac-tories, public utilities, railways and generatiori of electricity,'Basic industries of national inrportance may be nationalizedprovided atlequate private capital is not forthcoming and it isregarded as essential in the national interest to promote suchindustries.'ro Amongst the industries listed as falling in thiscategory were aircraft,. automobiles, tractors, chemicals anddyes, iron and steel, prime movers, transport, vehicles, electri-cal machinery, machine tools, 'electrochemical and non-ferrous industries. This list, agaiq is not so radically differentfrom the list of industries included in the 1956 Resolution as'Schedule "A" industries' in which future development wouldbe the exclusive responsibility of the State. All other indus-tries 'were to be lefl to private enterpfises, under varyingdegrees of control.'11

It is wr:rth noting that way back in 1945 the then Govern-ment had come to the conclusion that 'they must take powerto license industrial undertakings.'12 Again, the Policy Staternent anlicipates the future when it states:

One effect of this unregulated firedom to promote industrial enterprises has been the concentration of industries incertain areas. For instance, franufacture of cotton textileshas been cnncentrated in Bombay and Ahmedabad, sugarin UP and Bihar, paper in Bengal. In some cases thereare good grounds for concentration of industries in par-ticular areas but in many cases, it has been the result of for-tuitous and haphazard growth. There are vast areas in thiscountry which though suitable for industrial developmenr.

.& EVOLUTION OF INDUSTRIAL POLICY - 1945.1973

have not been developed becairse industry has tended toflow in particular channels.13

Pointing out that the concentration of industries is not alwaysthe result of economic or technical considerations, the State.

, ment furt her adds

Even where concentration appears relatively cheap on thebasis of financial costs of production and distribution, itwould, in many cases be foutnd, in the long run, bothsocially and economically cheaper to disperse industry, ifregard is paid to the benefits of a widely spread industrialstructure and its integration wit[r agriculture.la

The other reason for licensing mentioned in the policyStatement was that there was a tendency for capitalists toadopt scherqes which promised quick returns. This wouldlead to

l,opsided development-a scrarnble for some indusFieswith the danger of overproduction and excessive competi-tion and inadequate attention tQ other industries which areequally necessaty in the national interest. To overcome thisdifficulty it would be necessary to fix targets, to allocatethem on a re$onal basis, and to see that these targers areachieved.ls

For this purpose the Government would have to assumepower to license and establish new factories and for theexpansion of existing factorieq because ,without this powerpLanned industrial development will be quite impossible.,lG TheStatement recognised that in order to avoid unnecessarydelays it would be desirable to exempt fi:om the proposedlicensing smaller plants below a certain monetary limi! mod-erate expansion of existing plants, or replacements which do'not add to the output. Further, in order to ensure. that the

Regulation and Deve[oPment 47

advise the Central Government rn tne matter of granting

licences for industries. Details of the personnel of the

Board, its function, and irther connected matter were to be

decid6d later.17

The Policy Statement also anticipates the future by making

a specific rbierence to the need'to enstlre that unhealthy con-

centration of assets in the hands of few persons or of a-special

community would be avoided.'1s For this purpose the Policy

Statemeni further suggests that this may be secured by judi'

cious exercise of controls, such as capital issue control' and

the licensing machinery for regionalisation of industry'

This somewhat detailed reference to the 1945 Policy State

ment is primarity to underline the continuity of national

thinking on "ome'of

the malor issues of industrial policy All

the important elements referred to in this Policy Statement

recur in subsequent Resolutions on Industrial Policy of April1948 and April 1956. There are, of course, differences in

emphasis and in the nuances of drafting, some of which are

significant enough to merit mention. For instance, the Indus-

trLt foticy Resolution of April 1948 marks the first stage ofevolution of industrial policy after independence; but it also

reflects a somewhat delicate political balance between the

more radical aspirations of the younger element in the Con-

gress Party, the known sociGeconomic predilections of Pandit

iawaharlal Nehru and the cautious and basically consewative

approach of Sandar Valtabhbhai Patel and many others of the

old guard.The Policy Resolution gives top priority to an 'increase ln

national *"ulth"' and categorically states that 'a mere redis-

tnibution of the existing wealth would make no essential dif-

ference to the people and would merely mean distribution ofpoverty.'20 While the Resolution begins with the premise thatihu'st.tu must play a progressively active role in the develop

ment of indusries',2r it goes on to caution that 'the ability toachieve main obiectives shoutd determine the immediateextent of the State's responsibility and limits to private enter-

prise.'zz The conclusion, therefore, is that 'for sometime to

come' the State could contribute more quickly to the increase

of national wealth 'by expanding its pnesent activities

42 EVOLUTION OF INDUSTRIAI- POLICY _ 1945.1973

wherever ir is already operallng and by concentrating on newunits r:f pr.oduction in othe-r fields rather than on acquiringanci running existing units.,23

In thc light of this contexl, areas r,t,hich are to be lheexclusive monopoly of the Centrral Government are defined.These are manufacture of arms and ammunition, pft)ductionand control of atomic energy, ownership and nranagement ofrailway. transport. In respect of the foll,owing industries, theResolution states that the State-ancl the Resolutionspecifically. clarifies that this inclucles Central, provincial andfonner Princely States, Governments as well as other publicauthorities like municipal corpo4ations-would be exclusivelyresponsible for the establishmenl of new undertakings. Thereis a further clarification that ,thp Stale may itself secure thecooperalion of:private enterprisei in the national interest, sut>ject to such control and regulatidn as the Central Governmentmay prescribe.'24 The activities listed for this purpose were :

Coal (tne Indian Coalfield$ Committee,s proposals willbe generally followed).

I.

,3.

4.

5.

Irorr and steel.Aircraft manufacture.Shipbuilding.Manufacture of telephonre, telegfaph and wirelessapparatus, excluding radio receiving sets.

6. Mineral oils.

An interesting feature of the Resolution was that while, reiterating the inherent right of the State to acquire ,any exist-ing industrial undertaking,2s it adps specifically that ,covern_ment have decided to let the existing undertakings in thesefields develop for a period of ten yeirs, during which theywill be allowed all facilities for efficient and reasonableexpansion.'i6 After a period of ten yeats the matter was to bereviewed and a decision taken in the light of circumstancesobtaining at the time; and if it Was decided that the Stateshould acquire any unit, ,fundanlental rights guaranteed bythe Constitution will be observed and compen"ation will beawarded on a fair and equitat_rle basis.,z7

In addilion to these, the Resdlution also lists industries


whose loc.ations must be governed by economic factors of all-

India importance or which re quire considerable investrnent

or a higtrdegree of technical skill; and these rvould be subiect

to Ceniral regulation and control 'Ihese industries were as

follows :

1. salt.2; Automobiles and tractors.3. Prime movers.4. F.lectric engineering.5. Olher hear,Y machineru.6. Machine tools.7 . iHeary chemicals, feftilisers and phalmaceuticals and

drugs.8. Electro-chemtcal industries'9. Non-ferrous metals.

10. Rubber manulaclures11. Power and industrial alcohol'12. Cotton and woollen textiles'13. Cement.14. Sugar.15. Paper and newsPrint.16. Air and sea transpofi.17. Minerals.18. Industries related to defence'

It is important to .note that the Resolution' while defining

areas or citegories .of industries whi0h vrould be subject to

Central regulation and control, specitically guarantees that'itwill consult Governments of the Provinces and States at all

stages and fully associate them in the formulations and execu-

tion of the plans"28Ilnlike the Policy Statement of 1945, the Industrial Policy

Resolution of 1948 refers to the rcle of cotlage and stnall-scale

ind;stries which offer 'scr-rpe fot'individual, village or co-

oDerative enterprise and rneans fb| the lehabilitation of dis-

placed pe""on".lt*' Th" justification for the inclusion of cottage

Lnd small-scale industries was that thev were particularly

suitecl for 'better utilisation of local resources and fbr the

achievement of local self-sulTiciency in respect of certain

,t4 EVOLUTION oF INDUSTRIAL PoLIcY _ 1945.1973

essential con^sumer goods like food, cloth and agriculturalimplements.'30 The Resolution, while noting that theseactivities fall mostly in the sphere of provincial Governmenrsand former princely States, adds that the Central Governmentwould investigate how far and il.r what manner these indus-tries could be coordihated and integrated with largescaleindustries. The Resolution passed by the Industries Conferen-ce, 7948, had made this recommdndation and the Resolution,while accepting the recommendation, refers by way of exampieto the possibility of the textile industry bling made com_plementary rather than competitive with ihe haridloom indus"try, which is the countqy's_ largest and best organised cottageindustry. It further states that in certain other Jreas of prodtic_tion like agricultural implements, textile accessories, andparts of machine tools it should tre possible to produce com-ponents on a cottage industry sc4le and assemble these intotheir final product at a factory. It was also proposed to inves-tigate how far industries highly centralised ai p"e"ent couldbe decentralised with advantage.

The text of the Industrial policy Resolutioq 1948, alsor€fers to other issues such as association of labour in mattersconcerning industrial production and requirements of indus-trial housing. In the case of participation of foreign privateenterprise and particularly foreign technolory, the Resolutionaccepts the Industries Conference .""o--".rdution that ,it isnecessary that the conditions under which they rforeign capi_tal

_and enterprise) may participate in industry should be care-fully regulated in the national '31 For this purpose itwas proposed that suitable tion would be introduced

of foreign capital and nt in industry. '32 Generalpolicy, of course, was that as a rule the maior interest in

which would provide for theCentral Government 'of everv

It will be seen that therEpresents in some ways aunderlyin5 the Statement of

and approval by thecase of panticipation

Policy Resolution, 1948of the thinking

Policy, 1945; but in

ownership and effective control, should always be in Indianhands; 'but power will be taken to deal with exceptional

lome areas, such as the role small-scale an(l cottage

neguletion and Develoqment lLS

induslries, the attitude to foreign capital' and the policy in reLation

to nationahsation, it marks a departure from tne past' An

interesting feature of the Resolution, of course' is the fine

balance it- seeks to maintain between a greater role for the

Central Government and the role of the Prcvinciavstate

Governments on the one hand and the private enterprise on

the other.Eight ybars elapsed before a new formulation elaborating

th" Corr""rr-tnt's approach to industrial policy was presented

to Parliament. In the new formulation, there was a marked

change in emphasis though not in direction; and in the

changed politiial and economic environment, there was less

need- for careful compromises or for balancing various

interests. By 1956, Pandit Nehru was the undisputed leader of

the ruling party and with the death of Sardar Patel the conser-

vative wing of the Congress Party became much weaker' The

First Five-Year Plan ending in March 1956 was undoubtedlysuccessful. Prices had declined over the FiveYear Plan period

and national income had increased by 3'6 per cent per

annum. The disruption caused by the Partition and its after'

math was being overcome; and the nation's mood was one ofsupreme confidence in facing the future.

The Industrial Policy Resolution passed by Parliament inApril 1956 is one which is rnost often referred to partly

because it held sway for more than two decades; arrd partlytrecause it sought to translate the ideological basis of the Con-

gress under Pandit Nehru's leadership into a framework ofpolicy for future industrial development' As time passed itacquired a little of the mystic character of the scriptures

which could be quoted by people who had scarcely readit carefully. ;l'he association of the name of Pandit

Jawaharlal Nehru with the formulation of that Resolutiongave it an added halo; and even those who, in later years,

wanted.to make some modifications in it in the lighr of chang-

ing circumstances had to swear by it. The changes had to be

camouflaged as continuitY.As the Resolution points out, the eight year period follow-

ing the previous Industrial Policy Resolution witnessed many

important changes in the development of India' The Constitu-tion of India had been enacted which guaranteed fundamental

46 EVOLTITION OF INDUSTRIAI POLICIY. 1945.1973

rights and enunciated Directive principles of the StatePolicy. Ptanning had been estatilished. on an orAanised trasisand in December 1954, parliamefrt accepted the ;socialist pat_tern of socieb/34 as the object[ve of socjal and economicpolicy, thus giving the basic general principle enshrined inthe Constitution, 'a more pnecise direction,.3s

The starting point of the Resolution, however. is the sameas that of its predecessor, namely, that the State is lo assumedirect responsibility for the future development of industriesover a wide area; but there ar.e llmiting factors which make itnecessary 'at thi$ stage' to definq the field in which it rvouldundentake sole resp6nsibility fo4 further development and tomake a selection, of industries in the development of which itwould plal' a dorninant role. Thb Resolution, therefore, cate-gonises industries into three gmups : (a) indusries included inSchedule A the future development of which will be the exclu-sive responsibility of the State; (b) Schedule B consisting ofindustries which will be progressivelv State owned andwhere the State will, therefore, generally iake initiative inestablishing new undertakings, nnd in which private entepprise will also be expected to qupplement the effort of theState; (c,l all remaining industries where future developmentwill, in general be.left to the initiative and enterprise of theprivate sector. Ihe list of industrfes included in Schedules ,A,

and 'B' is given in Appendix II.TWo features of the Resolutiolr .are often overlooked. First,

is its commitment that 'it will be the policy of the State tofacilitate and encourage the devr]llopment of these industriesln private sector in accondance with the programmes fonmulated in successive Five-Yeaf. Plans....' 36 The Resolutionspecifically mentions that whils the private sector undeFtakings must necessarily fit into thp framework of the social anceconomic poliry of the State, anld be subject to control andr€gulation in terms of the nelevant legislation, the Govern-ment of India

recognised that it would, in ggneraf be desirable to allowsuch undertakings to develop with as much fueedom aspossible consistent with the thrgets and objectives of theNational Plan. When there exibt in the same industrv both

negulation and Develapnre nt 4z

privately and publicly owned units it would continue to bethe policy of the State to give fain and non-discriminatorytreat[tent to both of them.37

Contrary to the common assumption that the IndustrialPolicy Resolution, 1956 established an area of activity whichwas not open to private industry and another in which thernle of private industry would be increasingly circumscribed,the text of the Resolution allowed much greater degree offlexibility in operating the policy. For instance, the Resolutionspecifically mentions that the 'divtsion of industries into separate

categories-does not imply that they are being placed in water*tight compartments. Inevitably, there will be not only an areaof overlapping but also a great deal of dovetailln6 betweenthe industries in the private and public sectors.'3E While refenring to the possibility of State owned industries not includedeither in Schedule A or Schedule B, the Resolution also men-tions that 'in appnopdate cases, privately owned units may bepermitted to produce an item falling within Schedule A fornleeting their own tequrre[rents on as by'products.'3s Similar-ly, there was to be no bar to small privately owned unitsundertaking prcduction such as the making of launches andother light-crafts, generation of power for local needs andsmall-scale minirrg. In short, the framers of the Resolutionenvisaged situations where the public sector might enterareas normally reserved for tlie private secton and, to someextent, vice-vensa. Over a period of time, however, the trendwas towards the State enterin€t areas not specifically neservedfor it, for example, Modern Bakeries, photo films, paper,cament, fisheries and construction. But there was no corres.ponding flexibility with regard to the private sector being per'mitted to produre items included in Schedule A. Thisreflected partly the political olimate; but, partly at least, itreflected the fact that the political and administrative systemwas becoming increasingly conscious of the advantages (at

least to itselfl) of gneater contnol over and Par'ticipation inindustrial activity by the Governmen! especially at the Centrc.Many of the States were also not far behind in emulating theCentre by starting a plethora of State level corporations whichwidened the scope for political patronage.

iI6 EVOLUTION OF INDUSTRIAL POLICY _ 194F1973

There is another aspect which merits mention here. Unlikethe-Industrial Folicy Resolution of 1946 which, as pointed outearlier, defined State participatrion as including Central, pro_vincial and State Governments, and public authorities such asmunicipal corporations, the 1986 Resolution makes no suchmention. On the other hand, there is a somewhat crypticreference in the Resolution stalting that ,the division of res_ponsibility between the Central Goverqment and the StateGovernments in regard to indugtries has been set out in theIndustries (Development and Regulation) 4st, +o The Indus_tries (Development and Regulation) Act specified that in res-pect of activities listed in the Scheduls to the Act it maybecome expedlent in the puhlic interest to takeover theindustries specified therein, i.e., the entire range of licensableindustrial activity. Further, all the powers under the Actincluding the power to assume management or control ofindustrial undertakings in certaln cases, were to be exercisedby the Central covernment only. Section 25 of the Act prGvides for the delegation df powers, other than the powers inrespect of direct management or control of industrial under_.takings, '...subiect to such corlditions, if anv., as mav bespecified in the direction be ekercisable by such officer orauthority including in the said expressions any DevelopmentCouncil, State Government or officer or authoritv subordinateto the Central Government, as rnay be specifiej in the direc.tion. In other words, the responsibility in respect of allScheduled industries was that of the Central Government,although industry remained a ooncunent subiect under theConstitution. The industries lioted in Schedules A and Battached to the Industrial policy Resolution of 1956 are allincluded as Scheduled Industtries under the Industries{Development and Regulatiod Act, except for coal, lignite, min_ing of iron ore, chromirlm andt other ores, etc. The result,therefore, was that for all pr.acrical purposes tunlike the Indus-triat Policy Resolution of 19461, the industrial policv Resolutionof 1956, by implication, equated State participation with Cen_tral Government participation in industry. Witn the exceptionof coal, lignite, mining of iron ore, chromium. and other ores,etc., all other activities listed in Schedule A were covered bvrhe ligt of scheduled industries un{er rhe IndustriesiDevelopmeni

netulation and Develoqment 49

and Regulation) Act._

The industrial Poiicy Resolution, 1956 also stressed the role

of cottage, village and srqall-scale industries; and mentioned

by way of advantages 'immediate large-scale employment "'more Lquitable distribution of the national income "' (and)

effective mobilization of resources of capital and skill whichmight otherwise remain unutilised.'a1 A brief reference to

unllanned urbanisation appears in the Resolution and the

,ui,rtio.t offered is the 'establishment of small centres ofindusrial production all over the iountry'. Emphasis is placed

on the organisation of industrial cooperatives which were to

be encouraged in every waY.On the question of regional disparities which should be

progressivelY' reduced, the Resolution recognised that the con-

centnation of industries in certain areas had been due to the

ready availability of power, water supply and transportfacilities which had been developed there. It was to be theaim of national planning to ensure that these facilities weresteadily made available to areas which were lagging behindindustrially or 'where there is greater need for prnvidingopportunities for employment, proiided the location is otheFlgise suitable.'az The objective of the Policy was to lead to 'abalanced and coordinated development of the industrial andagricultural economy in each negion.'43

The Resolution discussed technical and managerial resour'ces in terms of personnel and added that in order to meet therapidly growing needs for the expansion of the public sectorand for the development of village and small-scale industries.proper managerial and technibal cadres in the public serwices

were being established. Further, a relelence was made to themeasures being taken to meet shortages at supervisory levels

and for extending the faining facilities in business management in univensities and other institutions' On the question ofmanagement of public enterprises, the Resolution noted that'speedy decisions and willingness to assume responsibility areessential if these enterprises are lo succeed''# There wouldhave to be decentralisation of authority and management hasto be along business lines. Workers and technicians shoul{wherever possible, be associated progtessively in manage-ment and 'enterprises in the public sector have to set an

JO EVOLUTION OF INDUSTNIAL POLICY - 19,I.5-1973

example in this respect.,lsIr will be seen that there is a considerable degree of con

tinuity in thinking in the succesdive policy Statements of 1945

the systern of import licensing, both these were Central sub-iects. But with the in of- Planning and IndustrialLicensing, continued shortage of exchange meant thatdecisions.regarding the import of capital gobds as well as theavailability of raw materials, or wholly imported, cameexclusively unden the control of the Central Government. Thesignificance of this was that the sector of small-scaieindustry and even some types of iictivities in the decentralisedsector, such as handloom, powbnloom or woollen textiles,came within the puwiew of the policies and administrativeactions of the Central Govefnment.

For over two decades, the Industrial Policy Resolution con-tinued to remain the gospel a gospel not always carefully read..The two decadesdevelopments which had anciated 'or implied in the 1956

numerous importantpact on the policies enun-

and adrninistralive mechrequired a review of the polic and procedures; in practicethere was considerable resischanges.

to introduqing any maior

The licensing mechanism as ell as the nelease of foreignexchange for imports of t were relativelv uncom-plicated in the first few years er the Industries (Development and Regulation) Act, 1956 into force. For one thing,

lution and the proceduresevolved for the purpose

a great deal of time anci effort was spent in the socalled

Regulation and. Development 57

'Registration certificates'* as provided tor under Sectioir xrelaling to the registration of existing industrial undertakingsunder the Indusries (Development and Regulation) Act. Theclearance of foreign exchange for import of raw materials/capital goods was also relatively easy till foreigr exchange difficulties began to surface by 195s. As a result there wasrelatively little criticism of the working of the iicensingregulatory system in the early years.

The situation, however, changed when, on the one hand,the demands on the licensing system in the form of appli.cations for new undertakings, substantial expansion andmanufacturing new articles, all of which required priorapproval began to increase. For instance, the total number ofapplications examined by the Licensing Committee increasedfrom 1300 in 1956 to approximately 1900 by 1961 and toapproximately 25oo by 1966. Con€spondingly, the number ofnequests entertained by the Capital Goods Committee forforeign exchange also increased significantly. The sheeradministrative burden involved as well as the growing short-age of foreign exchange and domestic resources began ioreflect itself in a chorus of criticism directed against thelicensing syslem.

The first appraisal of the licensing systema6 was done in1964 by a committee under the chairmanship of Shri T'Swaminathan: but the task of the committee was confined to

. The certificates of registration had to be issued to the 'existing undeFtakings, that i9 those undertakings which were already establi$hed at the

commencement of the Act and were manufacturing items included in th€

FirEt Schedule to the Act. But these certificates did not usually specil' the produc-

tive capacities and other relevant particulars. As such it was considered

necessary to amend the Industries (Development and Regulation) Act, to con-

fer powers on the government to specify in the Registration certificates the

productive capacity of the industrial undertakings and other prescribed pal.ticulars. Accordingly, Section x of the Act was amended by the Industries(Development and Regulation) Amendment Act of 1973 b}r inserting Sub-

Sections IV and V, i e., after a lapse of sevenleen years. During this period a

great deal of confusion persisted about 'licensed pmductive capacity. This

was especially the case in respect of several undertakings, including t''eigncompanies, engaged in the production of consumer goods, where their entry

was to be restdcted; or in fields such as drugs and pharmaceuticals, where

ihe policy was to encourage the public sector/Indian sect-or.

52 EVOLUTION OF INDUSTNIAT POLICY * 7s,45.1973

licensing procedures and allied matters. Its main recommenda-tion was to institute a 'two tiey' Fystem. Under this system apuick preliminary examination of the application was followedby the Licensing Qommittee issuing a letter of intent, subject tocertain conditions and speciffing a period of time withinlvhich these conditions were to be fulfilled. In the event,these con&ions were not fulfille4 the intention was thatthe letter of intent should automatically lapse or in the eventof adequate justification, to be extended for a specifiedperiod. In case the conditions were satisfied, the letter ofintent may be converted into an industrial licence.

Unlike the Swaminathan Com{nittee which dealt with theprocedures, a more comprehensife enquiry into the role andpurpose of the industrial policy ap an instrument of planningfor an industrial environment which had altered considerablysince the enactment of the Industries (Development andRegulation) Act, was entrusted fot,the time to Dr. R.K. Hazari.In 1964 the Industrial Development Bank of India was set upas an apex institution for industrial finance and in t969 all themaior commercial banks were n{tionalised, thus completingthe process of Central Government's control over a predomi-nant segment of the nation's savings and institutional lendingfor all purposes, including industly. The rupee was devaluedin June 1966 by 57.5 per cent agBinst the sterling and tariffstructure was instituted which, it was hoped, would enablethe country to achieve greater viability in its balance ofpayments, without dependence on or excessive recourse tomultiple exchange nates implicit in the system of ExportBonus Vouchers which had evolved in the eanly sixties as themaior instrument for export prorllotion. The Monopolies andRestrictive Trade Practices (MRTp) Act was enacted in 1969;and acting upon the Report of the Industrial Licensing policyEnquiry Committee under the chhirmanship of Shri SubimalDutt, whose Report was published in July 1969,17 various res-trictions were placed on new licences for the bigger industrialhouses specified in the Dutt Comrfittee,s Report. A list of coreindustries consisting of basic and strategic industries wasdrawn up and the bigger industrinl houses were expected tocontribute to the development of irldushies only in this sector.

Thmughout this period the indlistnial policy was guided by


the approach outlined in the Industrial Policy Resolution,1956. Despite the findings or recommendations of variouscommittees or Policy Statements made from time to time orthe appnoach outlined in Plan Documents, there was noattempt to review the administrative mechanisms or procedures or to re.define priorities in cases where conflict bet-ween different obiectives was seen to emerge. For instance,the first major review of the working of the Industries(Development and Regulation) Act was in July 1966 when thePlanning Commission appointed Dr. R.K. Hazari, then pro-fessor of Industrial Economics at the University of Bombay, asHonorary Consultant to conduct a study of licensing under theIndustries (Development and Regulation) Ac! and suggestmodifications, if any, to the licensing policy. His final reportsubmitted in 1967 contains several important modificationsand recommendations. Amongst the more impoftant con-clusions were :48

1. The assumptions implicit in the Act that growth andallocation of resources should be looked after wholly ormainly by administrative guidance, promotion and ccn-trnl and hardly at all by the market mechanism was jus.tified only up to a point (para tg.Z).

2. That industrial licensing has served to channelise invest-ment into desired directions appears extremely doubtful(para 20.1).

3. The gains in terms of balanced regional developmentand wider distribution of entrepreneurship were at bestmoderate (para 20.1).

4. Licensing is only among the first of the many hurdlesthat has to be crossed by a private entrepreneur so that alicence does not automatically provide a package ofsarrctions and clearances (para Z0.Z).There is vqry little follow up of Iicensing to see thatapproved projects fructify in time (para ZO.2).In attempting to cover almost the whole range of largescale industrial development licensing, the Act rn-evitably loses sight of the relative importance of dif-terent proiects/products, i.e., whether critical to theeconomy or otherwise, all applications will undergo

J.

o.

I54 EVOLUTION OF INDUSTRIAL POLI

similar pnocessing.

Similarly, over the years, the

overall fiscal and monetarygenerating resources at thg

lanning Commission seemsto have realised that the framework of industrial policy and,more particularly, the mechanisrn for ensuring its implemen-tation need to be reviewed. Thris, even in the First FiveYearPlan {1951), while underlying the need for a system of controlssuch as capital issues control, of new enterprisesand large extension of g ones, foreign exchangeallocations, import and export ntrols, controls on prices andphysical controls including con ls on distributiott of com-

modities, the Planners were qulte explicit in stating that forthe success of the Plan 'administration and periodical reviewsof these controlq machinery for consultation and coopenationwith the private sector will have an effective shate.'ae Discuss'

ing the respective roles of the State and private enterprise, thePlan Document emphasised that 'harmonious working ofthese two sectors will depend, to a large extent, on decisionsan-ived at by mutual between the representativesof the Government and business and industry and labour.'so

Bv 1956, when the Seconc Year Plan was drafted,'the?lanning Commission had d a very prominent place inthe stnucture of Government. official view, as enunciatedin the Second Five-Year Plan ent, was that while an

e can go a long way inin desirable directions, 'a

comprehensive plan...cannot be seen through on the basis ofmerely overall fiscal and monetary controls.'sl The underlyinglogic was that 'if controls are administratively cumbrous andmay act as dis.incentive, lack of them, it has to be remem-bered may create inequality and hardships to the prejudice

By the time the Third Five-Ydar Plan (1961-66) was framed,nt that whatever the merits

of the long-term strategy for industrial develop

mances, between requirements and resources, and above alltletween the institutional ework needed for puttingthmugh the type and scale of of the working of

- 19,t5-r973

the existing cal system. For the first


time, there was an awareness and mention of the fact that theoperation of the industry depended not only on the needs ofthe people or markets for their products but also on the supply of raw materials, power, fuel and facilities for transport.The main emphasis, therefore, had to be 'on implementation,on speed and thorou6ihness in seeking practical results andcreating conditions for maximum production and employ-ment and the development of human resources.'53

The adverse factors operating on the economy during theThird Plan period culminated in the drastic devaluation of therupee in June 1966 and delayed the finalisation of the Plan.

The Planning Commission was reconstituted in September1967 with Professor D.R. Gadgil, one of the most distinguishedeconomists in the country, as Deputy Chairman. Aftel a careful review of the position the Commission concluded that withthe lapse of time many of the assumptions and estimates ofthe Draft Outline of the Fourth Plan which was published inAugust 1966 were no longer valid. In any event, there wereannual plans only for the years 1966-67 and 1967-68 and it wasdecided that for 1968-69 there should be an annual plan aswell. In effect, therefore, the Fourth Plan which, ordinarily,should have commenced in April 1966 was dravr.rr up for thefive-year period beginning with the fiscal year 1969-70.

Against this background the Fourth Plan Document wasmuch less complacent, more realistic and critical, particularlyof the actual performance in relation to the stnategy andobjectives. For instance, the Plan Document emphasised that'the concern for speed, economy and efficiency has not beenperwasive as it ought to be.'sa It further stressed that the'public sector which had the responsibility of setting muchhigher standards of performance had as yet to fulfil its role ofgenerating adequate surpluses for investment.'ss Even in res-pect of sensitive issues like income disparity the Fourth PlanDocument was much more forthright. For instance, it beginswith the proposition that 'in a rich country greater equalitycould be achieved in part by transfer of income through fiscal,pricing and other policies. No significant results can beachieved through such measures in a poor country.'s6 Thepath towards reduction of income disparities, therefore, wasa difficult one. The solution to the problem of income dis.

56 EVOLUTION OF INDUSTRIAI POLICY _ 1945-1973

parities must/ therefore, lie in '... more rapid growth ofeconomy, g1eater diffusion of enterprises and of theownership of the means of prodrnction, increasing the produc-tivity of the weaker units and widening opportunities of productive work and employment to the commotr man ..andparticularly the less privileged sdctions of society.'57

Regarding the issue of industrflal policy, the Fourth plan lis-ted a number of important poipts and many of these wereeither in contrast to the main stream of past thinking or coverareas often neglected in the past. For instance, it states thatspecific price and allocation pontrols and the general capitalissue and licensing controls were inescapable in the earliersituation of considerable generall and specific scarcities, butwith more efficient food management and greater availabilityof plant, machinery and other equipment in the country, areview of the past policies is required. This is all the more impontant because 'the existing industrlal structure has led generallyto a high level of costs and that the present system doesnot appear to have prevented concentration.'s8 The PlanningCommission refers to the proposal of social control of bankingand legislation of Monopolies and Restrictive Trade Practices;and of the assumption that would be operative indesired direbtions, a revision of the prcsent regime of controlswas deemed desirable. There two main obiectives of the

fully responsible decision-revisiori, first, 'it should enmaking on the part of en fixation of targets,licensing and some price and on controls seem to haveaffected the care with which the entrepreneurs should weighthe long-term prospects of their investment decisions.'se Thesecond important objective of the policy revision, it wasuurLUtrv a

argued, should be 'to introduce an element of competitivenessln the economy which would keep cost consciousness.'60Referring to the sheltered condltions created in part by theoperation of exrsting controls and liceqsing systems, whichhad reduced cost consciousness, the Plan Document stressesthe need for increasing the element of competitiveness, paFticularly when industrial activif begins to increase at thehigher rate expected dufing the Fourth Plan period. The onedirection in which greater vigilafirce by the Government was,accordinf to the Planning Comrhission, imperative was with


regard to the location of industries in metropolitan and large city

"""rrt""r. 'This should be effected in two ways-firstly' by positive

assistance and incentives given for dispersal of industry' and

sec<rndly, by disincentives imposed in large cities and positive

steps taien ior decongestion of metropolitan areas '61

ihe ,rie*s of the Commission on industrial policy are also

reflected in their ideas about the rate and pattern of industrial

development. In the long.term perspective of,ten or fifteen

y"u.r, ih" Commission concluded that an overall expansion ofb per cent in the net output of mining and manufacturing

industries and construction lvas required for achieving the

proiected growth in aggregate income and aglicultural production. .Iie pattern of industrial expansion had to be guided

by 'the necessity of meeting the requirements by the domestic

production of a wide range of manufactures which admit ofLconomic production.'62 In other words, the thrust for

development was still in the main ftom import substitutionwhich was viable. In this context the Commission noted that

in 1967-68, 70 per cent of finished fertilisers, alloy and special

steel, 75 per cent of copper and newsprint were met by

imports. Similarly, 60 per cent of crude oil 30 per cent of

aluminium and 30 per cent of machinery requirements of the

country were still dependent on imports. Fortunately, the

most significant branches of industry which needed attention

fi:om the point of view of import substitution were ones

where India was well placed by virtue both of the size of the

prospective market and of resource endowment to ensure

economic and efficient production.In conformity with its thinking and approach to the ques'

tion of industrial developmen! the Fourth Plan concluded

that 'both from the points of view of accelerating industrialdevelopment and improving the administrative efficiency,

the existing system of controls, would need a review''63

As regirds the most important and pervasive control'namely, the industrihl licensing system, the Planning Commis-

sion showed greater awareness of the issues involved and

also greater willingness to modif past approaches and prac-

tices. Thus, it begins with the proposition

The primary purpose of control is to ensure proper alloca-

5E EVOLUTION OF INDUSTRIAL POLICY _ 1945.1973

tion of scarce resources. Regulation of industrial development has ro be considered $rimarily in relation to thealiocation of foreign

tinue. Within the broad of control in strategicareas, there is advantage in the market muchfuller play. The supply of a variety- of industrial com_modities has considerablvslimulating delnand and

and the need is one ofuction. With the broader

control on commodities in

industrial base and growingment and raw materials from

Thrrs, import control andsupply would have to con-

iiity of capital equipthe country the need

to control Jurther expansion in industries which are largelybased on domestic resounces ha$ assumed less importance.

Accordingly, the industrial licensing policy during theFourth Plan was envisaged as follows :

1. All basic and strategic indr;sries, involving significantinvestments or foreign exchange, should be carefullyplanned and sublccted to industrial licensinA. It isnecessary to ensure effective penformance and tokeep aclose watch on the developmqnt of these industries. Hence,once the licence is granted, credit, foreign exchangeand scarce raw materials wquld be earmarked for thetand made available in timd. This should be done forunits both in (the) public and private sectors.

2. Industries requiring only marginal assistance by wav offoreign exchange for capital equipment may

' be

exempted from the need to secure industrial licences.For this purpose, the foreign exchange ceiling may bestipulated at about 10 per cent of the total value of thecapital equipment. The reJease of foreign exchangewould continue to be regulated and the import of capitalgoods screened by the Capital Goods Committee.However, in industries in which, though the foreign capi_tal equipment component is low, the maintenanceimports component is high, it rvill be necessary to con-tinue licensing.

3. Industries which do not call for foreign exchange forimport of capital equipment br raw materials should be

negulatton and DeveloPment 59

exempted from the requirements of ind usl rial"lice nsit rg

In these industries, there should be freedom for private

enterprise to operate in accordance with the market

requirements.

The freedom trom industrial licensing as proposed

above may in certain areas have adverse consequences-for

example, it may increase further the congestion of industry

i.r ,tt" tu"g" mltropolitan areas, may lead to undesirable

competiti; with traditional and small-scale industries and

coul<l add to the concentration of economic power' It isnecessary to safeguard against these conlingencies and

suitable --"u"r."r,

including reservation of certain indus-

tries for the traditional and small-scale sector' would have

to be devised in accordance with the requirements frr.rm

time to time.6s

In line with its approach to the question of licensing' the

Commission p"oporud that it was not necessary to lay down

'for the Fourth Plan targets for all industries'

Definite targets are proposed to be fixed onl1' fe" a limited

number of high priority industries ln order to ensure

fulfilment of these targets, full plovision will be made for'n;;;;;

supplies, ani other facilities' For the remaining

industries, estrmates of requirements and production have

been proiected in consultation with industrial associations

and other interests. These prolections do not nepresent

targets or ceilings.66

While the Fourth FiveYear Plan Document showed a refreg

hing realism and a willingness to accept changes in

dire"ctions of policy, in actual practice very little' if anything

changed. .Ihe iicensing system continued much the same way as

beforle. Indeed, with the passing of the Monopolies

Restrictive Trade Practices (MRTP) Act in 1969 f'urther res-

trictions were sought to be placed on new licences for the

larger industrial houses specified in the Indushial Licensing

Poiicy nnquiry Committee Report' The delays in various

upp"o.rul" l.tiers of intent, permission for import of capital

gooas, permi"sion for capital issues, provision for medium

60 EVOLU'I.ION OF INDUSTRIAL POLICY- 1945-1973

long-term finance, etc.:were endemic; and after the congresssplit in 1969 there was a marked increase in the number ofdecisions or clearances which were obtained, by approachingthe political levels of decision_making. In fact, ii m'f not be amere coincidence that there was a marked increase in thetime taken for clearing applicati0ns for letters of intent or,forcapital goods or for foreign co aborations and the greater rre.quency with which these approvals were u^p-"dit"d byapproaching the decision-makers at the politicai level. Therhetoric, particularly because of the political compulsions ofthe time, tend€d to be more nadical; buiit was clear that conbaryto the anticipations in the Fourth plan the growth of industrialproduction was far belo,,v the expectati;ns. Instead of theSrowth rate of8 to 10 per cent in industrial production, exceptfor the year 1969-20 when indusirial output gnew by 6.8 percent, the increase in output in the nexi three years of theFourth Plan varied between 3.5 to 4.5 per cent annually. In thelast year of the Plan, i.e., 1g7B-24 there was, in fact, hardly anyincre-ase. The factors responsible for this unsatisfactory stateof affairs were rnany, but by l9Z3 it was increasingly clear thatthe gap between promise and pepformance, betr.v'el., policiesand their actual implementatio[r, between obiectives andtheir achievement had greatly widened, necessitating a criti_cal review of both policies and procedures.


five parts.2. India, Industrial Licensing policy Inquily Committee, neport New Delhi

Go!'1. of India, Ministry of Industrial Developmenl, 1969.

1. R.K- Hazari, Industrial planning and Litensing pollcy New Delhi: Gort. ofIndia, Planning Commission, 1967. Dr Hazari was appointed Honorary corrsultant by the planning Commission to qndertake a thorou-gh examination ofthe industrial licensing policy. He subrnined an interim ;porr in 1966 andthe final report in 1962. The final report ib in two volume" urrd i" dirridrd irrto

Regulatton and Development 87

3..c.\'. RamakrishDa, Chairlnan, neport o.f lhe .Studv Ot]dup on lndu.ttrialRcgulations an<l Ptoced.otes. New Delhi: Go\4. of India, February 197{l

.t. Industrial Policv Resolution, 19.56. No. 91/'CF-/.+E,30 April 1956. In Guidelines

-fc,r lndur^trie.r New Delhi: Indian Investment Centrc, 1982, Parl l, Section II,

PP.6'10.5. India, Planning and Development Department, Statetnenr of Government s

lndustrial Policy, 1945.

6. Ibid., para 2.

7. lbid, pal"a 3.

8. Ibid., parc 4.

9. Ibrd, para 5.

10. lbid., paru 7 .

ll lbid., paraT.12. Ibid., paru 10.

13. tbid'..1. /bid., pam 11.

15. lbid, para 12.

16. Ibid, para 13.

t7 . tbid.'18. /bid , para 14

' u.

19. Industrial Policy Resolution,1946. No. 1(3)'14113)/48, 6 April194E /nGuidelines

for Industies. New Delhi: Indian Investment Centre, 19E2, Part l, S;ction Itpp. l-5, para 2.

20. Ibid., parc 3.

21. Ibid.22. rbid.23. Ibid.24. Ibid., para 4.

2s. Ibid26. rbid.27 . rbid.2E. Ibid, para 7 .

2s. Ibid., parc a.

30. lbid.31. Ibid.33. rbid.34. Industrial Policy. Resolution, 1956. No. 9'llCF/4E' 30 April 1956 /n

Guidelines for Induslries New Delhi: tndian lnvestment centr€, 1982, Part

I, Section lI, pp. 6-10, Para 2.

35. Ibid., paft 4.

36. lbid, para 10.

37. Ibid., para 17.

3a- Ibid., para't2.3s. rbid.40- Ibid., pa,ra 7S.

41. Ibid., para 73

42. Ibid-, para 75.

43. rbid.

A2 EVOLLITION OF INDUSTR|AL POUOY 1945-1973

.14. lbid, para 16.

4E. R.K. Hazari, Indusrrial Planning and Licensing Polic.y. New Delhi: Go!'t. ofIndia, PlanninA Conrorission, 1967.

'19. India, Planning Commission, The First-Five Year Plan: A Draft Outline.Delhi: Manager of Publications, 1951, p..3tt.

so. Ibid., p. 2-r.

51. India, Planning Comrnission, Second Five-Year Plan. Delhi: Manager ofPu[,lications, | 356. p. 38.

s2. 1b'4 p. 39.

India, Planning commission, Third Five-Year Plan. Delhi:Publications, 19€1, htroduction" p. xiv.India, Planninq Comrnission, Fourth Five-Year Plan 7969-74,

53. lndia, Planning Commission,

54. fndiu, Planninq Cornrnission, FoLnh Five.Year Plan 7969-74,

Manager of

Draft. Del}].i:Manager of Publications, 1969, p. 8.

s5. Ibid.56. Ibid., p. 14.57.Ibid., p. rs.58. Ibid., p. 26.ss- rbid.60. Ibid., pp. 26-27 .

61. Ibicl., p. 27.

62. Ibid-, p. 36.63. Ibid-, p. 238.64. rbid.65. /brd., pp. 23E-39.

66. Ibid, p. 23s.

Legislafive lrlechanism

INDUSTRIES (DEVELOPMENT AND REGULATION) ACT 1951

The evolution o/thinking on industrial policy and the elabora-tion of the strategy for industrial development, as pointed outearlier, shows a remarkable degree of continuity. From theearly years of this century nationalist opinion had alwaysstressed the need for active Government intervention with aview to protecting and encouraging the Indian industry. Evenprior to independence the major elements of the subsequentpolicy had crystallised, for example, demarcation of spheresfor public and private enterprises, planning and regulaiion bythe Central Government in respect of certain industries ofiinportance and the regulation of private sector growth so asto be within the broad framework of the plan priorities andpolicies. Prior to the Government of India Act of 1935 whichprovided for Provincial Autonomy, the policy for industrialisa-tion was implemented largely through adlustments in thebroader fiscal, monetary and exchange rate policies, for exam_ple, policy of discriminating protection, Stores purchasepolicy, credit policies. But in the context of the new federalstructure in the post-independence period and consideringthe wider range of policy obiectives such as regional dispersaiof industries, avoidance of concentration of economic power

64 LEGISLATIVEMECHANISM

in the hands of a tew, selectivity with regard to the use offoreign capital and technology, and special protection to some

of the employment intensive industries like handlooms, it was

necessary to evolve an appropriate legislative framework' It isin this context that one has to view the changes that lvereintroduced in the first two decades after independencethrough the amendment of exist[ng legislation like the Com-

'panies Act of 1913 or the Foreign Exchange Regulalion Act of1943 or the Imports and Exports (Control/ Act of 1947 In addition maior new enactments were also introduced, the moreimportant of these being the Ifdustries (Development andRegulation) Act, 1951 and the Monopolies and RestrictiveTrade Practices Act, 1969.

In terms of its impact on the growth and structure of theIndian industry and also as an instrument for implementingthe established industrial policles, the Industries (Develop

ment and Regulation) Act, 1951 is by far the most importantsingle piece of legislation; and its legislative histoly and actualimplementation, therefore, desefve special attention in orderto understand and assess the process of industrial transforma-tion in India during the last three decades. It is interesting tonote-though it is not as widely known that the original Billintroduced in Parliament in 1949 was entitled lndustrie$(Development and Control) Bill 1949. A very important featureof the original Industries (Development and Control) Bill wasthat the powers under the proposed legislation were to be

exercised by the Government thrpugh a Central Board consist-ing of three persons, all having 'wide experience of industrial,commercial, technical or iudicinl matters or in administra-tion.' While the Central Board was to be appointed by theGovennment, the intention was that it would be empoweredto exercise control over capital iqsues so that the Board wouldbe in a position to use these powers for directing lilnitednesources of manpower, materials and finance into desired'channels and for ensuring genefal efficiency of the industry.The important regulatory provisions of the Bill were :

1. No new rndustrial unit can be established or substantialextensions to existing plants made without a licence fnorl'the Central Government add while granting licences ftrr

z.

negulat[on and Developmenl 65

new, underlakings the Governnlent catr lay clolvtl ';on-ditions regardin6l locatiot't, tnitrintum size, etc, ifnecessarv.The Gorrernment can nrake investigations inlo certainspecified industries or undertakitrgs in industries (aJ

rvhich show a fall in prodr.tction, a deterioration itr thequality of the product, a rise in the price of thc.product,oi r,r'hich short, tenclencies in these diI'ections; (bl rvhichuse resources of national importance; and l(cJ r.vhich are

managed in a manner likely to do harm to the intel'estsof the shareholders or consumel'si and issue Properdirections for rectifying the drarvbacks.The Government can take under its o\vn managementundertakings which fail to carry out its instructions frrrimprovement in management and policies.

The Bill also provided-as did the subsequent Inrltrstries

{Development and Regulation) Act. for the creation ofDerrelopment Councils for enabling private industry to play itspart in planrred national development.

The rationale underlying the Development Councils as

explained in the First Five-Year Plan Document is rvorthwhilerecalling. This is pafticulallv relevant because over lhe vears,the role of the Development Councils rvas overshadowed bythe opefative and regulatory sections of the Act. The pro-visions regarding licensing of nelr' units and of substantialexpansions and proCuction of new afiicles and also thepowers acquired by the Central Government in the matter oftakeover of ailing or closed units were amended and enlargedover the years. But there w:rs hardly any change in theoriginal provisions regarding the establishment and workingof the Development Councils.

With regard to the Development Councils, the Draft Outlineof the First Five.Year Plan stated the follorving :

There is at present no machiirery for enabling privateindustry to play its part in planned national development.The question of development and regulation of industrieshas, therefore, to be considered not so much from the pointofview ofhow Government should exercise certain powers

66 LEGISLATIVE MECI.IANISM

in relation to indusfy as of the kind of mar;hinerv rvhiclrcan work from within each industrv and help to bringabout a steadv improvement in the standards of productivi-ty, efficiency and managemeqt. It is only by establishing a

svstem of mana€{ement r.vhich is efficient in itself and isseen to function in the intenests r,rf the communitv as awhole lhat a system of private enterprise can, in future,gain the confidence of the putilic. It is, therefore/ necessaryto provide for the establishment of such suitable machineryfor planning in industry'. Development Councils, one eachfor the important industries, consisting of representativesof industry, labour and technical management hnd appoin-ted by Government, would achieve this end. They wouldalso serve as an effective link between the Central Boardand the industries. In addition to advising Governmentthese Councils should perform the following functions.

1. Recommend targets of production for securing fullerutilisation of installed capaqity.

2. Suggest norms of efficienc;r with a view to eliminatingwaste, obtaining maximum production, improvingquality and reducing cost.Recommend measures for improving the working of theindustry, particularly of i'he inefficient units.Help in devising a syslem of distribution and sales whichwould satisfy the consumer;

The bevelopment Councils would thus be capable ofdealing with all the important problems, which confrontindustry today. Obviously, eaph Development Council, inorder to perform its functions satisfactorily, would need anadequate administrative and technical staff, which shouldbe provided by Government. In course of time, the staff ofthese Councils would secure valuable knowledge regardingthe administration of the different industries and their problems and as such would constitute a pool which could bedrawn upon by the State for mbnagerial assignments.l

The Bitl was introduced in the Constituent Assemtrlv ofIndia (Iegistative) in April 1949 by Dr. Shyama erasad uukherjee,then Minister of Industry and $upply. He emphasised that

4.

neg,ulation and DeveloPment 67

the oblect of the Bill was 'lo select cefiain industries whichwe consider to be of all-India importance and to provide amachinery for the purposes of securing their regulation and

development.'Z While defending the wide powers which theBill sought to confer o.n the Government, Dt. Shyama Prasad

Mukheriee made it clear that it was not the Gov€rnment'sintention to exercise these powers indiscriminately,

I may give this assurance that this power to direct and con-

trol management of particular undertakings can only be

exercised in an emergency or in circumstances whereGovernment felt convinced that an industrial undertakingdealing with a vital industry in order to be protected has

got to be so takenover by Government for the time being.3

He further went on to stress that these powers though vestedin the Central Government by law would, in practice, need tobe decentralised and, therefore, they may be'delegated eitherto Provincial Governments or such authorities as Governmenlmay consider fit and proper to constitute.'4

Sir Homi Mody, while conveying the general agleementwith the principles of the said Bill on behalf of the indus-trialists in the country, emphasised that many questions like'regionalization of industry, location of industry in suitablesites, and availability of raw material . . can be controlled andregulated by the Centre to the great benefit of the country as a

whole.... However, he expressed some concern over the tactthat the powers that were being sought were, 'very sweepingin character/ and he warned that 'if these powers are strictlyinterpreted and applied, the private enterprise will be left inname only.'s

One of the critics of the Bill, intercstingly enough, wasShri T.T. Krishnamachari, later the Commerce and IndustryMinister and one who moulded the operations of the Indus-tries (Development and Regulation) Act in the earlier years.

He commented on the Bill: 'I do not think that as we ane

placed at present we are administratively competent in theCentre to handle all the subiects that my Honourable friendenvisages in the Schedule to this Bill.'6 He was also critical ofthe considerably high erosion of powers of the Provincial

68 T,EGISLATII'EMECHANISM

Governrnents. FIe sarcasticallv askecl, ,Is the HonourableMember going to increase the revenue bv rail traffic and airtraffic by making more people conte to Delhi than those whocome todav ?';

There n'as extensive debate on the Bill anci it followed atortuous course through trvo Select Committees. The FinstSelect Cornmittee emphasised the regulatorv provisions of the.Bill and inselted the word 'regulation, in place of ,conlrol, inthe litle of the Bill. 'fhe Second Select Committee, however,laid greater emphasis on the clevelopmental aspects and elaborated the provisions relating to the psl,slspment Councils.

Legislation as finally passed, i.e,, Industries. (Developmentand Regulation/ Act, 19S1,E constitutes the legal tramework forcontrol and regulation of a number of ke1, and importantindustries. T'hese were selected out of the three lists of indus-tries in the Inclustrial Policy Resolution of 1948.s Althoughindustrial policy was re-enunqialed in 1956r0 and certainimportant changes in approach to the problems of industrialdevelopment wene incorporated, no significant changes weremade in the basic provisions of the Industries (Developmentand Regulation) Act relating to indusFial licences. The onlysubstantive change was the addilion of a few industries in theFirst Schedule to the Act and their rearrangement. Theadditions were mostlv those nteritioned in Schedules A and Bof the Industrial Policy Resolution, 1956 r,r,hich had not beenlisted in the First Schedule lo the Act earlier.

In subsequent years there were nurnerous amendments tothe Act, mainly in I971, 1C74, and 1979. It is interesting to notethat Chapter II of the Act which deals with the CentralAdvisory Council and Developm@nt Councils has hardly beensubject to any amendment over the last thirty years. On theother hand, Chapter III dealing with the regulation ofScheduled industries has undengone maxirnum number ofchanges with the primary purpose of strengthening theregulatory powerc. A new chapter III-A on ,Direct Management or Control of Industrial tlndertakings by Central covern-ment in Certain Cases' was inserted by Act 26 of 1959 andfurther arnended from time to time. Another addition wasChapter III-AA on 'Managemertt or Control of IndustrialUndertakings Owned by Companies in Liquidation, which


was inserted by Act 72 of 1977 The chapter dealing with the

regulation of industries including various provisions regarding

diLct management or control of industriai undertakings under

different circumstances now accounts for over 60 per cent of the

substantive portion of the enactment'

Some of the amendments were with a vierv to filling lacunae

which arose in the implementation of the legislation' Forinstance'

certain pmvisions forihe registration ofexisting industnal under-

takings were introduced by Act 26 of 1953 and a Clause empower-

ing Central Govemment to r€voke registration in certain caseswas

also added. Certain changes, however, were of a more substantive

character. For instance, by the sameAct, a Clausewas addedto the

legislation makjng it necessary for undertakings registered under

Secfion 10 or licensed under Section 11 of the Act to obtain a

licence or permission for producing any new article' A fanr changes

were made with a viernr to overr:oming specific problems which the

adminisFation had run into.

A classic example is the provision lelating to the period for

rvhich Central Government may assume the management or con-

trol of industrial undertakings. The original enactment empo-

wered Central Govemment to authorise any person or a body ofpersons to takeover the management of the whole or any part ofihe undertaking after an investigation had been made under Sec-

tion 15. The notified order under this Section, however, was to have

effect for such period not exceeding five years, as may be specified

in the order. In 1965 a prDvision was added to the effect that if it was

expedient in public interest that any such notified order should

continue, it could have effect after the expiry of the five-year period'

The Central Government could, fiom time to time, issue directions

for continuance of the ordeq not exceeding two yeans at a timgprovided the total period of such continuance (after the expiry

of the period of five years) did not exceed ten years' In 1974

this was further amended to permit continuance of the orderfor a period of twelve years, thus making a total of seventeen

years during which Central Govemment may, by notification'

iakeover the management of an undertaking' The reason for

the last amendment was that certain textile mills had been. under direct management for a period of fifteen years; and


the legislation setting up the Nat[onal Textile Corporation waslikely to be passed by Parliament dnly after a few months.

A malor consequence of this appnoach to amending legislationwas the tendency, in the first instance, to tr€at the provisions ofChapters III, ilI-A and III-AAA in a rputine manner by the adminis-trative ministries concerned. Thus, the original Section 15 pncvidesfor an investigation into scheduled indushies or industrial under-takings and Section 10 provides for certain pbwers to the CentralGovemment upon completion of irnvestigation under Section 15.The original Section 17, which made 'special provision for directcontrDl by Central Govemment in certain cases,'was repealed bythe Amendment Act, 1953 and a nenar Chapter III-A was insertedempolvering the Central Government to assume the managementor contrpl of undertakings in certain cases. This powerwas fuitherenhanced by the insertion of Section 1&-AA by Anendrncnt Act 72of 1971 which empowered the Centd Government to takeoverindustrial undertakings without investigation in certain circum-stances. As mentioned earlier, the period over which such orderswould remain in force was extenddd. By the same amendment in1971 an additional set of provisions under Chapter III-AAA wasinserted. These were aimed at pmviding powers to the CentralGovemment for the rnanagement on control of industrial undertak-ings owned by companies in liquidation.

In order to enable these powers to be exercised, Section 15-A wasadded giving the Central Govemment power to investigate into theaffairs ofa company in liquidation.,{ new Clause provided that iftheCenbal Government felt it necessaly to investigate into the possi-tliligi of running or restarting an industrial undertaking which isbeingwound up by or under the supervision ofthe High Court, it canmake an application to the High Court praying foran investigationinto such a possibility. It was also provided that wherc such anapplication was made the High Cortnt shall, notwithstanding any-thing contained in the Companiesdct, 1956 orany other law beingin force at the timq grant the permission pnayed for. On thebasis of sueh an investigation, Gdvernment assumed power tomake an application to the High Court seeking permission toappoint any person or a body of persons to takeover the

Regulation and DeveloPment 7t

management of an industrial undertaking in the same manner

as a takeover unden Section 18-A In'this case too' the period

for takeover was extended from time to time ending with a

total of seventeen years, except that here the extension had to

be with the prior permission of the High Court'

An interesting feature of the new Section 18-AA was that

where an order had been passed by the High Court to hand-

over the managernent of an undertaking to the authorised per-

son, he was'deemed'to be the Official Liquidator in fespect

of the industrial undeltaking or of the concerned part as the

case mav be. Further, the amended Act, vide Chapters III-A to

III-C, gave considerable scope for the Government to decide

,]oo.r ih" best alternative to be adopted in relation to the

*unaged company, whether it was being wound up by the

High Court or not.Broadly, the options were :

1. To takeover direct management.2. If the company's financial conditions and other cir-

cumstances so required the industrial undertaking

could be sold as a running concern'3. Undertake a scheme of reconstruction of the company/

including, where necessary, the vesting of controlling '

interest in the reconstruction of the company in the Cen-

tral Government, either by the appointment of

additional directors or by the allotment of additional

shares.

The extremely wide and extensive provisions under Sec-

tion 16-FF were meant to strenglhen the hands of the Govern-

ment in case it decided to avail of the option provided under

the relevant Sections to prepare a scheme for the reconstruc-

tion of the company The rationale behind the amendments

was to provid" ih" Go.r""tt-ent with alternative options and

the necessary powers to effectively intervene so as to ensure

that ailing units could be.nursed back to health' It was expec-

ted that the choice of option would depend upon the

circumstances in each case; that the decision would be with a

view to securing public interest and the method chosen

would be the least cost option. It rs a sad commentary on the

72 LECISLATIVEMECHANISM

manner in which the provisions of Chapter III of the Industries(Development and Regulation) Act were, in practice, used that theoriginal purpodes of the legislation seern to have been totallvforgotten. Relevant sections of the Act were used pri-;t;nesponse to pressurcs emanating ftom those who, at any cost,wanted to prevent the closure of a unit. There was, hardly even, anattempt made to examine whether, and if so, at what cost the unitfacing closure (or sometimes already closed) could be rcstarted.

_ It would be devastating but not unfai,r to say that over the last

three decades when the Industries (Dwelopment and Regulation)Act has been in forre its implemeritation has been governed byadministrative convenience or needs; and the originaipurposes ofthe Act, namely, orderty dwelopm4nt, have bee"n given a secon_dary place. Between 1953 and l9E3 fhe Act was am-ended no lessthan ten times, the first amendment being in 1953 and the last in1979. As pointed out earlier, there wqre hardly any amendments inChapter II of the Act dealing with the Advisory and Consultativemachinery, i.e., the Central Advisoly Councii and DevelopmentCouncils. The amendments conceming Chapter III were eitherpmcedural or arising firom a need to nemove certain lacunag forexample, the provision for revocatio.n of re$stration. Some of theamendments which were substantive were primarily with a vierazto extending the area of operation of the Industries (Developmentand Regulation) Act, for example, additions to or elaborations ofthe industries listed in the Finst Schedule and the provision requining registered or licensed units to otrtain a licence or permissionfor producing any new article. The 1979 amendment was enactedprimarily with a vier,rz to enabling the Central Government to obtainpowers for ensuring that the resprvBtion for small industries innespect of certain items could be enforced. Legal authorigz forresewing certain items for the small.scate indusiry could be pro-vided only when the item to be reserved was includld under one ofthe headings or sub-headings listed in the First Schedule tothe Act. Thus, items such ai plastic moulded goods,handtools, small tools, pnessure cbokers, cutlery, steel fumi-ture, zip-fasteners, and oil stoves hpd to be specifically addedwith a view to providing necessqry legat p-ower to reserve

netulation and Development 73

them for the small-scale industry. The major amendmentswere, .however, with a view to widening powers of theGovernment in respect of takeover of management and toincrease alternative options open to the Government in anyparticular situation.

Unfortunately, these amendments w-ere never utilised tbrthe purposes of more rational policy regarding takeover. Inthirty years of the operation of the lndustries (Developmentand Regulation) Act, some of the important provisions rvereallowed to go by default, for example, consultative pro.cedures and provisions for reconstruction. Certain provisionswere so used as to distorl considerably the original purposes,for example, the provisions and procedures in respect oflicensed capacity; and finally, the operation of the Act whichwas intended to be limited to certain industries of nationalimportance, ultimately extended itself to almost any manufac-turing activity rvilh the result that the constitutional provisions which make inilustrv a State sublect were totallynullified. In retrospect, it is clear that over the years theoriginal structure of the Indusfies (Development and Regula-tion) Act was altered. Sometimes these changes weredeliberate, but at other times as a consequence of certainadministrative procedures or practices which strengthenedIhe regulatory parts of the legislation and reduced, in actualworking, the elTectiveness of the consultative procedures towhich the original architects of the legislation as well as theplanners had attached tremendous importance.

To examine the question of consultative procedures, theIndustries (Development and .Regulation) Act, 1951 asoriginall-y enacted made a provision for the Central AdvisoryCouncil and Development Councils. Chapter II of the Act-incidentalll,, a part of the Act which has unrlergone minimumchanges deals with the establishment and constitution af theCentral Advisory Council for industries and specifies itsfunctions. Among other things the Act lays down that the Cen-tral covernrnent shall consult the Advisory Council regardingthe making of any rules other than the first rules to be madeunder Sutrsection (3); and also contains a provision that theCentral Government may consult the Advisory Council inconnection with anv other matter related to tl.re administration

74 LEGISLATI'VE\4ECHANIS]\I

of theAct. Chapter II also contains several pncvisions regarding theestablishment and constitution of tftre Development Councils andalso pruvides for the imposition of cess on Scheduled industriesnot exceeding 1/8 percent ofthe valnre ofgoods produced. It is alsopmvided in the Act that the Central Government may hand overthe ploceeds ofthe cess collected rtnder this Section to the Devel-opment Councils established for that industry or gmup of indus-tries; and where such cess is placed at the disposal of theDwelopment Council it shall utilise the proceeds.

1, To promote $cientific and industrial researchwith referenceto the Scheduled industry or group of Scheduled industriesin respect ofwhich the Development Council is established.

2. To promote improvements in design and quality with refur-ence to the products ofsuch industry or group ofindustries.

3. To provide for the training oftechnicians and labour in suchindusty or group of industrieg.

4. To meet such expenses in the exercise ofits functions and itsadministrative expenses as mpy be prescribed.

In the Industries (Dwelopment and Regulation) Act, 1951, therEwas also provision for consultatiod in €xercising the powers cdn-{eued on the Govemment under 8ection 16 or Sub-section 1 ofSection 17, that is, sections pertainlng to investigations into Sche-

duled industries or Scheduled unilertakings, and powers of theCentral Government and special provisions for direct control bythe Central Government in certain cases. Following anamendment in 1953, the provision for consultation with theCentral Advisory Council in cases'where the Govemment wastaking over the management of a unit was deleted. The argu-


for industries.The number of cases where the management had to be

taken over in an emergent situation were not many in the

course of the last thilty years or more; and even in such cases

the consideration of a proposal for the takeover of the

management invariably took considerable time within the

Government itself and, therefore, if the Government so

desired, some mechanism for consultation with the Central

Advisory Council (or a smaller committee of the Council as

suggested by some members during the course of a discussion

in Parliament on the Amendment) would have been practic-

able. In retrospect, it would seem that this amendment, in a

sense, marked a change in the attitude towards the need foror usefulness of the consultation procedure, includingDevelopment Councils, envisaged in the Act. Ironically', theman responsible for piloting this amendment through Parlia-

ment was Shri T. T. Krishnamachari who had earlier cast

doubts upon the ability of the Government to take on so lar5le

a responsibility. As Minister for Commerce and .Industry he

was now a part of the Government and was obviously per-

suaded to believe that it was both necessary and desirable forthe Government to exercise these powers under the Actwithout having the encumbrance of consultation with a largebody like the Central Advisory Council or any other outsidebody.

In fact, the reason for reiecting any proposal which wouldmake it obligatory on the Government to consult an outside

body was a curious one. To quote Shri T.T. Krishnamachari...I cannot understand why when you have two Houses whichcan always call Government to account, there should be a provision for consultation with so large,a body on all matters.

That means, the Hon. Member who seeks to float an amend-ment has no faith in this House;'11 This, essentially, is the doc-

trine of parliamentary supremacy. But underlying tlrisapproach was a certain shift in style. Within less than fiveyears from the time the original Industries (Control and Regu-

lation) Bill was inboduced in Parliament, political thinkinghad moved distinctly towards an unfettered use of Govern-

ment's powers-something which was not envisaged in theearlier Bills, and negarding which assurances were given on

18 !-EGISI-ATIVEMECHANISM

the tloor of the House at each stage of the debate since theintroduction of rhe Bill.

f'his is not all. The Registrationr and Licensing of IndustrialUndertakings Rules, 1952t2 which r.vere notified in July 1952provided under Section 18 for a revien' of licences issued,refused, varied, amended or revoked ffom time to time. T-heRules provided for a SubCommiXtee of the Central AdvisoryCouncil which would undertake such a review and alsoadvise the Covernment on the 'general principles to befollowed in the issue of licences for establishing new under-takings or substantial expansion of the existing under-takings.'ra Initially, such a Comntittee rvas, in fact, set upunder the distinguished chairmanship of the late PanditHirdaynath Kunzru, an independerrit Member of Parliament. Hissuccesser as chairman was -another eminent person, SirRamaswamv Mudaliar-. But over a period the importanceattached to the work of the SubComfiittee diminished.Meetings became less frequent and by 1968-69 meetinf{s of theReview Sub-Committee lvere reduced to one per vear. By theearly 1970s the Review Subcomrnittee became defunct. f'hetenure of the Subcommittee being coterminus with the mainCouncil, there was no Sub-Committee between Mali 1977 andMav 1981 during r.vhich period the Council itself did not existafter tlre expirv of i1s lwGyear term before ilday 1977. BetweenMay 1981 and May 1983 the reco4stituted Council met thricebut no meeting of the Review Slub-Committee appeared tohave taken place. Even the Standing Committee of the Councilwhich used to function in the initial vears was discontinuedduring the later part of the seventies. The importanceattached to the deliberations of the Central Advisory Councilor its usefulness in terms of the role envisaged for it in theIndustries (Development and Regulation) Act diminishedSIeatlv.

In part, the size and the diverse composition of the Counciland the tendency- unfortu n ately far too common in publicforum in this country-for member's to read out long preparedtexts, turned the meetings of the Central Advisory Councilinlo something of a ritual to be gone through rather than a

fonum which would provide inpuls for policy,-rn2lirl* and acl

as a sounding board with regard to the working of Govern-

Regulation and Developmen t

ment policies. Many members of the Council were present atthe meetings in their representative capacitv on behalf of par_ticular organisatibns; and they tended to use the CentralAdvisory Council to place on record the position of their con-stituents on particular issues. The result, therefore, was thatthe proceedings of the Council were more in the nature of areaffirmation of the position of the Government, .represen_

tatives of industrial organisations, labour unions, etc., andthere n'as little, if any, discussion or exchange of icleas with al iew lo arriving al a consensus.

The manner in whictr the meetings were organised also ledto this situation. The inaugural speech of lhe Minister usuallytook the form of either zrn exhortation to industry to generallvbehave better, or somelimes a long list of prescriptions forindustry to follow. There was never anv aftempt to list out afew specific issues on which the discussion should centre;nor was any attempt made to revierv the actual working ofspecific Government policies with a vier,r, to improvinq theirworkirrg or changing their conlent. Ir is no rvonder, therefore,that during the period ofJanata Government and its successorcdalition Governmenl under ChoudhaD, Charan Singh, that is,between 1977 -aO there was no meeting of the Central AdvisoryCouncil and no one seemed to even notice it.

A similar situation developed in respect of the rvorking ofthe Development Councils which were assigned an impor-tant role in the tndustries (Development and Regulationl Act.r1The funclions of the Development Councils as envisaged rnthe Act and lisled in tlre Second Schedule are as Ibllows:

1. Recommending targets for produclion, coordinating pr<>duction prograrnmes and reviewing progress from timeto time.Suggesting norms of efficiency rvith a view to eliminat-ing waste, obtaining maximum production, improvin6;quality and rcducing costs.Recommending measures for securing the luller utilisa-tion ol the installed capacity and fon imploving theworking of the industry, pafiiculafly of the less efficientunits.Promoting arrangernents for better marketing and help.

2.

--_r

LEGISLATIVE MECHANISM

rng in the devising of a system of distribution and sale

of the produce of the induttry which would be satisfac-

tory to the consumer.5. Promoting standardisation of products6. Assisting in the distributioh of controlled materials and

promoting arrangements for obtaining materials fon the

industry.7. Promoting or undertaking inquiry as to materials and

equipment and as to the methods of productioq manage

ment and labour utilisatlon, including the discoveryand development of new materials, equipment and

methods and of improvernents in those already in use,

the assessment of the advantages of different altennatives and the conduct of experimental establishmentand of tests on a comrnerclal scale.

8. Promoting the training of persons engaged or propos-

ing engagement in the industry and their education intechnical or artistic subjects'relevant thereto.

9. Promoting the re-training in alternative occupations ofpersonnel engaged in or retrenched from the industry.

10. Fromoting or undertaking scientific and industrialresearch, research into maiters affecting industrial psy-

chology and research into matters relating to produc-

tion and to the co tion or use of goods andservices supplied by the iridustry.

11. Promoting improvements andaccounting and costing

standardisation ofand practice.

the collection and formula-12. Promoting or untion of statistics.

13.

'14.

Investigating possibilities of decentralising stages andprocesses of production with a view to encouragingthe growth of allied smallscale and cottage industries'Promoting the adoption of measures for increasing theproductivity of labour, including measures for securingsafer and better working conditions and the provisionand improvement of arnenities and incentives forworkers.Advising on any matters nelating .to the industry (other

than remuneration and oonditions of employment) as

to which the central GDvernment may request the

15.

Regulation and Development 7g

Development Council to advise ano undertakinginquiries for the purpose of enabling the DevelopmentCouncil so to advise.

16. Undertaking arrangements for making available to theindustry information obrained and for advising on mat_ters with which the Developrnent Councils are con_cerned in the exercise of any of their functions.

It is a tribute to those associated with the fonmulation ofthe Industries (Development and Regulation) Act that it hasnot been found necessary to amend or add to the functions ofthe Development Councils. Indeed, it would be difficult tosuggest even today a wider or a more crucial mandate.

It is clear that such wide ranging functions would require acorresponding back-up in terms of resources; and it was forthis reason that the Act provided for the imposition of cess onSchiduled industries, the proceeds of which could be placedat the disposal of the Development Councils. All this wa:done in an em,ironment marked by a genuine belief that con-sultation between industry and Government is necessary anddesirable even from the point of view of improving the fonmulation and implementation of the Five-year plans. It isinteresting to note, for instance, that in the First plan Docu-ment there are references to the respective roles of the publicand private sectors, and the Document emphasises that ,har_

monious working of these two sectors will depend, to a largeextent/ on decisions arrived at by mutual agreement betweenrepresentatives of Government, business, industry andlabour.'ls The First Plan also stressed that local and regionalbcidies as well as industrial associations could play an effec-tive role in the formulition and implementation of the plan.While underlining the need for a system of controls such ascapital issue control; licensing of new enterprises and largeextensions of existing ones, foreign exchange allocations,import and export controls, controls on prices and also physi_cal controls, such as price and distribution controls, theauthors of the Plan were quite explicit in stating that ,in the

I administration and periodical reviews of these contnols,machinery for consultation and cooperation with the privatesector will have an effective share.'16

AO LEGISL,{TIVEMI'CHANIIiM

While the Development Council as a forumr in which dif:

ferent skills and backgrounds cclnnected rvith industry were

represented continued, its conlribution to the processes ofplanning ancl revierv of industrial developmenl and related

policies was nowhere near the level envisa6led by the First

Plan or contemplatcd at the time of the Industries lllevelop-

menl and Regulation) Act. In the first few years the Develop-

ment Councils did fairly useful work, especially i n terms ofproviding people connected r.vith particular indrrstries the

opportullity of lookin6l at the.industr-v- as a whole Some of the

Development Councils were also assigned the task ol drawingup plans for the developrnent arf their respectirre industriesover the next five or ten vears and also to project the likelyrequirements of skilled manpower and input materials forachieving the proiected growth. In pleneral, however', lheDevelopment Councils were unable to play the role envisaged

for them, largely because of certain badic weaknesses in theirconstitulion arrd fu nct ion ing.

More otten than not the l)evelopment Councils were large

bodies. This was either because different segments of indus-try were sought to be represented in one Council or an

attempt was made to provide representation to differentregions, associations, etc. On the other hand, in spite of thelarge size of the Councils which itself was sometimes a handi-cap, their composition did not include certain relevant ornecessary inpuls. Thus, most lopment Councils did notinclude representatives of institutions; nor was thePlanning Commission or the ive ministrv sufficient-ly closely associated with the of Development Councils.

These bodies became of industrialists and technl-

of the Councils, however, was that they did not have lhe su1>

port of a competent and full.time secretariat. The usualirrangement was for the Development ofiicer from the Direc-to|ate General of Technical Development (DGTD) to act as asecretary of the Council. This kind of part-time and ofteninadequate, if not casual, secretariat support greatly reducedthe ability of the Councils to devote tlme and attention to thewrde ranging terms of referencb assrgned to them. At timesthe Councils were not reconstituted after the expiry of their

negulation and DeveloPment El

initial term; and even otherwise, in many cases the Councilsmet only very occasionally. In short, instead of becomingactive functional bodies comprising persons closely connec-

ted with industry and policy formulation which could effec"-

tively interface with the planning process, these Councils-orat least many of them--tended to become social Satheringswhere industrialists met for exchangin5'views rather than fonmulating operational guidelines for the future development ofindustry. Meetin$s of the Development Councils rarely engagedin a serious or detailed discussion about the changing technGlogies, the position of raw materials, narketing conditions andfinancial parameters. In turn, credibility of the DevelopmentCouncils, with some exceptions, and usefulness of the workdone by them for policy formulation was gradually reduced.

Wh.ile there were a few legislative amendments in relationto the Chapter on th€ consultative process, in practice, therewas considerable variance between the intention and thefrarnework of the Industries (Development and Regulation)Act, and its actual working. As pointed out earlier, several

amendments were made to the original legislation. The effect,

if not always the intent, of these amendments was to alter theoriginal structure of the Industries (Development and Regula-

tion) Act. Over the years there was a considerable increase inthe extent of administrative involvement in the day-todayworking of industry. The controls over the pricing and dis-

tribution of raw materials, price control over the final pro-ducts, allocation of foreign exchange in addition to a rigorousrestrictive import policy, special requirements or conditionswith regard to the activities of larger houses and similar othermeasures, undoubtedly contributed greatly to the ever grow-ing presence of the Government in the industrial field. Theregulatory system became increasingly complex. The continu-ing era of shortages and the extraordinarily high degree ofprotection meant easy profits for anyone who was able tosecure the necessary approvals or permissions. This, in turn,gradually created an environment in which the administrativep"o"tr""", both at the political and truneaucratic levels,

became increasingly susceptible to the exercise of patronage.'Ihere was a growing cynicism about the working of the sys'

tem in which there was a price tag for getting various

A2 LEGISLATIVEMECHANISM

approvals or clearances from the Govet nment.The original intention of the lndustries (Development and

Regulation) Act was to provide a framework in which theUnion Government would be ablB to regulate certaitr specificareas of industrial activity which were sufficientlv importantfrnm the national point of view. The list of industries in theSchedule to the Industries (Develtopment and Regulation) Actwas drawn with a view to ensufing that the Union Govern_ment had the requisite powers. Tlhe original First Schedule tothe Act was fairly broad with categorisations such as,Iron &Steel and products thereof. The Schedule was drasticallyrevised in 1956 and to a Ieiser extent by subsequentamendments in 1962, 1923 and 1929. The result of theseamendments was twofold. First, certain categories of indus.trial activity were added to the Schedule. Second, andmore important, the description of industrial activity wasgiven in much more detail. This ldtter ihange had a particularrelevance in terms of expanding the coverage and degree ofdetail in regulation, because, as pointed out earlier after theamendment to the Act in 1959 licence was needed for the ptuduction of any 'New Article'.

The structure of the Industrieg (Development and Regula-tion) Act was designed-and rig$tly* to provide the CentralGovernment with powers to lay down that the establishmentof any new undertaking (or sqbstantial expansion and later in1953, manufacture of new article$.'shall not be except underand in accordance with the licertce issuecl in that behalf bythe Central Government.'l7 The inclusion of an industrywithin the purview of the Act trlnsferred from the States tothe Central Gover4ment the reqponsibility and power forlegislating for its regulation, control or development. In thefederal context, this was a necegsary and sensible piece oflegislation because in the absence of such a law in respect ofthe major industries, different andl possibly conflicting controlsystems may, otherwise, have dev(loped in the countrv.

The smaller enterprises originally defined as those iirvolvingan investment of less than five lakh rupees in plant andequipment (suf,sequently raised by stages to twenty lakhrupees) were outslde the purview Of the legislation. In the ini-tial years the adrninistritiort ol the Industries (Development

netulation and kvelopment E3

and Regulation) Act did not. create many problems nordid it evoke much criticism. This was pnimarily due trl the factthat initially a large part of the administnative functions underthe Act consisted of issuing Registration certificates in respectof existing enterprises which came within the purview o{ thelaw; and also the Act was looked upon as a simple but effec-tive inslrument of planning in the field of industry by direct-ing the resources according to the overall view of priorities indevelopment. Normally, the requirement and, therefore, thescope for new licensing in different industries was deter-mined from time to time on the basis of a survey of the exist-ing capacity and iudgement by planners of the capacityrequired at a future date. Licensing of new units or expansionof existing ones was generally restricted to the limits soarrived at, though sometimes the targets were deliberatelyexceeded to allow for infructuous schemes. Generally speak-in6 expansion of existing units was perrnitted, exceptionsbeing comparatively nare.

This initial phase, however, was short-lived. By 1958 ther€was considerable pressure on the balance of payments result-ing in fairly rigid control over the imports not only of capitalgoods needed for starting new industries or for substantialexpansion of existing undertakings but also essential rawmaterials and components needid by the industry. The res-lrictions on imports involved first, a more careful scrutiny bythe relevant technical or sponsoring authorities to determinewhether or not a particular item and in the proposed quan-tities asked for tre allowed to be imponted. And second, as

part of the long-term strategy of development reinforced byforeign exchange to so organise new industrial activity as toreduce significantlv over as short a time as possible theimport content of the new activity. All applications forimports of capital goods or of raw materials needed by theindustry were scrutinised by the technical authorities such as

the Director General Technical Development for most chemi-cal and engineering industnies, Textile Commissioner or JuteCommissioner for cotton and jute textiles, Directorate ofSugar and Vanaspati for these two industries. The scrutinisingor sponsoring agencies were required to clear importrequirernents by certifying that the import and the quantities

E4 LEGISLATIVEMECHANISM

suggested \ rere 'essential' in terrfis of the production needs ofthe unit and r.ere not either indigenously available or wouldnot in an1, case adversely affect the existing or potentialindigerious prnduction of that itdm. In official iargon, the firstcame to be called scmtiny from the 'essentiality' angle; andthe second from the 'irrdigenous' angle.

It is important to stress that what started as a mechanismfor _the orderly development of [ndustries of national importance became a rnuch more elhborate and administrativelycomplex arrangement largely bedause of the foreign exchangedifficulties v,'hich became increRsingly acute during the six-

ties. In consequence, the tive needs of the sponsoning authorities for their responsibilities weremixed up with the stalulory ents of the Industries

unless the product description fvas sufficientty detailed, theDirector General Technical Development was not in a. positionto sponsor the import rqquirerilents of components or I'awmaterials and also determine v{thether or not the particulartype of equipment or intermddiate or final product wasdomesticaliy available. It was aldo not possible for the officersconcerned to lay down a phasetl manufactpring programme,i.e., a progressive I'eduction in tfre import content by increas-ing the extent of indigenisation df production.

Of course, this could have beqn taken care of by stipulatingthat while the licence may be fo[ a broader category as it1 theoriginal Schedule to the Industrlcs lDevelopment and Rcgula-tion) Act, but the undertakin$ would have to fulnish allnecessary details about the product to the sponsoring authori-ty. In other words, a distinctiotr could have been made bet-ween the degree of detail incorporated in the industrial

negulation and Development Es

licenpe and the <letails required for administrative purposes.The fuli implications of entering in the licence the detailed

description of the product line werc not realised and adminis-trative convenience was permitted to take precedence overthe legal provisions. The result was that the degree offreedom avaiiable to the manufacturer to alter' his pruductspecifications or product mix was greatly reduced. This wasparticularly the case with units which carne within theamhit of the MRTP Act. In these units, the procedure forobtainin€t a iicence for the pmduction of a 'New Article' wasparticularly stringent; and in several areas of activity theywere detrarred ftom obtaining a licence. From the earlyseventies thele was a further stipulation that all such cases

would need to be cleared by the Cabinet Committee on Economic Affairs, which added to the delays.

The result was that within a decade of coming into exis.tence of the Industries (Development and Regulation) Act, thepnocess of licensing acquired a very different character fromwhat was orginally envisaged. Instead of limiting itself tosanctioning creation of new capacity in specified fields atapproved locations, the licensing system tended to become anall pervasive rnechanism which laid down numerous con-ditions. There was also a tendency to introduce in the indus.trial licence-a document having a legal status, conditions orunderstandings which were essentially of an administrativecharacter. For instance, many licences for new undertakingsor substantial expansion of existing units carried, particularlyin the sixties, stipulations such as 'no capital equipment willbe allowed to be imported' or 'no raw material will be imponted.' This had several undesirable consequences. In the same

r An extreme example of this-lbfiunately not very common-was the case ofan elevator manufacturer. The oiiSinal licence stipulated that the licensee waspeimitted a capacity to produce 'X' number of elevator'rs travelling at not more

than 'Y' feet per minute, Over the years, when multistoryed buildings became

more common, and the manufacturer, by now well established, wanted to Pro-duce lifts travelling at'2 Y' feet per minute, it was necessary for him to get hi6

hcenc€ amended. The stipulation in the licgnce obviously was ab)'product of thcadministrative needs of the Dircctor General Technical Development; but the

conaequence was that for shifting production to meel the newly emergingdemands the licensee had to spend several months going through the pmcess

of cldarance.

66 LEGISLATTVEMECIIANISM

industry, for instance, there w0uld be some units licensedearlier which would not be subilct to the onerous conditionsbeing imposed on the new entrants.

This was particularly true of, the socalled export otiliga-tion. Many new units were licen$ed only on the condition thatthey would export specified qugntities or agree to expofi aspecified proportion of their prpduction. Similar stipulation,however, was not applicable to the older and, therefore, bet-ten established units. Fufther, the administrativearrangements for monitoring adherence to the conditionsrcgarding. exports were totally inadequate. The result wasthat such stipulations only deterted the more reputed or wellestablished entrepreneurB who lrad a neputation to maintain.The less scrupulous, 'fly-by-night operators' were willing toaccept any conditions because t{ey had no intention of fulfill-ing them.

Ther€ was, however, one ottier malor change which r,.asseen fairly early in the implementation of the legislation andwhich had serious implications for the licensing system. TheIndustries (Development and Regulation) Act stipulates thatthe Iicence may contain 'such conditions including, in par-ticular, conditions as to the location of the undertaking andminimum standards in respect qf size to be provided thereinas the Central Government may deem fit to impose.'l8 In otherwords, the intention obviously was to ensure that licensingpmvisions werr used to prevenf the creation of excessivelysmall or fragmented and, thdrefore, unviable capacities.Similarly, the term substantial e;rpansion which is defined inthe Act also makes it clear that the original purpose of the Actwas not restrictive. Thus, the explanation to Section 13 of theAct states :

For the purpo$es of this Section 'substantial expansionmeans the expansion of an exlsting industrial undertaking,which substaritially increases the productive capacity of theundertaking, or which is of $uch a nature as to amountvirtual.ly to a new industrial rJndertaking but does not in-clude any such expansion as ls normal to the undertakinghaving regard to its naturt arld the circumstances relatingto such expansion. (Italics minE.)


Over a period, however, possibly without realising whatwas happening, partly as a consequence of other factors suchas the convenience of using the licensing mechanism for deal-ing with problems of administrative allocation of foreignexchange and partly through the sheer momentum of a sys"

tem of controls feeding on itself, both these initial purposeswere lost. The licence specified the ma;imum capacity of theundertaking; and soon the capacity began to be equated withmaximum production permissible for the undertaking.Second, substantial expansiory instead ofbeing interpreted as

intended in the explanation, namely, all expansion normal tothe undertaking was not to constitute substantial expansion,the term was defined as anything which increased thecapacity py more than 25 per eent. It was but a short stepfrom this to equate capacity with production and for theGovernment, and, even more, Parliament to look upon anyincrease in production beyond the permissitrle 25 per centover capacity as infringement of the Industnies tDevelopmeutand Regulation) Act.

Shri S. Bhoothalingam, a distinguished civil servant whorvas closely associated with the policy-making relating toindustry and also for a time with the operation of the licens-ing system under the Industries (Development and Regulation)Act had, in a very perceptive article in the Astan Review,

October 1968, analysed the working of the administrative con-trols including the Industries (Development and Regulation)Act. He said, 'Gradually, and as the controlling authoritiesgained experience, the range and depth of regulation wasextended well beyond the initial objective of regulating onlythe growth of industrial capacity and the administration ten-ded to become more rigorous, rigid and detailed.'1e As pointedout earlier, the capacity permitted in the industrial licencecame to be regarded as ceiling for actual production.

Where by greater managerial efficiency or the practice oftechniques not involving much capital investment an enter-prise was able to produce more than stated in the indus"trial licence it had to do so at its peril even when the totalproduction in the country was insufficient to meet thedemand. Again, an enterprise desiring to produce slightly

88 LEGISLAI'IVEMECHANISM

different artidles but with the same equipmentrequired to seek fresh permisdion for undertaking lhe production of a 'new article'. In the process of determining thenumber and capacity of new units required to achieve aplan target, the judgment of tge Government and planners.on questions such as the size, the nature of the equipment,the process and sometimes even the actual physical loca-tion of a unit often prevailed over the judgment of theentrepreneur ooncerned. The well-intentioned desire tospread new capacity equitably among ditTerent regions,combined with the need to do so without the risk of creat-ing'excess capaciqy' often led to limitations on the size andtechnical character of new enterprises which hampenedefficient functioning and growth. The limitations, in turn,led some entrepreneurs to seek dubious ways of gettingover or around them. These, in turn, attracted counter-measures by way of more interference and policing thanwas ever inlended.Zo

It was not that these distortiohs or adverse consequcnceswent unnoticed. A number of committees and also authons ofsuccessive FiveYear Plans highllghted the inefficiencl, (andineffectiveness) of the system. Foi instance, the high-powereclIndustrial Licensing Policy Inquiry Committeezr appointed iriJuly 1967 to enquire into the working of the industrial licens-ing system had recognised that ,the licensing system as itactually worked could not ensurd the development of indus-tries mainly according to Plan priorities, {para 8.03).22 TheCommittee also observed that 'whlle licensing failed to preventthe Browth of capacity in less essdntial industries, it could notbe expected directly to ensure thb creation of capacity in themost essential ones' (para s.03). ]lhe Industrial policy InquiryCommittce rightlv concluded that with all the possible improvcments in the machinery for ddtailed industrial planning-in the Planning Commission, the Ministries, DG.[D, theDevelopment Councils-it was not likely that detailed and fullycoordinated plans would be forrrlulated in respect of all theinoustries covered by the Industries (Development anrJRegulation) Act. What was importaht, however, was that indus-tries constituting the basic, stratpgic and critical sectors of

Regulation and Development Eg

economic development should be so ptanned (para 8.21).

By the early seventies, therefore, there was cleal evidencethat the li<;ensing system in actual operation \ /as not effectivein terms of either achieving goals or as an instrurnent forplanning. But the response frorn the system in terms of adjust-ment or shift in emphasis or change in direction was minimal.This lack of responsiveness has to be seen in the context of anoticeable slowing down of the rate of grorvth .of indus[ialcapacity and output since the mid-sixties. It would be simplis-tic to attribute the deceleration process entifely or even

mainll' to the working of the industrial licensing system but itwas becomin€i increasingly evident that the totality ofeconornic policies and, in particular, the administrativemechanisms for implementing those policies were not onlyinadequate to meet the country's needs and objectives butwere also likely to place a premium on the circumvention oflaw and regulaf ion. The complex regulatory system whichcovered industrial licensing import and export regulations,price controls and allccations of indigenously prrcduced

materiils was also creating a large and powerful lobby of vest-

ed interests which comprised politicians, bureaucrats andfairly Iarge sections of private industry.


1. India, Planning commission, The First Five-Year Plan: A Draft outli^e'Delhi: Manager of Publications, 1951, pp. 157-56.

2. India, the constituent Assembly of India llegislative), Debates. Part II, proceedings other than questioDs and answers, vol. III, 1949, pp 2388-S2

3. Ibid., D. 23s2.

4. rbid.s. Ihid., pp. 2473-74.

6. Ibid., p. 2477 .

7. rbid.8. fhe Industries lDevelopmenl and Regulatlonl Act, 1951, 65 of 1951 In


Guidelines for Indisaries. New Delhi: lndian Investment Centre, 1982, Part

l, Section IIl, pp. 1-38.

9. tndustrial Policy Resolution, 194E. No. 1\3)44\13)i41t, tj Ap'il 1948 InGuidelines for lnduslries. New Delhi : Indian Investment Centre, 1982, PartI, Section II, pp. 1-5.

10. Induslrial Poli(iy Resolution, 1956. No.91r'CF,i.l8, 30 April 1950. InGuidelines for Industries. New Delhi: Indian lnvestment Centre, 1982, Part

I, Section lI, pp. 6-10.

11. Irrdia, I'arliamentary Debales. rvol. IV, No. 1,22 April 1953, p.5740.12. Registration and Licensin€i of Induistrial Undertaki[g Rules, 1952 In

Cuidelines for Industries. New Delhi: Indian Investment Centre, 1982, Part

I, Section lll, pp. 39-66.

13. lbid, Rule 18.

14. llle lnclustl'ies (Developrrrent and Rd,gulationl Act, 1951, 65 of 1951. In

Guidelines for lndustries. New Delhi: Indian lnvestment centre, 1982, Part

L Section IIL pp. 1.J6, 36.

1.5. tndia, Planning Commissiorl, I'he Fiist Fite-Year Plan : A Draft Outline.Delhi: Manager ofPublications, 1951, p. 25.

76. lbid., p. 26.17 The Industries (Development and Regulatiod Act, 1951, 65 of 1951. In

Guidelines.lbr lndustries New Delhi: Indian lnvestment Centre, 1982,

Part I, Section III, pp. 1-3E (section 11 [1]).18. /bid., Section 11121.

19. S. Bhoothalingam, DirectoFceneral, NCAER, New Delhi, Asian ReviewOctober 1968.

20. Ibid.21. India, lndustrial Licensing Polic), Inquiry committee, Reporl.

covernnent of Indi4 Ministry of Inddstrial Development, 1969

22. c.V. Ramakrishna, Chaiman, Aepora of the Study Group onnegulations and Pmcedures. New Ddlhi: Go\,ernment of India,1978, p. 3.

New Delhi:

InduEtrialFebruary/

Industoial Pollcy Stnce 11976

By the early seventies there was sufficient evidence and a cor.responding awaneneas of the inadequacy or ineffectiveness ofsome of the main elements of industrial policy and panticularly of the decision-making and administrative apparatus.The objective of 'gmwth with social justicd which was thecentral theme of the policy for the preceding twenty yearswas beginning to run into difficulties. It was increasingly evi-dent that there was a conflict between the number olindividually desirable objectives of policy, for example,rational allocation of resources with a view to maximisingproduction, pFevention of concentration of economic power,regional dispersal of industrieg cr€ation of countervailingpower through a rapid expansion of the public sector whichwould scale the commanding heights of the economy usingthe public s€ctor not only as an instrument for pursuingdevelopment along desirable lines but also as an instrumentfor mobilising nesounces for the plary protection to andgrowth of the modern small-scale sector and also the tradi-tional household industries providing considerable employ-ment; and that the system seemed incapable of resolvingthese conflicts with the result that in actual practice therewas neittrer adequate growth nor was ther€ a discernible

92 INDUS RIAL POLTCY SINCE 1973

move towards gr€ater social iustice.Frorn the mid-sixties there hacl beerr a marked deceleration of

industrial growth. Acconding to a r€cent study,r there was a

marked slow-down in the gtowth of value-added in the industrialsector as a whole, and also in mining and rnanufacturing. The

quantitative accuracy of the stud! can be questioned not ongmunds of the methodoloS' adopted but because of the linita-tions of the primary data. For irlstance, the non-inclusion orinadequate inclusion ofthe industEial output and value-added inunorganised oa'non-r€gistered units can, especially in some

industries like textiles, distort the picture sufficiently to affect thefinal conclusions, If one takes valrrre-added as the basis of mea-

surement of change in trcnds in irldustrial pmduction, the con'clusions would be affected as a result of the impact of pricecontrols which, in some cases, could distort the picture of value-added. Similarly, in working oul the national income deflator foraniving at value-added at constant prices, the result can be dis-torted try the existerrce of several practices, such as open or con-cealed discounts (or pnemia), or the existence ofa faidy extensiveblack market where ransactions take place at much higher(though unrecorded) pnices. These Arc not reflected either in priceindices or in national income stati$tics.

Despite these limitations therc islenough empirical evidence tosuggest that {a) the rate of gmwth of industrial production sloweddoum somewherc around the mix-sixties, and (b) that prior to 1965

there rvas a fairly steady annual inclease in the index of industrialprcduction, and thereafter the bdhaviour of lhe index becamernuch more enratic. Thus, from 1965-66 to 1979-ti0 the index actu-ally declined in two yeans, and incrEased by less than 3 per cent infouryears. The increase in the indqx of industrial production wasbetween 3 to 6 per cent in fouryeart, and the indexwas above 6 percerrt in fiveyears, ttre highest being l0 per cent in 1976-77. This is insharp contrast to the behaliour pf the index ftom 1956-57 to19&-65 during which period the i4crease in the index was neverless than I per cenl.

It is not possible to attribute tliris diceleration to any singlefactor; nor is it possible to olfer a simple explanation in terms ofacts of omission or commission b! the Govemment or industrywhich would account fon the decelleration of the nate of growth. It

negulation and Development gz

is, howevet clear that trends in industrial output have been nroreerratic in recent yeani and, as the Reserve Bank of India studlpoints out, the $owth of production potential has been relativelymone steady than the gnwth in output. This would imply thatcertain forces were at work in the system which made for a mis-match betr4/een elfective demand and output, or created a higtrlypmtected industrial structune wNcll because of lack of competi_tion firm outside and restrictions on entry from lvithin the systern,tended to use its degree of monopoly for ensuring pmlitahilitywen when capacig utilisation was way below normal. A numberof possible explanations have been analysed and tested forexplaining the slorving down of industrial go!vth:3

1. Poor perforrnance of agriculture.2. Slow-down in public investment.3. Changes in income distribution.

.4. Slow-dotvn of import substitution.5. Increasingly inefficient industrial system resulting tom the

complex system ofinterventions and controls in the economv.6. General worsening of work ethics.

hobably some of these factors hav. e been at work over a period oftime and prwided an envirpnment in which the impact of someother causatory factor was enhance{ fon example, the worseningof the efficiency of the system which aggravated the deceleratingeffects of slow-down in public investments. Certain other factors,such as poor agricultural output in a particular year, wouldaccount for thewider variations in the rate of gmwth of industrialoutput as compared to the period pdor to the mid-sixties whenchanges in agricultuml output were offset to a grcater extent lry thegrowth impact of a fairly extensive import substitution. In shor!the uncomplicated and more or less steady linear glu/vth of indus-trial output which formed the basis of industrial pmgammes inthe earlier Plans could no longer remain a credible basis for plan-ning investment and pruciuction in maior industrial sectors.

94 INDUSTRIAL POLICY SINCE 1973

This has certain implication$ in terms of policy and

administrative practice. The fapt that the economy has

become complei over the last qlrarter of a century implies

that gfbater responsiveness to changing circumstances has to

be built into the system. Such increased responsiveness'woul{ on the one hand, require 4 considerable stren€f,hening

of the industrial rtranagement culltur€, both in the public and

private sectors; and on the other, necessilate systems which

enable those rcsponsible for marlagement of the economy to

reduce substanlially the response time required to adjust or

reacl to the emerging trends.Despite the mounting evidence for a thornugh reappraisal

of the priorities as between diffrbrent obiectives and also an

evahntion of the effectiveness of administrative mechanisms

for achieving the $iven objectiveg, there was no effort to con-

sider the options available in terms of policy orientation'

Instead, minor modifications in the operative fi:amework were

sought to tre used as a substitute for a critical appraisal of the

"ffeitirrenes" of the fiamework itself. For instance, in Feb

ruary 1973 'Government (havinp carefully reviewed theirpolicies relating to indusrial development in the light ofexperience gained ...'a suggested certain modifications' The

obiective of the Policy Statement was 'to update the indusriallicensing policy in order to refleot apprcach to the Fifth Plan

and taking into account thle legal and institutionalur"ut g"-"rrt" that are now availlable for the effective control

of the concentration of economib power.'s It was hoped that

by amending the Industrial Liqetnsing Policy there would be

'gleater clarity in the investment climate (which) will facilitate

tl-r" priorities and productioir objectives in the Fifth

Plan.'6 (Press hote dated 2 February 1973') The net result of the

new policy, however, was to briirg all units with assets along

with assets of interconnecled u[rdertakings of not less than

rupees twenty cmres within thd purview of the r€strictions

placed on the activities of MRTF units in terms of the Indus-

trial Licensing Policy announced in Febrrrary 1970'

The policy also announced a list of industries which were

opurt, ulottg with other applicarits, for participation of larger

industrial houses as defined in the IURTP Act' Foreign con-

cerns and subsidiaries and br4nchee of foreign companies

Regulation and. Development gS

wene also eligible to participate in industries specified in thelist-Appendix I to the policy Statement.* Both MRTp units as wellas foreign companies would ,ordinarily be excluded {iom theindustries not included in this list.,z Theywere, howwer, eli$ble toinvest in industries where pncduction was predominantly forexport. In the case of foreign companies, their lnvestmenr propo_sals were to be examined with special reference to technologicalaspects, export possibilities and overall effects on the bahnCe ofpayments. The exemption limit trcm the licensing prnvisions waslo continue to be rupees one crore try way of fixedissets in land,buildings and machinery. But this exemptlon was not to apply tolarger industrial houses and dominant undertakings as defined inthe MRTPAcI and foreign companies irrcluding theibranches andsubsidiaries. In addition, the exemption *u"-ul"o not to apply toexistin€ licensed or register€d undertakings with fixed assetsexceeding rupees five crores. These were, hereafter, to be subjectto the licensing provisions of the Industries (Development andRegulation) Act both in respect of ner,v undertakings and expan-sions and diversifications in the delicensed sector. The new policyalso gave its blessings to the ioint sector {which was to be apromotional instrument), as, for instance, in cases where the StateGovemment went into partnership with medium-scale and newentrepreneurs in order to guide them in developing a priorityindustry. The joint sector, it was clarified, was not to bi permitted'to be used for the entry of larger houses, dominant undertakingsand foreign companies in industries in which they ar€ otherwiseprccluded on lhein or,rm.'s

The purpose of the policy announced in February 1973 was topmvide 'greater cenainty in the investment climate, ind .stimulategpowth in all priority industries ,6f impontance to the Fifth plansubject to a more effective enforcement of social objectives.,s TheStatement also strEsses that it was pnoposed to further streamlinelicensing and connected procedunes, whereven necessary, so as toexpedite the investment process in all its stages.

As a follow-up of the announcements of these decisions on

List ofAppendix.l industries is given in Appendi{ IIL

industrial policy, the Government undertook a comprehensive

examination of the procedures relating to preinvestment

upf"o*tuf", such as letiers of inteht, industrial licence' foreign

ciilabo"at;on approval, capitai gqods clearance arrd approvals

under the MRrrP Act, 1969' It wis recognised that it was 'both

necessary an<l feasible within the flamewolk of Industrial

Policy to reduce the time lags Gtlrrently involved in issuing

these approvals.'10 In order to expedite clearance- a new sys.

tem for'issuing industrial approvals lvas introduced with effect

from 1 November 1973. The essential objective of the new sys-

tem was to en{ture t}rat various Olearances were given within

defined time targets. Letters of lntent, foreign collaboration

upp-rrut" and c-apital goods clgarances were to be issued

*iihi., .titt"ty days of the receipt of applications in each case'

In MRTP "u"ot

ih" time for 5living clearance was to be 150

96 INDUSTRIAL POLICY SINCE l9?3

policies and make exPeditious of applications for let-

ters of intent, foreign capital goods imPofis or

were taken io further

liberalise the licensing ents. These included greater

freedom for diversification the same grouP of Sche

duled industries, recognition of additional capacity as a result

days. The Government also advlsed industry that' wherever

possible, entrepreneurs should come forward with composite

applications for industrial licencb and other clearances' such

u" ioreigt collaboration approval and capital goods clearance'

A new irter-Ministerial Committee of Secretaries, namely' Project Approval Board (PAB) was formed to deal with composite

applications.- ih" Gorr""t -ents announcelrrent of 31 october 1973 des.

cribed in detail how the new system for a Secretariat for

Industrial Approvals (SIA) would function' The intention' cleatlv, was that the decisions annouirced in February 1973 and the

streamlining of procedures whlch was to be effective with

regard to ;il applications after 1 November 1973' would

minimise, if not eliminate, the uncertainties in nelation to

clearance under the MRTP Act.

In 1975-1976 a number of

of modernisation, rnaximum utllisation of the plant capacity'

automatic permission for gfowtfr of capacity up to 25 per cent

over a fiveyear period in selBcted engineering indusfies'r€cognition of excess productibn over licensed capacity for

Regulation and Development gz

fuller utilisation of installed capacity, and de-licensing of certain industries.

The establishment of the Secretariat for IndustrialApprovals was, no doubt, an important organisational innova-tion and led to a significant improvement in expeditingclearances. The requirement that decisions would have to treconveyed within specified time limits did, up to a poin!ensure that administrative lapses were avoided. Butexperience has shown that the insistence on time limitsresulted in an increase in the proportion of cases rejected. Forexample, in 797 5-76 and later during 1980-81 to 1982-83, the'number of reiected applications exceeded the number ofapprovals. Rejected applications constituted 26 per cent of'total disposal of applications in 1978 and 32 per cent in 1929.This proportion exceeded 50 per.cent in 1981 and 1982. Thereason was that the administrative system's response to theinsistence on time limits was either to return the initialapplication on the ground that it was not ,complete in all res.pects'; or if the time limit was about to expire to send theparty a letter of rejection, which, under the normal procedure, always contained a clause that the party could represent its case within twenty-one days. It woul4 however, befair to say that even after allowing for these gimmicks the SIAas an organisational innovation was reasonably successful.

The impact of the various licensing policy liberalisationsannounced from time to time, however, was much morelimited. In part this was because none of the liberalisationmeasuFes were automatic, i.e., removed the need for applyingfor permission and, further, many of the Iiberalisations car-ried small print caveats which, in practice, grEatly limited thelikely impact. For instance, in October 1975 ,pursuant to Item14 in the zo-Point Programme of the prime Ministe/ proposalsfor the establishment of a new undertaking, substantialexpansion and manufacture of new articles by medium-scaleentnepreneuns were made exempt from licensing in respect oftwenty-four industriesll and from the licensing provisions ofthe Industries (Development and Regulation) Act. This de-licensing, however, was subiect to the condition that noimpoll of raw materials or capital goods or foreign collabora_tion would be required. The liberalisation in any case was not

96 INDUSTRIAL POLICY SINCE I973

applicable to undertakings rwhich within the purview ofthe MRTP Act or were foreign panies under the Foreign

Exchange Regulation Act. It also laid down that theal expansion of

nat rne'nofanmanufacture of a new article or

existing activity was not ble in respect of anY itemwhich was reserved for the smallsector.

automatic glowth ofSimilarly, the provisions lbr ancapacity allowed to selected engirieering industries in August1975 permitted an automatic growth of 5 per cent per annumor 25 per cent in five years in o e or more steps over theirlicensed capacity. This increase was to be over and above thenormal permissible limit of 25 Per cent over the licencedcapacity. While the fifteen engineering* 12 industries were cer-

tainly important the automatic growth was to be subject toseveral conditions. For instance, the investment should be

met by an internal generation of funds and no import of capi-

tal goods should ordinarily be involved' It was also stipulatedthat the undertaking should not be dominant (i'e', it shouldnot have a share exceeding 30 per cent of the production inthe country). These and similar other conditions, in effect, dis'

qualified some of the rapidly grdwing or larger units whichhad established a substantial manket share in terms of sales,

although quite often in terms of irlstalled capacity in the coun-

try they hid a much less dominaht position' It is also signifi-

cant to note that the provision for automatic growth was

limited to a selected list of engin(ering industries and did not

extend+ to undertakings in other industries.

* The fifteen selected engineering indusltries wer€: automobile ancillaries;castings and closed die forgings; tractois; commercial vehicles; conveyingequipmenti diesel engines; pumps; crhnes; earth movin& mining andmetallur$cal equipment; hydrauJic equipment; industdal machinery, includ-ing chemical plant and machinery; machine tools; textile machines; powertransmission and distribution equipment (other than cables and rvires);power transformers; and swilchgears.+ ln a sen"e, this is a ielling conrmetrtat on the pr'(rcess of polic'-makingThe permission tbr automatic gfowth of bapacity for certain selected indus'tries wa$ largely the r.".ilt ofrhe initiative and persistence of the then Sec

relary in the Department of Hea\"-v Industry Hi!t (iounterparts in olherDepartments/'Ministries rvere either not too keen on anv such automaticincrease in capacity being permitted or Were not persistent in pressing theirclaims.

Regulation and Development gg

The same kind of half-hearted or hesitant approach wasreflected in liberalisation pertaining to capacity based on in-house R&D or de-licensing of units which were set up withtechnology developed by National Laboratories.l3 For instan-ce, in August 1975 it was announced that creation of capacitybased on results obtained by in-house R&D efforts would befreely permitted; but with regard to MRTP/FERA undertakingsthis facility was restricted only to industries listed in Appen-dix I. Xegarding non-Appendix I industries they could avail ofthis facility, if R&D was undertaken with prior approval of theGovernment (Department of Science and Technologi). In anycase the creation of all such new capacity would continue toneed a licence but application for a licehce in such cases'would ordinarily be allowed as a matter of course.'1a Similar.Iy, if manufacturing of an item was taken up on the basis oftechnolog5r developed byr any of the laboratories establishedby the Council of Scientific and Indusfial Research, accord-ing to the Notification of March 1976, licensing provisions ofthe Industries (Development and Regulation) Act would notapply.rs As always, this was further qualified by the provisothat it would not be applicable in the case of MRTP com-panies or foreign companies; and that this would also be subject to the condition that the item is not one reserved for thepublic sector or the small-scale sectoi or was governed bySpecial Regulations.*

In retrospect, the main emphasis of the Government duringthe seventies was on reducing the restrietive and complexfeatures of the licensing policy which, in the rqain, were dueto the manner in which the Industries (Development andRegulation) Act was implemented. The results, however, werenot very impressive. This was due to several rea3ons. The pro-visions of the MRTP Act implied that there was yet anotherdimension added to the administrative procedures for various

'

approvals. The time taken for giving glearances was sq,ught tobe reduced; but at the same tirne in respect of MRTP/FEIiAcompanies, around 1972-73, a new system was introduced

' lnter€stingly, the list of Special Regulation industries has grown over lime.'There have been no instances of an industrial activity being removed fromthe list. The details are given in Appendix IV.

1OO INDUSTRIAL POLICY SINCE 1973

which required that every case involving MRTP/FERA com-

panies for a licence, whether for a new undertaking' substan-

conveying approvals. BY far the

iial e*pan"ion or manufacture of a new article would have to

be cleared by the Cabinet Committee on Planning and CooF

dination p"""id"d over by the Prime Minisier' Inevitably' this'

added several weeks, even months, to the time taken for

conveying approvals. By far the rnlost important reason why thls

phase of liberalisation did not add up to much was that there

was an unwillingness at the pplitical level to recognise oror

accept that a change in direction rv-as needed' The attempt

was io prolect ail measures ol liberalisation as being signiti'

cant in ihe-"elrres but in no way representing any modifica-

tion of past policies. This inhibition against any critical review

of the actu;l working of past policies implied that such

changes as wete to be made had to be marginal and each

liberalisation had to be hedged in by some proviso or the

other. In the words of a distin$uished civil servant who had

retired by then, the attempt was .'to do good by stealth' and

,rr""r"u"ily, therefore, the amount of good that could be done

had to be modest.Despite the announced intention to llberalise 'the system

and to simpliSr the procedures in order to reduce delays indealing with applications,'16 the regulatory system continuedto be much more elaborate than was originally envisaged inthe Industries (Development and Regulation) Act. The system

seemed to have acquired a mqmentum of its own and any

attempt to rEduce its procddural rigours or to make

peripheral improvements was being reiected by the system

iik utt ,t.r*uttted transplant. OVer the years a formidable and

pervasive vested interest had been built up in the continuedoperation of an elaborate system of regulation in which dif-ferent agencies within the Gove[nment and at different levels

of responsibility had to.be invohl,ed.Bu'"eruc"ucy it different ievels and in different de

partments/agencies of the Government including scientists

and technocrats associated with the approval processes'

politicians-whether a legislatob a Minister or an influentialparty member-and also, to a considerable exten! sections ofindustrialists who benefited dinectly from the protective con-

sequences of the regulations constituted a powerful lobby in

negulation and Development loa

favour of maintaining the system. Nevertheless, the working ofthe system was found unsatisfactory both by those who werein favour of the regulatory system and those who were against

it. Those who were ideologically committed to regulation and

control were unhappy that it was not effective in achieving to

any significant extent, the desirable objectives such as a morebalanced regional dispersal of industry preventing concentra-tion of economic power in private hands or creation ofadditional capacity in consonance with the Plan targets' The

system seemed to have failed in curbing the role of the largerbusiness houses, nor did it have sufficient clout to prevent orcorrect 'excess production in relation to licensed capacity.'17

In discussions in Parliament and elsewhere there wererepeated references to several instances where industrialunits, chiefly large houses or foreign companies, continued toproduce with impunity far beyond their licensed capacity.The critics were particularly concerned that such excess pnoduction was largely in the case of consumer goods, such as

footwear or biscuits, where the decentralised sector wasbeing encroached upon or in other relatively srmple items ofmanufactune, such as metal containers, which were beingpmduced by new medium-scale and small-scaleentfepreneurs.

rn the field of drug formulations, many foreign drug com-

panies, it was alleged, had exceeded their licensed capacity or had illegally enhanced their productive capacity'The new entrants in the field of formulations, mainlymedium-sized Indian companies, were the most vocal criticsand were supported by legislators from all major political panties, who were highly critical of Government's inability orunwillingness to stop excess production. At the same time,those who were generally in favour of a freer economy con-tinued to be concerned about the fact that the licensing sys-

tem prevented the normal operation of market forces by notpermitting the growth of more efficient units' Despite the procedural improvements, delays were endemic and a great dealof managerial time and attention lyas spent on dealing withre8Ulatory mechanisms rathet than concenlrating on lnorecrucial aspects of rnanagement.

This was the position when lor the first time since

opportunity for radical departupes from the past. But aparthom the fact that the Janata pafty itself was, probably, takenby surprise at its having to form a government, the politicalideologies of the different constrituerit parties which mergedto form the Janata Party were so different that it would havebeen unrealistic to expect a cofnmonality of approach or acoherent econornic philosophy, While the constituents wereunited in their opposition to the trends of political thoughtsand action represented by the declaration of Emergency in1975 there was no such unanimity on issues of economicpolicy. The Janata Parly's manifegto reflected, in the main, the,

.7O2 INDUSTRIAL POLICY SINCE 1973

independence, thene was a realthe Centre. The Congress Partythe Centre since

Government at the Centre co

leaders and their followers

change in the Governnient atwhich had been in power atI was badly mauled and the

or another. These seniornted a degree of continuity

nervly formed Janata Parq/ rode the crcst of a popular wavewhich gave them and their a clear twothird majority in

Parliament). The change inhave provided an excellent

the Lok Sabha (Lower House

In terms of the individuals were selected to constitutethe Cabinet also there was diversity. At one en4there were in the new t senior politicians likeMorarji Desai, the Prime ; Jagjivan Ram andBahuguna who had held positions in earlier Con-8F€ss Governments at one tim

several elements comprising the new Government who had atno time been part of the government and had been persist-,ent and vocal critics of past governmental policies. But they

with past governrnental policies. At the other end, there wereseveral elements comprising the

ent and vocal critics of pastwere individuals with diverse political and ideological back_ground. There were, for instance, former members of theSocialist Party, drawing inspiration from the writings andleadership of Dr. Ram Manohar lLohia, perhaps the most strlleadership of Dr. Ram Manohar perhaps the most stri

negulittion and DeveloPment IOJ

dent critic of Mrs. Gandhi's policies; and also members of the oldSwatantra Party which had been a strong advocate of a l€turn to a

mar{tet economy. The Jan Sangh group, rEpresenting largely the

urban middle class and the trading community, also had strongpredilections in favour of lesser Government rcgulations or inter-ventions. The Lok Dal led by Choudhary Lharan Singh with a

substantial following within the Janata Parqr' was committed tocurbing large-scale mechanised industry with a veiw to encourag-

ing the small and decentralised village industries.It is against this background that the StatementtE of Industrial

Policy laid trefore Parliament in December 1977 by George Fer-

nandes, Minister for Industry, acquirEs a special significance' The

Policy Statement rcfers to the Industrial Policy Resolution of 1956

which had been the basis of Govemment's policies for two

decades. Significantly, it begins with the proposition that 'while

some of the elements .of that Resolution with r€gand to the

desirable pattern of industfial development still remain valid, theresults ofactual policies in the industrial field have not been up to

the expectations or declared obiectives.'1e Thus, the purpose ofthenew policy was 'to nemove the distortions of the past so that

genuine aspirations of the people can be met within a time boundprogramme of economic development.'2o

The inadequacies of the working ofthe Industrial Policy Resolu-

tion of 1956 were also listed in the Policy Statement' Though the

$owth of per capita national income during the last decade was

approximately 1.5 per cent per annum, this was inadequate to

meet the needs of a dweloping economy' UnemploJ,'rnent had

increased, mral-urtran disparities hadwidened and the rate ofrealinvestment had stagnated. The growth of industrial output in the

last decade was no mor€ than 3 to 4 per cent per annum on an

average. The incidence ofindustrial sickness increased and some

of the maior industries of the country wer€ worst dffected' The

pattem of industrial costs and prices had tended to be distortedind the dispersal ofindustrial activity away fiom the larger urban

concentrations had been very slow This was a fairV massive

indictment on past policies; and the nerv Policy Statement aimed

at rcmoving and corrEcting these deficiencies.An important point-and a point of departure-in the Policy

I04 TNDUSTRIAI, POLICY SINCE I973

Statement was the effort to relate iboth industry and industrialpolicy to the needs of the economy as a whole and to definethe role of the large-scale sector i4 the socioeconomic contextof the country. In other woids, the industry was important notin itself nor as a contributor to the growth of national income,but as an instrument for more rapid development of agpicul-ture and activisation of rural manpower and the technical andmanagerial skills developed over the last two or threedecades. The recognition of the interaction between agricultural and industrial sectors reflected the recent experiencein India and other countries. Not only was p. substantial partof the industridl production based on domestic agriculturalproduction, but the level of agricultural production or thegrowth of productivity was also dependent upon the availa-bility of inputs like power, fertilisers, pesticides, etc., whichhad to be procured fiom the industrial sector. The lack of adequate power or cement or steel is as important for levels ofaeFicultural oulput 'as it is for indpstry. The poticy Statementalso recognised for the first tirne an important facet ofeconomic reality in India, namely, that ,the prosperity and dis-tribution of income arising from the broad-based growth ofagricultural and related activities in the countryside has toprovide the basic demand for a wide range of industries proilucing articles of consumption.'2r

The Policy Statement mention$ the vast rural manpowerand the reservoir of highly trained scientists, engineers andtechnicians as a maior resource for economic ana industrialdevelopmenq and argues that ,the emphasis of industrialpolicy so far has been mainly on large industries neglectingcottage industries completely relegating small industries to aminor role. It is the firm policy of this Government to changethis approach.'zz In pursuance of tltris new thrust of policy, theStatement lists specific actions that were proposed to betaken. These include significant expansion in the list of indus-tries which would be exclusively feserved for the small_scalesector. The Statement, how,ever, qualifies the reservationpolicy by an emphasis that produqtion in the small-scale sec-tor has to be 'economic and of acceptable quality and thatcapacity creation in the small-soale sector should not beallowed to lag behind the requirenlents of the economv.,2rJ For

Repiulation and Development los

this purpose 'an annual review of reserved industrres u'ill be

undertaken in irrder to ensure that reservation accorded tothe small-scale sector is efficient and is also contiually expan-

ded as new products and new processes capable of being,manufactured in the small-scale are identified.'24

An innovative feature of the Policy Statement was a specificfecognition of the need to encourage the 'tiny sector, i.e,,

activities with investment in machinery and equipment ofrupees one lakh or less and situated in towns with a popula-tion of less than 50,000.'2s The Policy Statement emphasisedpromotional measures and declared its intent to introducespecial legislation for protecting the interests of cottage andhousehold industries 'with a view to ensure that these activ-ities which provide self-employment in large numbers get duerecognition in our industrial development.'26

As part or the organisational restructuring in order toachieve these objectives the Statement announced a schemefor setting up District Industries Centres. The underlying logicwas that'in the past, there has been a tendency to proliferateschemes, agencies and organizations which have tendedmore to confuse the small and rural entrepreneur than toencourage and help him.'27 In order to recti$r this, the focalpoint of development for small-scale and cottage industrieswhich tended to be in the maior cities and State capitalsshould be shifted to the district headquarters. The proposedDistrict Industries Centres would provide under one roof allthe services and support required by small and village entre-

preneurs, such as economic investigation of the district's raw.materials and other resources, supply ot machinery andequipment, provision of raw materials, arrangements forcredit facilities, and an effective set up for marketing qualitl'control, research and extension. This new organisational pat-

tern was to be extended to cover all the districts in th€ countryover a period of four years. The emphasis on the decentralisedsector and the concept of District Industries Centres whichwould provide support for the decentralised sector and wouldshift the focal point of decision-making and approvals to th€di3trict headquarters, away from the State capitals, con-stituted a major departure from the 1956 Industrial PolicvResolution.

106 INDUSTBIAL POLICV SINCE 1973

While discussing Khadi and Village Industries, the State-ment mentioned increasing the share of village industries inthe total production of items like iootwear and soap and alsoemphasised the need for adopting modern managementtechniques in working out detai.led plans for the deveiopmentof village industries. It makes 4 reference to khadi where a'breakthrough'28 is in sight with prospects of spinning andweaving polyester fibre along with cotton fibre. The State-ment also makes a pointed reference to the need for thedevelopment and application of technologies ,appropriate toour socioeconomic conditions.,2e The emphasis was to be onthe development and widespread application of suitable,small and simple machines and devices for improving productivity and the earning capaoity of workers in small andvillage industries.

Having outlined its approacln to and preference for the,small and decentralised sector, the policy Statement proceedsto define the role of largescale iyrdustries. The role envisagedfor modern large-scale manufactiring activities was founfold :

1. Basic industries such as steel, non-ferrous metals,cement or petroldum produtcts.

2. High technology industries such as fertilisers, pesticides,and petrochernicals which have close linkage with ag-riculture and other small industrieb.

3. Capital goods industries needed for producing themachinery required for or in basic industries in. agricul-ture and in the small sector:

4. Finally, other manufacturing activities of a kind whichwould not ordinarily be cajrable of being undertaken inthe small-scale or decentrallsed sector.

Having defined the role of theStatement proceeds to discuss

modern sector, therole of large houses. It

argued that in the past, t policies 'have not suc-ceeded in restraining the nate Srowth of LargeHouses.'30 The definition of term'disproportionate',however, is important because it marks a departure fnom tnepast and conventinnal wisdom. The Statement stresses thepoint that'the growth of Large Flouses has been dispropon

negulation and Developmenl 7O7

tionate to the size of their internally generated resources andhas been largely based on borrowed funds from public finan-cial institutions and banks.'31 The obiect of the policy wouldbe to reverse this process; and, therefore, one of the impor-tant principles laid down in the Policy Statement was thathenceforth large houses would have to rely more on theirown internally generated resources for financing new ven-tures or expansion proiects. The operative part was

While an appropriate debt equity ratio will be permitted inthe case of industries like fertilizers, paper, cement, ship-pin& petrGchemicals, etc., which are relatively more capi-tal intensive in nature the debt equity ratio in the case ofother less capital intensive or less sophisticated industrieswill be so fixed as to reflect the greater use of their owninternally generated resources by the Large Houses. 32

This approach to the large houses implied a significantdeparture from the past approach which was to identifu areaswhere large houses could operate. These were so defined asto include a fairly wide range of activities. As a result theexisting units belonging to the large houses had a fairly widefield to operate. For instance, the list of industries whichwere to be open to larger houses, along with other applicants,included broad classifications such as organic or inorganicheavy chemicals, industrial machinery, cornmercial vehicles,specialised ancillaries, iigs, fixtures, tools, dyes, equipmentfor transmission and distribution of electricity, steel castingsand forgings. Second, many indusries, such as fertilisers;chemicals, drug intermediates, cement, and paper requiredsubstantial new investment and this necessitated dependenceupon large borrowings chiefly from public financial institutions. The result was that despite the MRTP Act and thedeclared policy of the Government to curb the role of largerhouses in the industrial economy, their control over assetsrose sharply in absolute terms in the decade following theimplementation of the new policy.

In fac! the real counterpoise to large houses had come notin the form of effective restraint on their expansion butthrough the growth of the public sector. As the Policy State-


ment points out that 'apart frorn oocializing the means of production in strategic areas, publip sector provides a counter-vailing power to the growth of Large Houses and largeenterprises in the private sector.']33 The policy, therefore, wasto provide an'expanding role for'the public sector in several

fields',3a including that of an effective stabilising tbrce inmaintaining essential supplies tOr the consumer. 11 was also

stressed that in future the publlc sector would be charged'with the responsibility of encouraging development of a widerange of ancillary industries and 'contribute to the growth ofdecentralized production by making available its expertise intechnologv and rlranagement to small-scale and cottage indus-try sectors.'35 This, again, was a significant departure in the'sense that the role of the public secton was to be integratedwith the socioecorromic objectives of the new industrialpolicy. It was to be a pace-setter in providing necgssary suPport for a more rapid and viable growth of the decentralisedsector.

On the question of foreign investment, the Policy Statementreiterated Governrnent's intentior,r to enforce the provisions of;he Foreign Exchange Regulation Act srictly. This impliedthat, where required under the FERA, foreign equity holdingswould have to be diluted in accordance with the guidelines.The Statement also went on to state categorically that afterthe process of dilution under the FERA had been completed'companies with direct non-resident investment not exceed-ing 40 per cent will be treated on par with Indian companies,except in cases specifically notified and their future expan-sion will be guided by the same principles as those applicableto Indian companies.'36 This was a significant affirmation ofthe policy because in the past, while FERA companies wererequired to dilute foreign equity in accordance with theguidelines, there was some fuzziness about whether or notthey became eligible for the sdme treatment as any otherIndian company once the foreigr\ holding was 40 per cent orllcss. There was occasional uncellainly about whether lbreigninvestment wa$ to be deemed ds direct non-resident invest-rrlent or whether irrdirect foreigri investment (i.e., investmentby the Indian companies in whibh there was a foreign hold-ingl, was also to be taken into acoount.

negulalion and Development 'Og

The Industnial Policy Statement of 7gZ7 was a departurefrom the past practice in that it covered other crucial issueswhich have a bearing on industrial policy such as the policywith regard to import liberalisation and compulsory exports;pricing policy for industrial proiects; sickness in industry;location policy for industries; and workers' participation.Thus, the Policy Statement underlined that the favourablechanges that had taken place in the foreign exchange situa-tion and the progress that had been made in the industrialfield 'should now enable us to selectively dispense withimport quotas and quantitative nestrictions, while retainingprotection given through tariffs.'37 Similarly, on the questionof export of manufactures {where understandablv the Govern-ment was willing to consider fully owned foreign companiesin 100 per cent export oriented cases) and the role of com-pulsory exports, the Policy Statement was very specific. TheStatement noted that in the past compulsory export obligationswene imposed in approving new industrial capacity eitherbecause of the need to ensune that imported raw matt rials andcapital goods wene paid for througl-r future exports or becausesome relaxation from industrial policy or licensing policy wasinvolved. However, equal attention was paid to ensure thatthese commitments were fulfilled. Apart fi.om strengtheningthe supervisory and surveillance machinery of the Govennment,the Policy Statement clarified that 'compulsory export obligations, merely for ensuring the foneign exchange balance ofthe proiect would no longer be insisted upon,'3E nor would alimited period of export commitment be given the sarneweightage as before in any relaxation of rhe industriallicensing policy.

On the question of pricing policy the Statement was veryclear-cut. The objectives of the pricing policy were to be areasonable degree of price stability and a fair parity betweenagricultural and industrial products. The Policy Statemenlnoted that in the past there had been a tendency to regulateprices of industrial products which were vital to the needs oldevelopment in a manner which made their production lessattractive than the production catering.to the needs of theelite. The Statement categorically assured that the policy ofllle Government ivould be to ensure :

1IO INDI. STRTAL POLICY S]NCE 1973

Where there is price control, the controlled price willinclude an adequate return td the investor. Provided theindustry is operating at a fairly high utilization capacity andis conforming to the technologik;ally attainable norms it willbe permitted to earn sufficielnt return to provide for areasonable divldend to the shf,reholder and also adequatefunds to plough back into buslness for modernization andgrowt h.3e

These are rather strong words coming from a committedsocialist speaking on behalf of 4 government which had allthe hues and tints from pale pink to deep blue reflected in itsranks.

The Policy Statement also had something new and morespecific to say about the role of r.rvorkers-the most importantsingle resource of the country beling 'the skill and hard workof the people.'4O The aim of the policy was to use effectivelythe abundant supply of labour and the existing reservoir oftechnical and managerial persqnhel. This, however, could bedone only 'in an environment in which the workers andmanagers develop a sense of personal involvement in theworking of the enterprise'.ar While family controlled businessis'an anachronisrn' arrd has to be dubstituted by pn:fessionalismin management, ways and meanb have to be simultaneouslyfound to create amongat workers, both in public and privatesector industries 'a stake in the efficient working of theirunitSla" For tnrs purpose two ptrssibilities were being exa-mined : (a) the possibility of. encguraging wonkers' participa-tion in the equity of industrial units, without in any way adven:ely affecting thein interests; and (b) an active association ofwonkers in decision-making frorri the shopfloor level to theBoard level. These are shades of West German form of'Capitalism' and are certainly a fal cry from the general exhor-tations on the questron of the role of labour in earlier policyleclarations.

There were two otheJ specific issues in which the PolicyStatement had something concrete to say. One was a relativelynew phenomenon and, therefore, not referred to in the Indus-rrial Policy Resolution of 1956 ol in subsequent Policy State-

ments. This was the growing inpidence of sickness in both


largescale and small-scale units. h the past, the almostautomatic response to closure, or'possibilities of closure,a3 oflargescale units was to bring the management under theIndustries (Development and Regulation) Act under Section18A or 18AA. Indeed, the Act itself, was amended severaltimes in order to strengthen the powers vested in the Govern_ment in this connection. The policy Statement of 1927, how-ever, stated emphatically that ,while Government cannor rgnorethe necessity of protecting the existing employment, the cost ofmaintaining such emplol.'rnent has also to be taken intoaccount.'aa In the past'large amounts of public funds have beenpumped into the sick units which rvere taken over buf thesecontinue to make losses which had to be financed bv the public.exchequer. This process cannot conlinue indefinitely.qr'fhePolicy Statement, therefore, announcecl the new Government,spolicy that the 'takeover of rnanagements of units would beresorted to selectively and onl-v after careful exarnination of thesteps required to revive the units.,16 lhe setting up of the highlevel Screening Committee to scrutinise the rakeover proposals,ensured that indiscriminate takeovers under politicar pressuresor some special interests were avoided.

There were two other prescriptions to be followed :

1. Considering the cost of overcoming sickness in industryis much more manageable when it is diagnosed at anearly date, the Government in cooperation with theReserve Bank of India would institute arrangements formonitoring incipient sickness in industries so that coFrective action can be initiated at an early stage.

2. Government would also consider measures wherebymanagers or owners who are responsible for mismanag-ing and turning their units sick are not permitted to playany further part in the management of other units.'.r; Inother words the not unknown disease of units gettingsick while the management/owners remain prosperouswould not be allowed to continue.

Another important and specific announcement containedin the Policy Statement was with regard to the locatron ofindustries. The Statement noted with concern that most of the

'712 INDUSTNIAI, POLICY SINCE 1973

industrial development that had taken place since indepen-

dence concentrated around metropolitan areas and large

cities. The consequence was rapid deterioration in the livingconditions, especially, of the working classes in the largercities and the attendant problerms of slums and environmentpollution. The Government, thefefore, 'had decided that no

more licences should be issued lo new industrial units withincertain limits of large metropolitran cities having a populationof rnore than one million and urban areas with a populatiohof more than five lakhs as per the 1971 Census.'1E This was tobe further buttressed by requebting the State Governmentsand financial institutions to deny support to new industries inthese locations in cises which did not require industrial licen-ces. Further, the Government'of India, the Statement empha-sised, would also 'consider providing assistance to large

existing industries which want to shift from congested met-

rupolitan cities to approved looations in backward areas.'4e

This was by far the most specific announcement of locationalpolicy and one which could be implemented straightway,without creating, in the pnoces$, any serious cost disadvan-

tages to the existing or proposed indusrial unitsThd Statement noted in conclusion thal 1977 'had been a

year of historical changes and people's expectations in thepolitical and economic fields ane high. It is hoped that thenew direction that is being given to the industrial policy of thecount{y will help in the creation of a iust and equitablesociety.'so As event$ turned ou,t, however, this r't'as to be

almost the last constructive step to be taken by a Governmentwhich came to power on a wave of e4pectations and good-

will, but which soon became inlvolved in personal iealousies,petty bickerings and worse. In consequence, follow-up ofsome of the more important pollcy changes suffered.

It has to be recognised, however, that the brief Janata

interlude did not find it necesqary (or possible) to make anyradical change in the operation of the complex system ofregrrlation and control which lTad evolved over a period ofnearly twenty-five years. The covernment did appoint a

Study Group on Industrial Regplations and Procidures withfairly wide terms of reference td review the roie of the Indus-tries (Developrnent and Regulation) Act in the promotion of

negulation and Develoqmetrt aa3

industries. The Group which had been asked to examine andrecommend changes in the existing policy and procedurescame to the conclusion that 'although the setting up of Sec-

retariat for Industrial Approvals has considerably streamlinedthe procedures, it has not been possible to take full advantageof this organizational improvement as the rationalization ofprocedures has not been adequately matched by necessarychanges in policy.'sr Against this background and in the con-text of the Industrial Policy Statement issued by the newGovernment on 23 December L977 the Group, inter alia, con-sidered'it was possible to move over to a system of licensingwhich would preserve the merits of the present system whilediscarding useless paper work and nemoving unnecessaryirritants to the entrepreneurs.'s2

Interestingly, an alternative considened by the Group wasto exempt non-MRTP and non-FERA companies from licens.ing subject to the following conditions :

1. No investment by large-scale units would be allowed initems reserwed for small-scale, village or rural industries.

2. No further capacity, without approval of the Govern-ment, would be allowed in industries which would bespecifically listed.

3. No new units would be allowed in metropolitan townqas specified by Goyernment.

The Group recognised that this alternative had severalattractive features. Such an amangement woul4 ordinarily, beable to achieve all the major obiectives of licensing and anyfunther control that the Government wished to exercise inpublic interest could be enforced at the financing stage byissuing suitable guidelines to the financial institutions.,However, the Group felt that 'this radical departure from thepast's3 may lead to certain problems. The report summed upthe pnoblems as follows :

1. It may defeat the purpose of regional dispersal of industries since the entrepreneurs would be free to establishinvestments in areas which are not specifically prehibited. Financial institutions may not be able to exercise


an effective control on the locational aspects of industry.While it was recognised that the previous record in thisFespect was not an enviable one, a measure of controlover investment decisions at least above certain levelswas considered desirable.

2. Total abolition of licences for a large segment of industrymay create probler4s for planning of infrastructure/ par-

ticularly that of power, railway capacity and road net-wol'k. etc.

3. As a general exemption would not by itself enable theabove obiective io be achieved, it would then be necessaryto extend the list of indu$tries to which exemptionwould not be available. The negative list would becomeso long that it would defeat the original purpose ofexemption. The licensing s),istem may, in fact, becomemore rigid if it is subiect to such large negative lists as

removal of industries from negative lists would becrrme

more difficult and more time consuming than the issue

of licences under the present svstem.

No doub! not all these problems or difficulties wereimaginery; but the crucial issue lwas whether or not regula-tion of industry was to be by exception or whether theregulatory mechanism should cbntinue to remain all penvasive. Clearly, the Group did .rot feel confident that the timewas ripe for a reversal of the all pervasive regulatoryframework by moving over to a system of licensing by exception. It is a moot point whether this judgement was right orwhether it was yet another evidence of the fact that the line ofthinking of many in the new Government and in theParliamentary Party was not very/- different from rhat of theirpredecessors in office. In any ca$e, in the absence of a clearand shong political direction it wBs very unlikely that a €Foupof senior officials wduld venturq out into new policies andprocedures which would subst4ntially reduce the areas ofintervention and, consequently, the extent of power and pat-

ronage exercised at the political and administrative levels. Inthe absence of a strong political direction to dismantle andnot merely tinker with the elaborate regulatory framework,there was, probably, considerabld justification for the Group's


fear that any significant liberalisation in polic-v and procedulespeftaining to the working of the Industries (Development andRegulation) Act would, in practice, add to the list of indusrieswhich are to be treated as 'special'. At the time of the Group,sreport this list was already long and included as many as,eighty industries. * This list would have been further enlargedmaking nonsense of any across the board liberalisation exceptin respecl of FERA,/MRTP companies and industries whichwere governed by some special regulatrons. The task of theGroup was further complicated by the fact that it was thedeclared policy of the Government to assign an increasinglyimportant role to the tiny, r,illage and smallscale industries.The approach of the Government was that whatever could beproduced by tiny or village industies should not be allowedto be produced by the modern small-scale intlustry; and,similarly, whatever could be pr.oduced by the small-scale sec-tor need not be permitted for prnduction by the large-scalesector. In order to hasten the development of tiny and small-

,ocale industries, it was proposed that where such prorluctionwas being undertaken in the large-scale sector, arrangementsshould be made to phase it out over a period. The mechanismby which the tiny/village/small-scale sectors were to bedeveloped was twofold: la) specific reservations for sectors

. which, in turn, necessitated a fairly elaborate regulation ofnew capacity creation; and {b/ second, requiring existing unitsto curtail in a phased mannen their production of items whichwere to be reserved for the tiny/village/small-scale sector,which would also necessitate continuing detailed interven-tion.

It is not surprising, therefore, that the Group rejected themore radical solution and contented itself with a recommen-dation for enlarging the present area of exemption and mak-ing it somewhat flexible.'sa At the time of the Group's reportindustrial licence was nol required in the following cases :

1, If the items of manufacture relate to an industry which isnot included in the Industries (Development and Regula-tion Act.

* List of industries gover.ned by Special Regulations is given in Appendix IV.


2.

J.

Small-scale and ancillarY unitsInvestment up to rupees one crore, sublect to :

(al overall limit of inl'estment should not exceed rupees

five crores;(b) import of -raw materials should not be more than

rupees five lakhs or 5 per cent of the value of annual

production, whichever is lower; and

{c) import of components dhould not exceed 10 per cent

of ex-factory value of annual production three years

after commencement of production or rupees five

lakhs whichever is less.

4. Industries which have been specifically de-licensed' sutr

iect to conditions for delicensing'

The Group noted that in spitQ of the apparently large area

of activity which would not require a licence a^considerable

amounl Lf tlrn* and effort of the Secretariat for Industrial

Approvals continued to be direQted towards the examination

of applications fon industrial. licences involving investment

below rupees one crore eveir 'though exemption limit had

been stipulated as rupees one crore investment' This was

because of the conditions attached to the exemption such as

tlmits of foreign exchange requirements for import of raw

materials and components, investments by MRTP units for

foreign malority companies, arld the overall limit of rupees

five irores in any undertaking seeking to take advantage of

the exemption. The Group's investigation showed over 30 per

cent of the approvals given for industrial licences related to

investments -belo*

rupees o!:re crore but with foreign

exchange requirements exceeding the limits prescribed'

The Group noted that srnce the limit of rupees one crore

*u" fi."t introduced there have been major changes which

needed to be taken into account. There was a sharp decline in

the real value of money since fdbruary 1970 when the limit of

rupees oire crore was first introduced' Similarly, the foreign

.*"hu.rgt position had significantly improved and the policy

regarding imports was consequently mo1e liberal' Taking into

account these two factors, the Group made certain r€commen-

dations for what they considered to be a fairly extensive

liberalisation of the licensing regime'

negulation and Developmenr 777

The Group, however, was in favour of maintaining certainother existing stipulations, namely, the item of manufactureshould not relate to industries neserved for the public sectorand the small-scale sector, industries subiect to Special regu-lation, and other specitied industries. f'his was ploposed inonder to ensure that there was no encroachment on the small-scale sector b1, large units (a concept lvhich u,as dear to thenen, Governmentl; and there was to be no erosion of the role,ol the public sector by permitting creation of capacily llyprivate sector units in Schedule 'A' industries. In order toensure that liberalisation did not circumvent either of thesestipulations and also to ensure adequate availability of infor-mation with the Government on developments in the field ofindustry, the Group suggested that all units would, neverthe-less, still have to get themselves registered rvith either theState Director of Industries or the Director General of Techni-cal Development, depending upon whether they rvere small-scale or largescale units according to the present definitions.

In brie{, the recommendations of the Study Group were :

1. The exemption limit for industrial licensing may beraised from the present level of-rupees one crore torupees three crofes.

2. The existing stipulation negarding the overall limit ofinvestment ol'rupees five crores mav be deleted.

3. The existing stipulations regarding the limits of import ofraw materials and components ma),' also be deleted.Such imports will be governed by the import tradepolicy in force from time to time.

4. Other existing stipulations, i.e., the item of rnanufactureshould not relate to industries ieserved for the publicsector and small-scale secton, industries subiect to Special regulation and other specified industries shouldcontinue to apply.

5. The de-licensing of specified industries, announced in1975, Il].ay be withdrawn, in view of the fact that exemFtion limit fon investment is being raised to rupees threecrores without the present stipulation regarding foneignexchange.


If the intention of the Study GFoup was to reduce the num-ber of applications received, thqs enabling better scrutiny ofapplications, or whether it was {o fi'ee the system of unneceesary nestriclions there is little evidence to suggest that thisactually happened. Due to the increasing number of applica-tions the work of licensing aclually increased. Barring theapplications which were returned to the parties as defectiveor incomplete applications, the remaining which were disposed of by the Licensing Cornmittee increased. Total dis.posal work of the Committee which was about 1000 applications a year in 1976 and 1977, increased to around 1300 in 1978and 1979 andduring 1980-83.

was in the range of 1800 to 2000 applications

This divengence between intention and outcome was, in a

sense, built into the structure Of the Government's decisionitself. The relaxation did not apply to -ither MRTP/FERA unitsimespective of the ty?e or scale of activity, and even in thecase of ploduction of new articles, however small the invest-ment, lhey continued to requine Government's approval in theform of licences or endorsements on existing licences. Second,the foreign exchange limit created a number of problemsincluding problems of interpret:ition. Further, because of thelong list of industries subject to $pecial negulation, there werenumerous applications which, for most part, remained underexamination for extended perioSs of time in the administra-tive nrinistries.

There were two other major recommendations of the StudyGroup which also had implicalions for the working of theindustrial policy. The Study Group observed that the monitor-ing of implementation of letterg of intent was 'either inade-quate or non-existent.'ss Atthoqgh the initial validity of theletter of intent was one year, extensions were being grantedfreely by the administrative ministries. The standard con-ditions of the Ietters of intent usually rclated to the acceptance by Government of foreign collaboration terms and theapplication for capital goods import. The Group pnoposed thatsinge every new undertaking wquld be approaching financialinstitutions for assistance, it would rnake far better coordina-tion if the letter of intent stipulated a period of time, say, sixmonths within which the entrepreneur should submit a

negulation and Development 7lg

complete application to the fitrancial institution. Industriallicences could be issued only after the institution had givenlhe nccessary approval with regard to lhe financing of theproiect. This particular recommendation, however, was notimplemented.

' The other maior recommendation pertained to the work ofthe Development Councils. The Group observed that underthe Industries (Developrnent and Regulation) Act, the Development Councils were expected to provide the mechanism fordeveloping a coordinated approach for orderly and dynamicdevelopment of industries specified in the Schedule. Thefunctions of the Development Councils as.specified in theSecond Schedule to the Act were compnehensive andincluded, inter alia, recommending targets of production, sug-gesting norms of efficiency, proposing measures for max-imum utilisation of installed capacity, promotingstandardisation, assisting in the distribution of controlledmaterials and suggesting improved marketing strategies. TheCouncils were also to be entrusted with certain other respon-sibilities such as promotion of scientific and indusFialresearch, standardisation and improvements of accountingand costing methods, collection and compilation of statistics,in addition to training of personnel engaged in industry andalso retraining of surplus personnel. An important function ofthe Development Councils envisaged in the Act was inves.tigating the possibilities of decentralising the stages and processes of production with a view to encouraging the growth ofallied small-scale and cottage industries. It is a ribute tothose associated with the formulation 0f tite IndustriesiDevelopment and Regulation) Act that it has not been foundnecessary to amend or add to the functions of the Development Councils. Indeed, it would be difficult to suggest, eventoday, a w-ider or more crucial mandate. In practice, however,the functioning of the Development Councils has fallen farshort of the mandate envisaged for them in the Act. The mleassigned to them in the planning process was never actuallyperformed or indeed, expected. There was very little, if any,interfacing between the Development Councils and the plan-ning process.

In part. of course, the failure bf the Development Councils

I2O INDUSTNIAL POLICY SINCE 1973

rlepresentative of all relevant necessaryexperience. Thus, mostany representatives of

expertise ordid not havenor was the.

Develop ent Councilsinstitutions;

Planning Commission or the a minislry sufficient-ly closely associated with the wonk of Devclopment Councils.These bodies tended to become largely, gatherings of indus-trialists and technical experts. Frlrther, the Councils did nothave the support of a competent and full-time Secretariat. Themost common arrangement wa.s fbr the Development Officerfrom the Directorate of Technioal Development to act asSecretary of the Council. This kind of part-time and ofteninadequate Secretariat support gr€atly reduced the ability ofthe Councils to devote trme and attention to the wide rangingterms of functions assigned to thdm. The size of the Councilsoften tended to become very l4rge, particularly when anattempt was made within the imdustry to represent diversesegments or interests. Sometimes, the Councils wene notneconstituted after expiry of theii [nitial term; and even otherwise, in many cases meetings of the Councils were not suf-ficiently frequent. In short, instead of becoming activefunctional bodies consisting of ipersons closely connectedwith industry and policy formulafiion, these Councils tendedto become more like a social gathering for exchanging viewsrather than formulating operational guidelines for futuredevelopment of industry, taking into account the changingtechnologies, position of raw materials, marketing conditions,financial parameters, etc. The Grpup recommended that theDevelopment Councils needed to be activised and equippedto perfonm the entire range of functions assigned to them inthe Second Schedule to the Industries (Development andRegulation) Act. For this purpose the Group made the follow-ing suggestions :

1. Each Development Council ohould be presided over bythe Secretary or Additional Secretary of the concernedadministrative ministry and should have not more thanfifteen members including trepresentatives of industry

to play the role envisaged for thefir arose out of certain weak-nesses in their constitution and firnctioning. More often thannot, the composition of the Development Councils was not

2.


(wherever appropriate), the Department of Industrial

ll..,utop-".t't, the Planning Commission' fittant:ial

institutions, concerned national laboratories' BICP and

DGTD. The Membersecretary of the Development Coun-

cil will be the Joint Secretary concerned in the adminis-

trative rninistry.Each Development Council should have a small full-time

Secretariat with adequate technical support working in

the administrative ministry.A Development Council shnrtld normally meet once every

qual'ter and send a report to the PAB

the Councils could usefully organize their work thmugh

subcornmittees dealing with the following aspects of

the industry :

(a) A technical sub-committee clealing with the current

stage of technology achieved in othe| countries' rheif

relevance to our sltuation; means of inducting desir-

able improvement in indigenous technologli establish-

ment oi' linkages with small'scale u'nits' scope for

product divet'sification, etc'

(b) An economic sut>committee dealing with the overall

and supply situation, prevailing tax structure and its

impact on prices and profits, the scope for generation

of investible resources within the industry, etc'

5. While the membership of the l)evelopment Llouncils

itself will be restricted, the sutrcommittees could coopt

experts in their respective areas and thereby impnove

the inputs available to them and to the Councils as a

whole.

3.4 A Development Council should consider the slate of

affairs of the industry including the current state of

indigenous technology and the need for upgrading it' itsmarieting and pricing policy, its problems' Srowth pros-

pects, et;., and to make recommendations for speedy

ind orderly growth of the industry' The recommen-

dations of the Development Council will be taken into

account by the Government in framing the annual

guidelines for that industry. These guidelines should

ilso be taken into account by the t'icensing Committee

I22 INDUSTRIAL POLICY SINCE 1973

for the purpose of determining the scope and extent offurther licensing.56

3.5 Sitnilarlv, the view taken bl' the Development Courrcilwhere representatives of the planning Commission,financial institutions and cdncerned ministries would bepresent, would permit the financial institutions also totake into account the reco{nmendation of the Development Council with regard to the likely demand andfuture requirements of capacitl, in that industry. Thesynthesised view should help in promoting coondinationat the stage of iicensing and financing.

3.6 Both for the purpose of stflling in respective Development Councils and fol pro.,'iding adequate technicalinput into tl)e examination of industrial licence applica-tions by the Administrative Ministries, it may be neces-sary to strengthen lthel technical staff available in someAdministrative Ministries.sT

"Ihe proposals of the Study Group were designed to placethe Development Councils in ttre key position assigned tothem in the fnamework of the Indusries (Development andRegulationr Act.

While the rationale underlyiqg a smaller but more com-posite Council was sound, in pructice, the situation did notvastly improve. The earlier tradition of the planning prccessfollowing its own path rcmainbd strong. This was partlybecause not many Development Councils were in a positionto make any authentic contribution to the improvement of theplanning process, and partly because over the year-s the plan_ning process had tended to la)4 greater store by technicalsophistiiation in refining the plan modcl and in developinggreater internal consistency of the major macrovariables. Inpractice, the availability of resour.ces in real terms was almostinvariably short of requinements hnd, therefore, the tendencywas to sweep some of the unple4sant realities under the car-pet. For this style of planning the detailed or down-toearthspecific recommendations of the Development Councils wereeither irrelevant or positively incdrnvenient. While there wereclear advantages of a Secretary of Additional Secretary of theconcerned ministry being the Chairman of the Development


Council, in the sense that the administrative ministry then

was directly involved in the conclusions/recommendations,the time and attention u'hich a Secretary of the Government

could devote to this work varied widely from one person to

anothen and because of other commitments, hardly any Sec-

retary was in a position to really devote adequate time to

guiding the work of the Councils. In retrospect, it would have

b""., -o"" useful if there was a Vice-Chairman of the

Development Council drawn from or closely connected withthe industry concerned, one who would be willing and able

to devote sufficient time to the work of the Council' Such an

arrangement would have had the benefit of a direct and more

than casual involvement of someone knowledgeable about the

problems and prospects of the industry concerned and wouldirave been in a position to guide and give direction to the

work of the Council.Just as the Industrial Policy Statement of L977 reflected an

attempt to break with the past, the Industrial Policy Statement

issued in July 1980 by the new Government headed by

Shrimati Indira Gandhi, which returned to power with a

massive mandate in January 1980, was a strident reiteraticn ofpast policies. It was an aggressively political document whichrnfused to accept any inadequacies in the earlier firamework

of policy or its implementation. According to the new Govern-

ment it was only because the thirty-threc month rule of the

Janata Party and its successor which interfered with the prccess of industrial development that corrective action was

needed. The Statemenl claimed

While the country had redched a take-off stage in [the] mid-197os, both the growth channels*optimum utilization ofinstalled capacity as well as expansion of industries-werechoked off by the 33 months' rule of the Janata Party and its

successor Government. The runway of the economy has

been damaged by the last two Governments and the entire

process of development was put in reverse gear's8

The Industrial Policy Resolution of 1956 which has served

as 'the comer-stone of the Congress Government's policy-

frame for the past quarter of century' retlects the 'value

I24 INDUSTRIAL POLICY SINCE 1973

system of our country and has sholvn the lrerit of constructiveflexibiliqy'.ss The implication was that there was no need toreview past policies or practices or assess how far they hadbeen effective in achieving the oliginal obieetives. Obviously,twenty-five years after the Industrfial Policy Resolution of 1956had little to teach and there was evidently no need to learn:the return of the Congrpss Party to power at the Centre in1980 with a massive mandate also brought to the foreftnnt in-dividuals who would have liked td,erase fiom the records theexistence of a nonCongless Goveinment. The intensity of thisfeeling is best illustr.ated by the curious omission of anyreference to the Industrial policy Statement of December 1927.

The Policy Statement of July 1980 made curious reading. Itis a combination of mixed metalbhors, general exhofiationsand broad statements of intent, whic[ like the Ten Com-mandments would have few objeqtors. But above all else, it isessentially and unashamedly a ,pafty document,. For instance,it stresses that'new thrusts need to be made to establish adynamic indusfial economy as indicated in rhe ElectionManifesto of the Congress party.,6q The socio-econornic obiec.tives listed in the Policy Statement were:

Optimum utilisation of the installed capacity.Maximising pncrduction and actrlieving higher productivity.Higher employment generation.Correction of regional inrbalarices through a preferentialdevelopment of industrially backward areas.Strengthening of the agriculturhl base by according a preferential treatment to agrobased industries, and promotingoptimum inter-sectoral relationShip.Faster promotion of export-oriented and import substi-tution industries.Pmmoting economic federalisnfl with an equitable spreadof investment and the dispersal of returns amongst widelyspread over small but gfowing units in rural as well asunban area s.Consumer protection against hi6h prices and bad quality.6l

One could hardl;, disagree with the desirability of any or allof these obiectives; but it was doubtful if, try themselVes, they

nrgulrtion and Develolment 725

could constitute an adequate basis for an industrial policy'The only specific reference in terms of a new policy initia-

tive was a reference to what was termed as 'economicfederalism'.62 The Statement claimed that during the last

three years, artificial divisions wene sought to be crcated bet-

ween small and largescale industry unden the misconceptionthat 'these interests are essentially conflicting'.*63 It was nowproposed under the new policy to 'promote the concept ofeconomic federalism with the setting up of a few nucleusplants in each district, identified as industrially backward togenerate as many ancillaries and small and cottage units as

possible.'65 It is, perhaps, appropriate to quote the relevantpas$age explaining the concept of a nucleus plant:

A nucleus plant would concentrate on assembling the prcducts of the ancillary units falling within its orbit, on producing the inputs needed by a large number of smallerunits and making adequate marketing arrangements. Thenuclei will also ensure a widely spread pattern of invest-

ment and employment and will distribute the benefits oIindustrialization to the maximum possible. The nucleusplants would also work for upgrading the technologr ofsmall units. Small is beautiful only if it is growing. Just as

the phased manufacturing prograrnme with a view torcducing reliance on imported components and materialsplayed an important role in diversifying our industrialstructure, a carefully worked out, time bound programmefor greater ancillarisation in certain industries will

' However, having talked about the perveNe poticies of the previous C'overn-

ment of creating artiticial divisions between large and small industries, the

Policy Statement blandly states the following :

Policies regarding marketing support io the decentralized sectors andr€servations of items for small-scale industries shall continue to be inforce in the interest and growth of the smallscale industries, encouragement fbr village industries and correcting |egional imbalances by giving

special concessions and facihties 'for setting.up of units inLindustriallybackward areas.64

An interesting point in the Statement was that a review woutd be undertakenand the nurnerous incentives that had been provided to the industries fromtime to time so as to ensure that the incentives have fulfilled their initialpurpose.

726 INDTJSTfiTAL POLICY SINCE T973

conlribute consideral)ly tolvartls dispelsal of industrv andgf,owth of entrepreneurship.66

The Policy Statement covered several other issues, such as

financial support to small unitsi, buffen stocks for criticalinputs, marketing support and re$ervation of items for smallscale industries.

In operatronal terms, the Statelnent quoted with approba-tion the decision taken in 1975 with regard to the recognitionof additional capacities under certain circumstances andwent on to state that in the view of the Government, in severalindustri€s which were importani from the point of view of'national economy or were engaged in the production ofarticles of mass consumption, the productive capacity endonsed on the original licences or ag amended in terms of 1975

Notifications, 'may not reflect the full productive potential ofthe unit.'67 This may be due to 'iricreased labour productivityor technological impmvements' I aird il rvas pmposed, therefore,'to recognise such capacities on a selective basis'.6e The procedu|e for endorsement of capacities was to beissued separately. Similarly, the cility fon automatic growthwhich was extended to a sel number of industries in1975 was to be extended to all es included in Appen-dix I to the Notiflcation issued i4 February 1973 announcing.the classification of industries wer€ to be treated as

core industries and opcn for by large houses,

Even in cases where the Policy Statement proposed to con-tinue the initiatives taken by thB previous Government, interms of the Industrial Policy Statlement, 1977, care was takento avoid any accusation of conti uity. For instance, for preserying regional balance and encouraging dispensal of indus-tries, the Statement affirmed that 'steps have been taken topt€vent growth of industry in the metropolitan cities andlarger towns. Setting up of ndw industrial undertakingswithin the limits of such urban cdntres is not permitted.'7o Itwas further added that the Government 'proposed to providefor selective relaxation to remove genuine difficulties, butwithout detriment to the basic obiectives.'7r This was, of course,without any reference to the fact that such modification was


made even during the previous regime.* Sirnilarly, it wasstated that necourse to'takeover the management of a unitunder the Industries (Development and Regulation) Act wouldbe only in exceptional cases on grounds of public interestwhere other means for the revival of sick undertakings werenot considered feasible; and every attempt would be made todetect sickness at an early stage with a view to taking correc-tive action. This was no different l'rom the previousGovernment's Policy on Sick Industries as announced inParliament in 1978.72

The thrust and content of the Policy Statement of 1980 isbest illustrated in its penultirnate paragraph, the text of whichreads as follows:

4l.Industrial development rs an inter-discipiinary concept.It pertains not only to the manufacturing activity but to allrelated infrastructural development: licensing and conporate policies; financial, fiscal, trade and pricing policies;industrial relations and management; scientific andtechnological - developments and broad socioeconomicpolicies. As such, the implementation of the industrialpolicy requires close and effective coordination and monitoring at various levels at the Centre as well as between theCentre and the States. lts ultimate supcess will also dependon the extent of cooperation that [the] ir]dustrl' t'eceives

from the other sections of society.T3

In sho'rt, everything depends on everything else; but nevertheless, the Statement concludes on an optimistic note that 'theobiectives set out in this Paper and the measunes outlinedherein' would receive the support of all sections of thepeople.+

' After the announcement of the Policy in December 1977, lhere was for a

period of several months a rigid insi$tence that no new industrial licenceseither for new units or tbr substantial expansion or even for new articleswould be given to a unit if the location was in lhe prohibited category. B)'mid-197a the GoverDnrent had, in the light of experience, decided to makesome relaxations with a vierv to ensuriilg that cases of genuine hardshipcould be dealt. with seleotivel-r,, \vithout reducrng the elfectivenes$ of thepoUcy.+ Important polic!, changes effecled subsequent lo lhe 1980 Poticy Statementthrough notifcadons have been given on pp. 128-30.

I2A INDUSTRIAL POLICY SINCE 1973

The Policy Statement of July 1980, as pointed out earlier,was strong on exhortation but hnd little by way of new or dif-ferent policy prescriptions. This was borne out by the variousmeasures which were adopted hetween 1980-84 in pursuanceof the announced policy. For in$tance, soon after announcingthe new Policy Statement in July 1980, the Governmentallowed an automatic gfowth at the rate of 5 per cent perannum up to 25 per cent over a of five years (i.e., end-ing August 1985) forincluded in the list of

basic and core industriesin Appendix I. This was in

addition to fifteen engineering tries for which automaticgrowth had been granted in 1p75. Second, the established

items were added to the ' Iist' for exclusive produc'tion in the small-scale sector in 1980-81 and in subsequentyears. In order to restrict the of 'reserved items' bymedium and larger the Industrial (Developmentand Regulation) Amendment of 1984 empoweredthe Government to call for theappnopriate conditions on their

in 1981-82 related to obtaining of Registration certificates.Following the amendment oi the Industrial lDevelopment andRegulation) Act in 1971, the Goverfiment had issued notificationsto industrial undertakings holding Registration certificates with-out the indication of productive capacities to submit theirRegistration certificates for endorsement of productivecapacities on them. Productive oapacities for the purpose ofendorsement were to be based on the best productionachieved during the three years prior to 29 August 1973. In1981-82 this matter was reconsidered and as a measure offurther liberalisation, it was decided that productive

Aegulation and Development tag

capacities for endorsement would be fixed with refer€nce toperiods after 29 August 1928.* The incorporation of productivecapacity in the Registration had assumed significance becauseof the policy of reserving more and tnore items for exclusivepnoduction in the smallsector. As a measure of further oppor.tunity for maximisation of utilisation of installed capacitybased on pnoductioir, units were permitted to get their re,gis.tercd capacities enhanced on the basis of pr.oductionachieved during the year 1982-83 or 1983-84.

Another feature introduced in the new Industrial policywas to use the instrument of licensing to promote indus"trialisation in the bac'kward areas. For this purpose, eighty-seven districts were identified as ,No-induitry-distiicts, an4over.riding preference was to be given to them for the grant ofindustrial licences. Noindustry-drstriatsi were also to begiven priority for the required infrastmctural development.+Even in the case of industries whjch were exempted ftomlicensing iequirementq the technical authorities Oike theDGTD) with whom the industrial undertakings werc requiredto b€ registered for purposes of procuring raw materials, etc.,were required to bear in mind the new thrust of thelocational policy.

In order to make it.easier for new and medium sizedundertakings to come up, the limit in lerms of fixed assets upto which undertakings l^/er€ exempt from the requirements oflicensing was further raised. Earlieo .units witti fixed assetsup to rupees three crores were exenrpted from the re_quirements of .licensing.

This limit was raised to rupeesfive crores from Apnil 1989. The important point to note,however, is that this raising of the limit was stili subiect to thesame conditions as before, i.e., this would not_be applicable inthe case of MRTp and FERA unitg or in respect of itemswhich hdd been reserved for production in the small-scalesebtor and 'that this exemption would not be extended toactivities under Special peguLations. In short, in real terms,that is allowing for changes in the valub of money, the socalled liberalisation announced with much fanfare meant lit-tle, if anything.

' Cl. Chapter IlI, pp.77-aO.+ Fof more details see Chapter VIII, pp. ZZ4-40.

13O INDUSTRIAL POLICY SINCE 1973'

administrative liberalisation'

Measures adopted in pursuance of the Industrial Policy

Statement of 19E0 once again l'evealed that even when a

greater degree of freedom for the industrial system was

deemed to be necessary and desirable there was tremendous

reluctance for this enhanced freedom to be determined by the

-u"f.ut forces on to use the other irrstruments of control in the

t una" of Government, for exarlnple, taxes' tariffs' lending

fofi"iu" ,qf nationalised banks or development institutions'

etc. rhe emphasis was still on easing of regulations which

coirtinued to be administered by fthe Central Government; and

themainconcernoftheadministrativemachineryresponsiblefor the regulatory framework was to ensure-that the invest-

ment decisions were not allowed to be influenced by the

market fortes except within thq'rather narrow limits of the


1; Isher Judge Ahluwalia, !' lndusrial Stalnation in India since the Mid-Sixties

0s56-sz i tgzgso). Nervv Delhi: oxlord uiniversity Press' 1985'

2. lndustrial Polential. Reierve Bank oJ-lndia Bullein3, See note 1 arrove.

i. Irraiu, rtarr"t"i"l Folicy-Govemrnent Decisions Pless Note' z February 1973 '

In Gluid.elines for lndustries' New Delhi: Indiat lnvestment centre' 19Ez'

Part I, S€ction II, PP. 12-16, Para 1'

5. Ibid., para 3.

6. Ibid-' para 4.

7 . lbid., para 5.

a. lbid., para 11.

s. lbid., pana 1z

1o. India, Streamlining of Industrial Procedures Press Note' 31 october 1973'

11. India, Liberalisation of lnvestment P{ocedur€ for Stimulating Production'

Pr€ss Note No. 721'1,3s)/LP175,25 Octotler 1975 ln Guidelines for Industries'

New Delhi: hdian lnvesrment Centre! 19E2, Part I' Section lV' pp 5-6 Also

irraiu, fuirli",ry of Indu$try and civil Supplres' Department of Indtrstrial

,legulatkttt at.d l)eveLtp,ttent 131

Developtlent, Notification No. S0 637/ (!;' IDRA 29Bi 75' l Novenrber l'975'

as am;nded by Notification No 735(!'J' 16 November lgt't' ltr (lDidelines

Jbr ln(lostrie; New fjeihi: Indian lnvestment (ienlre 1970' Part L Sectlon

lV, pp. rlt 20.

the t*"nti.fotr" specified industries we'e: cotton spinning for the

manulacture ol cottoll yarn up to a capactiv of 50'000 sPindles; man-nlade

fibre$ up to 50,000 spindles; solvent extraction of oiVoilcakes fronr nrinor

seeds including cotton seeds; wrilin6, printing and wrapping paper Irom

agricultural residue and waste; ravon grade pulp fronl bamboo; refrac-

tories; waler pumps beyond 10 cnr x 10 cm; colton seed linter pulp; ractordrawn agricultural implements; glass slag and mineral wool and products

thereof; hard board including tibrerchip board and the like; GLS lamps;

industrial sewing machines; basic drugs; forged hand tools and small'

lools; leather goods except those reserved for small-scale industries;

indu$trial machinery; surgical and medicinal rubber pfoductsi LT switch-

gears; mat'hine toolsi induslrial and scientific inslrumenls; hasic insec-

ticides; sanitary-waie, HT insulatom; tiles of size 4" x 4" and above'

12. India, Ministry of Industry and Civil Supplies, Depadment of Indu6trial

Developmeni, Notificati6n Nb. s. o.' 474fEtIDR N2g$l75,s september 1975.

In Guiietines Jbr lndustlies. New Delhi: lndian Investment -Cel\tre, 1979'

Pafl L Seclion IV, PP. l7-lE.13.tndia,UtilisarionofResultsofln-houseR&DforCommercialExPloita'

tion. Press Note, 72lz1llLPl75, 2r eugirst 1975''ln Guidelines ./br, fndusrries. New Delhi: Indian Investment Centre, 1982, Part I, Section lV, p' 3'

74. tbid.15. India, Delicenling of lndustries set up on the Basis of l echnology

Developed by National Laboratories. Press Note, No l2(49)/LPl76, 7 March

79?6. In Guidelines Jlor /ndustries. New Delhi: lndian Investment Centr€,

1982, Pafi I, Section lV, P. 8

16. G.V. Ramakri.shna, chairman, Report of lhe Study G'wup on lndustrialnegulations and Procedures. Ne!r' Delhi: Government of India, February

197E, p. 5.

17. Ibid., p. 7 , para 1.21.

1E. India, Statement of lndusirial't9. lbid., para 7.

20. Ibid, para 2.

27. Ibid, pa'|a 3.

22. Ibid., pa'ta 5.

23. Ibid., para 6.

24. rbid.,25. lbid' para7.26. lbid., para 8.

27.Ibid., para9.2a. Ibid., par 13,

2s. lbid.' pa'|a 75.

n. lhid-, para 77. '37. Ibid.,32. lbid., para 18{c).

Policv, dated 23 December 1977.

t1s2 INDUSTRTAT, POt,tCY SlNCE l973

33. .lbid., pala 21.

34. lbi.l.,3s. tbid.,36. 1bid., pal'a 24.

37. lbid., para 2u.

38. tbid., para 30.

39, ,t id., para 32.

40. Ibid., para 33.

41. tbid.,42. Ibid.,$. rbid.)44. Ibid., para 31.

4s. rbid.,46. Ibid., para 35.

47. rbid.,4E. ,bid., para 31.

ls. tbid.,50. /bid., para 38.

48, para 2.

59. tbid., para 1.

60. /bid., para 5.

61. Ibid.62. Ibid., para 10.

63. rbid.tu. /bid., para 16.

65. lbid., para 10.

66. Ibid.' para 11.

67.Ibid.' para zr.68. rbid.69. tbid70. lbid., para 30.

77. Ibid.' para31.

51. c.V. Ramakrishna, Chairrnan, nepof,t of the Study Croup an InduslrialRegulations and Prutcedures. Nerry Delhi: Governmenl of lndia, February

1978, p. E, para 1.?s.

52. lbid., p.10, para 2.6.

53. lbid., p. 17, Pata 2.7 .

s4, lbid., para 2.8.

55. Ibid.' p. 14, para 2.15.

56. Ibid., p. 77 , para 3.4.

57. Ibid.' p. 18, para 3.6.

5E. fndia, Industrial Poficy statement, Jtily 23, 19E0. In Guidelines for Indus'

tries. New Delhi: lndian lnvestment Centrc, 1962, Part I, Section ll, pp. 41-

72- lndia, Statement by Minister of In+ustry in Parlian)ent on 15 May 197E

on Policy of Sick Industries. In Glridcrlines for lndustries. New Delhi:lndian Investment Centrc, 1979, Part I, Section Il, pp..1E-20.

73. See note 58 abo\ie.

Indusfuial Policy and theFive'Year Plans

Tfte discussion in the preceding chapters has highliShted thelong tradition of depending on Government inteNention inorder to accelerate industrial development. The discussionalso reveals how, over a fairly long period, certain basicapproaches with regard to industrial policy remained, moreor less, unaltered. In part, this was due to the fact that eversince independence-for nearly thirty years - the same partycontinued to be in power at the Centre; and there was amarked unwillingness to either recognise or to acceptpublicly the need for any significant, if not radieal, departurefrom what had been accepted officially earlier. There wasalso a reluctance to review criticalty the actual performancein terms of the policy obiectives in order to assess whetherthe mechanisms for implementing the policy were effective.The major exceptions to this, however, were the occasionalglimpses available from the successive Plan Documentsrevealing the planners' awareness of the changing needs ofthe economy. By the time of the Fourth FiveYear Plan therewere indications that the Planning Commission was becom-

ing aware of the need for radical changes. The distressingpart, however, is that what was stated in the Plan Documenl

13J INDTISI'RI/\t, POI,ICY A^'I]'I'HE !'IVH,.YEAR PLANS

regarding the industrial policy on changes therein and whatwas actuall.v done were not always or adequately reflected inthe policies pursued.

In the sectior-l on Industrial Dqvelopment and Policy of theFirst Five-Year Plarr, there is d pointed reference to thedecline in productivity of indusitry in general since 1939.'1

Accorcling to the Plan Document, on a rough estimate, prGductivity had declined by 'about 20 to 30 per cent'.2 This wasattnibutable to various factors ingluding running down of thecapital equipment during the Second World War. While thePlan Document did not consider lt possible to allocate to eachfactor its specific share of respon$ibility for the loss in produc-tivity it was clear that 'industrv is now using [aJ much largervolume of real resources per unit of output than it used toconsume before, and this is partly responsible for inflating thelevel of prices.'3 It is interesting tO note that in this context theFinst Plan Document often refers to the respective roles of theState and of private enterprise and emphasises that a 'haFmonious working of these two sectors will depend, to a largeextent, on decisions arrived at b)l mutual agreement betweenthe representatives of the Goverrtment, business and industryand latrour.'a It envisaged that local and negional bodies aswell as functional associations c$uld play an effective nole inthe formulation and implementation of the Plan. Whileunderlining the need for a system of controls such as capitalissue control, licensing of new enterprises and large exten-sions of existing ones, foreign exchange allocations, importand export controls, controls on prices and also physical con-trols such as price and distribution contnols, the authors ofthe Plan were quite explicit in stating that 'in. the Plan,administrartion and periodical revlews of these contmls, machi-nery for consultation and cooperlalion with the private sectorwill have an elTective shale.'5

Equally significant were the $tatements in the First Five-Year Plan on the question of interfacing between privateindustry and Government. The Flan Document begins withlhe proposition

negulalion and DeveloPment 135

point of view of how government should exercise certain

po*""" in relation to industry, as of the kind of machinery

irhi"h "un work from within each industry and help to

bring about 'steady improvement in the standards of productivity, efficiency, and management "'By the time the Second FiveYear Plan was adopted by the

National Development Council in May 1956' significant

changes had taken place since the preparation of the First

Fiveiear Plan. As the Second Plan Document points ou! the

First Five-Year Plan, '"was conceived as a modest effort"which addressed itself to the solution of certain immediate

problems arising from the aftermath of the Second World War

and Partition.'7 ihe overall results of the First Plan were 'in

the particulay' context very satisfactory''s National income had

incrlased by about 18 per cent, foodgrain producrion had

gone up b)'Zo per cent, considerable new investment' paF

iicutarty in the public sector had taken place; and prices at

the end of the First Plan were lower by 13 per cent than at the

time when the Plan was introduced; and in fact, they were

slightly below those prevailing on the eve of the Konean War'.-It

is against this background that one must view the more

ambitious approach adopted in the Second Plan.Document'

The task for the Second and subsequent plan periods was tobring about a structural change in the economy, which wouid

enable the county to move towards the goal of a technologi-

cally mature society, which could ensure self-sustaininggrowth in a more equal society by avoiding excessive concen-

iration of wealth and power in the hands of a few individuals'The adoption of the Awadi Resolution by the Indian National

Congress and the adoption of the socialistic pattern of society

as the national objective by Parliament in 1954 provided the

ideological basis for the Second Plan. In some ways, after

1955, the Planning Commission of which the hime Minister was

ex-officio Chairman, became an extension of the Prime Minis-

tey's authority in maior areas of economic policy' Not only didit gain in status and power but the demarcation originallyenvisaged between the advisory functions of the Planning

Commission and the decision-making responsibility of the

Central Government tended to get blurred'

. Two prelirninary outlines of the Second plan, one preparedby Professor Mahalanobis {Draft Recommendations tbr theFormulation of the Second plan) anel the other irv theEconomic Division of tlre Ministry of Finance (Franrervork 'folthe Five-Year-Planj were circu latdd for discussion rn March1955. But as both drafts were based on the Working papersprepared lry the Indian Statisticai Institute under prof.essorMahalanobis' supervision, there was little difference 'bet_

ween the two in terms of outlay, Fectoral allocations, rargetsand recommendations on sociGeconomic policy. Manv ofthose associated wilh the formulation of rhe iecond plan ditl,however, have some reservationq about the administrativeand political feasibilities of some !f the p"oposals containedin the Plan for achieving a comirination oi economic andsocial goals. Certain fundamental structural changes in theeconomv were envisaged in the pl{ln. Not only were mo.dernmanufacture and mining to accouft lbr a much larger shareof the Gross Domestic product, bqt even within the modernsector there was to be a shift afva1, from the creation ofcapacity for the production of cqnsumer goods. The mainthrust of both poticy and allocatiqn of resources was to beon the creation of additional capqcity anri expansion of theoutput of intermediates and capithl goods. In the organisedindlsllial sector as a whole, not only was there to be anabsolute increase in the size of public investment, but ilsshare in relation to private investrnlent wds to be sisnificantlv

13ti INllUSt RtT\1, p.Ol.tCy ,tNt) i HIi trVE-fti,\R pL,\NS

higher. These proposals were cqmbined with "!"o--"r_dations for transferring large in t resources from theprivate sector to the State. These included proposals for thenationalisation cf the Imperial and the Life Insuranceindustry; the creation of a State Corporation and-following up the report of r Nicholas Kalders whichsuggested major revisions in the tai structur€_an irrcrease inincome tax and the i.ntroductionexpenditure and capilal gains.

new taxes on wealth and

The PIan Document emphasise{ that the major point ofdeparture in the Second plan was the precedence accorded tothe public sector in industrial and tnineral development. ro Interms of magnitude, the First plan tlad a totai pnor.,ision of Rs.94 crores for the establishment of lalrge_scale industries in the


public sector as against an estimated programme of newinvestment in the private sector of Rs.233 crores. In theSecond Plan the provision of Rs.690 crores for largescaleindustries and mining (including scientific resbarch) ,in the'public sector was a shade higher than the total estimated newinvestment of Rs,575 crores for industries and mining in theprivate sector. Thus, while the private sector was expected tocontinue to play an impoftant pan in the process of indus.Fialisation, there was a clear shift in emphasis in favour ofprojects in the public sector so that over a period of time thepublic sector would occupy a dominant position and attain'thii commanding heights' of the economy. The second rnajordeparture was with regardr to the composition of investmentin the industrial sector. Practically, the entire proposed outlayof Rs.690 crores was for large-scale industries such as ironand steel, coal, fertilisees, healy engineering, and heav_v elec-trical equipment. The Second Plan emphasised, for the firsttime, that a Plan was not merely'a statement or list of thingslo be done.'1l The function of economic policy in the contextof the Plan was 'not merely to mobilize the financial resourcesneeded but also to promote in all ways it can, a pattern ofconsumption and of utilization of the real resources whichconforms to the requirements of the Plan.'|2 The Plan Docu-ment went on to state that the democratic system of planningcould not rely on direct commandeering of resources and hadto operate, therefore, 'mainly through the price mechanism.'13

In order' to ensure that such a mixed economy succeeds inbringing about not merely the desired allocation of resourcegbut also the desined structural changes in the economy, twotypes of techniques needed to be employed. First, there wasthe overall regulation of economic activity through' fiscal andmonetary policy. Second, there were specific regulatoryder.ices like export and import controts, licensing of indus-tries, price controls, and the system of taxes, subsidies andallocations which influence and regulate activities in a particl:lar sector or sutlsector of the economy. While the PlanDocument stressed that the overall fiscal and monetary dis.cipline could go a long. way in channeling resources 'at themargin'r1 in desirable directions, 'a comprehensive Plaurllrich ainrs at raising the inve$tment level in the economl

13E INDIIS'IRIAL POI,ICIFJS AND IHE, FIVE-YEAR PI-ANS

sul)stantialh' ar1d has a delinite ortler'of pliorities in vieu' can-not lle seerr thlough on the basis nteleh of orelall liscal andll)olx)talv contnol.'l; l'he undellvihg logic rt,as tltat 'if controlsat'e administt'ativelv cunilrrous and rnav act as disincentives,lack of tltem, it has to be lememlieled, ntav r;reirte inequaiitiesand haldships, to the plejudice ospeciallv of the classes thatneed protection nrost.'rrjThe Plan flocunter)l entptrasised thepoint that such contlols should ncit be legaldcd as srrfficient bvthethsclvcs. Tlteit' irnposition should be accompanied b1.mea-sules to simultaneouslv inr:rease supplir:s. Tlrc stiction dealingwith the'r\pproacll to the Second FiveYear Platr'ends r.vith the

l)r'oli()sllrt,n:

For directing resources for the Plan as well as for promot-ing and lacilitating a balanced attainment of the economicand social objectives in view, the Plan has to have sanctionsor regulatorv devices which bperate within the existingstructu|e. But more and more, the structure itself has tochange so lhat the desiled balance of incentives and res-t!'aints gets built into it instead of having to be broughtabout through ad-hoc controls dnd correctives.lT

Ilr retrospect, these were strong words and it was not clearwheihel the authors of the Plan fully understood or acceptedthe implications of the kind of structural changes needed inthe economy and the society which would enable a 'des.iredbalance of incentives and restrainls'rE to be built into the socitt-

economic structure itsell Any such structural transforrrationwould have required, by definition, an increasing acceptanceby the social and political svsteru of a set of values and of a

work ethic which would so trarisform the structure that noexternal controls or corectives dre needed. There was littleevidence that there was any systlematic effort either throughthe educational system or through the working of the politicalrnechanism to materially alter the dominant value system insociety. The consequence was that the transfe| of large invest-nrent resources from the private sector to the Statenecessitated an elaborate system of taxation-income ta&wealth tax, gili tax, estate dutv, capital gain tax ancl for a

short period expenditure tax-which effectively mopped up

negulation and Develoqment 139

all income in excess of a certain level. Indeed, it was statedon behalf of the Government from time to time that theegalitarian ideal was being achieved through this taxation sys-

tem. An income, say of rupees five lakhs together with wealthamounting to rupees twenty lakhs would necessitate payment

of total tax by the assessee which would requine him to dis-

invest his assets thus, r'educing his wealth. Technically, tltiswas true if taxes were paid, which of course, they were not.

The growth of black money or socalled parallel economywhich was not subiect to the effects of fiscal or monetarypolicies has been, in a large measure, the consequence of the,lact that lhere was a wide gap between the taxation, pricingand regulatory policies pursued by Government, and thesocial and political ethos of the country which never fullyaccepted the morality or equity of the regulatory system or ofthe structure of taxation. There were no inhibitions atrout ciFcumventing price and distribution controls or against conupt-ing political or administrative systeins through the use ofmoney po!\, er nor was there any social stigma attachedto the acquisition of income and wealth through meanswhich could only have been illegal. The consequence wastirat around the mid-sixties and certainly by the mid-seventiesthe rhetoric in the Plan or in the announcement of publicpolicies began to be increasingly irrelevant to what was happening at the grassroots.

The Third Five-Year Plan (1961-66) was firamed in muchmore difficult circumstances than the Second Plan. The

sharp dlawing down of the accumulated foreign exchange

reserves, the spurt in prices, both wholesale and retail, andgXowing difficulties of foreign exchange formed the backdropat the time of the preparation of the Third Plan' The plannerswere made of sterner stuff and were not daunted unduly by

the immediate problerns. Instead, the Third Plan was'the firstphase in the scheme of long-term development extendingover the next 15 years or so.'re During this period not only wasthe Indian economy to expand rapidly, but at the same time ithad to become increasingly self-reliant and self-generating'The long-term approach was to provide 'a general design fordevelopment,'Zo atrd it was in this context that the Third Planset its obiectives and targets for the five-year period.

lir(, INDUSTRIAL FOI,ICIES AND THf, FIVb.YEAR PLANS

InterEstingly, the Plan Document found it necessary to em-phasise that 'they { rargets) gre lar6e only lri comparison withthe past and not in relation to the needs or the nation,scapacity to achieve.'21 As a further assurance to their earnest-ness, the introduction to the Flan emphasised that ,the

grealest emphasis in the Plan has to be on implementation.on speed and thoroughness in sepking pnactical resultg andcn creating conditions for the inaximum pnoduction andemplovment and the development of human resources.,z?

Regarding the approach to industrial development theThird Plan emphasised lhat ind has a leading role insecuring rapid economic As between agicultureand industry which must beof the same pnocess of devt

ed as 'closely linked partst',23 industry was to have

primacy as an instrument of ; and the development ofbasic heavy industries was to be as part of the com-prehensive design of development

ullimately linked the industrial and rural economy, theeconomy of the large-scale and qf small-scale units and theeconomy of the major industrial centres as well as of thesmaller towns and villages brfinging them into a closerelationship with one ?rnother, ttnus, assuring a high degreeof mobility and economic integrl'ation within the economyas a whole.za

While underlining that fanrqaching gains had beensecured in the industrial field during the first two Plan;periods, the Third Plan'recogrised :

This success, considerable though it is, has so far been in-sufficient to make any great irFpact on the general con.ditions of the masses of the popqlation or radically alter thestructure of the economy. MorFover, compared with theindustrial targets which the country had set to itself, therehave been some large short-falls.tr

The Plan Document further went on to concede that the short-falls that had occurred were maihly in iron and steel, fer.tilisers, certain items of industriall machinery, heavy casting

ne. guletion and Development tL7

and forgings, aluminium, newspiin0 cement and certainchemical industries such as soda-a$h, caustic soda, and dyeptuffs, i.e., 'the very industries which are of crucial impor..tance and have deprived the econ6rrry of the benefits whichwere reckoned on for thg start of tfre Third Plan.'26 It furtherobserved that in spite of large investments-about 30 per centmor€ than in the Plan estimate-the fiscal targets set underthe Second Plan were broadly estimated to have beenachieved only to the extent of 85 to 90 per cent.

Ne\€rtheless, the plannen pruceeded on the basig that the solu.tion lay in preparing the glround for further rapid industrialisa-tion over the next fifteen yearS. It was, therefore, 'essential toprcss fonvard with the establishment of basic and capital andproducer goods industries-with special emphasis onmachinery building programmes-and also on the acquisitionof the rclated skills, technical know-how and desi6rringcapacity... etc.'27 For the first time, however, there was anawareness of the fact that the operation of industries depen-ded not only on the needs of the people or mar*ets for theirprgducte, but also on the supply of raw materials, power,fuel, and facilities for transport. The Plan also took note of thefact that power and fue_l were likely to be the inhibiting fac.{orB 'in the first half of the Third Plari period.'a In consequenbe,therefore, in some instances, the adoption of enorry-intensivepnrcesses was likely to be foregone. Similarly, for the first timethere was a mention that amongst the industrial priorities,accent would have to be on 'proiects which by contributing toexports will earn, or by replacing the impqrts save foreignexchange. It will not be possible to allow significant expansionof industries which are heavily dependent on import.of rawmaterials.'2e

With rcgard to the putrlic sector programme for industries,the primacy of plage for the public sector was not in any wayto be diluted, but hard realities were begfnning to b€ reflec-ted. For instance, the Plan rncludes a whoh chaper on ttre'Organisation of Public Enterprises and another one on Ad-ministration and Plan Implementation', which inter-alia con-tains a section on 'Projectg in Public Secto/. It isinteresting-and somewhat depressing-in retiospect to notethat the chapter.on the 'Ofganisation of prrhlic Enterprises'

I42 INDUS.I.RIAL PoLICY AND I.HE FIVEIYE,\R PLANS

discusses the same problems andl difficulties which continueto be talked about today, in the cpntext of the working of thepublic sector. The Plan bemoans tfre fact that 'consciousness ofprofit in costs is not also as widespread as is necessary.'Jo Theaim of the management should tre to secure economic efficien-cy; 'cost consciousness is necessary to achieve the desiredresults.'31 Among the important aspects of 'calling for suitableaction', the Third Plan Document spoke of public accountabilityand the danger that'exposed to cqnstant scrutiny the manage-

r ment will be afraid of making the day-today decisions necessaryin commercial undertakings andl an ostensibly autonomousenterprise will be virtually stifleil by ned tape and bureau-cracy.'32 There was also an extensive discussion about thenature and functions of the Board of Directors and the need toenhance the powers of the Board; the need for continuity oftenure and relating reward with performance in order toensune that the Managing Director/Chief Executive providesleadership and guidance necessary for successful operation;the role of the Financial Adviseri and the need for advanceplannin6 etc.

In terms of priorities for publio sector proiects, the proiectswer€ to be gmuped into three catqgories:

1. Proiects under execution fnd carried over from theSecond Plan,

2. New projects for which external credits are alreadyassured wholly or partly.

3. New proiects for which external credits have yet to bearranged.

The Plan Document further noted that after taking into'accountRs. 300 crores which were to becbme available from the intennal resources of public sector und,ertakings for financing industrial investment, there would stilll be difficulty in financing theindustrial and mineral progfammes of the public sector. Exclud-

ing the defence industries and prdjects of ministries of railwayotransport and communications designed to meet their ownoperational requirements, the ovdrall cost of public sector proiects was estimated at Rs. 1,882 Drcres. A provision that waspossible, however, was only of Rsl 1,520 crores, including Rs. 70

ne4ulation and DeveloPtnent 1'|i|

cnores in the States' Plans. The conclusion, therelbre, was that'it is probable, therefore, that as already stated, their fullimplementation will take rather more than 5 years.' In short, bythe Third Plan period it was increasingly evident that whateverthe merits of the long-terrn strates/ for economic and in parti-cular indusfial development, there was a widening gap betweentargets and performances, between requirements and resouFces, arrd above all, between the institutional frameworkneeded for putting through the type and scale of developmentand the working of the existing administrativecum-politicalsystem.

It was against this background of growing sfesses andstrains that work on the Fourth Five-Year Plan commenced.The Planning Commission presented a Mernorandum on theFourth Plan to the National Development Council in October1964, which envisaged a total outlay of Rs. 21,500 crores at 1963-

ff prices. After further work a document entitled 'Fourth Five-

Year PIan Resources, outlays and Programmes' 33 was presen-ted to the National Development Council in September 1965.

However, as the country faced serious hostilities around thistime, the Council authorised the then Prime Minister, Shri LalBahadur Shastri to make such adjustments in the Pran that hedeemed necessary for meeting the emergency and safeguard-ing the countqy's security and long-term necessities. While thePlanning Commission undertook a series of studies for deter-mining the changes that would be necessary in the changedcontext, there was another mafor development in the form ofdevaluation of rupee on 6 June 1966. This necessitated a com-plete re-examination of the Plan resources, priorities andoullays.

In the context of these uncertainities in the preparation of theFourth Five-Year Plan, the Annual Plan for 1966-67 (first yearof the Fourth Plan) was formulated in advance of the Dnaft

Outline, which was to be submitted to the National Development Council, to obviate any delay in the implementation ofprogrammes to be undertaken in that year, In the DraftOutline of the Fourth Five-Year Plan, which was published inAugust 1966, it was further made clear :

The annual planning will play much more important role

744 INDUSTRIAL POLICY AND THE FIVE-YEAR PLANS

during the Fourth Plan than id the past.... No new schemewill be inclucled in the annual plan unless it is fully workedout in all details and unless thbre is a neasonable assurancethat requisite resources will be available for its completionas scheduled.s

This was, virtually, an admissidn of the fact that the plan-ning exercises in the past had failed to take note of the emerg-ing situation, that many schemes were included in the Planeven before thev were fully workdd out and even more disturt>ingly, the size of the Plan was not always related to 'anyreasonable assurance that rgquisite resources will beavailable.'

The Draft Outline noted with concern the disappointingrecord in terrqs of growth of national income during the ThirdPlan period. Thiq was in mankrid contrast to the Finst Planwhich had achieved consideratlle success both in terme ofincrea.se in output as well as st{bility in prices. In the ThirdPlan, however, while financial toutlay was about Rs. 8,630crores, substantially higher thaln the oniginal provision of

national income during the Ffan period was less thanhaH of the rate of 5 per cent per envisaged in the Plan Asa result, the pef capita income at 1960€1 prices,which was Rs. 326 in 1960-611965{6 was estimated to be

at that lbvel and in4 little less. It was

becoming clear that the between an increase inin terms of Smwth out-investment in real terms and

put and nalional income was weaker; and that theemphasis on a higher rate of in investment was not, inthe Indian context, _sufficient foF achieving the goal of self-

. reliant growth.Of course, in many respects the Third PIan peniod was

;somewhat abnorrnal. Three o{rt of five years witnessedunusual adverse weather condiftions; there were two wanswith Pakistan, though each wasi of short duration, and thedelay in tying up extemal creditd at the beginning of the Planperiod as well as suspension of credits by the USA towandsthe end of the Plan period furtller aggfavated the situation.

RegDlalion atrd Development 745

Despite these difficulties, however, the rate of growth of some

of the key industrial sectors such as, machinery, metals,chemicals and fertilisers, was more than 15 per cent perannum. There was also a substantial increase in the produc-

tion of items like aluminium, automobiles, ball and rollerbearings, electric transformers, machine tools, textile ma-

chinery, power driven pumps, diesel engines, sugar, cement,petrcchemical products; and the rate of growth of capacitywas even faster than that of production in a number of theseitems. To some extent, this reflectedthe spill-over of investmentsor implementation of schemes fiom the Second Plan or lags incapacity creation and output gfowth. Though it also highlightedthe point that as long as there are viable opportunities for importsubstitution, trends in industrial production did not have to coin-cide with the rate of growth of the economy as a whole.

The adverse factors operating on the economy cturing theThird Plan period, culminating in a drastic devaluation of therupee in June 1966 delayed the finalisation of the Plan. Aftenthe reconstitution of the Planning Commission in Septembet '

1967, with Professor D. R. Gadgil as Deputy Chairman, andafter a careful review of the positionr the Commission came tothe conclusion that, with the lapse of time, many of theassumptions and estima.les of the Draft Outline were no long-er valid. In any event there were only Annual Plans for theyears 1966-67 and 1967-68 and it was decided that the sameshould be done for 1966-69. The Foufih Plan which shouldhave commenced in April 1966, would commence with the fis.cal year 1969-70. The total outlay provided in the draft of theFourth FiveYear Plan was Rs. 24,398 crores including thecurrEnt outlay of Rs, 2,146 crcres.s This was in terans of 1967-68pric€$' In real terms the Plan was substantially smaller thanthe ambitious programmes envisaged in the Draft Outline oIthe Fourth FiveYear Plan in 1966. This is borne out by the factthat the Draft Outline had proposed a minimum PIan with a

' total outlay of Rs, 23,750 cror€s at June 1966 prices. The indexof wholesale prices which was 169 in 1965-66 had advanced to273 in 7967 -68;36 and, therefore, the real content of the Plan,was substantially smaller than envisaged earlier.

On the whole, the Fourth Plan Report was much less com-plaisant ancl nruclr nrore r.ealistic and cr.itical than the

146 INDUSTRIAL POLICIHS.,\ND THE FIVFYEAR PLANS

pfevious Plan llocuments. lr) Fact, Ibr the first tinre, there wererefenences to major failures in lmplementing the Plan praglarnmes. For instance, the Report stated that'the concern forspeed, economy and efficiency has not been pervasive as itought to be.'37 It further stressed that'the public sector whichhad the responsibility of settingl much higher standands ofperformance had as yet to fulfil its role of generating ade-quate surpluses for investment.'38 Even in relation to sensitiveissues like income disparity the Fourth Plan Document wasmuch more forthright. For instance, it made the propositionthat'in a rich country greater equality could be achieved inpart by transfer of income throulgh fiscal, pricing and otherpolicies. No significant results can be achieved through suchmeasures in a poor country.'3e Thb way to reduce income dis-parities, therefore, wa6 a more difficult one-'more rapidgrowth of economy, greater diffubion of enterprise and of theownership of the rneans of production, increasing .produc-tivity of the weaker units and widening opportunities of productive work and employment to the common man andparticularly the less privileged sections of society.'40

On the question of industrial pplicy the Fourth Plan made anumber of important points and lnany of these were either incontnast to th'e mainstream of piast thinking or cover areasoften neglected in the past. For instance, it noted that specificprice and allocation controls and lhe general capital issue andlicensing controls were inescapalDle in the earlier situation ofconsiderable general and specific scarcities, but with moreefficient food management and greater availability of plant,machinery and other equipment in the country, a review ofthe past policies was needed. is all the more importantbecause 'the existing industriala high level of costs and that

has led generally topresent system does not

appear to have prevented concentration.'41 The Planning Com-mission referred to the proposal of social control of bankingand legislation of the Mo and Restrictive Trade Prac-tices; ahd of the assumption that these would be operative indesired directions, a revision of tlire present regime of controlswas deemed desirable. Of the main obiectives of the revi-sion, the first was 'it should encourage fully responsibledecision-making on the part entrepreneurs, fixation of

negulation and Development 14?

targets, licensing and some price and allocation controls seemto have affected the care with which the entrepreneursshould ryeigh the long-term prospects of their investmentdecisions.az The second important obiective, it was argued,should be 'to introduce an element of competitiveness in theeconomy which would keep up cost consciousness.' Referringto the sheltered conditions created in part by the operation ofthe existing controls and licensing systems, which hadreduced cost consciousness, the Plan Document stressed theneed for increasing the element of competitiveness, par.ticularly when industrial activity begins to grow at the higherrate expected during the Fourth Plan period. The one direc-tion in which greater vigilance by Government was, accordingto the Planning Commission, imperative was with regard tothe location of industries in metropolitan and large qity cen-tres. 'This should be effected in two ways-firstly, by positiveassistance and incentives given for dispersal of industry, andsecondly, by disincentives imposed in large cities and positivesteps taken for decongestion of metropolitan areas.'43

The views of the Commission on industrial policy were alsoreflected in its ideas about the rate and pattern of industrialdevelopment. In the long-term perspective of ten or fifteenyears, the Commission concluded that an overall expansion ofI per cent in the net output of mining and manufacturingindustries and construction was required for achieving theprojected growth in aggregate income and agricultural production. The pattern of industrial expansion had to be guidedby 'the necessity of meeting the requirements try the domesticproduction of a wide range of manufactures which admit ofeconomic production.'aa In othei words, the thrust fordevelopment was still in the main from import substitutionwhich was viable. In this context the Commission noted thatin 1967-68, 70 per cent of finished fertilisers, alloy and specialsteel 75 per cent of copper and newsprint were met byimports. Similarly, 60 per cent of crude oil, 30 per cent ofaluminium and 30 per cent of machinery requirements of thecountry were still import. dependent. Fortunately, the mostsignificant branches of industry which needed attention fromthe point of view of import substitution were the ones whereInclia was vl.ell placecl ll' vit'lue botlt of thc size of the

146 INDUSTRIAI POLICIES AND THE PIVE.YEAR PLANS

prospective market and of resource endowment 10 ensureeconomic and efficient production.

In conformily with its thinking and approach to the que6-

tion of industrial development, the Fourth Plan concludedthat 'both from the points of viqw of accelerating industrialdevelopment and improving the administrative efficiency, theexis'ting system of controls, would need a review.'s What theFourth Plan had to say about industrial licensing policy iswofih reproduction mainly for the reason that even fifteenyears after its publication, it is stlll relevant and has not been

implemented:

The primary purpose of Control is to ensure properallocation of scarce resources. Regulation of industrialdevelopment has to be considered primarily in relation to

the allocation of foreign excllange. Thus, import controland control on commodities in short supply would have tocontinue. Within the broad framework of control instrategic areaE, there is advarltage in allowing the marketmuch fuller play. The supply of a variety of industrial com-

modities has considerably eased and the need is one ofstimulating demand and production. With the broaderindustrial base and gr-owing availability of capital equipment and raw materials from rwithin the country the needto control further expansion i4 industries which are largelybased on domestic resoutces has assunied less importance'

Thus the authors of the Plan realised that freedom fi-omindustrial licensing as proposed above might, in certain areas,

have adverse consequence's. For example, it mighl increasefurther the congestion of industiy in large metropolitan areas,lead to undesirable competition with traditional and small-scale industries and could add to the concentration ofeconomic power. Hence il was necessary lo sal'eguard againslthese contingencies and suitable measures 'including reserva-tion of certain industries for th@ traditional and small-scalesector, would have to be devised in accordance with therequinements from time to lime.'+7

In line with the approach to the question of licensing, the


Commission proposed that it was not necessary to lay downfor lhe Fourth Plan targets for all industries.

Definite targets.are proposed to be fixed only for alimited number of high priority industries. In order toensure tne fulfilment of these targets, lull provision will bemade for finance, supplies, and other facilities. For theremaining industries, estimates of requirements and prcduction have been projected in consultation with industrialassociations and other interests. These proiections do notrepresent targets or ceilings.a8

By the time work on the Fifth FiveYear Plan was com-pleted and the draft prepared in 1973, it was clear that con-trary to the anticipations in the Fourth Plan, the growth ofindustrial production had fallen far short of expectations.Instead'of the growth fate of 8 to 10 per cent in industrial production, apart from the year 1969-70 when industrial outputincreased by 6.8 per cent, the increase in the output each yearvaried between 3.5 to 4.5 per cent. In the last year of the Plan,i.e., L973-7 4, there was hardly any increase. The factors nes"

ponsible for this unsatisfactory state of affairs were many butfbr the first time the Fifth Plan Document had to accept :

in some of the critical indusbies like steel and fertilizers,production remained substantially below the installedcapacity, primarily on account of the operational problenrs.These included lack of maintenance, design deficienciesand towards the later part of the Plan a widespread short.tage of power and coal. Inadequate pace of investmentresulted in reduced demand for industrial machineryadversely affecting the level of output ,of the capital goodsindustries. *ae

The Fifth Five-Year Plan Document, the drafi ol which wasready by the end of 1973, tried to define the objectives and

* Il is nol cleal as to how a more adequat€ level ol investmenl was to bcerrsured ir) irrduslry iD lhe faoe ol shortage of coal ancl power, worsenlnginduslri.ri relatiotrs and a general slackenin6l ol the rate of growth ofecononlv,

lso TNDUSTRIAL pot,lcy AND THE Flvi-ynan plars

policy frames for the Fifth Plan in the context of theJong-termperspective. For the first time ag€in, the Fifth Plan took intoaccount the demographic perspective, that is, the size of thepopulation, age, structure, urbanlsation and labour force, in a

more elaborate way. As expectedr it came to the conclusion'that 'employment is perhaps, going to be the most importantchallenge to development planning during the perspectivepeniod.'5O The other objectives for the long-term perspectivewene self-reliance and removal of poverty, the last being'reflected in the working ou! for the first time, of a national programme of minimum needs.

Surprisingly, (or perhaps, not so surprisingly) the Fifth Planhad very little to say with regard to the policy in respect ofeconomic development and in particular, industrial development. The section on'Policv towards Public Investment,' forinstance, came up with prescriptions which were no differentthan either the conv€ntional wlsdom or the prescriptionsrepeated in the earlier Plans. For instance, it stated :

Olganisation and management of public enterprises need tobe reviewed from the point of view of efficient productionand profitability..., the organisational structure has to be

professionalised and the process of decision-making left tothe enterprises themselves except in matters which are ofmajor policy significance from the point of view of nationaleconomy.sl

It goes on to say :

Encouragement of small industnies nust form an essentialpart of the policy frame.... Small industries which existmerely because of subsidies, which may be given in oneform or another do not serve the same social purpose assmall industries which can stand on theil own, once the

' imperfections in credit markets and products markets areobviated through government policy.... T'here should be anappropriate liaison between small industries and largeindustries where government can plav a useful role.i?

netulation and Development 157

Perhaps, the only area where the Fifth Plan was fairlyforthright with regard to the policies to be pursued, was inthe sphere of diminishing concentration of economic poweLThe Plan Document begins with the proposition that 'in nursituation, concentration of economic power in the industrialsector arises ftom the narrow size of the home market, presence of impoft contrrols, and lack of finance and professionalmanagement on an adequate scale.'s3 Regarding the measuresto tackle the problem, the Plan Document gives-and rightly-importance to measur€s for the 'rapid growth of the homemarket through ensuring improvement in productivity,especially in agriculture,'s4 Other important areas of policywere the creation of an efficient and dynamic public sector,and encouragement of new entrepreneurs. Apart from thei,Ionopolies Commission which could play an important rolein preventing restrictive price and output policies in crucialsectors of the econom, the Plan Document comes out, for thefirst time, in tavour ol using public ownership of financialinstitutions as an instrument for exercising an appropriateform of 'social control'.

The general strategy, however, was not significantly dif-ferent from the earlier policies. The twin objectives of 'self-rellance and Slowth with social justice's5 underlying the Plannecessarily implied that the main thrust was not on growth orremoval of impediments to growth. But it was to be on rapidgrowth of core sector industries like steel non-ferrous metals,fertilisers, mineral oil, coal and machine building. .,\t thesame time 'surpltis capacity' had to be created in certainindustries for encouraging the gxowth of exports of mariufac-tured goods. In order that there was an adequate supply ofmass consumption of goodq it was necessary to have substan-tial production of essential commodities like cloth, edible oilsand vanaspati, sugar, drugs and corrsumer durables like bicycles. 'I'he production pattern in this case rvas to be'so adius-ted as to cater to those varieties required lbr mass

consumption, at prices rvithin the reach of the poorer sectionsof the population.'56 Moreover, there was to be a restraint olIthe production of inessential goods. The other areas of actionwere encouragement of village and small industries, development of industrially backward areas, and the application of

152 INDUSTRIAL POLICV AND THE FIVE.YEAR PI,ANS

science and technology to the ,irnmediate development needsof the economy.'s7

On the question of industrial policy the plan Documentreaffirmed that the Industrial policy Resolution of t9S6 wouldcontinue to govern the direction of the industrial policy duning the Fifth Plan, i.e., two decades after it was first announ-ced. But in terms of licensing policy, the operative policy wasto be the announcement in February 1923 which listed theindustries which were open along wiih other applicants forparticipation of largei industrial houses and foreign com-panies. These included 'core industries of importance to thenational economy in the future, industries having direct link_ages with such core industries and industries with long_termexlgort potential.'s8 While larger houses and foreign com_panies were made eligible to palticipate in and coniribute tothe establishment of these indu$tries (provicied the item ofmanufacture was not.one that was reserved for production inthe public sector or in the small,$cale sector), they were to be'ordinarily excluded from the industries not specified above,except where pruduction is predominantly for export., Theother measures which were enVisaged included ,encouragement of competent small and medium entrepreneurs, alongwith cooperatives who will be dncouraged to participate inthe production of mass consumption goods with the publicsector also playing an increasing role.'5e Other investors wereallowed to participate in the production of mass consumptiongoods only 'if there were speciAl factors such as sizeableeconomies of scale resulting in reduced prices, technologicalimprovements, large investment requirements, strbstantialexport possibilities or as patt of modernization.,60 Theinteresting point was that having clearly demarcated a largearea of industrial activity and oire requiring a considerable

'quantum of investment, the 1923 Policy excluded larger housesand foreign companies from all dther fields of industrial pro.duction and investment. The assuinption being that new entrepneneurs, small- and medium-scale, r,r,ould be able and willingto enter these fields on a scale adequate to meet the requirements of the economy and also generate a degree of com-petitiveness in the system whidh would ensure adequatediscipline in terms of prices and quality. The corollary to this,

negulation and Developmena 15,3

of course, was that the entry of larger houses in the wideranging capital intensive industries wotrld mean a relativelyfaster growth of the volume of assets which such largerhouses would control. While this was implicit in the policyannouncement of February 1973, this implication was neverfully or openly accepted, with the result that every time therewas a question of growth of 'Monopoly houses' after the pass-ing of the MRTP Act, the spokesmen of Government tended toadopl a defensive siance.

Apart from the policy in relation to larger houses, the Planmentioned. the following as means by which obiectives ofindustrial growth were to be attained :

1. The maximisation of output from existing capacity.2. Speedy completion of projects already taken up for

implementation.3. Technological improvements and expansion of existing

units where substantial additional production could beachieved expeditiously.

4. The creation of new capacity in accordance with thepriorities in lhe Plan.

5. The initiation of advance action on long gestation proiects keeping in view the requirements of the Sixth Plan.

T'he last was in recognition of the need for continuity inplanning for growth of indusFial capacity, especially in areaswhere the gestation period was necessarily long. The empt-rasisof the Fifth Plan on maximisation of output from existingcapacity or on technological improvements and expansion ofexisting units for achieving additional production expeditious-ly, ran into the problem of regularising excess capacity, thatis, cases where some units in a particular industry hadachieved levels of production in excess of the productioncapacity endorsed on their licences. The recognition of highercapacity was not only relevant for maximisation of outputfi.om existing capacity, but it was also often a precondition forpermitting expansions or moderhisations involving technological upgradation which would result in increased produc-tion. Unfortunately, though not surprisingly, many of thesecases were in respect of either large houses or foreigrr com-

r54 TNDUSTRIAL POLICY AND THE FtVE-yIrAR pllr*S

panies who were historically engaged in activitie$ which,under the February 797J policy, were no longer open to themexcept on the basis of substantial exports.

The Sixth Plan (1978-83) was prepared after the electionsand the ensuing change in Government. The Commission com_prised new members except for one member rvho had beenassociated with the work of the plAnning Commission under theprevious regime. This was also reflected in the plan Docu_ment. For instance, the Plan I)ocument began with a reviewof the achievements of the past quarter of a century. euotingfrom the F'irst Five-Year plan rhat tlre objective was to tran-slate ... the goals of social and edonomic po\icy prescribed inthe Directive Principles of the C0nstitution ... into a nationalprogranme based on the assessment of needs and resources,'61 the Plan Document sought to assess ,the achievementsand $hortcomings so that we rnay better plan the course ofnation's lbture development., Unlike the reviews in the earlierPlans, the main theme of the rcView was that while a greatdeal had been achieved in ahnost every sphere of nationallife, much of the benefits had accnued largely to the lelativelvaffluent sections. Tho pattern of industrial developmentwhich had emerged was based On the structure of effectivedemand, which, in turnj was clelermined by the cjistributionof incomes and involved certain costs to the communitv. Theconcentration of economic powef had increasecl in the sensethal within tlre corporate sector, tbe assets of bigger conporations had increased more rapidly, lhe expansion of large-scale industries had failed to absorb any signiiicant proportionof the increment to the labour force, and in some cases hadeven led to a loss of income for the rural poor engaged in cot-ta{fe industries like textiles, leather, pottery, etc. The indus_trial structure, based as it was on the demand of a relativelysmall class of the more affluent segment of society; tended touse an unduly large proportion of resources in productionwhich related directly or indirectly to maintaining or improv_ing the living standards of the tligher income groups. Thismeant that further expansion of industry was , likely to belimited by the narrowness of the market. As a result ,furtherimport substitution of consumer goods or capital goods can_not, at the cument level of demand, afford any great impetusfor continued industrial growth.'62

fregulation and. DeveloPment 155

For the first time the Sixth Plan spoke in specific termsabout village and small industries. It began with the proposi{ion that, 'as in irrigation/ resources (for village and smallindustries) are not the constrainls. Past experience shows thatthe grcwth of these industries ir" limited by organizational,manageriaf and training effort needed to increase the capacityof the sector to absorb more investment.'63 Against this back-ground the Plan suggested (or endorsed) specific measuresbeing adopted such as the concept of DiStrict Industries Cen-tres so aE to minimise the number of contact pbints that smallentrepreneurs have to deal with; or the increase in ttre num-ber of items exclusively reserwed for development in the smallindustry sector.

Another innovation envisaged in the Plan Document wasthat a number of industries were to be studied including tex-tiles and su8ar to analyse 'the available technologicaloptions.'64 The intention was to evolve policy measures so asto ensure a desirable technolog;, mix in industries, panticularly mass consumption goods industries, with a view' toenabling a much more widespread dispersal of entrepreneur.ship and production. The industrial policy for the Plan was tobe in terms of the Industrial Policy StatemeDt announced inParliament in December 1977 , whiclr, as pointed out earlier,placed emphasis on preventing further industrial concentra-tion in towns with a population of more than half a millionand providing assistance for shifting of existing industries torural or semi-urban areas or in the vicinity of small towns.

The programme of establishing District Indusbies Centres(DICs) was intended to provide services and inputs requiredby entrepreneurs-technical and marketing assistance, credits,raw materials, etc. It was also envisaged that these Centreswould work in close collaboration with other agencies in thedistrict engaged in the development of cottage and smallhousehold industries. In manning the DICs, it was proposedto select, as far as possible, motivated persons with adequatepractical knowledge who would actually be in a position tohelp and advise the small-scale units. In order to recruit theright person as Manager (Credit), for instance, the nationalisedbanks were appncached to lend the services of suitable officers.In order to avoid the problem df difference in salaries, they

156 INDUSTfrIAL POLICY AND THE FIVDYEAR PLAN,

were also requested-and most banks agreed-that they maycontinue to remain on the pay rqlls of the banks themselves. Itwas envisaged that the DICs would be able to exploit the con-siderable scope that existed for developing new products andimproving and adapting proce$ses and techniques so as toraise the level of productivity, rEduce costs, and improve thequality of the products of cottage industries, particularly invillages. The intentioD was to place grealer emphasis on re.search and technologr transfer to the small and householdsectors and use the DICs in collaboration with other existingagencies, to effect this lransfer. Similarly, glearer ptannin!was done for expanding substantially training facilities infields such as calpets, handloom weaving, processing leather,and manufacture of leather goods, etc. Greater attention wasto be paid to inputs for prototype development centres, ITIS,tool room, etc., with a view to equipping rural or semi-urbanunemployed for gainful employrhent.

In the sphere of marketing-which in many cases was theweakest link in the chain-emphasis was to be on replacingmiddlemen by producers' cooperatives as far as possible.Apart from price preferences in Government and the publicsector for purchases from small-scale and village industries,the Plan proposed exploring possibilities of utilising the exist-ing network of thousands of rethil outlets under the aegis ofthe Khadi and Village Industrial Commission.

The Plan also mentioned that 'an important policy changewill be made in the area of choobing technologu which furthercontributed to the raising of empiloyment without adding significantly to cost$ of production.,Gs Resetvation of items forindustries in the small-scale and cottage sectors, as spelt outin the Industrial poliry Statement, was one of the instmments forachieving this purpose. The other important shift in policy was

Given lesources limitations anfl national prioriries it followsthat while there r.r,ill be a step up in the public sector outlayon industries and nrinerals in albsolute terms, its shar.e of thepublic sector outlay will have to come down. For large andmedium industries and minenals, the public sector outlaywill grow from Rs.9,660 crorEs to Rs. 13,992 crores but its

negulation and Developnent 157

share of the public sector outlay will fall from 25 per cent to20 per cen1.66

As against this decline in the relative proportion of .thelargescale sector the investment in cottage, village and smallindustries was to be tripled.

The deliberate decision to invest less in highly capitalintensive public sector could create a situation where theavailability of crucial commodities like steel, non-ferrousmetals or fertilisers could suffer. The Plan envisaged a'cons-cious slralegy'67 of utilising foreign exchange resources byplanning imports of such commodities as iron and steel, fer-tilisers and non-ferrous metals; and it was intended that thisway a large proportion of the domestic resources could bemade available fbr'the key sectors of the Plan, such as power,irrigation, agriculture and minimum needs proglamme.

There were other significant departures from past policies.l-or instance, the PIan Document recognised that a certainminimum rate of STowth 'is a necessary precondition of indus'trial health';s and., therefore, the policy was to be to permitsuch growth even in the case of large enterprises so that theywere not allowed to become sick units. The reason underlyingthe permission lbr such glowth was that 'in socioeconomicterms what is important is that the economic power they (largehouses) wield is not used against public interest.lGe For thispurpose, for the first time, it was intended to use the leveragepmvided by equity and loans which had been sanctioned byterm lending institutions and scheduled banks. It was Drt>posed, therefore, 'to examirie ways and means by which [the]financial stake of Gov€rnment controlled institutions can beput to better use'70 in terms of ensuring that the economicpower of large houses was not used against public interest.The mechanism for bringing about closer coordination bet-ween the financial institutions and Government so that fundswou ld flow preferentially into priority aneas were also to beexamined, and instituted.

On the question of growing sickness in industry- anincreasingly troublesome problem-the Government announ-ced a Policy Statement on sick industries in May 1978. Th€problem of sickness was to be viewed as a multilayen pro-

156 INDUSTRIAL POLICY AND THE FIVE.YEAR PLANS

blem. On the preventive side, thpre was the question of iden-ti$zing incipient sickness and taking prcmpt and adequatecorrective action. In this case the approach suggested in thePolicy Statdment-and endorsed ih the Plan was to bring about'a closer and more vigilant ifivolvement of the financialinstitutions.'71 The specific proposal was to operate througha gmup of professional direct6rs who would be full-timeemployees of the financial instiitutions, and would be norninated to the Board of Directors of companies with amanagement of doubtful comfetence or integrity and inwhich financial institutions had a stake. Suspected casesof malpractice, etc., would bd reported to the financialinstitutions by these direclors and these cases would be inves.tigated by an inter-institutional $roup to be set up under thechairmanship of IDBI. In respect of units which were alreadysick; it was, for the first time, t[re Government's announcedpolicy to 'first explore avenues for ' rehabilitation eitherthrough the State Governments or financial institutions providing financial and manhgeripl support, or through themerger of the sick units with the healthy units in the privatesector.'7z Takeover of managertrent under the Industries(Development and Regulation) Aot which, in the past, was themost commonly used instrumentf was to be the last resort.

The Screening Committee set up to examine the possibilityof revival of sick units (referred to in Chapter 4) was to takeinto account factors like investments required to rehabilitatethe unit and to compare this witfr the costs entailed in settingup a new plant of the same capacity; the additional invest-ment required in relation to the number of employees in theunit; and most important, the $ossibility of the undertakingbecoming viable in the' foresqeatrle future. In short, theGovernment's policy was no longer to ensure the revival or'each and every sicl unit for the purpose of maintainingemploymbnt, irrespective of the, costs involved. The shift inapproach was in conformity witlh the rather bold stand adopted in the Plan that industries 'which are basically not viableor cannot stand up fo limited international competition in centain product areab which the llberalised import poiicy willcreate will be allowed to close ddwn.'73

This r6view of the to indu$trial policy in suc-cessive Plan Documents and the recommendations

ne gulat ion and Develo pme nt

for modifications in policy clearly reveals the inertia of thesystem which prevented any radical changes either in approachor in the mechanisms. No doubt, the Sixth plan drawn upunder a new Government riding on the crest of popular wavedid atternpt some interesting and important departures frompast policies. But what the Sixth PIan had to say on industrialpoliiy or the Industrial Policy Statement of Decemb er lgZTwas not translated into a practical action programme; or evenin cases where the necessary administrative initiatives weretaken, as in the case of Disfict Industries Centres (DICSJ, theoriginal purposes were considerably diluted. The inordinatehurry to expand the network of DICs all over the country with-in two or three years resulted in the Centre becoming not theprototype of a new decentralised institutional arrangement,but a largely bureaucratic set-up at the distriit level. Theeffective delegation of powers to the DICs by different agen-cies in the State Government, which indeed was the precondi-tion for this major step towards decentralisation, was, by an{large, neglected. In any event, the initial enthusiasm of thenew regime for exploring different options for achieving thesociGeconomic objectives which formed a part of their manifeeto was soon replaced by vicious infighting and politicalmanoeuwing which left little tirne for evolving or implement-ing new policies.

The major conclusion which emerges from the. review ofindustrial policy is that till the mid-sixties there was noattempt to critically appraise the results of the policies beingpursuod. This was understandable in the earlier years becauseit could be argued that a few years was too short a period toassess the effectiveness or otheni/ise of policied which aimedat structural changes in the economy. But by the late sixties,although it was clear that the policies being pursued w€Fe nottaking the country towards the socioeconomic objectiverapidly enough, there was a marked reluctarice to accept thib,fact. Politically, perhaps, it wris difficult to do so in the earlyyears of Mrs. Gandhi's stewardship of the nation. It seemedthat the most impofiant factor was that by the mid-seventiesthe whole apparatus of regulation and control of industry,which was an integral part of the industrial policy evo!ved over the years, had acquired a momentum of its own.

159

The regulatory framewonk- indubtrial licensing recognitionL/regularisation of capacity, clearapce under MRTP legislatioryimport controls and the rest-had become very complex andin many cases the approvals/olearances were sequentialralher than concurrent. The result was that at various levelsof administratiory including the non-decision-making levels,there was a considerable accretion of discretionary or semi-discretionary powers. Even when no discretionary power wasinvoived there was always the power inherent in the adminis-tration of any regulatory mechanlsm, viz., the power to delaymatters. This accrual of power ahd the consequent scope forconferring or denying favours tO the admiiristrative systemhad its counterpart in a similar acfrual of power to the politicalsystem. If anJ^hing over a period of time, the political sy$tembecame more adept at using these levels of power to funher itsown political (sometimes even per8onal) ends. At the same timethe business communif'-and contrary to common assumption,not merely the large houses-had adjusted itself to the plethoraof con'hols and regulations and ltrad evolved its own wavs. ofdealing with the system. Those lvhdr wene mone efficient in tlrmsof openating the system through means which wene, at best,amoml and mort often, patently illegal, began to dwelop a vestedinter€st in a system which gave them an edge over others. Thebasic reason why any maior changes were either.not conceived ornot vigorous.ly pursued was the emergence of this vestedinterest-of politicians, bureaucrat$ and businessmen.

160 INDUSTRIAL POLICIES AND THE FIVE.YEAR PLANS

NOTES AND REf'ERENCES

1. India, Planning Commission, The Firdt Five-year plan: A Draft Outltine.Delhi : Manager of Publicaiions, t95t, p. l4E.

2. tbid.3. tbid.4. Il,i.t., p.25.

Regulatioit and DeveloPment 161

5. lbid.' tt.26.6. llrid. I p. 157.

7. India, Planning commission, Second ltivevear Plan Delhi: Manager of

bublications, 1956, P. 2.

8. Ibid., p.3.

s. P-;;":." Ni"lt.las Kalder, later Lord Kalder' an eminent British economist

\yas invited by the Government of India to visit the country and prepare a

rcport on the methods for mobilising resources for development' Pro-

fessor Kaldt:t, in his rcport to the Government' recommended the establish-

ment of an integi'ated system of direct taxation comprising income tax'

expenditure (ax, wealth tax, gift tai and inheritanc€ tax He also recom-

mended a reduction in the level of income taxation in view of the other

proposed imposts on incorne and wealth Recommendations contained in

Proiessor Kaldeds report were imPlemented by the Government but with

the maior modification rhat the effective rates of taxation on income

remarned high and, in fact, were stepped up during the sixties Actual

coliection of taxes from sources other lhan income tax was' however'

meagre. Tax on expenditure was tried only for a short time and the estate

duay which was nevdi a major soutle of revenue was abolished in the

budget of uarch 1985. In the same budget the elfective marginal rates of

income tax were also substantially reduced.10. India, Planning Commission, Second Five-Year Plan. Delhi: Manager of

I'ublications, 1956, p. 26.

7r. Ibid., p, 3E.

12. Ibid., p.37 .

lJ. /bi.l., p. 38.

14. Ibid.15. Ibid.16. fbid., p.39.r?. Ibid., p. 42.

1E. Ibid.19. India, Planning Commission, T-hird Five-Year Plan. Delhi;Manager of

Publications, 1961, Introduction, p. xiv.

20. Ibid.21. Ibid22. rbid.23. Ibid., p. 24.

24. lbid., p. 2s.

25- tbid, p. 4s3.26. lbid., pp. 4s3-s4.

27. lbid, p. 4s7 .

28- tbid.2s. Ibidt p. 453.jo. bid, p. zEE.

31. Ibid.32. rbid.33, India, Planning Commission, Foufth Five-Year Plan 1969-74: A Draft

Ourline. Delhi I Manager of Publications, 1966, lntrcduction, p. ,\ii.

742 INDUSTRIAL PCILICIES AND TIiE FI\IE.YEAR PLANS

Dralt.

,19. lndia, Planning Commissior! O"aift fifth Five-year plan) 7g74-7g.DelhiController of Publications, t9z.l, VoLII, p. 191.

50. India, Planning Commission, ur.lti Fiflrlh Fite-year plan, j97tt-79. Del]hi:Controller ol Publications, 1974, VolI, p 3.

57- Ibid., p. 20.

52. Ibid., p. 21.53. Ibid-, p. 22.

54. rbtd.55- lbid, Vol. II, p. rae.s6. rbid.57. Ibid, p. r34.58. rbid.59. Ibid., p. 135.

60. tbid

34. Ibid, Introduction,,p. xiii.35. India, Planning Commission,

Delhi : Manager of publicarions,36. Ibid., p. z.37. Ibid-, p. 8.s8. rbid.39- Ibid., pp. 74-7s.40. rbid.47. Ibid., p. 26.42. rbid.43. Ibid., p. 27.

44. Ibid., p. 36.as. Ibid., V 238.46. tbid., pp. 238-3s.47. Ibid., p. 23s.4a. Ibid

62. Ibid., p. 3.

63. Ibid-, p. 23.

u.tuid6s. Ibid, p- 343.66. lbid., p. 344.67. Ibid.6E. Itud.69. rbid.70..rbid.71: rbid., P. 34s.72. Ibid73. Ibid-

Fourth Five-Year plan 1969-24,1969, htroduction, p. xii.

Im1rcrt S n-Some Co nces

In the prcceding chapters al] attenrpt was nracle to trace theevolution of national thinking on issues related to industrialpolicy. It was seen that over th€ years the mechanisms orspecific measures adopted for adhieving some of the malorobiectives of policy were found to be inadequate; and althoughthese inadequacies were noted tiy various committees andalso in the reports of the Planning Commission, rhe modifi-cations introduced were, by and lhrge, marginal. Relaxationsin the regulatory system were often hedged in by severalcaveats which reduced their usefulness; and the tendency,generally, was to avoid any radical change either in theregulatory system or in the basic policy frame in the light ofchanging circumstances.

In the following pages an attenhpt will be made to reviewthe effectiveness of policies in certain important areas with aview to focussing on the. kind of changes which would beneeded to bring these policies in line with the needs of thenext one or two decades. It is obvious that policies which werevalid and r€levant in the mid-fifties or the mid-sixties neednot-and indeed cannot-be relevant or appropriate in thesame way in the rnid-eighties. A cdrtain willingness to accepr


the need fon change in policy orientation, to take account ofourown past achiwements and,/orfailures, and also of the chan$ngintemal and global environment is a precondition for a realisticand effective industrial policy. Unless the necessa4r changes aremade, it would not be possible for the system to overtome theweaknesses in the industrial structurc or even to utilise the sounces of strength which have bgen developed over the last twenty-five years in the Indian industrial system.

There are two other points which need to be mentioned here.Any discussion on industrial policy can be meaningful only in thecontext of the totaligz of economic policies. The follorviag discirs-sion on industrial policy, therefore, is implicitly based on theassumption that other policies - such as, fiscal and monetarypolicles, tax policies, policies relating to agricultur€ and ruraldevelopment, and energr - arE gmwth oriented; and generallythe framework of economic policies ofwhich the industrial policyforms a part n'ill be mutually reinforcing. Second, industrial policyshould not be confused with specific regulatory mechanisms likeindustrial licensing, import rcgulations or control over forcigntechnical and financial collaborations. Licensing policy and otherrelited regulatory measunes ane instnments to be used for eftc-tive implementation of a given set ofpolicies; and the preconditionfor a viable policy fi'ame is a clear perueption of the oblectives of thepolicy. It has to be rccogtrlised that no county-and certainly nodemocratic govemment-can avoid a multiplicigr of objectives.For instance, in the Indian context, apart tum a widening anddeepening of the industrial system and accelerating the pace ofindustrial development, avoidance of concentration of economicpower in the hands of a few an@, therEforB, measurEs for rEstrictingthe grDwth of large or interconnected business houses; grcaterr€gional dispersal of industry particularly with a view to dwelop-ing industry in backwardareas; encouragement to small-scaleindustry and to the gfowth of entrepreneurship; movingtowards greater self-reliance through an orderly process ofimport substitution and technological self-reliance; and protec-tion of the environment. The more important issue, however,

166 IMPORT SUBSTTTUTTON - SOME CONSEqUENCES

is how to ensure that this multiplicity of objectives does notobstruct an adequate rate of giowth. Some of the objectivescould be mutually conflicting. For qxample, rapid dwelopment ofindustry or rapid progress towards self-reliance in technologycould, in some cases, be hampered by the pursuit of otherdesirable objectives like limiting the growth of or role oflarger houses or encouragemettt to the small-scale sectorthruugh reservations or other special measures. The essentialpoint is, as the last two decades have shown, that unless thereis a clear recognition of the possilbilities of such a conflict andan explicit acceptance of the primacy of one of the objectives itwould be difficult to evolve a ratitonal system of trade-offs andwould result in a great deal of cnnfusion in the implementa.tion of policies.

In,the Indian context the prlmary objective of industrialpolicy, and, indeed, the main thfust of all economic policies,has to be on a high and sustained rate of growth so that thecountry can move forward towards the obiective of self-sustairhing growth. Since the early days of planning the obiective oIplanned development has always been very clearly identified,viz., the creation of a technolo$ically.mature society whichwould enable the country to rirove towards self-sustaininggmwth without undue concentraltion of wealth and economicpower in the hands of a few. Evdn today this definition of theobjective of planned development remains valid. But,experience over the years has shown that neither the objective of a technologically mature society nor the objective ofmore equitable distribution of wealth and income are capableof being attained except in the context of rapid gfowth. Inassessing past policies, therefore, or in identiSzing the areas ofpolicy which need to be modified, the test should be whetherthese policies have tended to infribit the growth potential ofthe system or distofted the use o[ scarce resources to the det-riment of the community. There are, of course, other dimen-sions such as whether, in practice, certain policies imposesuch heavy burdens on the admlnistrative system as to makeil impossible for the policies to'be rationally implemented.Similarly, one has to keep in view the implications of a givenset of policies for the broader sooileconomic framework. Forinstance, unrealistic pricing resulting in penasive black


market; or a system of allocations and licensing which places

such large discretionary powers in the hands of government

functionaries, legislators and politicians that it cannot buthave far-reaching consequences for the economig social and

political system; and here again, these adverse consequences,

it must be noted, contribute to the slowing down of the process of growth and also inhibit a rational or optimal use ofresources.

It is in thts context that an attempt will be made to reviewbriefly some of the major elements of past policies These

dre:

1. Import controls and import substitution for ensuringrapid self-reliance in technolog;z and production and theimplications of thgse policies in terms of the cost struc-ture of the industrial economy.

2. Public sector as an instrument of growth.3. Regional dispersal of industry.4. Price controls on manufacturing industry.5. The role of the small-scale industry including the decen-

tralised or household manufacturing activities.

Before turning to an appraisal of past policies one pointneeds to be emphasised. In a large and complex country likeIndia, with a long tradition in favour of active Governmentintervention with a view to assisting industrial growth, itwould be clearly unrealistic to proceed on the basis that theGovernment has little or no role to play. In the past, Govern-ment intervention or involvement rrlas looked upon as a pre-requisite for growth. Increasingly, and more so in the years tocome, the electorate is bound to hold the rulers accountablefor the results of such involvement. In years to come theGovernment r'vill corrtinue to play a maior nole; but its account-ability will be in tenns of performance and not rhetoric,results and not ideologies. The main issues, therefore, arehow in order to be productive in terms of results, the role ofGovernment can be made more selective than in the past; andhow the consultative machinery envisaged in the early yearsof planning and embodied in the Industries (Development andRegulation) Act, 1951, can be effectively activated to provide

166 TMPORT SUBSTITUTTON - SOME CONSEqUENCES

the necessary inputs for evolving the right set of policies andto give feedback on the results of policies.

An important feature of the inrflustrial policy ever since themid-fifties has been the emphAsis on import substitution,which was looked upon as an integral part ;f the strategy forseH-reliance. To a considerable extent, howevet the mecha-nisms for import substitution as well as the general approachto the question of substituting irnports by domestic produc-tion, wherever possible, were a direct consequence of thecontinuing and offen acute shortage of foreign exchange. Tothe extent that import subslitution was forced upon the sys-tem as a result of non-availability of foreign exchange, it caFried with it an inevitable bias in favour of import substitutionat any cost-

In retrospect, it seems clear {hat the concept of ,importsubstitution at any cost' took hold in terms of import licensingsomewhere around the early 19q0s, i.e., towards the begin-ning of the Third Plan. No doubt, increasingly severe restric-tions had been imposed on impgrts during the Second planperiod; but the shortage of foreiglr exchange was even moreacute during the Third plan perioil and as a result the importpolicy became extr'emely restrictive even in the ca6e of essen-tial industrial imports such as ferrous/non-ferrous metals,other industrial raw materials, and components and spares.Of course, the Third Plan period was in several reipectsabnormal. First, the weather conditions were adverse inthree out of the five years of thp plan period. Second, thecountry witnessed the traumatic Chinese aggression on theNorth-East frontier and the hostiliiies with pakistan in the lastyear of the Plan period. Third, the delays in obtaining externalcredits and the virtual suspensior]r of bulk credits because ofthe US decision during the Indo-pak conflict, further added tothe difficulties. By the mid-sixties, the country had reached astage where drastic banning of imports implied that in manycases even imports of essential coinmodities for maintenanceand enhancement of production could not be provided for. Anelaborate systen of rationing antd allocation of the scarceforeign exchange meant that what a particular unit could prorlrrce was increasingly dependent upon its foreign exchangeallocation; and this in turn was, b$, and targe, deiermined by


what it had utilised during the previous period' In order toincrease the degree of control over foreign exchange utilisa-

tion, the allocation exercise was done on a half-yearly basis

with the result that no meaningful plan of production was'possible for any unit which was dependent upon some crucial

imports. IO trlost cases the basis of foreign exchange allocation

wai license(Vinstalled capacity; and in order to limit theforeign exchange expenditure to what was available, theauthorities concerned, e.g.. the Director General of TephnicalDevelopment or the Department of Economic Affairs,Ministry of Finance, stipulated that as against the assessed

requirements on the basis of productive capacity, all unitswould be eligible for foreign exchange allocation of, say, 60

per cent or som6 other predetermined percentage. In effect,the rationing/allocation system was essentially arbitrary andconstituted a serious curb on increased production by themore efficient units. Decisions on the allocation of foreignexchange .for individual units in an induslry were based onpast allocations and, therefore, the t'nter se position of theunits tended to remain frozen except to the extent that newentrants were permitted some foreign exchange allocatioil inorder to utilise part of the newly created capacity. But even

here the tendency was not to permit additional capacities tobe created so as to limit the foreign exchange requinements irlfuture. For the same neasons, only schemes which did notrequire either imported capital equipment or raw material orwhich, on completicin, would greatly reduce imports got past

official scrutiny and received clearance The question ofdomestic cost of production as compared with internationalprices was considered to be almost irrelevant. The result wasthat the pressuie'on the industry in terms of rapid indigenisa-tion and early and substantial reduction in i'nports contentwas gjreatly increased. This trend was further accentuatedbecause of an increase in the level of duties imposed on

imported goods. The consequence was that on the one hand,

ttre productive efficiency of the industrial system was adver-

sely affected by an acute shortage of foreign exchange; and)

on the other hand, the anea over which, given imports restric-tions and high customs duties, the indigenous productionbecame attractive, was considerably enlarged.

, In a sense, developments dur,ing the early srxtres tended toshape rational thinking on the qirestio., of mpo.t substitu-tion. The rontinuing and senious ioreign e*chanie difficultieswere further aggravated by the fact that most of"the bilateralaid available to India under the Consortium arrangements,under the aegis of the Internatito.al Bank for Reconstructionand Development (IBRD), was country-tied, i.e., purchasesagainst the aid amounts had to be made oaty in the donorcountry. This added yet another dimension io the alreadycomplex exercise of distributing scarce foreign exchangeamongst competing alternative irses. The result was that, interms of desirable areas for import substitution, the svstembegan to receive misleading sighals. Domestic p"oa""ii*-oicertain items which were bein6i imported seemed attractiveon the basis of landed costs, i.e., CIF price plus customsduties, etc., but the landed price itself was distorted becauseinternational purchases were not being made from the mostcompetitive source and the customs duties (mostly advalorem) were fairly high. It was not uncommon, therefore,fir a manufacturer to approac[r the Government with anapplii:ation for a licence to produce an item,/s where on hisown reckonin& his cost of prodrictionL,/selling orice would betwice or thrice as high as the international price; and moreoften than not such high cost productive

"upu"ity was permit-

ted to be established, because the policy of almost total indis_criminate protection in order to promote import substitutionwas an integral part of the politipal, administrative and busi_ness ethos. Of course, in part the domestic production costswere high because some of the inputs whictrwere being pro_duced domestically (or had to tre imported from high-. costsources and attracted heavy ad valorem duties) were at muchhigher prices compared with the international level. In addi-tion_ to this, the higher cost of domestic production wasattributed to dis-economies of scale, lags in process technoloey and generally less concern with containing costs becauseof the protected market situation.

17O IMPORT SUBSTITUTION _ SOME CONSEQUENCES

Another aspect of the policy cif import substitution deserves mention. The quantitative restrictions on imports, includ_in6 in some cases, a total ban on lmports combined with highrates of customs duties meant an effective eochange

"a"te

negulation and Development a7l

which was much less favourable than the official rate ofexchange. In other words, even if the official parity'of the

dollar was equivalent to Rs. 4.50, the effective cost of imports,

inclusive of scarcity margin and duties, resulted in the dollarbeing equivalent to, say, Rs. 8; and to the extent that the

degree of import restriction was not uniform nor were the

customs duties uniform, the effective foreign exchange rates

varied greatly from one item of manufacture to another' Itshould also be noted that while the effective degree of protec-

tion to the domestic manufacturer was very high {he corres'

ponding subsidy to the exporter was on a much more modest

scale. The result was that the system laid greater store uponimport substitution irrespective of the effective cost of such a

poiicy and tended to discriminate against the growth of' ex-

ports by providing a significantlv lower level of subsidisation'Over a period, no doubt, there have been changes in

emphasis with regard to import substitution The fact remains

that a high and rising level of effective import duties com-

bined with an elaborate system of quantitative restrictions on

imports continued to influence investment decisions by raising, often arbitrarily, the landed costs of imports Of course, in

cases where imports were banned and this was not uncom-mon-because one ,or more indigenous producers were able

,to (or made claims to) produce the same item, the protectionwas absolute. Even after the more recent liberalisation ofimports policies and procedures, by and large, the effective

degree of protection to the Indian manufacturer still remains

trign. efter allowing for differences in specifications and

quality, domestic products are, in many cases, uncompetitivein varying degrees. It would be wrong, however, to assume

that Indian manufacturing activity is, across the board,

uncompetitive. The fact that the country has a wide and

expanding range of engineering products rvhich are exportedis proof enough of the accepiability of the product abroad

in terms of price, quality and delivery. Even if, as is commonin international trade, export prices are lower than the corres-

ponding domestic prices and allowance is made for incerrtives and any special benefits available to the exporter, it isfound that in batch-production type of goods or wherespecifications and perforrnance parameters are custom-made'

I72 IMPORT SUBSTTTUTION - SOME CONSEQUENCES

the capability of Indian industrSz c(mpares favourablv with thar ofthe advanced industrial countries. On the other handl'tne policy ofimport substitution, often regardlEss of cost, und ihe high andcontinuing levels ofprctectiory has resulted in the Indian industrylagging far behind its internation4l competitony i., u tul.ly _ia"f$e 9f engneering and chemi$al industries. These includeindustries where technological ofsolesc"r"e i" .r"f

"upid (e.g.,

eiectronic components or compuler technolos/) oiwhere boththe cost and quantity are considqrabfy afectei Uy the scale ofprnduction (e.g., large volume standardised componlnt") o"wherethe process and scale ar€ important determin;nts of cost (e.g.,many continuous pnccess chemical industries or basic drugs aiaintermediates).

The- administratlve mechanism fon import substitution also con-tributed to rigiditieis and consequent distortions. For instance, theimport substitution policies were based on:

1. Using the annual import

production over time.

These arrangements wer€ effective in terms of pushing theimport substitution efforts so ag to maximise the domesticproduction of items which wert till then imported. On theother hand, these mechanisms were also I esponsible forintroducing arbitrariness in the use of foneign exchange andincreasing enormously the porivers and p"atronage at thebureaucratic {and sometimes at the political) levels. Thus,what the system ensured was fiot merely that the importcontent of a particular line of prtrduction in a manufacturing

part of the import licence, the irtems which would be permit_ted to be imported by the actiral user and sometimes evenspecific quantities of the itemsi to be so imported.

3. By laying down and enforring the phased programme ofmanufacture which rcduced tlie import content of domestic

fregulation and l)e|elopnent 1?3

unit would be reduced from, say, 20 per cent to 15 per cenl andfinally to 10 per cent over a period of three or five vears; whatit did ensure was the cu ailment or eliminaticjn of specificitems of imports, on the basis that these were (or would be)available. To the extent that these anticipations were notfulfilled either the manufacturer had to scurry around andobtain the necessary modifications in his import licence-atime-consuming process even if the applicant finally suc-ceeded. This arrangement was all the more detrimental toproduction and efficiency in a situation where for extraneousreasons, such as strike or lock-out, or some internal problem,the unit supposed to supply an input {and ordinarily capableof doing so), failed to make supplies for fairly long periods. Bythe time the actual user was able to convince all concerned ofthe need to import, on account of special circumstances, hisproduction had already suffered. Second, the application ofthe so-called indigenous angle often was such as to force amanufacturer to accept unsatisfactory quality or a pricewhich was significantly higher than the landed costs, or insome cases suffer on account of premature gr exaggeratedclaims made by manufacturers regarding indigenous availability. It was not uncommon for someone to claim that he couldpmduce qn item which was till recently being imported; and ifwas always a matter of dispute as to whether his claim was justifiable. In any case consideralions of quality, price and deliverybecame secondary.

At one stage the intending user of a material or a componentwas required to obtain noobjection certificates from all thosewho were allegedly capable of producing that item, before hisrequest for import could be considered. C)f course, in practice,it was not at all uncommon for one or more of these suppliersto either refuse to give a nGobiection certificate or simply failto respond to any such enquiry or request. The whole systemwas geared to giving a whiphand to anyone who claimed production capability of an item which was imported in the past.

In order to minimise the difficulties of actual users a newprocedure was introduced in the latter part of the sixties. Therevised arrangements specified that anyone wanting to importcapital goods in excess of given value would have to advertisein suflicient detail in the Inclian Trade Journal putrlished

174 lMpoRT suBsrlruTloN - SOME CONSEqUENCES

monthly by the Ministry of Forelgn Trade. If for the t@ ofequipment so advertised there were no concr€te indigenousoffers within a P,qnod of forty-fivd days from the date of adventisement the parlty would be allowed to import the capitalgoods. A copy Qf the offer was to be concurrently marked tothe sponsoring authority-the Director General of TechnicalDwelopment, 6r the Textile Qomririssioner, etc. -so that by the

end of-forty-five days' period they were in a position to check

any offers that had been receivod and whether these were

serious offers b4cked up by a{equate production capability'

To some extent the new system Was an improvement over the

earlier one; but the fact remained that anyone wanting toimport capital goods could still be held up by someone whowai interested in selling his output (or by someone who was

already in that line of production and did not want a new unitto be set up).

The better course in terms of policy, of course, would pe

one which makes it clear that, as in everythin8 else, there

would be a cut-off point beyond which additional costs

involved as a result of import substitution would not be

acceptable. In other words, an effective protection limit (or toput it differcntly, an effective fate of exchange) would be

specified. Second, even wh@re indigenous productioncapacity exists-and thi; is alt tlhe more relevant in case ofcomponents required by other manufactuners-a complete

ban on imports may be avoided.' The actual user should have

the freedom to use the limited foreign exchange allotted tohim in a manner which is most 4dvantageous to him in term$

of maximising the quantum, impnoving the quality, on neducing the price of his product. Kdeping in mind the rigiditiesand distortions of the central import system, there may be an

incentive to impbrt large quantities of certain items with a

view to illegallj' selling them at a premium. To the extent thatsuch illegal transactions can be dhecked the problem does notarise, but it can be argued that even if such transactions did,in fact, take place it would not be a sufficient reason to limitor discard the flexibility with regard to items which an actualuser could import, provided thoy were already endorsed onhis import licence on the basis of essentiality.

' An addecl factor making fon high cost industry is the '

Regulation and Devetopment 778

relatively high input costs of basic materials, such as f.emous/non-l'errous metals, basic chemicals, either because thedomestic production costs are high or because the domestictax structure is such that the prices to the final consumer areraised through imposition of duties like exlise and sales-taxor as a result of heavy impositions by way of customs dutiesand,/or restrictions on imports. This is the marked fbature ofseveral lines of. manufacturing. Fdr instance, the cost ofaluminium metai needed for an enginonlo"t' in a twGwheeler in India inay be higher than t-he completed compGnent produced abroad or in several chemical industries, thecost of domestically produced inputs accounts for most of thedifferences between domestic production cost and inter_national price. Several exercises done on the basis of sutrstituting international prices for domestic prices of inputsindicate that in terms of conversion costs or value added bvmanufacture, Indian manufacturing activity is not as widelyuncompetitive as is commonly believed. The disadvantagearisirig from a smaller scale or less sophisticated technolog,-isoften offset, to a considerable exteni, by lower initial costsand because the present depreciated vaiue of capital equipment reduces the interest and depreciation element in capitalintensive industries. Further the effective wage costs especiallyof skilled labour, cost of some utilities liki water and alsosome of the overheads are lower in India.

It,is common experience that costs and prices of industrialproducts tend to be lower (or rise in prices over a period oftime tends to be less) where the demand, regionally or nation-ally,

.is large enough to permit conditions of free -entry

for anumber of entrepreneurs each setting up production facilitieson an economically viable scale. In such a situation bothlarge-scale manufacturens as well as small_ or medium_scale,continue to operate and expand. The large number of pro_,ducers of different sizes with varying techn-ologies results in awider choice in terms of a product range and slecifications tothe ultimate consumer. This is the cas6 with -u.ry u"ti"l"i ofcommon consumption such as soap, detergenis, cookingappliances, and household wares. On the .othJr hancl, wlrerithe size of the domestic market is limited, fragmentations ofthis limited demand by setting up several units to produce the

776 IMPORT SUBSTITUTION _ SOMtr

item does nol effectivelY in competition and, if anY'thing,

the sub-optimal scale of produc{ion of new entrants t:"9: *o

raise the average as well as the marginal cost of-production'

Given the size of the country and the fact that viable scales of

production under Indian condi are usually smaller than

those in the advanced ind countries, it is not very often

that the market is too smatl to permit effective competition

between producers operating

limiting licensing to meet ated demand, or Permittin€fnagmented and uneconomic

ed demand, or PerrnrrunFcapacities in the hoPe that

they will Senerate competition lies at the root of the

high cost structi.rre. The ns on growth or diversifica-

tion of a more efficient or more unit in a particular

to international comPetition is to achieve the desired objec-

tive of improving the efficienry and reducing costsralisation should be accom-in Indian industry, imPort li

of sciencl and technology, the pace of technological progress

and associated increases ln in Indian industry

line of manufacturing is anothdr factor which contributes to

the high cost struct ure.

No cloubt, the more recent trbnd towards easing of import-

controls is a step in the rigtlt direction' Th-e process of'

graduatty exposirig ihe I.tdian industry to €ffective inteF'

national competition needs to de continued' If such exposure'

panied by a more Iiberal approlch towards induction of new

lechnologlz from abroad. Despitb an impressive infrastructure

have been extremely slow. This is in part due to the relativelyweak links between the agen(ies involved in research and

development and the users of technology Despite consider-

able emphasis on science and technology in our plans and

policies, the bridge between lesearch and development in

iaboratories and their application in industry have not been

built with the same care This lnas resulted in a kind of advep

sary relationship between $cientists, technologists and

reslarch workers in the country on the one hand, and the

users of research in industry dn the other' There is a belief

that Indian industry prefers to |-ely upon imported know-how

rather than use the fruits of research conducted in ournational institutions. There is {lso a feellng that 'the craze fot

Regulation and Development 7Zz

foreign' applies as much to technical know-how as it does toconsumer articles for elitist consumption. On the other hand,those connected with industry claim that scientists andtechnologists in the country sometimes tend to become apowerful vested interest seeking to prevent the induction oftechnologr from abroad in the hope that in this way theirwork wiil receive due recognition. In practice, however, thishas only tended to increase the obsolescence of technology inIndian industry. This is because, with some notable excel>tions, the claims made on behalf of scientific establishments,including national and regional laboratories, of technologicalbreakthroughs are either premature or exaggerated. A widegap exists between a laboratory scale experiment and itsscaled up version which can have application on the shopfloor. The various links in the chain which enable a poten-tially interesting idea to be converted into a commerciallyprofitable process are either too weak or are sometimesnon-existent. Many segments of the Indian industry and in particular, the capital goods industry are threatened with technologi-cal obsolescence. This is particularly true in the context of theimpressive technological innovations which the rest of theworld has adopted in the wake of the energy crisis of theearly seventies.

It would be wrong however, to attribute the widening gapbetrn'een India and the rest of the world in the field oftechnologz solely to the factors outlined here. Dr. ManmohanSingh, Governor, Reserve Bank of India, pointed out in hisSilver Jubilee Foundation Day Lecture at the National Produc-tivity Council:

If this technological gap is to be closed early, there isclearly no alternative to a liberal import of technology forindustries cusider€d vital for our future growth.... As rugardschoice of technologies I am convinced that gfeater weightought to be given to the views of users of technologies thanthe views of the generalist administrators or superan-nuated technicians who sit on official bodies regulatinginflow of technologr.l

,Such a course, however, need not perpetuate dependence

7J18 IMPORT SUBSTITUTION _ SIIME CPNSEqUENCES

on imported technolog,r because it is both necessary and poss-

ible to formuiate public policies with a strong bias in favourof locally developed technologies so thal adequate emphasis islaid on domestic R&D. A proper combination of tax policies,credit policies and policies of terrn-lending institutions can.b€used to encourage the growth and commercial use of domes.tically developed technologies and effective adaptation ofimported technologies.

The question of reducing the gap in technology, however,is closely linked with certain otlher major policy issues. Forinstance, policy orientation which, on the one hand, restrictsthe freedom to expand on grounds of monopoly and at thesame time, lays emphasis on maintenance of existing employ-ment on the other, acts as a maior inhibiting factor for theadoption of new and cost effective technologies. It isunderstandable that in a country with masses of undenemployed and unemployed, thetre would be a strong biasagainst displacernent of laboi:r. It must be borne in mind thatmost technological improvements involve some decrease inthe requirement of labour per qnit of output. Therefore, iflabour displacement is to be avoided, this can only beensured by permitting expansion of productive capacity in thesame unit. In general, greater freedom in expansion is a precondition. for a unit to be able to adopt new technologtrrwithout getting involved in an industrial relations problem.Ttrere is yet another point. Whild i{ is the legitimate concernof public policy to prevent concdntration of economic poweror curb monopolistic praclices, it is necessary to ensure thatin the administration of the applibation it does not create con-ditions advensely affecting constant technological upgrada-

tion. As Dr. Manmohan Singh pointed out

... in administering anti-monopoly legislation it is necessaryto recognize, as was emphasised by Schumpeter, that a ceFtain degree of market power rday be an essential conditionfor a firm to undertake major rrew investments or technological upgradition ventures. Without a certain amount ofcontrul over its market envirohment, a firrn may place anexcessive premium on playi4g it safe and discount itsfuture verv heavilv.... It must a[so be recognized that faced

negulation and Development l7g

with market uncertainties, a multiproduct firm will havegteater incentive to introduce new technologr or new prt>ducts than a single product firm for in the case of the fonmer, a failure of the new venture does not imply totalbankruptcy as may be the case with the latter type offirm.... Thus, economies of agglomeration as distinct fromthe economies of scale; can also exercise an importantinfluence both on investment decisions and technologicalchoices.2

In future if viable import substitution is to be encouragedand the concept of import at any cost is to be discarded anew policy mix will have to be evolved. The main elements inthis policy mb(, as pointed out earlier, should be a grad-ual relaxation of import controls; a reduction, over time,of .the effective degree of protection; a concerted effort tobridge the technological gap, especially in the fields of capitalgoods and intermediate goods industries; a more positiveattitude including simplification of procedures for import ofrequired technology and a review of some of the elements inthe anti-monopoly legislation which have tended to inhibitthe adoption of upgraded technologies, whether domestic orimported.

NOTES AND REFENENCES

1, Economic Inrclligence servic€. Bombay : Centr€ for Monitoring lndia$ Economy, April 19a3, p. 11.

z. Ibid.

-,,.Ja-

Public Sector as an Instrumentof Grorr{h

As will be seen fitom the earlier discussions in Chapters 1 and2 an active and interventionist nole for the State and a sut>stantial glowing public sector were integral elements ofnational thinking on industrial policies even before indepen-dence. This long tradition of the State playing a crucial role inindustrialisation was first formalised in the Policy Statementof 7945, reiterated in the Industrial Policy Resolution, 1948,

and took its'final shape in the Industrial Policy Resolution 6f1956 which has remained the cbrnenstone of the indusFialpolicy framework ever since. There were certain commonelements in all the successive policy statements. First, therewas the premise, sometimes unBtated but often openly suppofie4 that in the absence ofa cbnsiderable degree of regula-tion and control the pace and pattern of industrialdevelopment would be inadequ4te and undesirable from thenational point of view. Second, although industry was a Statesubiect the Central Government had to play an active anddominant role both in the mattler of establishing the infra-structure for industrial growth including developmentalfinance and in the development of a wide range of industriesof national importance. Finally, the State and, principally, the

negulatiatr and Development IB7

Central Govennmenl had to assume direct responsibility forfuture development of industries over a wide area.

This basic approach assumed a more. concrete form ',viththe Second Five-Year- Plan which aimed to bring about a struGtural change in the economy as a result of the Second andsubsequent FiveYear Plans. The modern mining and manufaclturing sectors were to account for a larger proportion of theGross Domestic Product, and within the modern manufactur-ing industrl' there was to be a shift away from the creation ofcapacity for the production of consumer goods which were tobe primarily within the ambit of small-scale, decentralisedor traditional manufacturing. A major point of departure inthe Second Five-Year Plan was that thene was not only to bean absolute increase in the proportion of public investment inindustry and mining but its share in relation to private invest-ment n/as to be significantly higher. Thus, there was to be aclear shift in emphbsis in the strategy of development so thatover a period, the puhlic sector would occupy a dominantposition and acquirc 'the commanding heights of theeconorny' This is reflected in the numben of units as well as inthe amount of investment in eentral Government under-takings. The Central public sector excluding departmentalactivities like railway+ posts and telegraph, telephones oractivities r,rnder the aegis of the Ministry of Defence was miniecule in 1950-51-a total of five undert:rkings ,with an investmerrtof Rs. 29 crores. By 1960-61, ie., by the end of the $econd FiveYear Plan period the number had increased to forty-eight a-;rdthe total investment amounted to Rs. 953 crores.l Followingthis the glowth of the public sector has been rapid orphenomenal. By 1.972-73 the number of enterprises hadincrease<l to 101 and total capital invested was Rs. 4,752 c'.oreswith a total employment of 9.32 lakhs. By 7977-ZS the numberof enterprises had further increased to 1sS, capital employedRs. 12,065 crores and number employed to 1.64 million. Theposition at the end of 1981-82 was a total of 1EZ enterpriseswith a capital of Rs. 21,865 crores and an employment of 1.9million.2

These trgures from the annual review by the Bureau ofFublic Enterprises however, coven only a part-though animportant one-of the entire public sector. It muEt be noted

IA2 PUBLIC SECTOR AS AN INSTRUMENT OF GROWTH

that the figures in the survey oonducted by the Bureau ofPublic Enterprises exclude departmental enterprises of theCentral Government as also of the State Governments,nationalised banks, insurance companies, State road transportcorporations, State Electricity Boards, irrigation works, for-ests and other State Government owned non-departmentaleconomic enterprises, departmental and non-departmentalenterprises of the local bodies, Etc. Unfortunately, the com-plete picture of the entire public Bector, i.e., Central, State andlocal including depaftmental urtrdertakings, is not availablebut all indications suggest that the part of the public sectorexcluded from the Bureau of Public Enterprises survey is con-siderably larger than the part of the Central public sectorincluded in the Bureau of Public Entenprises survey. A recentestimate made by the Centre for Monitoring Indian Economyin the dcono mic Intelligence Sqrvice issue of March 1983

pLaces the total investments in enterprises covered by theBureau of Public Enterprises retiew at about 40 per cent ofthe total; and in terms of employment the BPE units accountfor less than a quarter of the total employment in all publicsector enterprises. Even more important, however, is the factthat the financial performance of the publtc sector as broughtout in the annual review of Centlal Government enterprises isovershadowed by the financial performance of other majorsegments of the public sector. Thus, in 1981-82 the net profitsof the railways and posts and telegraph amounted to less thanRs. 100 crores, but the departmental commercial enterprisesof the State Governments, mainlyr forests, mines and mineralsmade a profit of Rs. 335 crores. on the other hand, majoractivities like irrigation prolects incurred a deficit of Rs. 356

crores, State Electricity Boards Rs. 590 crores, and StateTransport Corporations Rs.200 cfores.3 The important conclu-sion, therefore, is that while disoussing the role of the publicsector as an instrument of growfh or while assessing its per-formance as an instrument for rnobilising investible nesour-ces, note must be made of what is happening in Central aswell as State departmental undertakings and also in non-departmental activities in the production of goods andserwices.

An important feature of the operation of the public sector

negulation and De\elopmenl ls3

in India is that apart from areas of production of arms andammunition and allied items of defence production andactivities in the field of atomic energy, the public secton alsohas almost the sole responsibility in respect of much of theinfrastructure, e.g., generation and distribution of electrici-ty, mining of coal and mineral oil, rail transport, com-

munications including telephones, teleprinters and wireless,air transport, etc. Industries which provide basic inputs toagriculture or to other industries, such as iron and steel,

machine tools, aluminium and fertilisers are also wholly orlargely in the public sector. Many other areas like healy electrical plants, telegraph and wireless apparatus includingtelephone cables and shipbuilding were also resen'ed for thepubiic sector. The original logic in emphasising the publicsecior was partly ideological-a rapid growth cf the publicsector which would occupy the commanding heights of theeconomy was aeen as an element in the structural transforma-tion of the economy needed in order to move towards a

socialistic pattern of society. But there were other con-siderations as well. It was felt, for instance, that left to theprivate sector' the growth of many r-rf the basic industrieswould not be adequate to meet the requirements ofaccelerated industrial development. This was in part becauseof lhe resource constraints of the private sector, though itwas also implicitly assumed that the attractiveness of suchinvestments in terms of profitability, particularly keeping inview the relatively long gestation periods, would deter theprivate sector from entering these fields. The original logic ofthe public sector/ however, was modified over the years. Thepublic sector both at the Centre and in the States began to beinvolved with 'an incredible variety of indristrial and commeFcial enteiprises such as scooters, rubber goods, 8lass, bread,footwear, tea, textiles, hotels and beverages, both alcoholicand others.'+ In part, of course, extension into some of theseareas was due to the phenomenon of 'taken over enterprisesfaced with managerial failures in the private sector. But it is'also true as B.K. Nehru pointedly emphasised in his short butinteresting paper presented at the'Workshop on Perspectiveson Indian Economy, Short and Long-Term':

184 PUBLIC SECTOR AS AN TNSTRUMENT OF GROWTH

The reason for this exiension has been neithen the conver-sion of our politicians to the philosophy of socialism northeir desire to enhance revenues of the State. It is simplythat it has become common practice for public sector,enterprises, particularly in the States, to be made intomechanisms to provide powerfr.rl politicians, who cannotbe accommodated as Ministers, with salaries, peryuisites,patronage and opportunities to make money throughcorruption.s

Apart trom the diversity of the public sector, whatever thereasons/ it is important to take note of the fact that the publicsector contribution in the total industrial production in vitalsectors has grown enormously over the years. And, indeed, ifthe public sector share in total lndustrial capacity is takeninto accoun! its dominance is eyen gleater in many fieldswhere the average public sectof utilisation of capacity islower than in the private sector. The public sectof has a monGpoly in petroleum, oil, coal, telephones and teleprinters andcommunications equipment. Apart from coal and petroleumwhere the public sector has virtual monopoly, the public sec-tor share was 31 per cent in phosphatic fertilisers; 51 per centin nitrogenorrs fertilisers; 62 per Cent in steel ingots; zz percent in saleable steel; and 81 per cetrlt in zinc during 1981-82.6 Inaluminium while the public sector production was about one.sixth of the total national productilory the productive capacityin the public sector accounted fof nearly 40 per cent of thetotal. Over a period of more than two and a half decades sincethe Industrial Poiicy Resolution, 1956, therefore, a structuralchange was seen in the country's ilndustrial profile and in therelative importance'of the public and private sectors.

These changes have certain irnlportant implications. First,the linkages between public secton performance and developments in the rest of the economy including agriculture are suchthat operational inefficiencies or technological inadequacies inthe public sector can retard the Arowth of the economy. AsB.K. Nehru pointed out in his paper:?... As the ,,commandingheights' of llre economy, coal, steel, oil, electric powerlrailway transport, telecommunicationg banking and irrsurance,are all in the public sector and as they are all ineflicient

negulatton and l)evelapmenr 78!,

the rest of the economy, which must rely on the inputsthey provide, is necessarily hampered.'7 The shortage of coal,inadequacies of railway transport, short or intermittent supply of electricity all of which depend upon the public sectorlerformance is, on the one hand, self-rcinforcing and, on theother, affects the pace and pattern of growth of lhe economyas a whole. For instance, it is not uncommon to fincl steelmills in the public sector blaming the national collieries forinadequate or low quality supply of coal, or the electricityauthorities for erratic power supply which is responsible forthe poor perfoirnance of these mills. The collieries, in turn,blame the electricity authorities. for an inadequate or inteFmittent supply of power which results in loss of productionand the railways for not being able to lift the coai available atthe pitheads thus aggravating the effect of lhe shortfall in production. 'fhe State Electricity tsoards, in turn, acr;use thecollieries and railways and hold ttrem responsible for theirunsatisfactory performance. The circle is, thus, complete andit is poor. consolation for the millions, whether engaged inagriculture, small- or large-scale industry, or as consumersrvho are aff'ected ltv the rron pcrtbrnrance it-r thesc vitalsectors.

The degree of efficiency of public sector operations has afurther consequence. Since a very large volume of resourceshas been invested in the public sector-not only the Centralpublic sector but in the public sector in the wider sense- ihegeneration of surplus from past investments becomes animportant source of financing future investments. If ineffi-cient management of past investments erodes these surpluses, as is the case today, it inevitablv has an aclverse rrnpacron future Srowth. In part this takes the form of a furlher stlainon investible fesources to correct which an excessive, or,for political reasons, a sub-optimal reliance has to be placedon taxation both direct and indirect. In the late 1950s andthe early 19[i0s an atternpl rvas utattc to inttncluce a stl'uctureoI direct ta.tation which was to bc both an instrunlentfor generating more resources and for reducing inequalitiesin inconre and wealth. High ancl steeply rising marginal ratcsof income tax, a capital gains tax, an estate duty and fora short period expenditure tax lvere used in conrbination

186 PUBLIC SECTON AS AN INSTRUMEI1IT OF GROWTH

to ensure that individuals with irrcome and wealth in excessof certain limits would have to pay by way of direct taxesmore thi.n their total cument income. The dissaving by wayof disposition of assets lvas perceived as a modality for redu-cing inequalities in wealth and for a virtual ceiling on non-agricultural income. In practice, however, the consequenceswere disastrous. To the extent that the tax system totallyignored changes irr the real value of money-the purchasingpower of the rupee declined by hearly half in the sixties*theprogressive element in direct taxation was much higher thanwas initially intended. This was deleterious to the newlyemerging salaried class because they were least able, unlikecertain other sections, to avoid Or minimise the tax burden.The deliberate-and to a considerable extent hypocritical-policy of maintaining a curb oh salaries including, wherepossible, private sector salaries contributed in no smallmeasure to the emergence of an expense account culture.Right from the ministers and legislators downwards therewas an attempt to maximise tax-free perquisites or misust:ftlnctional facilities such as official vehicles, low renr accommcrdation, or availability of services. Thrs kind of real income wasrelatively inflation-pncof and, thelefore, meant much more inreal terms. The transition from ah expense account culture toa culture based on outright cbrruption was not slow incoming. The complex regulatory system with its discretionarycontrols ensured that all levels df Government functionaries,high and low, whether elected representatives or permanentofficials were in a position to dernand and obtain a price foreven discharging their normal functions. It was not longlbefore the rate-schedule was fixeil, initially at the lower levelsin the system, particularly in the States and later at the Cen-trE. By the mid-1970s the cancer of cormption had spreadthroughout the system and harl assumed such perniciousforms that unless those in power and authority were givenwhat they dernanded they could certainly delay and ofteneven deny rightful claims of the average citizen. There wassuch a wide gap between what lhe law required in terms oftax liability at different levels of income and wealth and whatthe prevailing socio-cultural mores deemed to be fair oracceptable that evasion of taxes on income and wealth

Regulation and Development 1.B?

became commonplace. There was no longer any apparenrstigtna attached to evasion of taxes or even total suppressionof income from lhe tax net. This contbination of pervasive taxevasion and universal corruption reduced to a mockery theegalitarian claims of the tax policy and of rhe original logic ofkeeping a strict control over relatively higher ranges of salaryincome. The continuing failure of the system to generate ade.quate surpluses finm investments in the public sector was, ina substantial measure, responsible for this chain ofevents.

The inability to generate mone revenues from direct taxa-tion meant that there had to be an increasing dependence onindirect taxation through excise and customs at the Centre andsales-tax in the States. As the Report of the Ind.irect TaxationEnquiry Commlttee (Part I, October l9Z7)8 pointed out the sys-tem of indirect taxation, particularly of Central excise dutiespassed through four distinct phases. First, there was areliance on taxation of relatively few products chiefly in thenature of finished consumer goods. This was followed by anextension of the tax net to inputs in preference to finishedproducts. The next stage was taxation of a widening range ofconsumer products on a selective basis. Finally, there was anextension of the tax base to cover all industrial productsexcept those deliberately excluded. The Committee con-cluded

Some of the weaknesses of the excise tax srructure ... arisefrom the fact that in rcality there was no ctear shift in thepolicy regarding the pattern of taxation from one phase toanother but a superimposition of the new phase on the oldone without any attempt to make appropriate adjustmentsin taxes imposed earlier. The high taxation of a select rangeof products including inputs has persisted even when thetax base has been widened.e

The resulting distortion in the rate structure of indirect taxeswas further' dggravdted by the cascading effects of such taxa-tion. When taxes were levied both on inputs and on the finalproduct such of these taxes as were levied on an ad valorembasis fell not only on the value of the pnrducts but at each stagethey also fell on the taxes that may have been earlier levied

188 PUBLIC SECTOR AS AN INSTRUMEII'IT OF GROWTH

on them. {For the adverse effects of cascading see paragraphs

3.6 to 3.12 of Section 3 of the Report of the Indirect TaxationEnquiry Comfitillee, Part l, Octolfer 1977 ) Some of the distor-

tions.in the indirect taxation system are attributable to thevolume and urgency of generating additional resources yearafter year through taxation rathdr than through mobilisationof surpluses accruing from past ihvestments.

The question is : How serious is the problem resulting fromthe public secto/s inability to gsnerate surpluses on an adequate scale? It is difficult to quantify the total impact of theinefficient use of resources. The linkage effects of the inade-quacies in the performance of the public sector are so peF

vasive and assume so many different forms that it is difficultto quantifu the losses. Power cutF or worse still, unscheduledinterruptions and trippings or Wide voltage fluctuations notonly curtail production and resrllt in financial losses to hun-dreds of thousands of units, large and small, but also damage

expensive equipment. Non-availability of wagons for the supply of coal or other rnat'erials involving their transportation by

road is not only much more expensive but a national wasle.A non-functioning communication system results in tyingup managerial fesources and adds to the costs, but even moresignificantly discourages a widQr dispersal of industry' Thecumulative losses to the nation arising from these factors are

incalcr.llable. Apart fi:om this there are direct consequencessuch as the huge losses incutlred by the State ElectricityBoarris, State.road transport organisations and others whichrun into hundreds of crores of rupees annually, requiringadditional resource mobilisation by the Central and State

Governments. Even in respect of the more limited segments,i.e., the Central public sector un{ertakings the performance is

far from satisfactory. Between 1b72-73 and 1980-81 except forone vear, namely, 1,976-77, grogs profit, i.e., gross surplusminus depreciation varied between 5 per cent and 8 per cent.Pretax profits of these enterpflises, i.e., after providing forinterest, was as little as Rs. 18.7.qrores on a total investment ofseveral thousands of crores'of rupees in 1980'81 and the figureir,7976-77 was Rs. 421 crores, i.e;, a pretax return of less than4 per cent on capital employed i1n that year. The performancein 1981-82 was significaltly bett€r-a pre-tax p|ofit of Rs' 1,074

Regulation and Development t8g

crores giving a neturn of a little less than 5 pen cent.10l'here is another way of looking at the profitabiliry- picture.

Of the total of 187 enterprises covenecl in the BpE survey 102enterprises reported a total prstax profit of Rs. 1,886 crores. Ofthis Rs. 1,332 crones was accounted for by ten large pnofit mak_ing. enterT)rises, i.e., 71 per cent of the total pretax profitearned by profit making enterprises in the Cerrtnal public sec-tor. This figure looks impressive but a closer analysis revealsthat out of Rs. 1,332 crores Rs. 132 cror€s or apprDximately 10pen cent was accounted for by the State Trading Corporation ofIndia Ltd" and Minerals and Mrltals Trading Corporation of IndiaLtd, both these organisations rtrake their profits largely on thebasis of the monopoly power conferred on them as a result of the import policies. Oil India Ltd and Indian Oil Conporation Ltd accounted for another Rs.300 crnres, i.e., a littleless than a quarter of the total. Oil and Natural Gas Commis"sio4 provided Rs. 574 crores, i.e., nearly 44 per cent of thetotal profits of the ten largest enterprises or 30 per cent of allthe profit making entenprises. This high profiiability was acons€quence of the pricing policy for crude oil. The crudeprices were raised fipm Rs. 380 per metric tonne to approximatelyIls. 1,182 per metric tonne with effect ftom 11 July 1981 and thisalone accounted for an increase of over Rs. 200 crpr€s in thetotal prcfitability of public enterprisies.rr

Another indicator of the lact-lustre financial performanceeven of the top pmfit making enterprises is the rend in theaccumulated surpluses and neserues. On a total paid-up cap!tal of Rs. 1,450 crores the- accumulated_ free reserves on JlMarch 1982 amounted to Rs. 1,786 crol€s. In view of the factthat modt of these enterprises have been in existence for morethan two decades this is not an impressive performance. Acloser analysis reveals that of these accumulated free neservesas much as Rs. 1,138 cnores wene accounted for Oy the Oil andNatural Gas Commission and Oil India Ltd, and Indian Oil Conporation Lt4 and between them they had a paid-up capital ofRs. 493 crores. The other seven enterprises with a paid-up capital of approximately Rs. 950 cror€s had only Rs. 64{t crores in theaccumulated foee reserves. Of this nearly a third, i.e., Rs. ZZBcrcres were accounted for by the State Trading Corporation oIIndia Ltd, and the Minerals and Metals Trading Corporation oi

190 PUBLTC SECTOR AS AN TNSTRUMENT OF GROWTH

India Ltd.12 It is clear, therefore, that with the exception of the

oil and trading sectors the rest of the public enterprises making

profits have a very low profitability.The other feature of the working of putrlic enterprises is

the substantial number of comgranies which continued to

incur losses year after year. Thu$, even in lS81-82' which the

Bureau of pubtic Enterprises clai{ns as a 'land-mark in the his'

tory of public enterprises in Indla which have made highest

ever post-tax pnofits'13 the total number of manufacluring

enterprises incurring losses had gone up from fifty-six to sixty-

five and the total losses incurred had risen from Rs' 614 crores

to Rs. 710 crores' If enterprises engaged in non-manufacturingactivities were also included a total of seventy-eight enten

prises had incurred losses during 1981-82' Of this twenty-two

enterprises had reduced their losses in relation.to the pre-

vious year but thirty-three units had incurred higher losses as

compared to 19s0-8i' Even more worrying wer€ the projections

for 1983-84 and 1984-85 which wdre prepared by the Bureau oI

Public Enterprises in March 198$ in consultation with public

sector units. fhuo, for instance, Bharat Ahrminium Co' Ltd' was

dxpected to continue making losses in each of the three

years-1982-83, 1983-84, and 1984-85-amounting to a total ofhs. z5 crores; and Hindustan Copper Ltd to the tune of Rs' 32

crores. The same was true of Hirrdustan Steelworks Construc-

tion Corporation Ltd, Cycle Corporation of India Ltd'

Nagaland Pulp and Paper Co' Ltd, Tannery and Footwear Con

poiation of India Ltd, National Bicycle Corporation of India

itd, National InsEuments Ltd, Engineering Proiect$ (India)

Ltd, CenFal Inland Water Transport Corporation Ltd' Delhi

Transport Corporation, and Seru,lConductor Complex Ltd'14 Itis clear, therefore, that in the pprception of the management

of some of these public sector e4rterprises there was little prospect of their turning the .corner in the next two to three

years.what is it that makes for thls depressing performance by

the public secton? Theoretically, there is absolutely no reason

why enterprises owned by the State should be-any less effi-

cient (or rnore inefficien0 th4n those owned by faceless

shareholders; b'ut the fact remains that they are and it is

important to take a note of this both fium the point of view of

negulation and Developrnent tgl

determining the policy orientation appropriate to our cir_cumstances and for adopting corrective measures in order toimprove the performance of the public sgctor. On the ques-tion of policy reorientation certain lessons should be learntfrom our past experience. In the early phases of industrialdevelopment domestic base was narrot, not onlv in terms ofproduction capability but also in terms of enrcrprises andskills, and there was a case for a fairly wide range of indus-tries or activities which were reserved for the public sector orthose in which the State, to quote from the Indusfial policyResolution, 1956, 'will increasingly establish new under-takings.'rs Since the mid-1950s, however, two major changeshave occurred. First, there has been a considerable deepeningand widening of the industrial structure in the country and abemendous increase in lechnical and managerial skills.Entrepreneurship which was earlier limited to a few areas inthe country or traditionally restricted to a few communitieshas become much more broad-based. During the same periodthe public sector in terms of size, diversity and organisationhas come of age. Unlike the fifties o"

"rru., fhe ea"rl1, sixties

when a verv significant proportion of managerial cadres inthe public sector were persons seconded fr.om the railwavs,posts and. telegraph, ordnance factonies, Audit and AccountsService or administrative services, the public sector in Indiatodav has its own managerial cadre. In all fairness, quite afew of the management personnel working in the public sec_tor at different levels are as. good as any in terms ofqualifications, experience and dedication. Indeed, theexperience of handling really large or complex proiects is,today, more present in the public sector.

In the context of these changes which have taken placeover the last twenty-five years there is a need to take a freshlook at the concept of certain activities being reserved fbr thepublic sector and the rationale underlying it. Of c.,r.se, centain activities would continue to be reserved for the publicsector, e.9., arlns and ammunition and allied items ofdefen<;e equiprnent, atomic energv, and railwav tt.ansport. tsutthe important point is that at present and in vears to come agreater degree of complementarity. between public sectorunits and the existing or potential manufacturing capaiity in

1SZ PUBLIC SECTOR AS AN INSTRUNTENTOF GROWTI'

lhe private sector would have tO be establistred in order to

improve at the margin capital odtput ratio in industry. As the

Indian industrial sector, public and private, has become

increasingly diversified their inter-linkages have increased

and will continue to grow. Any rigid demarcation except on

grounds of natinnal security or compulsions of publicownership inherent in certain t)fpes of public utilities whichpreclude new entry except by a Government corporation need

to be revieu'ed.A broad approach with regard to the public sector in future

would have to take into account past experience of the work-

ing of the public sector and also the national needs fbr the

next decade or two. Some major departures from the past

would be needed without sacrificing the gains that have been

achieved in the last two or three decades in terms of counter'vailing power developed by the public sector' Thus, it wouldappear necessary to have gfeater clarity with regard to the

roll of profits in public sector activities and the criteria to be

employed for judging the track record of individual State

entirprises. one of the comnlonly held beliefs-and one

which has, sometimes, been assiduously propagated bypublic sector managerc, no less than politicians to cover upinadequate performances-is thet there is a basic contradiction between profits or generatlon of sulpluses and achieve-

ment of socieeconomic goals. Experience in India and

elsewhere has shown that well-meant and well-intentioneddesires of policy-makers to use public sector enterprises forachieving broader social objectives were more likely to suc-

ceed if a public enterprise was making adequate profits andgenerating healthy surpluses Only these enterprises were

able to follow forward-looking in the attainment ofsocial objectives. TheY were employers, more respon-

sive for protecting the en and were able to build uP

technological self-reliance. from contributing lhroughsurpluses to further national nt they were con-

tributing to public good bY available quality products

negulation and Develoqment 793

nlodel cmplo!'ers or lbr erpenditure otl R& D; and thev rc-

mained a drain on the public exchequer'of course, this rs not to suggest that the level of pnofitability

of an enterprise is, by i.tself, an index of its efficiency, nor isthere any iustification for the view that the private sector is,

by comparison, always more efficient than the public sector.

No doubt, unlike the public sector where continued losses donot necessitate liquidation or bankruptcy because even largeand continuing losses can be borne by the public exchequerand ultimately by the tax-payer, management of private enteFprises cannot possibly survive unless they can make a profitor at least break even. But, again, it is not uncommon for themanagement in the private sector to thrive when the privatesector units are becoming sicb and not only amongst thedeveloping countries but even in the citadel of USA weak ortottering enterprises have, often, been bailed out by Govern-ment or financial institutions at the behest of the Govern-

ment. The apparently inefficient working of the public sectorin many developing countries including India is, at least inpart, the consequence of the fact that for various con-siderations of public policy including responsibility lowardsworkers' employment and the production needs of the coun-try, governments have had to takeover in the public sectorsick or closed units which were initially in the private sector.

The fact, however, remains that there is, regrettably, con-siderable fuzziness about the yardstick by which the performance of public sector units should be judged; and themanner in which the accountability of public sectormanagements should be ensured. It would, clearly, be sim-plistic to use profitability as the only yardstick to iudge apublie sector-or for that matter a private sector- enterprise.For instance, there are any number of cases in the private sec-tor where companies continue to enjoy high levels of profitseven when the operations arc inefficierit, on the basis of con-

sumption norms, aird there is underutilisation of capacity.This is possible because import regulations pr€vent cornpeti-tion from abroad, and the internal regulatory framework pre-vents competition from new entrants. On the other hand,even efficient operations can, on occasions, suffer losses-even staggering losses-because of factors beyond their

r9. PUBLIC SECTOft AS AN INSTRUMENT OF GROWTH

control such as a sharp downvizard swing in intennationaldemands or unreasonable price controls. The real issueinvolved in determining the role of proffts in public sd-ctorenterprises is not whether or not they should make profits,but the manner in which profits are inade. There is no meritin public enterprises claiming qredit for pnofits which areeither the consequence of monopoly position or a result ofshortages, or are incidental to the governmental decision withregand to pricing {e.9., domestically produced crude oilprices). The essential point is that pubiic sector enterprises,like Janus, should have two faces;a public dimension and anenterprise dimension. The publilc dimension is reflected inpublic ownership, professional tnanagement, public controland accountability, and commitment to the furtherance ofpublic interest. The enterprise ditnension, on the other hand,implies production of goods and services on the most efficientbasis, i.e., with rnost economical l,rse of manpower, machinesand materials; and marketing them at a price which, hr termsof commercial accounting principles, would provide adequatereturn on the public capital employed in the activity.

The enterprise dimension of public sector functioning has,with some exceptrons, been generally unsatisfactory. Thefactors contributing to the ungatisfactory performance ofthe public sector have been mdny and varied; but in themain they can be traced back to two or tlrree principal areas-managerial, financial, and, in certhin specific cases, personneland marketing. In some cases the continued poor perfor-mance of a public sector enterpnibe can be traced back to theinitial stage when the investme4lt decision was taken. Thepr€paration of project reports and feasibility studies weredone haphazardly and the technical, financial and marketingasp€cts were not given careful consideration. In a few casesthene was a desire to set up a pnestige proiect or a totallyunsuitable location was chosen for non-economic reasons.Another common feature which has adversely affected thepfofitabilit), of the public secto[' is slippages in terms ofconstructionL/completion schedules and very substantial costover runs. These, usually, reflect inadequate proiect prepara-tion or unrealistic assumption of oupply lags and were furthercompounded by inadequate inteinal systems of management

Hegulation and Development tgs

monitoring. The delays in project completion, particularlytowalds the later plrases of the proiect, otrvrously implied substantial additional costs often nunnrng into millions'of mpeesper month.

'Io somq extent the initial problems of cost escalation anddelays in the completion of projects arose because the costand execution of several important projects depended eitheron adequate performance or the cneation of necessary infra-structure in some other part of the public sector. In the con-text of acute shortage of foneign exchange and a desire toaccelerate the progress towards self-reliance, the napidlygrowing public sector necessarily meant a very extensiveinterlinking of public sector proiects. The progress of steelplants was dependent upon the creation of healyengineering capacity in the public sector and the perfonmance of the Heavy Engineering Corporation at Ranchi. Elec-tricity generation and transmission depended on the qualitystandards and delivery schedules of public secton producersof electrical equipments and on the efficiency of the railwaysin making available adequate quantities of coal. These instan-ces can be multiplied. Of counse, such interlinking is neitheruncommon nor undesrrable; anrl. indeed, it has ro be seen asan rntegral part or the planning process. Though in theabsence of an effective network of :Ipproach the close interlink-ages between public sector units resulted in transmitting thedelays and the cost escalations from one unit to another.

These deficiencies are in the nature of internal shortcomingswhich can be corrected by actions internal to the unit. Butequally important-or of even more fundamental importance-are the external factors affecting the operations of public sectorenterprises. One of the major problems facing public sectorenter prises has been that of management. Given the fact thatpublic sector units in India are panly or fully owned bv Govern-ment, there would necessarily be a need for accountabrlity tothe Government. Government being the shareholder, the execu-tive branch has the sole night to select, appoint and dispensewith the services of the chief executives and senior managers ofthe public enterprises. Similarly, substantial funds for thepublic sector are voted fcir by Parliament; and there can be mldispute about the need for public accountability through the

ment to control and regulateto their efficient management.

enterprises are conducive

In princrple, the desiderata for efficient management of apublic enterprise is that in its related operations ilshould be able to decide ly and act quickly. In orderto achieve this, both the prnximate and long-term objectivesshould be clear to the management, and should be within thecompetence of the micro system to achieve. These objectiveswould, of course, be part of the macro objectives which theGovernment would have in view. As in all systems, thereshould be a clearly defined procedure or machinery for recon-ciliation of the micro obiective with the macro obiective. Thisimplies that the initiatives and structures for making businessdecisions within the pattern of ofoiectives should vest with themanagembnt of the enterprise. lA{hereas the decisions relatingto the broad policy parameters affecting the enterprise shouldvest with the Government. Once the organisational structuresand conventions suitable for such a division of responsibilitieshave been established, it would be legitimate to expect themanagement of a public enterprise to perform efficiently.However, if it failed to do so, it Would be the function of theGovernment to take decisions dn a new management or anew set of relationships.

Unfortunately, procedural systems and conv.entions of thiskind have not been developed. There was, originally, wide-spread agreement that public enterprises which had to absorbsophisticated technologies, ormarkets, should develop a

te in large or sensitiveng cadre of professional

managers. It was also generally that the effectiveness of a chief executive in any enterprise depended largelyon his having an explicit to take certain kinds ofdecisions, and, save in exceptional cifi,-umstances, his parentdepartment or Ministry fi'om interfering with thesedecisions. These considerations led to the establishment of aspecial cadre, the Indian Management Pool, to cater to theneeds of manufacturing and tr6ding establishments in thepublic sector.

Regulation and DeveloDment 797

Progresslvel, however, these elements were overlaid withpractices which greatly reduced the authoritv and effectiveness of the chief executives. The l\{anagement pool virtuallydisappeared. Many appointments to these positions were oncriteria other than professional competence or suitabinty; andtheir continuance was often unconnected with efficientmanagement. On the financial side, it became the common lotof public enterprises to operate continuously on inadequateaccess to long-term or working capital. Because of delays ingovernmental decisions on prices, funds allocation or licencesof various kinds, the management is unable to take promptlyeven those steps which the objective situation requires themto take. Last, but not the least important, with the rapidorganisation of labour in these enterprises, and the access oftradg unions to political or extra-political means, personnelmanagement has become a major concern.

Dr. K.S. Krishnaswamy in the Ajit Bhagat Memorial Lec-tures, 1980, 16 pointed out

The reduced effectiveness of chief executives together withr€lative security of tenure for the lower cadres has resultedrn an attitude to work in public enterprises, which is hardlyconducive to the realization of the multiple objectives setfor them. \ /hether it is banks or railways or ration shops orlarge manufacturing units, the deterioration in productivitylevel is palpable. Customer service is not assigned the hjghvalue it should have in a welfare or socialistic society....Lack of modernization in our banking system is beginningto hamper its effbctiveness as a means. of social oreconomic change.... Impediments to arloption of newertechnology are adversely,,affecting coal production, railwaytransport, turn around of ships at ports and so on.... Whilelt is legitimate to avoid needless dislocation of labour andadditional unemployment, it is equally legitimate to ensurethat in public anterprises, which dominate infrastructureand basic industries, productivity standards do not sufferfrom obsolete or archaic equipment and practices....However, as far as I am aware, most managements ofpublic enterprises are unable to satis$/ this requirement,for reasons other than their competence or willingness toaccept chanae.17

'196 PUBLIC SECTON AS AN INSTRUMEIiIT OF GROWTH

Dr. Krishnaswamy concluded that iust as we seek to avoidwastage of capital, we should also seek to avoid ,thedeliberate creation of disguised unemployment.,ls If theshortcornings of public enterprlses arise from a vaniety ofinternal and external factors, they have to be remedied byinitiating changes in policies, praptices as well as attitudeE.

Experience has shown that in a number of cases, the pooreconomic performance of an etrterprise continued becauseeven when the corrective action was specified, there was areluctance to take the responsitiility for rectifing the situa_tion. In most cases, this was seen because ,r""u"a""y .o"""otive action would imply that ellher the earlier investmentdecision was wrong for one neason or anotheq or in the-implementation of the proiect at some stage there werefailures or shortcomings. For in$tance, a ropeway origiriallyenvisaged had been delaye{ consequently unless adflitionalexpenditure was incurred on a railway line or construction of'roads, etc., the inputs and/or tlle output from the proiect,would be adversely affected. It may be true that the ropeway,which, in dire course, would be completed, would be theoptimal mode of investment; but long delays in its completionmay have such large adverse effeets on profitability that short-tarm measures even at an extl'a cost would be justified.However, if the decision-making process is so tardy, or theresponse lags in the system are such that the decision regard_ing corrective action is not taken expeditiously, the remedialaction itself becomes inftrrctuous. It is in this kind of situation thatthe question of accountability of the public.sector and its con_sequences on profitability become important. A weak Govern_ment or a general unwillingness oh the part of the Governmentto accept errors or failures can cause great harm to the publicsector.

There has been a great deal of debate on control systemsand accountability in public entepprises. As one professionalmanager with wide experience in both putrlic and private sec_tor recentlv obsenved :

Trust on the one hand and the responsibility to report onthe other, are the two ends pf the relationship, whoseimportance is the greater in a public enterprise than it is in

negulation and DeveloPrnent 7gg

a private enterprise, because the former belongs to the peo-

ple and the State while the latter belongs to one of some'

who can more closely control or supervise theirenterprise.lt'

The system of accountability for public enterprises,however, does not and, indeed, cannot operate in a vat:uum; it

is too much to expect that public sector enterprises can be

isolated from the environment in which they operate' Itfollows, therefore, that if the combination of trust and respon-

sibility is to work out satisfactorily, the system as a whole-theinternal control system in public enterprises, bureaucraticapparatus in the Government, the political, executive andultimately Parliament and public opinion, would have toaccept a culture in which there is an unambiguous accePtance of lhe link between nroductivity and reward; and inwhich innovation and efficiency are recognised as being goals

which have to be achieved. Public sector managements wouldhave to be allowed-indeed, encouraged-to experiment andto innovate, with minimum interference from the Ministries,or the legislative organs. This, however, would not be poseible unless the system is willing to accept and condonebonafide errors, provided they are not too frequent.

In this context, one could work out an overall system usingmodern techniques of planning budgeting and appraisal and,

:rudit. Ideally such a system, as Mr. Tandon points out,20 wouldhave to be a single system, making no distinctions between the

internal and external requirements but meeting both. A refined

control system will usually consist of :

1. A long-term plan.2. Annual performance budget.3. Monthly and quarterly review and accounts'4. Mid-year review5. Before the year ends, announce provisional results for

the' curent year and performance budget for the foL

lowing Year.

If public enterprises are to develop such a combined sys

tem a.rd operate in a much more open manrler vis-a-vis the

owners, i.e., public, it is essential that there is a corresponding

A)O PUBLIC SECTON AS AN TNSTRUME IT OF GROWTH

change in current attitudes arpd procedures. The publicsector should be treated with a klegree of permissiveness tomake its own mistakes; and as lqng as the enterprise is ableand willing to learn from the .mistakes or respond quickly andeffeclively to changing situations, i public sector managemenrsshould be fi€e to go through the process of erring and leirning.

One last polnt. public enterprises in many countries includ_ing India, are often synonymous with a Government or Stateenterprise system. In fact, where fublic enterprises operate ina non-competitive situation, the consumer including otherpublic (or private) enterprises, may often be worse off becausethere is no choice; and yet the consumer has no voice or efl.ec_tive redress. Therefore, the task in the eighties would be toenable public enterprises to make a trinsition from theGovernment or State enterprise system to a truly ,public,enterprise system. The latter wOuld imply a much greaterdegree ol openness and accountatlility wnicn is to be based ontrust and responsibility. There *ould have to be a greaterclarity of objectives and where a multiplicity of objectives rsinevitable, a certain order of their relative priorities. Efficiencyin the sense of cost effectiveness ghould be the test of perfonmance. Such a transition, however, would require a sense ofresponsibility and discipline on thp part of those who are con_nected with or work for public edterprises and also maturityof judgement and a better understhnding of the real issues onthe part of politicians, legislators, bureaucrats, and othersinvolved in moulding public oflinion or determining theenvironment in which public entelrprises function.

Hele, as in inany other basic bhanges in the sysrem, thcpossibilities of effective and truitful changes depend upon thesociopolitical environment. It hfls been argued and withsome persuasiveness that notwithstanding what the countryhas achieved so tar there rs incrFasrng evidence ro suggesrthat the economic as well as the administrative infrasrructureof the country is becoming less and less equipped to meet thechallenges of modernisation. The various minifestations ofthe inadequacies of the system-whether it is in the field ofpower, transport, communicationF, banking, law and orderand the dispensation of iustice-arb essentiallv a result of thefailure of the system to cope with the increasing complexity of

Regulation and. Developmenl 2o7

modern society. As Prem Shankar Jha recently pointed out:... the crisis that the Indian economic system faces in the years

ahead is that the demands of the political system and the preoccupations of the politician are diverging steadil)' from thecompulsions of the economic evolution.'zl The demands onthe infrastructure, the bureaucracy, the police, the judiciaryand most importantly our defence forces will continue togrow in volume and complexity and will need a more sophis-ticated techncmanagerial elite. On the other hand, recenttrends have been ton ards the emergence of a political systemwhich needs'pliable bureaucrats, corrupt managers and mus-

clemen, arid not policemen.'z2 Unless this trend is reversedand the root causes of the decline of the system tackled thecountry will be unable to rise to the challenges that, in themodern world, periodically test the mettle of the nation. Theperformance and effectiveness of the public sector as an

insfument of growth will depend, in the same way as theeffectiveness of the industrial and economic system, on howrapidly and how well a country is able to bring about certainbasic changes in the socio-political milieu.


t. Tata Services Lid., Department of Economic$ and Statistics, 'sratisticaloutline of India. Bombay, 1982, p.77,'lable74.

2. India, Nlinistry ol finance, Buleau of Public Enterprises,A Review of Central

Governmenl Enterprises 1Sa7'aZ In Economic Intelligence Service Bom-

bay : Centre for MonitorinA Indian Economy, March 1983, p. 6, Table 1 9.

3. lbid., Introduction, p. II.4. F.K. Nelrru, 'fhe crosy)ect Jbr the Indian Economy-A New Ferspective

Paper Dresented at the Wor*shop on Perspectives on Indian F'conomy, short

and Longrl'erm organised by tire Associated Chamber of Comm€rce ti'Industry of India, on 12 January 19E3, telhi, p 7

6. Ibid., pp. 7-E.

6. See rrote 2 above, P. 2, Iable 1 2.

N2 PUBLIC SECTOR AS AN INSTRUMEI.IT OF GROWTH

7. See note 4 above.

E. India, Ministry of l-inanc€, Department of Revenue, neport of the lndircctTaxation Enqutry Committee. Part t. X-.K. Jha, Chairman, Delhi, October1977.

9. ltrid., p. 18.

10. See note:, above, p. 6, Table 1.9.

17. Ih;d., chapter 2, paras 18 to 20, Tables ,.10 and 2.11.12. Ibid.t Table 2.'12.

13. /bid., chapter ,2, para7.14. India, Minislry of Finanae, Bureair of Public Enterprises, Proiections for

1983-84 and 1984-85. ln Economic Intelllgence Service. Bombay I Centrc forMonitoring Indian Economy, April 19a3i

15. lndusrial Polic-y Resolution, 1956. No. 51/CFi48, 30 April 1956. In Guide-Iines for lndustries. New Delhi: Indian InvestmeDt Centre, 1982, part t,Section ll, pp. &10, para 9.

16. Dr. K.S. Kfishnaswamy, What Ails thd public Secron Ahmedabad: AjitBhagat Nlemorial 'lrust, 1980. Fourth Lecture delivered on 21 Decemlle|1960.

17. Ibid., p. 21.

1t . Ibid., p. 22.

19. Prakash landon, Chairman, National Council of Applied EconomicResearclr, Central System$ and Accounlability in Public Enterpriaes. Paperpresented al the lnternational Workshop, International Center for PublicEnlerpriscs in Developing Counbies At Ljubljana, lugoslavia, 1-5 June1981. (U npublished.l

20. rbid.21. Prem shankar Jha" Why Nothing worka. A series ofthrEe articies. ?he Times of

lndia, 1O,14 and 21 May 19E4.

22. tbid.

Dispersat of Indust4r- Gronthand Kemoval of Regional

Disparities

One of the accepted objectrves of tndustrial policy over thelast forty. years has been wider geographical dispersal ofmanufacturing industry. Prior to independence, industrialactivity was confined to three or four maior industries andthese, in turn, were concentrated in particular aleas. 'l'hus, outot the twenty-nrne jute mills twenty-six were located inCalcutta and oul of 144 cottol) mills 100 wet'e located itr tlteBombav Pfesidency. 'Ihe concentratiou of industries"in certainafeas was not necessarill, based on tl)e availability ol locallabour. For instance, the mills in Borlrbar.' recluited labout'ersfi'orn the coastal srip ol Konkan and a Ie$, districts of Weritern Mahaiashtra. 'I'he landless lalloulet's fronr these districtsmigrated to Bombav in sealch of emplovment. On the othelhand, labour in Ahmedabad was dlawn, by and large, l'mm theadjoining areas. So was the case in Calcutta till the turn of theninteenth century, but in later years, with the expansion ofindustry, labour was increasingly provided bv particular aI'easofeasteln UP, Bihar and Orissa.

The pattern of industrial location atter independence, and

?N4 DISPENSAL OF INDUS1 flV

particularly from the Second Five-Year Plan period onwards,was increasittglv irrfluenced bv a consciotts polit:v lo llloveindustry to new areas. Administfative action in the form oflicensing Jr other approvals sought to substitute market for-'ces and counter the usual tendqncy for industry to concen-

trate in particular areas. This tendency to congregate atcefiain centres is due to sevenal teasons. First, industryrequires infrastructural facilitied which are often concen-

trated at particular centres. This was particularly true in theearlier stages of development when, on account of the limitedavailability of nesources, even the minimum necessary infra-shucture required by industry could not be provided in allparts of the country. There r,vere other reasons such as link-

ages between industlies iIr the sense that the output of one

industry was often the input of another. Sirnilarly, the presence of many units located at one place stimulated the

$nwth of repair and maintenance services and trading net-

works, or creat€d a larger pulf on floating labour whichenabled a unit to cope with absenteeism-a fairly commonphenomenon till a mature indu$trial cuiture is established'

Thus, the economies, both internal and external, workedtowards a degree of industrial concenlration in large urban

agglomerations.This, however, apart from its lmpact in terms of widening

the gulf between industnial and rlon-industrial areas, has also

created maior environmental prcblems, overcrowding and

erosion of the quality of life' It al$o entails substantial costs interms of social overheads needed for large urban centres lnfact, the external economies whlch prompt industry to con-

centrate in certain areas are often more than offset if due

account is taken of the substantlal costs which have to be

borne by the cornmunity as a whole in catering to the needs

of such urban concentration. Tlhere is, thus, a significantdivergence between private rnarginal costs and socialmarginal costs when industry tends to be concentrated in oraround major urban centres. One of the obiectives' of the

policy of dispersal of industries, therefore, is to ensure thatthe geographical pattern of grdwth of industry takes intoaccount the dimensions of social costs and encourages loca'tion of industries on a more widely dispersed basis' It has to

Regulation and Development aos

be recognised, however, that Vast differences in the relativeimportance of industry in different parts of the country is notan uncommon phenomenon, particularly in a large subcon-tinental economy. Even highly industrialised countries likethe USA have significant skewness in the geographical dis.tribution of industries; and countries like tne Soviet Union,even after decades of planned development, still have sutrstantial variations in different regions of the Soviet Union interms of direct industrial employment. This is unavoidablebecause certain activities such as mining or industries whichare mineral based., iron and steel, and non-ferrous metals likezinc and copper, or cement are location specific; and thesame is the case with forest based industries. Increasingly,howeven, as a consequence of technological developmenteven these industries are becoming less location specific anda whole new range of industries including manufacture of awide variety of chemical products, plastic products and highvalue metal fabrication are becoming more and more freefrom these constraints. As a result, the scope for a wider andmore even distribution of indusfies and for opportunities fornon-agricultural employment is, therefore, much greater nowthan in the past.

Apart from economic or technological Considerations, avariety of factors have influenced the actual pauern of loca-tion in India as in many other countries. In principle, freshindustrial investment should be located at the least cost loca-tion. In practice, however, the actual pattern of locationdeparts from this optimal .choice for various neasons. In acountry like India where geographigal mobility of the popula-tion is rather limited, unlike in the United States, because ofdifferences in language and other social factors, the spatialdistribution of entrepreneurship tends to be un6qual. As aresult, sutroptimal locations are often chosen on grounds ofpersonal conveniences or regional or linguistic loyalties. Inaddition there are institutional factors which militate againstoptimal location, e.9., freight equalisation or unevenspread of banking. Political pressures sometimes play animportant role especially in the location of public sector unitsor departmentally managed manufacturing activities includ-ing defence; and it is not uncommon tbr the licensing svstem

206 I)tSt)t.R5.\t. ()t t\DI SIR\

to lle used to canvass ol supporFt srrboptirnal localrons. Iheneed to devote greater attentiol! to the question of a morefational Iocational dist|ibution olf industries and in particular,(lo\'c lol)rtrc n t ol in(lustr| irr r rrrlurst r.ia ll\, llat:krva|d St:ttos \\'asarl\\'il|s r'()cogniserl. llre StaIonlollt 0l (irlver.n nre nt's lltdr.rstr.ialI)olit;r, 11).1.1,1irrrrl paltit:rrIar'lr lltc Irrrltrslt.ial t'olic,r Rt:soluliorr,ll)5(i,2 crnlthirsisctl tltc trct:d to arot.l r)r:l t\rgional irnllalanlt:s.Or cr' llrc last tlrnlc clcrratles, :r rrrrirrltt:r' ol rnt;asultls lravc lleerratlolrlcd lo.lc(jclol'illc irrdtrslritrl glrrrvtlr in Slales rr,lticlr lracllittlc ol no rnanulirctuling ar:tivih. 'l hese rne asunts irrcludcclkrcaliorr of lrrrlrlic t:ntelpliscs irr i rrtl rrsl'r'i:r llv lrackr.r,altl alcus;use ol ilrdusllial lit:ensing to otr(;out.rge ne\,\' utlits to l)(leslablisbcrl in irrrlustt'iallv bat:kwalrl ilr'oils; concessions arr<lsubsidies irrclrrcling e.rt:rnptions li'orrr the application of spcr;ificrogulations suclt as ,\lR'l'P legiglatiorr; and developnrent ol'i nll'.lstn lot ur() neeckrd Iol attractilrg nrart rrlircluli ng inclustn,.

The available data do not suggest any substantial reductionin the share of States like Guianat, Nlaharashtra, Tamil Naduand West Bengal in the total net industrial output. But therehave been changes in the relativb position of States and er/enmore, by way of emergence of new industrial centres such as

Pune-Pimpri or Indore-Dewas belt, Bhopal, Ludhiana, Jullun-dur, and of course, the new steel to\ ,'ns.

Manufacturing employment irl India covers a whole rangeof activities and particularly household industries includingtraditional activities like handloorhs, modern small-scale indus"try and very large factories. Certain important conclusionsemerge from the analysis of available data of Statewise distribu-tion of ernployment in household and non-household manufac-tUring activities and of employment in different sizecategories of manufacturing eslablishments (See Table 11.*

First. there is little difference between the industrially moredeveloped and less developed Staies in respect of the number

* The National Commitlee on the Development of Backward" Areas October19E0, has categorised as States industrially more developed if their per capitavalue added in manufacturing is above the national averaae in 1975-76, rhelatest year for which Central Statistical Organisation's estimates of States'

income were available. on this basis Guiaiat, Haryana, Karnataka, Maharashtra,Punjab, Tamil NadL\ West Bengal arc cateBorised as more developed. All otherStates and Union Territories (except Delh ar€ considef€d less developed.

negulation and Development zo7

of persol)s emploYe(l per 100 population rn the household in_tlustlres sector. T he ditference rs much wtder in respect ofmanufacturing establishments. Second, this difference is progressively more significant according to the size of themanufacturing establishment.

TABLE 1 \umber of Persons Employed per rOoO population

-_-. Industriallv OtherMore Developea StatesJtales

1 Household industfies2 MaDulactudngestabiishmeDts

{al Less thaD t0 workeru(bJ 10-50 tvorkers{el 5[J-500 worketr{d, Ntore than 500 workers

11.3

6.9.1.3

(i.9

11.8

11.6

1.52.4

SOUnCE: neport on Industrial Dispersal, p.1.)

Third, while the number of persons per 1000 populationernployed in manufacturing establishments with 500 or moreemployees was 2.5 in respect of industrially less developedStates, two States, namely, Maharashtra and West Bengal hadmore than four times this number employed in the larger fac_tories and the average for all industrially more developedStates was nearly thrice.s

The significant differences in the extent of industrialactivity in different States, however, have to be viewed intheir proper perspective. First, it has to be noted that his_tolically, fbl valious reasons llrere has been a failly largedif'lenential in lelnrs of developrnent of modern industrv.Conscious measure$ to reduce these ditterentials have hadsome impact. For instance, of the tolal factory employment in1971 Maharashtra and Bengal together accounted for 3z.Z percent-a0.7 per cent in the case of Maharashtra and 16.5 percent in the case of Bengal.6 By Tg7z_z I this percentage haddecf ined to 30.7-72.s in the case of Maharashtra and 1g.Z inthe case of Bengal.; A similar indication of a widcr dispersai

, of industrial activity is provided by the data on the growth ofsmall-scare industrial ulrtts 'I'hus, the total numDet,of srrrall-

2OA DISPERSAL OF INDUSTRY

scale unlts registered with the rdspective States' Directors ofIndustries was 2,14,000 in 19746 and this bad risen to 3,ti4,000 by1979.e Durirlg the same period the share of four States-Westtsengal, 'l'amil Nadu, Mahat'ashtra and Guiarat declined fi"om.17 pel' cellt to 42 per cenl. T'he decline in the share of thE indus-trially mofe advanced States in terms of the number of smallestablishments or employment in the factot y sector, ltorvever,

did not result in any marked irnp[rovetnent in the share of tlreindustliall!' more backrvard States and lhe gain ter)ded to be

concentraled in :r 1'erv States like .Andlrra Pladesh, Haryana and

Maclhya Pradesh. Second, to descl'ibe a particular State as

indLrstrially backwa|d or induslrially advanced is, at best, a

lelativti concept and tltet'e is, in fact, haldly any State in the

lrclian Union wbich catr be described as an industrial Stale'l'hus, the development of indugtries even itt Maharaslrt-ra-

accounting tbr nearly onefourth of tlre total value-added itimanufacturing in tlte entire couirtly-the industlv is concen-

trated in Bombay, Thane-Belapur area near Bombay, the Pune-

Pimpri region attd few other isolated areas like Aurarlgabad,

Nasik or Abmednagar'. The same is the case with lvest Bengal

and Karnataka. Tbc point, therelbre, is that to devise policiesfbr regional dispersal which proceed on the basis of a Stale

being relativelv more industriallli advanced can result in dis'crimination against large parts cf the socalled industriallyadvanced States. Indeed, even in these States tl)ere are areas,

not far from the industl ial concentrations, which are as poor

and as industt'iallv backward as any other area in the rest of thecountry. All indices of economic advancement for these areas

will be very similar- to the back4'ard areas in the indusfiallyless advanced States. 'Ihe point lo be emphasised is that the

States (or even districts) a|e politlcal or administlative entitiesand do not necessarily present a unilbrm picture and manif'est

tl)e same pattent of developme{rt in diff'erent parts of theirjulisdiction.

By and large, during the first [wenty years of planning theemphasis in the policy of achf eving a wider dispersal ofindustries was on the use of public investments. Thus, duringthe course of two decades ending 1970-71 tljle total publicinvestment in industry and rniherals including village andsmall-scale industries was to the tune of Rs. 11,000 cmres' Of

negulation and Dev-lupme ZOg

this three States-Bihar, Orissa and Madhya pradesh-whichare amongst the most backward accounted for over 60 percent of the total investment. However, it would not be correctto assume that this trend of channelling public investments inindustry located in industrially backward regions was in allcases a deliberate or conscious policy. The major contributoryfactor was that very large raw material intensive projects likesteel had to be situated near the sources of raw material anda substantial part of the investment in these three States wasof this nature. The consequence was that the spin-off effectsol sucb in\ estnleltt r,r,ele sonter,vhut limited and, indeed, itr let-rospect, the direct benefits accfuing to the surrounding areasin terms of the multiplier effect of such investment remainedsmall. On the other hand, industries based on first stage prccessing of agricultural raw materials, though much smaller inscale, which also have to be located near the raw materialsources have alwavs had a more integral relationship with thegnowth of the region. For instance, th€ growth of the sugarindustry in the South, and particulanly the growth of coopera-tive sugar units in Maharashtra and to a lesser extent inGujarat and Karnataka, had a far greater impact on local non-agricultural emplovment than the corresponding volumes ofinvestment in very large raw material intensive projects.

In the case of industries other than raw material basedindustries, during the first two decades of planning locationof industries including public sector units, tended toencourage concentration near a few unban areas. The exis-tence.of infrastructure, not merely in terms of water, eilectri-city, roads, and communications but also in terms of anattractive or at least an acceptable environment for superwisoryand managerial personnel was an important consideration. Inthe fifties and the sixties, lbr instance, public sector industryin the South tended to be concentrated in and around a citylike Bangalore which olTered many attractions such as con-genial and attractive living conditions. public sector indusbyin and around Bangalore was chiefly sophisticated engineer-ing activity; and the private sector activity was such as reinfor-ced the effects of public sector investment and tended tostnengthen the effects of external economies. Other factorsstrch as the availability of skilled labour., widespread

210 DISPERSAL O!' INDUS'I'RY

entrepreneurship and traditionaf buyers in favour of certainareas in the lendirrg policies of corhmercial banks and, to a lesser

extent, of the newly created tepm. lending institutions, alsotended to limit the impact of dispersal policies.

It is essentially in the seventies that a deliberate attemptthrough Central arrd, later, through the State Government sutx

sidy schemes and concessional flnance schemes was made togive special attention to the industrially backward areas. Thequestion was first discussed at a meeting of the Comrnittee ofthe National Development Counpil in September 1968 and itwas decided to set up two worklng groups-one dealing withthe incentives for establishing industries in backward areasand the other to lay down criteria to identiff the backwardareas. The main criteria fof the identification of industriallybackward States and Union Terriltories laid down by the Work-ing Gioup under the chairmanshfp of B.D.Pande were :ro

raJ per capita income; (bi per cit[)ila income f|orn irtclusttyand mining; {cJ number of pet'sons wo|king in the registered

lactories; (dl per capita annu4l consutnption ol electricily;{e) length ol surtaced rclads in relation to the population ancl

the area of the State; (J) length of railway mileage in relationto the population and the area ol the State.

The Group also suggested certain other criteria or indicatorsof backwardness for identificatfon of backward districts inbackward Statevunion Territorles. These were: the districtsshould be outside a radius of abqut 5o miles from larger citiesand large industrial projects; pen capita income should be atIeast 25 per cent below the State average; the population den-sity should be relatively high; ahd the infrastructure such aselecllicity, power/ tl'ansport and comrnunications, should eitherbe available or its availability should be ensured witbin tl)ert(')\l one o| lw() ) e |.s.

N.N. Wanchoo recommendbd inter alia the following set offiscal incenlives :

1. Grant of higher developmedt rebate to industries locatedin backward areas.

2. Grant of exemption fi'om income tax including corporale

Begulation and Developnent 277

tax for five years after providing fbn the developmentrebate.

3. Exemption from import duties on plant and machinery,components, etc., imported by units set up in backwardaneas.

4. Exemption from excise duties for a period of five years5. Exemption from sales ta& both on raw materials and

finished products to units set up in specified backwardareas for a period of five years from the date of theirgoing into production.

6. Transport subsidy for identified backward areas inAssam, the Hill States and J and K.

An important recommendation made by the WorkingGroup under Shri;Pdhde was that about twenty to thifiy dis.tricts in all may be selected for grant of special incentives duning the Fourth Plan period. This was, however, not acceptedand at the meeting of the National Development Council inSeptember 1969 it was decided that the concessions to be offeredby financial and credit institutions for financing industries inbackward areas should be available to selected backwardareas/districts in all 15he States and Union Territories. TheStafe Governments ere asked to select districts/areaS fmrheach State, the number of such districts/areas being larger inthe case of the industrially backward States. Later many Statesset up their own schemes to attract industries to their Statesand particulanly in the relatively backward parts qf the States.This was done chiefly by offering cash i4centives related tocapital investment but with an upper limiU and more impontantly by the sales tax exemptions recommended by theWanchoo Committee Report. The recommendation regardingtransport subsidy was partially implemented but the otherrecommendations were either not acceptable or workable.

The various concessions available in respect of investmentin industrially backward aleas should be seen as a wholebecause the investment concessions complement one anoth€r.For inslance, capital subsidy is available duning the construc-tion stage; interest concessior] helps in the earlier years ofproduction; and tax concession is attractive to a unit mainly inthe later years after the benefits under the other general set

ZIZ DISPERSAL OF INDUSTRY

up like tax l)ol;(lay ."'rr new unitrs, etc., ltave been availed. Ofcourse, t\ere is i.n upper limit to each of tbe benefits. l'or'inslance, tllefc is a ceiling ol Rs. 15 lakhs to the benefit irlcapital subsicly and amounts givetl on concessional terms arclimited to Rs,2 crores. Only itl the case of tax concessionunder Secliolt 60 HH \vhich is lo lhe extellt ol 20 pe t' cr:rtt ofthe t'axable profits allowable for calculation of tax as rebate oftax that tbere is no ceiling. It ili difficult to generalise aboutthe actual benefits arising fi'dm these concessitltls taken

logelher becaust' thesc vurl Irom one pl'Lliect to anothtrt'

depending on a number of factors. 'Ihe National Comnittecon tlte Developmetrt of Backrvatd At eus itr its Repolt on

Industrial Dispersal made solte interesting calculations about

the present i'alue of benefits a$ percentage of proiect costs ltsbowecl that for proiects with costs around Rs 2 crores the

Central subsidl, and inlerest concession constitutecl roughlv

about l2 pef cent of the project cost. This proportion steadilv

declirred as the project cosl increased because of the ceiling

on Centt'al subsidy and on conoqssional loans and w:rs as littleas 1 per cent for a project cosl of Rs. 25 crores'll

Oi the industrial undeflakings which received a subsidy tilllg7 8-7c as many as 10,064 units had a capttal investment of

less than Rs. 10 lakhs, 610 unitp between Rs' 10 lakhs and a

crore, and 143 units had an investment of more than a crore'

The total subsidy disbursed till 1978-79 was appnoximately

Rs. 62.4 crores. A little ldss than a quarter of this was for units

with a capital investment of less than Rs' 10 lakhs' and 30 per

cent for r+g units with an inve$tment above a crore' and the

remaining was for 601 units wlth a capital investment al)o\"e

Rs. fo lakhs but less than a crore On an average the level of

in!'estment in this category was Rs 35 lakhs for each project'1z

The concessional finance scheme has wider coverage than

the Central subsidy scheme. The latter is restricted to 101

districts/areas, while the concessional finance is available in

fespect of investment in all 241 dlist|icts declared backward by

the Planning Com mission.An even disbibi-ltion and an increasing bias tow'ards indus-

trially less advatrced States is seen in tbe disl:ursements made

so far under the Central capital subsidy scheme ln llre earlier


years and belbre the schetne was implemented, the indus-trially advanced States and particularll, those r,r.'ith a relativell,rvell organised administlation like i\laharashtra, Gujarat andKarnataka accounted fbr a substantial portion of the disbur-sements from the Central investment subsidy sclteme l'hus,betrveen 197 2-73 and'f.975-76 the total disbursements amoun-ted to slightly over Rs. 100 crores. Of this more than Rs.36crores was accounted for by these three States. By 1.97a-79 thetotal disbursements were to the tune of Rs. 57 crores and theshare of these three States had declined to less than Rs. 15

crores, that is, their percentage had in the total declined from36 per cent to 26 per cent.13.

'I'he share of the backward districts in the florv of financelrom the:rlflndia institutions increased as a resull of the con-

scious policy to taive prelerence to investments in the back-ward districts . litt 197 8-79 the share of the backward districtsIrad increased to appi"oximately 44 per cent as compared toabout one-third in the early seventies. This improvementshould be seen in the context of the lact that these districtscovered 70 per cent of the area of the country and account lb|nearly 60 per cent of the population. It should also be notedlhat in subsequent years the share of the backward areas intlre total flow of assistance from the all-India institutions hasstabilised around 40 per cent. According to the IndustrialIJevelopment tsank of India Report on 'Development Bankingin India' by the end of April 1981 backward areas accounledfor a cumulative total of Fs. 2,872 crores out-of a total disbursement of Rs.7,506 crores by these institutions since inception.ra . 'l'his works out to 38 per cent, which is approximatelythe share of the backward areas in the disbursement in 1980-

81. This would imply that the total assistance to the backwarda|eas is reaching a plateau, but as the Report of the IndustrialIievelopment Bank of India points out the share of assistanceto the backward areas of the States identified as backward bythe lVorking Group uncle,r Shri Pande increased sharply fromRs.279 crores in 1979-80 to Rs.4,10 crores in 1980-81 and con-stituted 46.3 per cent of the total assistance to backward areasas against 36.4 per cent in the previous year. It would appear,therefore, that the benefits of concessional finance are tendingto be increasingly used by the identified backward districts inthe industrially less advanced Stares.

ZI4 DISPERSAL OF INDUSTRY

'l hert; are, however, two othe[ l'ealures which emerge f|oman analvsis of the subsidy and finance schemes. First, thebenelits of the subsidy schenre have accrued nrore in the caseol States which attracted ltrore lalge.scale units; and tlreseunits, by and lalge, were locutecl in the inrlustriall_v advancedStates like'I'amil Nadti, lVlalrara6ltra, Guiarat and Karnataka.Second, an analysis of lhe disbursements made by the termIt;nding institulions on concessitrnal terms shows lhat nearlv ar

dozen districts ()aoh of which aclcounted lbr m<,r|e than Rs. 15

crores llv way ol concessional [inarrce accounted lbr nearl_von*thild of the lotal clisbursals macle in all the 247 llackwarddistlicts. tsenelhs ol' the Centrirl subsidv applicalllt: to totdistricts areas as well as concessional linance have ncerrgcnerally limiled to a snrall dumber of districls rtranv olwlric[ anr in the lelativel_v industriallv advarrced States.Mrrleovt:r', rnan.y ol thr:st{ rlistlir:ts are irr close proxirrrit_v lorelatively developed industrial Centres (e.9., Medak, Alleppy,Madurai) on lie on the trunlt noute between developedcentnes (e.8., North Arcot, Dharimapuri, Bharuch).'s Many ofthe distlicts that have lrcnel'itr:d lrave lalge industrial estatesor aftias plomrrlerl aggressivelv bv State level agencies whilethe availability ol indusllial infrastrur:ture and proximity toilrt: nralket in developed centres al)l)ears to have influerrcedtlre locatiorr ol' mediurn and large units. 'I'he concessionallinance arrd subsitly schenres haVe significantly inlluencecl thepaltern ot rllvelotinrent ol sntall units l)ased on local rawmalerials, llut have n()1 nrateriallv helped the development ol'ancillary inrltrstries in thcse artias. 'l he incentive scheme lbrtlre developmerrl ol backwaldr distlicts has tended to bt:skewed in lavour ot rhe industrihlly more advanced Start:s andalso in lavour of distlicts near establisht:<l industrial centres.

'I'he location ol public er)terprises in the backward aft)ashas, in statislical ternls, shown a marked bias in lhvorrl ol'inclustriallv backward Stales. A(rcor(ling 1o an analysis tlonel)v the National Comnlittee on tlre Developnrent of BackwarclAreas, at the end ol Malch lS)79 the strare of industrially back-ward States in the investment in Central pulllic enterpliseswas 6l per cent and in emploj,ment 53 per cent. No tlorrlrtthese are inrpressive figures but they need to be qualified irrcertain respects. As mentioned earlier, a large proportion ol'

negulation and Devel.rpment 215

the invcstment iir the less developed States is accounted forby Bokaro, Bhilai and Rourkela Steel plants.16 Cential publiqsector investment in other industdally backward States,thelefbre, is relatively small. Similarll,, a signilicant propoFtion oi the total employment in public sector undertakings ison account of the labour employed in the coal mines which ismainly in the Bengal,Bihar belt. Nevertheless, it should benoted that a bias in favour of industrially less developedStates has been an acceptecl element in public policy; andseverai Central seclor engineerin6{ enterprises which couldlral'e beerr iocatetl, perhaps rvith sorne advantage, neardeveloped inclu$trial centres have been deliberatelyestablished in undevelopetl areas. F-or instance, Bharat HealyElectricals Ltd (BHEL) plants at tshopat, Hardwa| anrl Jhansi;Hirtdustan Aeronautics Ltd (HAL) plants at Koraput and Luck-now; Indian Telephone Industries {ITI) plants at Naini, RaeBareli and Gonda; or Indian Drugs and Pharmaceuticals Ltd(IDPL) plant at Rishikesh. Moneover, many of the public sectorplants located in the relatively more developed States havealso chosen new centres like Hyderabad, Nasik, Trichv orDurgapur rather than being close to the establishecl industrialconglotnerations. lT

While public sector investment has always had a bias infavour of indubtrially backward areas, special financial incen-tives were introducecl to encourage new industrial units inmore industrially backward areas towards the end of the six-ties. The use of,industrial licensing as an instniment for deter-mining the location was somewhat restricted till the seventies.No doubt the First FiveYear Plan had recognised that 'in-creasingly, greater artention will have to be paid to the Statesand areas which have so far remained backward.'rS Under theIndustries (Development and Regulation) Act, 19S1, theGovernment has power to regulate location.l!, The Second anclThird Plan Documents also stressed the importance of loca-tion decisions in the public sector and particularly the con-cept of large projects as the nuclei for regional growth. TheSecond Plan, for instance, pointed out

T'here are industries in regard to the location of which, oneconomic considerationq there is a field of choice. Often

2T6 DISPERSAL OF INDUSTRY

the disadvantages of comparatfive costs are only a rel]ectionof [the] lack of a basic development. Once this is started thefinancial handicaps progressiively disappear. Wider ditlu-sion of development nuclei is essential lrom this point ofview.2(l

However, it was only in the early seventies that in additionto the introduction ol capital subsidy, concessional financeand other incentives indusrial licensing began to lte ust:d asan important instrument lbr deternrining location decisions.

In some ways (he use ol the licensiirg rner:hanism lbrencouraging investmenl in thr: industrially backward ar.eascould be more attractive. Although no specific provision in theIndustries (Development and Rcgr-rlationl Act seoks to give anincentive to the estalrlishrnenI ol irrtluslries in the bat;kwaldareas, the aspecl of indtrslrial lttr:atiolr in backwaltl ar.eas isgiven wcightage llv the (iovrirrrnrt:nt wlriltl t:onsirkr|itrgapplications Ibr inrluslr'ial Iir;crrct;s. In adclition, especiallvsince the later l)art ol tlre severrties.l tregalivo clitcrion lrasbeen applied whi<;h ext:ludos t[re s(]tting up rrl lir;ensallleindustries in nretlopolitan area1; and s1;t:t:ilir:tl ul.l)an con-glomerations. As a result of tlrese policir:s tlrt-' shal'e ol tlre ktt-ters ol intent'has lleen str:a<lilv iircleasing arrd lrv lhe entl o[the seventies arouncl 45 per (rent ol thc ncw lettet's of intentwere fbr locations in backward a|eas. 'l his change should ltr:viewed in the context ol anothilr leature of our. irrdustrialgnowth. l'or instance, in 1975 ncl 1976 the total lit;encesis$ued were 1,689 and lhe lotal rrunrber ol''leltels ()l inlentissued were 1,509. * The four relatively more industrialisedStates, viz., Maharashtra, West ts(rngal, Gujalat and 'l'amilNadu accounted for 54 per cent ol'lhe industrial licences and48 pei cent of the new letters of intent.rr Despite the changesin licensing policies and the more recent emphasis on (livert-ing industrial growth to 'NGindustry-district' the proportion ofletters of intent and inclustrial Ucences issrred lo these lburindustnially more advanced Statt:s has lemainr:rl . apprcx-imately the same.

* This inoluded some cases fi'om past yeads wbich wo.c clearod afl(x' lh(: e$talr"lishment ofthe S€cretariat for lDdust|.ial Approvals.

Regulation and Development Z7Z

While the licensing policv succeeded, to some extent, inencouraging industrial activity in the specified backwardareas, thenewas no corresponding success in morring industr-1,to the backward States as a r,vhole. f'his is not unexpectedbecause the licensing policy is a negative instrunent and can-not by itself promote industrial development in theindustrially backward States. It can, at the most, irnpose cer-tain restrictions on the pace of expansions in the developedareas including a ban on expansions in metropolitan centresor urban conglomerations; but the effect of such restrictionscan only be indirect by making it somewhat easier to attractentrepreneurs to industrially backward States or :rreas. Ultimately, the effectiveness of a policy of industrial dispersalwould depend upon the success or otherwise in establishingcentnes where thb infrastructural and other facilities are suchas to attract intending entrepreneurs. This together with aban cr fairly severe restrictions on expansions of new under-takings in specified urban conglomerations is more likely toresult in a wider dispersal of industry. It is against this back-ground that the more recent shift in policy towards movingindustries to the backward areas needs to be viewed.

In a Statement made in April 1983,22 the Minister for Industry divided the backward areas of the country into three catc-gories. Categoiy 'A' would consist of n*industries-districts,and special regions like Assam, J and .K, Himachal pradesh,Arunachal Pradesh and Hilly areas, totalling 118 disficts.Category 'B' would consist of districts cun-ently etigible forCentral subsidy (excluding ttrose included in category A).Category 'C' cornprised the existing 246 districts which areeligible for concessional finance (excluding those in categoriesA and B). Apart from this categorisation of the socalled back-ward districts, the announcement in parliament also enhan-ced a4d, in some caseg amended the benefits in the form ofcapital subsidies, etc. The existing ceiling of investment sub-sidy of 15 per cent or a maximuh of Rs. 15 lakhs was enhancedin the case of category 'A districts to 25 per cent with a maximum of Rs. 25 lakhs. At the other end, districts which wereformerly not eligible for Central subsidy, although being backward they were eligible for concessional finance, were alsoallou ed access to Central subsidy. However, investments in

278 DISPERSAL OF INDUSTRY

the blocks, talukas and urban agglomerations in categories'B'and'C' districts were not to be e|lgible for furlher investmentsubsidy or concessional finance if such investrnents attractingsubsiciy had exceeded Rs.30 crores. In any case MRTP anrlFERA houses were nol eligible fbr Cer-rtral subsidies in category'C'disficts.

'fhere were two other elements of the Policl, announced inApril 1983. In order to induce the State Governments to pro-vide adequate infrastructural laoilities, the Central Govern-ment agreed to assist the State Governments in respect ofinfi'astructura I developments in otrT e or more identified growthcentres in'ncindustry-districts'. Such assistance, however,was to be limited to one-third of the total cost of infrastruc-tural development, subject to a malimum o{ Rs. 2 crores pet'district. Ihe second element of the Policy rvas that in order toprovide an impetus for the establishment of such industriesas could promote the developmertr of ancillary industnies, cent;rin indusirial units were to be declared as nucleus plants.'{'he definition of a nucleus plant was that it should not haveless than 50 per cent ancillarisation and the employment levelin the ancillaries should be at least tlrree times the level ofdirect employment. In such a case the nucleus unit would beentitled to Central investme t subsidy; but MRTP and FERAcompanies would nol qualifl, for such subsidy.zr

'fhc Policy anuounced in April I9832a and its implementa-tion raise certain important issues. There is clearly a need toneview from time to time the extent of fiscal and other incen-tives to be provided in order to facilitate better regional dis-persal; and to the extent that the April 1933 Policy seeks toinduce greater orderliness in the Structure of incentives in theline of development since the scheme was introduced, this isa welcome step. Apart from restructuring the incentive schemethe implementation of the April 1983 Policy has, in practice,meant a gFeat deal of arbitrariness in forcing location decisionson entrepreneurs with regard to specific projects. In principle, l-raving announced a calibrated structure of incentivesand also a list of locations which are not eligible for theestablishment of industrial unit$, the exact choice of locationought to be left to the entrepreneur. It should be his/herchoice as to whether, taking intO account the differences in

negulation and Develo-pment Ztg

the extent offiscal and other incentives, he,rshe should chooselocation A rather than B, C or D.

It coulcl be argued that left to themselves entnepreneurswould probably opt for locations closer to the already developerl industrial concentrations and that in the process theindustrially less advanced States rvould continue to be neglec-ted; and for this reason il \vas necessalv to use the licensingpolicy as an instrurnent tbr pressurising people to establishunits in particular locations le.g., no-industry districts). Itmust be noted, however, that such an apprcach though a mafordeparture from past practice, introduced a dubious elementin the location policies. The licensing s1'stem is rro longerused for preventing an industry frcm being set up in non-permissible locations or even in preferred areas, i.e., back-ward areas. The system is now used to increasingly pressrtriseindividual units to locate part or whole of their activity inlocatiorylocations which are politically acceptable to theMinister concerned or to the Government in power.' This is an unclesirable development from sevenal points ofview. The principle of limiting new capacity to nGindustry-districts and to special regions like Assam, J and lri HimachalPradesh, etc., in effect means that 118 districts in category Aconstituted the only areas where new size and type of unitswould be granted.25 In practice, of course, a few of these nGindustry-districts are particularly pneferred for non-economicconsiderations. Basically, this particular approach in whichcertain aneas are specified as eligible or preferred locations isnot economically sound and in actual working has causedconsiderable hardships to intending entrepreneurs.

A no-industry-district is one in which there are no licensedor registered industrial units. This would imply that primafacie there must have been certain adverse factors rvhich, his-tonically, inhibited industry from being set up in these dis-tricts. For instance, several of the 118 distnicts designated asno-industru-districts are such that because of the telrain, lackof resources including manpower or adverse factors such aslack of adequate lail, road transport and conrmunications, itis hot feasible to establish medium- or large scale irrdustlies.On the other hand, the present definition of a noindustry-distlict rvould disqualifv a number of distlicts includin6l sorne.

22O DISPERSAL OF INDUSTRY

in the industrially backward States simply bgcause there maybe one or two resource based units such ad cement or sugarin that districl. The mere fact that there is a cement factoryr ora mechanised saw-mill or a sugaf and distillery unil woulddisqualifu the whole district from being inbluded in the list.Further it should be emphasised trhat a district is essentiallyan administrative unit and does not have to be-atrd indeed isnot-an economically homogeneous tract. f'he result is thatthe presence of just one or two units in a district would tendto denv a large tract of the district opportunities for attractinginclustries. It should be noted that this definition of a no-industlv-district results in a situatFon where there afe Stateslike Nlaharashtra which do not have a single noindustry-districtor Gutaral which has onl)' one. ,At the other end, there areStates like Uttar Pradesh, Rajasthan, Bihar and Madhya Pradeshwhere a large number of districts qualify as noindustry-d isl ricts.

A system in which the licensing mechanisrn is used fbrdetermining the location on a disqretionary basis rather thanon the basis of choice at the mar$in of the entrepreneur tak-ing into accolrnt the relevant factors including incentivesoffered or statutoly restrictions in force tends to become,costly and counterproductive. The general. rule since the April1983 Polic), was anncunced was that in the first insrance mostapplicants with large investment proposals would be asked togo to nGindustry-districts, particularly if the applicant haPpened to be either a large house or a FERA company. Thishas, usually, rneant considerable delay in project finalisationand implementation. While it is not possible to quantifu theextent of such delays, it is common knowledge that the origi-nal stipulation regalding location of the unit in a noindustrrv-dislrict can often be rescinded; btxt the process takes severalmonths resulting in not only loss of managerial time and effortbut also certain other costs and very significant escalation inthe total proiect cost. It is not uncommon to find cases wherethe original preferences of the entrepreneurs lo locate a par-ticular project in a noindustry- dilstrict is questioned or per-mision is delayed for one reason or another unless theentrepr€neur expnesses his willingngss to move to a noindustry-distfict in a particular State or sometimes tcr a particular area


within that State which is acceptable to the Government inpower. 'l'here are inslances whele the original nGindustry-district location was permitted only afler protracted discus-sion and long delays because lhe entrepreneur made it clearthat he would rather abandon the proiect than move to lhesuggested area.

This criticism of the recent policy regarding location doesnot, however, mean that there is no need for further strengthen-ing of the policy fbr a nider dispersal of industry. The mainjustification for encouraging a wider disp.ersal of industry isthat it enables diversification of employment structure andthe creation of centres of high productivitl, and high wageswhich rhen provide the base for development and diversifica-tion of economic activity. Economieally backward areas inIndia, as elsewhere in the world, are characterised by subsis-tence economy, stagnation of technology, low productivityand low incomes. The consequence is that the growth impulsesfrom the centres which are the concentrations of modern prc'ductive processes do not percolate down. The high proportiorrof working population which has to be absorbed in low productivity agriculture and,/or traditional sectors such as handicrafts leads to the perpetuation of low incomes and consequentlack of purchasing power which, in turry inhibits industrialdevelopment. One of the important r€asons for supporting andencouraging wider dispersal of niodern irrdustry is to utilisethe newly created industrial capacity for strengthening the forces for modernisation and for generating growth impulseswithin the backward areas.

While the need for dispersal of industries is clear and pres'sing, it does not mean that industrial growth should be res-tricted to the least ccngenial location with consequent effectson protect costs and production costs and the policy ofdispensal of industries should be distorted into forcing the intendingentrepreneurs to move into a particular State or areas of thatState for political reasons. It is true that the earlier system ofspecifuing a certain numben of districts in each State as back-ward districts eligible for several specified concessions andwhich, in addition, lvere treated as preferred locations interms of licensing policy did have some limitations andresulted in distortions. For instance, the choice of the district

222 I)ISPT]R SAI, OF INDI]STRY

did not in all cases lbllow the crit€ria laitl down by the Plan-ning Comnrission for determining backwardness, but the selec-

tiorr was, at least in some cases, on the basis of politicalr:onsicleralions. [f urther, in almost every State, the natural ten-denc1, of thc applicants was to seek a location which wasclose to an existing inclustrial centrc or was at least nearly'urban in terms of facilities such as schools, cinemas, raiVroadconnection ar-rd other means of communication. "I'hus,

locations like Hosur in 'I'amil Nadu, Alu,ar in Rajasthan, orAurangabad in Maharashtra attracted much more attentionand investment than other centreg specified as backward inthese States.2(; In short, the gror.r,th process corltiirued to haveas its epicentre an industrial or ecdnomically adr.'anced urbanconglomeration; but to the extent that sucb grorvtll broughtlarge areas or seg[rents of p<rpulation n ithin the ambit ofinfluence of modern irrdustry, the etTecl was salutory.However, this lype of developmenl continued to leave vervlarge areas of the country untoucired by the process of indus-trial development. 'Ihe answer to this problem, however, can-not be sought by a strategy rvl-ticlir concentrates on districtswhich have the least comparalive advantages, at least as seenby the entrepreneursi and which ilr numbers and area are so

large as to call for a massive investment if the necessaryinlrastructure in all its aspects is to lre built up.

It is in this context that the National Committee onDevelopment of Backrvard Areas, appointed by the PlanningCommission and headed by B. Sivararnan, analysed the pro-blems and made its recommenddtions. The main point ofdeparture in the strategy suggested by the Sivaraman Commit-tee was that, unlike in the past, the selection of concentrationof backward areas r /as to follow nrot 'an area approach' but a

growth centre approach'. The essential difl'el'ence was tllat inthc':rrea approach' the developmental elfolt had to lre wide-splearl, l hat r'vould entail eitherr resources r)n a scale r.t,hichvyas nruclr tt-ro large in t(:r'nrs of competin5l claims on resour-r;es; or lack of resources vvould result in inadequate invest-rnent which would continue to make the errea suboptimal itrternr.s of quantunr and qualitl, ol the inll'asfucturc, making itdistincth,a less preli:r'red or higlt iost location lbl tlie intend-irrg irrr cslt;r'. on llrc otlrt'r' hatt<1, it.r thc cast: ol lltc 'grrlrlllt

ne!{ulation and Devek pment ZZs

centre appfoach',27 the attempt would be to rrrst identify thecentres or nuclei with growth potential so that there wouldbe, ol,er a period of time; a large number of such centresthroughout the country which would be capable of providingthe impulse for modernisation and growth. In the iden-tification of such growth centres, the Committee recognisedthat due consideration can, and indeed should, be given tocreating more such centres in the States which, at present,are economically backward.

Subject to this the Sivaraman Committee,s approachinvolves minimising costs, providing infrastructure by select-ing growth centres which have a degree of urbanisation. Theother criteria suggested by the Committee for the identifica-tion of growth centres were :

1. Theli should have a population of 50,000 or more.2. They should have less than 10,000 workers in non-

household manulact uring.3. T'hey should not be near an existing centre which for this

purpose will be defined as one with a level of emplov_ment in non-household manufacturing exceeding 10,000as per the 1971 Census.

In order to ensure that there is adequate time for results ofthe growth centre strates/ to manifest themselves, the growthcentres selected for development should remain eligible forspecial assistance for a decade.

On this basis the Committee identified eighty-four centreswith a level of employment in non-household manufacturingof over 10,000, but there were also as many as 242 other cen-tres where the level of employment in non-householdmanufacturing was lower than 10,000 although their popula_tion size was 50,000 or more. On the basis of the three criteriamentioned earlier approximately 126 centres qualified to beconsidered as potential growth centres.rs

An intenesting point that emerges is.that if on the basis ofvalue-added per capita in manufacturing, States arecategorised into those which lie above the national average(i.e., Guiarat, Haryana, Maharashtra, Karnataka, puniab,Tamil Nadu, and West Bengal) and those which may be


classified as industrially backward, a little over 40 per cent (i.e.,

tlfiv-tlr'o) of thd gnowth cenres would fall in the industriallydeveloped areas. If for reasons of national policy or acceptedpriorities it is proposed that special weightage be given to theindustrially backward States, then it would be necessary toinclude proportionately more centres from areas in the selec-

ted Srorvth centres.'I'he essential point is that unlike in the past, the concentra-

tion of effort should be on the rapid development of selectedcentres. The provision of infrastructure and the pt'omotionaleflb|ts of the State Governments and the Central Governmentshould be focused on the selected centres with a view to

avoiding difTusion of limited resources including administra-tive inputs. 'fhe Committee made a number of specific sugges-

tions with regard to the manner in which this could be

organised. Past experience has shown that otten, policymeasures taken r'r'ith a view to encouraging industrialdevelopment in industrially backward areas-and at locationswhich are particularly backwardrthe benefits received by thelocal population in terms of industrial employment or as astimulus for further development have been much less thanone would expect. l'his r.vas due lo several reasons. The mostimportant was that if the industt'y t)eing set up was of a kindwhich had limited or nort-existent linkages with local resouFces, including manpower, the attempts to induce development in backward areas could prove to be counter productive.In some cases, the local impact was negligible. It is notuncommon to see instances where the new industry is

brought to the area by ;in outside entrepreneur with capitalfrom outside. 'l'he stafT and often most categories of labourare from outside; to the exteni that a large proportion ofinputs needed bv the manufactlring unit are also from out-

side, other spin-off efTects occur outside the area. This wouldimply that in the programme to stimulate industrial development in new centres there must, on.the one hand, be selec-

tion by way of speciallv encoufaging those lines of activitvrvhich have strong local linkages in terms of raw materials.Horvcver, this nrav Irot a.lrvavs lic ltossible, particularl)' if theirrlentirrn is to disperse ilrdusttv trrot r; rvitlelv than has l;ecn inthe I)a st.

Begulation and Development ZZs

In that event, it would be necessary to utilise opportunitiesfor inoustrial devetopment provided by footloose industrieswhich mone recent development in technologv has madepossible. Such footloose industries, by and large, are thosewhich use as raw material the commodities which are tradedon a national scale, e.9., metals - ferrous and non-ferrous,chemicals other than those which pose special problems oftranspontation, new technologies such as electronics. In suchcases the emphasis should be to ensure systematic measuresto identif the skills that are ndcessary for new industry; andto the extent they are not available locally, provide specialfacilities so as to enable the local people to be trained to fillthe vacancies. This, of course, would require considerableadvance planning, but unless it is undertaken, the depen-dence on workers and suppliers from outside can create ten_sion between the local people and the outsiders. What ismore dangerous is that even at a later stage the local peoplemay not benefit sufficiently because opportunities created bythe location of new industries wotild have been pr.+enpteibv people coming from outside in the first instance.

Recently several studies have been undertaken in differentparts of the country to analyse the impact of new industrialrlevelopment on opportunities for local employment. Inalmost all cases the conclusion was that the local people tendto be engaged in unskilled jobs, whereas many, if not most, ofthe better paid skilled jobs or highly paid senior jobs were,monopolised by persons from outside areas. Another interest_ing conclusion was that while in the indusfially advancedSlates outsiders were often from districts in the same State, insome of the industrially bdckward States the outside employ_ment in the newly developed industrial centres was not f.romother districts of the same State but from other adjoiningStates. Therc is, of course, nothing inherently undesirable incross movement of persons from different parts of the coun_try. Indeed, such movement may be a positive factor makingfor

-gleater national integration. But in a society with a peiirasive scarcity of resources and opportunities, the intrusion ofoutsiders, particularly if they seem to monopolise more lucra-tive employment or income opportunities, can be a maiorsource of tension.


At the same time it should.be recognised that an essentialcondition for the development df viable new industrial cen-tres is that special efforts are needed for equipping the localpopulation for transformation i ito an industrial workforce.An equally important requirement is to identifv potentialentrepreneurial talent and to provide opportunities ofmeaningful training which can end the initial rrainingperiod of the selected applicants who are given a blueprint ofthe industry they want to establish. By and large, entrePreneurs would either be people who already have an indus-trial background having worked at some level in a

manufacturing industry or having managed an industry whichis not very dissimilar to the one proposed to be set up. Themain source of entrepreneurship is traditional tradingfamilies who have an awareness of marketing possibilitiesand have, or can have, contact$ with other families whichmay be in a position to provide flinance. The third category ofpotential entrepreneurs-and one which is a favourite withpoliticians of all hues-is the technician and the professional.This last category has an advantnge of knowtedge of technologr; but experience shows that unless there is an. adequate

and continuing support to this category of potential entrcPrtrfeurs, especially in the initial stages and in the form ofexpentise in other disciplines $iuch as finance, marketingand industrial relations, the technocrat-entrepreneur oftenenCls up as a losen. Entreprenetrship is a separate and dis-

tinct quality and an attitude of mind lt can be refined anddeveloped;. and over a period of time through a suitableneorientation of education and social values, a larger pool ofentrepreneurship can be created. It should be rdcognised,however, that except to a limited extent entrepreneurs can-

not be created by making thern undergo training. llhis, inturn, means that the supply of entrepreneurial talent andinitiative will be somewhat uneven and varying from one partof the country to another and sornetimes may be concentratedin a particular location even within a State.

If this argument is accepted lwo conclusions follow. First,

as a result of special efforts and with the available localentrepreneurship in the backwand aneas, a certain amount ofdevelopment of srnall industries, mainly based on local rart'

negulation and Development ZZ7

material, may be possible. F'or this purpose a certarn level ofinfrastructural development such as the availabilitv of port er,water or essential inputs, developed land and industrialestates or sheds fbr small industries would be necessar,-.Second, in order to attract large and medium-scale industriesgrowth centles which are lo be the.focal points for the back-ward areas, local entrepreneurship cannot be counted upon.In consequence, for large and medium-scale industries, eitherthese will have to be public sector plants or expansion anddiversification of large units presently located elsewhere bothin the public and private sectors. The problem, however,faced by the large and medium industry is that, bv and large,backward areas, by definition, lack adgquate level of infra,-struclural development. For instance, although there may bean integrated grid, the capacity of the transmission systemand the design, and the. distribution system at different cen-tres varies with demand; and because of the svstem,s con-figulation and low despatch principles are such thatbackward regions often bear a disproportionate share ol fluc-tuations and shortages including greater frequenc,v ofunscheduled powercuts. 'I'he link \,vith the existing regionalor national network of roads and railways may be missingand would need sonre initial investment. Even more important for large and medium-scale industries is the need forquick and dependable communication link with other parts ofthe country and in particular metropolitan areas and also insome cases link with the oulside world. A good telecom-munication netn'ork is often a precondition for attractingindustry t o backr,r,ard regions some distance away from theestablished inclustri:rl or rltetropolitan centres.

l'he prlrble m, lrowever, arises because in most cases invest-ment in inlrastructure of this kincl-link with national net-n ork ol roads or railwavs, telecomrnunications, upgradationol pon'er availabilit,v, development ol other lacilities such asdeveloped land, and water supply, neerled by industry-tendsto folk.rvv dentand rather than lea<i it. While this is Io someextent unavoiclable, especiallv in the coritext of general shor-tage ot resoufces/ it is to [:e recognised that adequate al]d;timeh, investrnent in building up such infrastructure can bernuch more effective in attracting lar-ge and medium-scale

228 DTSPERSAL OF INDUSTRY

industry to backward areas and may, rndeed, turn out to be a

more cost effective method than having to offer altc'rnativeincentives by way of either subsidies or tax concessions'

One of the purposes of initiating development in backwardareas is to reduce, at least to some extent the concentration ofindustries in the traditional, large unban or metropolitan cen-

tres. However, a certain degree of concentration is obviously

inevitable in the location of indtlstrial activity. Apart from the

fact that infrastructural facilities or locational advantages interms of raw material and market will not be evenly dis-

tributed throughout the counhy, there is the important con-

sideration of the existence of external economies associated

with agglomeration of industriQs. In the absence of special

-uu"rl""" or policy initiatives, therefore, industry would tend

to go to urban areas which are plready established industrial

centres. While this preference which arises from the existerrce

of external economies cannot be ignored it is necessary, both

from the economic as well as social point of view, to have

wider dispersal of industry. At the same time it would be

urfealistic to think in terms of dotting the countryside withlarge and medium-scale units. This would either entail very

larle infiastructunal costs or would make the industries

opJrate in adverse conditions rresulting in lower efficiencies

o" high"" costs. If weaning away industrial development from

bein!. concentrated in existing urban areas is to- succeed' it*o,rld bt nece$sary to considet creating a limited number ofviable growth centres in backward regions These' in due

course, can become the focal points for further growth and

the ripple effects of such viable industrial locations would

tend to be far more significanl than the impact of isolated

large proiects.6f

'"o.,."", the correlation between industrialisation and

urbanisation is high not merely because manufacturing indus-

try and consequently employment tend to be in large towns ltcin also be the other way round, that is when industry comes

to a small town it can, in many casesi grow very rapidly' For

instance, during the first decade of the operation of Tata Iron

and Steel plant in Jamshedpur the population of the town

grew ten-f;ld from a mere 5,000 to begin with' More recently'

ih. g.o*th of Rourkela, ourgal]ur, or Bhilai also points to the


same lesson. Apart from this type of unbanisatron associatedwith the steel towns, industrial growth can take the form ofeither new industrial areas near metropolitan towns growingat a very fast rate or new areas transforming themselves intolarge towns within a short period. Examples of the formertype are to be seen in the growth of Avadi, near Madras,which between 1961 and 1971 grew from a populartion ofabout 13,000 to a population of 77,OOO; or Thane w\ich had anincrease in population of 7o per cent in the same decade orDombivali, near Thane which tripled its population between1960 ancl 1970. Examples of the latter type are to be seen inthe case of Kerkend near Dhanbad in Bihar, which in the six-ties grew into a town of 51,000 population although at the1961 Census it had a total population of 6,000. Similarly, indus-trial concentration at Pimpri-Chinchwad near Pune resultedin tripling <,rf the original population of 28,000 in a decade.

All these instances underline the fact that even a successfulpolicy of wider disp€rsal of industry would not eliminate theneed for a conscious urbanlsation policy. What dispersal byitself would help to do is only to minimise the pressure onsome of the existing urban based industrial centres and tend tomake more manageable the prqblems of major urban centresmany of which are bursting at the seams. Unless a consciouseffort is made to ensure that the plan for industrialisation andurbanisation proceeds simultaneously some of the distressingfeatures of unplanned urbanisation will soon emerge-andindeed, are already emerging in many of the new industrialcentres.


l. lfrdra, Pl.urrrirrg alrd Development Depat'tment, Statentent ofGovernnTent'sPoltcv, 1945.llncluded in Appendix Ll

23O DISPERSAL OF INDUSTRY

2. lndustrial Policy Resolution, 1956. No. 91/CF14E, 30 April 1956. 1,1

Guideliibs for Industnes, New Delhi: Indian Investment Centrc, 1982

l,art L seciion ll. pp.6-10.

3. India, Planning Commission, neport dn Industrial Dispersal Prepared bythe Natiorral Committee on the l)evelopment of Backward '\reas, B.Sivara-man, Chair-rnan. Delhi: Controllef of PUblications, 19a1.

4. Ibid., p. 4.

5. lbid., p..+, Table 2.?.,i lbid., p.6, l'ahle 2.4.

7. Tata SeNices Ltd., Department ol l-fjonomics and Statistics, Slatisficaloutline oJ India. Bomba!', 1982, p. 75, 'I'able 7I.

s. lbid., l9lJ0 edn., p. 76, I able 72.

9. ,bid., 1982 edn., p. 81, I able 78.

10. tndiir, Planning Commission, lleport Qn Industrial lli.spersal. Prepared b)llle National Committee on the Development of Backward Areas, B.Sivaraman, Chairman. Delhi: Contrcller of pub'licatiorrs, l9sl (iltapter4, pp. l1

11. lbrd., p. 20, Table 4.r.12. Ibid., p. 22, fable 4.3. Capital Inveslnrent Subsidy Scheme as an Instru-

ment for Industrialization of Backward Areas-An Expository View by AjayDua. Paper read at seminai' ou tDduslrial Developmettt of BackwardAreas, organised by the Industfial Development Rank of India, 16-17 May1960.

13. See note 10 above, p. 21, I'able 4.2.

74. neport on Development sanking inDevelopmenl Bank of India, t982, p. ;.

15. Ibrd., pp. 14-15.

16. Ibid., p. 1s.

17. Ibid-, p. 76.18. Ibid., p. 8.

India 1gE0-81,Bornbay : Industrial

19. The Industries (Development and RegulationlGuidelines for Industries. New Delhi: lndianPart I Section III, pp. 1-38, Section 11.

20. See note 10 above, pp. 6-9.

21. Reply by the Minister of Industry to unstared question No a747 ' daled' 25

April 1984 during the question Hour, in tarliament.The reply contains a

statement showing Statewise break-up of industrial licences between 1969

lo 19E3. Economic Trends, 7 May 19641 p. 29.

22. Statement rcgarding No-industry-distrlcts made by the Minister of Industr]in April 19a3. see Press Note 4/1/E1-rBAD(vol. III), Government of India,Ministry of Industry, Department of trldustrial Develppment, 27 April 1S83.

23. rbid.a.rbkl.2s. rbid.26. S€e note 10 above.27. Ibid., p€,ta7.6, p.35.2a- Ibid.,'paras 7.9 ro7.72. p.35,

Act, 1951, 65 0f 1951. InInvestment Centre, 1982,

Pricing Policy for Industry

Therc has beer4 over the years, a considerable amount of fitzzi-ness and confusion about an appropriate pricrng policy in theIndian context. This is true not only of the pricing policy forthe public sector but also pricing of important commoditiesproduced solely or largely in the private sector. T'he former isrelated to the lack of clarity with regard to the operativeguidelines for the public sector industry; and in particular,the role of surpluses in the context of development. The lat-ter, by and large, has arisen mainly out of the concern with'fair pricingi; and until about a decade ago the main thrust ofpolicy in this regard was to keep, through administrative con-trols, prices of important industrial products at a level lowerthan they would otherwise be. Price controls in one form oranother have been fairly extensive and the methodolo6y usedfor determining the prices to be paid to the producer hasoften been strongly biased in favour of protecting the interest()l tl)c c()nsullref in the short run l)ut lras generallf igno|ed llislong-term interest.

Following independence the discussiqn about the pricepolicy and the role of controls has been in the context of thestresses and strains. which were inherent in the process of

232 PRICING FOLICY FOR INDUSTRY

planned development and were, on occasions, aggravated byspecial factors such as droughtg, wars, or inflationary pre-rsures arising from internal ahd,/or external factors. Forinstance, at the time of the First Plan, the justification of con-trnls was that 'the conditions for a smooth functioning of anunregulated economy do not exibt at present and the socialresponsibilities which faII upon a modern State iust cannot bedischarged without the aid of cgrntrols.'1 The main emphasis,of course, at that point of time was on the regulation of food-grains prices, but the approach ttr the pricing policy and therole of controls was based upon the need to control infla-tionary tendencies and for this purpose 'great caution...\iasnecessary in conceding demands for price increases.,2

By the Second Plan period, the argument no longer wasthat the prevailing circumstances made price controlsnecessary. The justificalion was that in a developing economy

The basic trend of governmerttal operations in the fiscaland monetary field is inevitablll expansionist. Generation ofnew demand somewhat ahead of supplies is a part of thestrategy of development.... There is always a certain lagbetween creation of new incomes and the increase in avail-able supplies on which they can be spent.... A measure ofrisk has to be taken. This means that there must be corres-ponding preparedness to adopt physical conlrols andallocations as necessary.... If controls are administrativelycumbrous and may act as disincentives, lack of them it hasto be remembered, may create inequalities and hardshipsto the prejudice, especially/ of classes that need protectionmos[. r

This, in essence, was the logic arird the rationale of controlsduring the sixties and the seventles. The Second Plan Docu-ment further emphasised that whitle controls on essential con-sumption could not be ruled out in particular situations,'these controls should not be regarded as sufficient by them-selves, and their imposition should be accompanied bymeasures simultaneously to increase supplies.'1

By the early sixties persistent dnd occasional high rates olinflation had come to be accepted as a fact of life. The Third


Plan Document, for instance, admits that 'the possibilities ofsignificant-and even disturbing-price rises cannot be

entirely eliminated.'5 'I'here were several reasons fbr this suchas unceftainty witlr regard to nronsoons and imbalances inthe Plan implementation ol rates of growth in various sectonswhich are almosl certain to appear from time to time. ThePlan Document also concedes that'the various restraints onconsumption implicit in the Plan mav not always operate tothe lull extent,'6 and, therefore, certain upward pressures onprices are implicit in development . and these have to beaccepted as the basis for formulating policies and evolvingmechanisms for restrairring price rises.

It is in this context that official Statements of Policy overthe last tr,t'entlr-five years-the Plan Documents, the annualEconomic Surveys or statements of Government spokesmen-have consistently referred to the impofiance of fiscal andmonetary disciplines. In practice, however, these disciplinesparticularly the necessary fiscal discipline was lacking orcould not be enforced. This, in turn, meant that the burden onother instruments of policy was greater. The logic of pricecontrols and fiscal allocalions was spelt out in the Third PlanDocument in the following terms :

Without adequate fiscal and monetar.v disctplines otherregulatory measures cannot have the desired effect. But fis-cal and monetary policies bv themselves may not also suf-fice lo secure the right relationship between various prices orto prevent undue hardship to low ano fixed rncome groups.It may be necessary then to have physical allocations anddirect conlrols in certain seclors.;

'In otner words, the rore of price contr-ols and other

regulations was not merely to reduce the distortions whichlvould arise in a period of excess demand, but to supplementfiscal and monetary disciplincs with a view to 'secure [thel

right relationship between various prices, and to preventundue hardship to low and fixed income groups.' It is in thiscontext that the Government resorted to controls on prices

and allocations in respect of several commodities such as

steel, cement, sugar, coal and also a wide range of industrial

234 PRICING POLICY FOR INDUSTRY

products ranging from passenger vehicles to writing anS printing paper.

By the time the Fourth Plan was under preparation thepressure on prices had become a $ource of concern; and policy-makers, therefore, placed renewed emphasis on adequatemobilisation of internal resource$ and on the need to exercisediscipline in incurring expenditure as a means for avoiding{leneral pressure on prices. At the same time there was agrowing awareness

A distinction...should be ma{e between price increaseswhich are likely to have a curnulative and wide impact onthe economy and those which are of a peripheral nature ....The main emphasis in price policy should be to ensure thatspiralling of costs, prices and money incomes throughmutual interaction is avoided.E

Apart fiom maintaining prices of essential consumer goodslike foodgrains and edible oils, it was necessary to rlesignspecific measures for regulating the prices of industrial rawmaterials which had a significant bearing on the general coststructure and the econorny. For the prices and distribution ofthese materials, regulations have to be operated with a two-fbld purpose. First, with a view to ensuring economy in theiruse and second, preventing an undue increase in the prices ofcommodities produced from these raw materials. It r.vas alsorecognised that past experience of price controls and alloca-tions had not been satisfactori; and in the light of thisexperience 'the entire structui'e of controls has to bereorganized so that the obiectives to be serwed by it are clearand the administration purposive.'s

It was not until the late seventies" rhat the concern withprice controls and physical allochtions as methods for coun-tering inflationary pressures on trlrices were given secondary

*About this time, the question of setting rlp a body to advise the covetnment

on industrial costs and prices on a contiiuing basis was under Government

consideration. The need for such a body arose especially after the Tariff Com-

mission was wound up. Accordin€ily, b)' a fesolution dated 15 January 1970, the

Government set up a Bureau of Industrial Costs and Prices. The Resolution is

included in Appendlx V.

negulation and DeveloPmenl 235

irnportance. For instance, the Fifth Plan Document, unlikethe earlier Plan Documents, had little to say about the role ofprice controls and allocations of raw rnaterials; instead the

emphasis was on earning a higher rate of return from publicinvestment, higher rates of dilect taxes alrd a differential systemof excise duties, and widening the tax base by introducing a

direct tax on agricultural products.By the time the Sixtl-r Plan was formulated and with the

change in Government, the approach to prices emphasisedmore the macrorequiremnts of a reasonable balance betweenag$€gate demand and supply through a combination of mon-etary policies and also a steady increase in the supply of goods

of essential mass consumption. On the question of price ofmanufactured goods the Plan l)ocument very specifically men-tions that price fixation 'should be limited to a few com-modities where this is clearly required for maintaining or,'erallprice stability.'l0 A fair return on investment was alsomentioned-for the firist time-as an important determinant inadministered priceg whether for industrial goods or for ser'vices. This approach was clearly reflected in the Statement onIndustrial Policy of the Government issued in December 1977.

The Statement begins with the proposition :

There has been a tendency to regulate prices of industrialproducts rvhich were vital to the needs of development in amanner which made their production less attractive than

pro<luction catering to the needs of the elite' It will be the

policy of Government to ensu|e that in cases where there is

price control, the controlled prices will include an ade-

quate return to the investor.rr

Thus, over a period of two decacles or more, the degree of

reliance o., p"i". controls as an instrument of policy has under'

gone significant changes; and in cases where price controls were

io be applied, there has been a growing recognition that keeping

priceslow through price controls is often not in the best interests

of the economy.a viable policy with regard to the pricing of industrial pro-

ducts is possible only in the context of an effective policy fbrensuring adequate supplies, al reasonable prices, trf fbod6pains


and otl)er esscntial fbod ar.ticles like vegetabe oils. In letrcspect, it n,ould appear.tblt the inability ro t.cslrilitr prices oflbodgrarns and other agricultulal products including rawmaterials for major industries like cotton and jute textiles,sugar and vanaspati tended to make Government more keenon controlling prices of industrial products, often througharbitrary price fixation. Apart from the impacl of such pricefixation on the profitability and gfowth of output in respect ofitems which were under price control, an importanr conse_quence was the need to evolve E system of allocations and.quotas. After all, prices have to be controlled because in theabsence of such controls the level of prices in the market willtend to be higher than what is thought to be ,reasonable,. Con-trolled prices, therefore, have to he lower than the prevailingmarket prices. This, in turn, wopld imply that unless priceelasticity of demand for that item was negligible, lower levelsof controlled prices would aggra\iate the imbalance betweendemand atrd supply. An excess of demand in relation lo theavailable supply at a given controUed price can only be takencare of by a system of rationing which deternines the quan_tity available to each user. A systpm of rationing is relativelyeasier to operate when all users qT that item require the oro-duct in tnore or less predetermined quantities which do'notvary greatly from one user to another, e.g., foodgrains. Forrationing to be administrarively feasible the product shouldhave certain economic characteristics, namely, the productshould be homogenous; there shoiuld be few, if any, differen-ces in quality or specifications; the requirement of that itemshould be delerminable and not widely variable between con-suming units or in respect of the same consuming unit fromtime to time. Only when these product characteristics aresatisfied is it possible to evolve a workable system of pricecontroi and rationing.

Even in such cases, however, unless the controlled pricereflecls true economic cost that provides for not only inputcosts but also leaves adequate ritargin of profit to attractadditional investment leading to increased production eitherfrorn existing manufacturers or new entrants, over a period,the imbalance betr,veen effective flemand and available supply r.vill tend to rviden. 'lhe widetr the gap, the higher the

Regulation anrt Development 237

likelihood that price controls would lead to blackmarketingand the administrative allocations system would be underincreasing pressure.

India's experience of price contrnls over the last twenty-fiveyears contains many lessons, some of which have already beenlearnt, though at considerable cost to the economy. Forinstance, the earlier approach to price controls waE based orthe assulrnption that it is economically necessary and adminisbatively f'easible to operate an extensive and integrated sys

tem of controls consisting of price controls, quantitativeallocations, import restnictions and quotas for importers and,

also the use of the fiscal mechanism. There Was little, if any,

attempt .to view price controls and rationing as temporarydevices of a transitional character until the demand and supply were in better balance. In fact, as pointed out earlier, therealisation (during the mid-sixties) that fiscal discipline couldnot be observed or enforced put a premium on the use ofprice controls and physical allocations. As experience hasshown, the attempt to sul)stitute (or even supplement exceptto a marginal extent) fiscal and monetary disciplines by physical controls and allocations only led to considerable distortiorin the forn of arbit|ary allocations, erosion of political o

administrative will to reduce the area over which controls areexercised and an enormous increase in blackmarketing, blackmoney and money power.

No doubt, as compared to the sixties the extent and rigourof controls over itrdustrial prices have beeu gneatly reduced.But even now, it is not clear whether all the important lessonsof the past have been taken into account. A classic example ofthis is the history of working ol price controls in the drugsand pharmaceuticals induslry. 'l'he Drugs (Control of Prices)

Order of 1963 as amended liom time to time, virtuallyrequires the administrative ministry to announce and enforceprices of the entire range of basic dnugs and formulations.The extent of the task is best seen in terms of the number offormulations-around 25,000 at the last count-and seventy'five basic drugs (excluding imported drugs) which aremanufactured by over 5,000 units, of these 130 units are in theorganised sector which account for the bulk of production. Tocomplicate lrlatters further unlike other industrial products


which are purchased directly by the consumer, induslrial orindividual (though he may be influenced by the publicity andadvertising), the formulations arg, in the main, sold throughthe intermediary of the prescribiyrg doctors or are bought inbulk by institutions such as hoopitals, nursing homes andmore recently by large organisations like the Employees StateInsurance Corporation or the Central Government HealthScheme. It should also be noted. ttrat production costs of a for-mulation will vany depending ,lp.,n u change in the formulaand the price of any of the qrumerous inputs includingsweeteners, syrups or solvents which are of a non-pharmaceutical character. In shoft, what the Drug Price Con-trol Order seeks to do is to co4trol the retail prices to becharged uniformly in all parts of thp counlrv, for prodr.ictswhose consumplion, to a substarttial extent, depends not onprices, but on the medical practitionels preferences, and theinput costs of which are, in.varyilng degrees, uncontrolled. Alarge number of formulations which are price controlled usemole than one basic drug or active ingredient; and the changein the price of one on more basic drugs involves a conselluen-tial change in prices, in varying degrees, of literally hundredsof formulations.

The consequence, of course, is that there is an inevitablelag between cost escalations and price adjustments, the for-mer remaining always a sqep or two ahead particularly in aninflationary period. It is not that the ir-rherent problems ofprice controls of this nature have not been recognised. Fromtime to time, Committees, Working Groups and more recentlythe National Council of Applied Economic Researchl2 haveaddressed themselves to these pnoblems and have come up withsuggestions ol solutions. But there has been insufficientwillingness to address oneself to tlie more fundamental issue,namely, what is it that one wants to achieve as a result ofcontrol ?

In an industry like drugs and pharmaceuticals there areseveral issues, some of them emolive, which agifate people,sminds and which influence public policies. There is, forinstance, the question of 'Multinationals, and their dominancein the pharmaceuticals industry. The underlying assumptionis that the hold of multinatlbnals would be reduced if they,

negulation and Development Z3g

find that their operations in India are not as plofitable as theywould wish them to be. There is also the related question ofdistrust and scepticism about the pharmaceutical effective-ness of specific formulations. It is argued and with some

iustification- that the high pressure salesmanship resorted toby drug companies thlough their medical representatives isintended to induce doctors to prescribe lheir brand-name for-mulations, although there is no scientific evidence of theirbeing superior to other formulations available at much lowerprices. There is no doubt that there is a great deal lvhichneeds to be rectified in terms of the drugs ancl phar-maceuticals inrlustrys commitment to its social respon-sibilities, particularly in a poor country wlrere modernallopathic meclicine is still the preserve of a l'ew. It is alsorrndoubtedly true that despite the seemingly rigorotrs pricecontrols, the level of protilability of the drugs industrv hasuntil recently been significantly highel than thal of manyother industries meeting the essential needs of the popula-tion. The question, however, is not whether it is necessary toenforce some orderliness in the production pattern andtherapeutic. effectiveness of the products of the dn-rgs indus-try; but whether, and if so to what extent, a system of pricecontrols is likely to achieve this goal. It would appear that,for various reasons, an excessive degree of importance hasbeen attached to the role of price controls in the drugs andpharmaceuticals industry and tl-reir likely contribulion interms of public welfare. If it is accepted that there is a directproportionality between the availability of medicines andpublic welfare it is clear that any arrangertent which reduces,over time, the availability of medicines is counter-productivein terms of public interest. An elaborate ancl cumbrous systerr,of price controls tends to put a premium on the prices atwhich a medicine is available as distinct from the readyavailability of the medicines when needed. Thus, the emphasison the price aspect becomes even more irrelevant when it isrecognised that unlike other industrial products the end priceof a medicine (or an injection) constitutes only a small part ofthe total cost to the patient. This is obviously true in case ofprivate patients buying medicines on the basis of their doc-tors' prescriptrons; bllt it is also tt'ue in r:ase ol pultlic

Z4O PNICING POLICY FOR INDUSTRY

hospitals catering to the needs ol the less well-todo fbe cost ofmedicines, etc., is necessarilli only a fraction of the total costof the facility' plovided in health services organised as pdrt ofthe social securitv svstem" 'l'he major elements of costs consistof land and buildings, doctors' salaries and medicalequipmenl.

Against this background, one of the app|oaches used fronttime to time is to be more meticulous in the fixation of pricesof what ale called 'life-saving drtrgs' and to keep these prir.:esas low as possible; and to permit somewhat mol€ generousmark-ups on dinect costs in the case of non-prescription drugsand formulations. The logic underlyinf{ this is that, by definitron, the latter are consumed by l)etter off sections of the com-mulrity who can, therefore, all'ord to pa1,. The limitation ofthis approach, however, is that the profitability of a companywill thus depend upon horv mutch it procluces and sells (orcan produce and sell) of the sorcalled 'less essential drugs,such as commonl_v used household remedies for aches andpains or vitamin preparations. In other words, a pharmaceuti-cal manul'acturer who produces an anti-leprosy drug or adr-ug for treatment in cardiac cases would have to be contentwith a lower level of prol)tability than sorneone engaged inthe production of vitamin capsules or tonics of dubious value.Further, there is somethil)g spurious about the concept of'lifesaving drugs' the prices of whLich need to be kept as low aspossible. By definition, in terns of the number of times anindividual uses them or the cost gf the drug as a propbrtion olthe total cost ot treatment offered, excessive concern with theprice of life-saving drugs appears to be ill-founded..If any-thing, the crucial consideration in respect of such drugs shouldbe their availabilily and their therapeutic effectiveness ratherthan their price. On the other hand, the household remedies,vitamins, and tonics which are very widely prescribed or usedextensively have probably, a greater impact in terms of theconsumer budget. One could argue that if benefit to the con-srimer is to be the criteiion, it is these drugs rather tHan thrlifesaving drugs which need to be controlled.

The trutn, however, is that the approach to pricing policyin respect of the drugs and pharmaceuticals industry hasbeen coloured b1, the mistaken nbtion that the ills and short-

Eegulation and Development Z4l

comings-and there are many-of this industry can, and shouldbe, tackled through a rigorous system of price controls. Onlyrecently there has been an increasing awareness of the impor-tance of epsuling adherence to the national pharmacopoeia,avoidance of unnecessary drugs, or excess dosages of vita-mins, etc., which have no therapeutic l,alue and are wastefulin terms of resources. Similarly, a shill in emphasis awayfrom controls over prices, the insistence on siandards,therapeutic effectiveness and ready availabiliry is slill notcommon.

Finallv, if the concern is about 'excessive profitability'-andthat too in an industry' r,vhich appears to thrive on people,sillnessess the answer could well be in terms of a post-fac'toexamination of pnofitability of individual units; and anarrangement by which they are required to readiust theirprices so as to bring their operations within the prolitabilitynorms worked out for the industry as a whole. The experienceof the working of the drug price controls over the last twodecades illustrates how a lack of clarity regarding the objec-tives to be achieved and also an inadequate recognition of thespecial characteristics of the product can resu.lt in a cumbrouscontrol system which fails to senve the purpose for which theconlrol was first introduced.

Another industry where a system of rigonous price controlshas been in existence for a long time is cement. More thanlorty years ago, in 7542 when cement was brought under pricecontrol, the Government of India fixecl the prices admissibleto cenent manufacturers on a cosl-plus basis. In 1946 the priceof cement was again fixed on the basis of cost of productionof the Associated Cement Company units as it was the singlelargest group producing cement in the country. The fixing ofprices by executive orders continued till 1952, when the TariffCommission was requested to suggest a fair ex-works pricestfucture to cement proclucing units for the first time in 19s3.Following this, the Tar.iff Commission carried out cost studiesin 1958, 1961 and 1964; and in all these enquiries because ofthe varialions in working conditions and homogeneity in prr>cessing technolo5y, the _number of labourers employed, the ageof the plants, the availability and transportation costs of rawmatefials, etc., nratrulbcturing costs of the units. differed

considembly. Accordingly, lhe Tat'ifr Commission recomrnended

separate reteution prices to various producers in its reports ol'1953, 1958 and 1961, which were accepted by the Governmentof India.

Although, from time to tlme, the Government had

emphasised that a system of differential prices based on

individual costs was not conducive to efficiency and that asystem of uniform prices for the industry as a whole wouldhave the effect of compelling the high cost units to seek

economies and provide a measure of reward to those unitswho were able to achieve therrl, Government continued tofollow the system of differentlal prices till 1969, when a

uniform price structure was introduced for the first time'Between 1961 and 1969 when the retention prices fixed for

the industry were different for low, medium and high cost

.A2 PRTCING FOLICY FOR INDUSTRY

units,. the price range variedworks per tonne of nakedRs.90.50 to Rs.96 in 1968. In

een Rs. 69.50 to Rs.75 ex-

ent in 1961 and between1969 the llrice was fixed at

Rs. 100, and successive Price raised the price toRs. 161.12 by october 1977 the point of view of the con-

sumer, however, it is not so mu the retenlion price but the

FOR destination price and for the smaller consumer, the retailprice of packed cement which is important The FOR price

comprises retention price, cential excise duty, packing costs'

lincidentals and uniform freight charges' The retail price oflcement includes, in addition to FOR price, Central and State

,sales.tax and octroi and additional incidental expenses As a

result of the freight-pooling arrangements, the FOR price ot

cement is uniform throughout the country; but the retail priceivaries depending upon the ratds of sales-tax' octroi' etc For'example, during 1983 the retention price payable to cement

-urrrrfu"t,l"r"" was Rs. 335 per tonne and the FoR destination

price of levy cement rt'as in the range of Rs 653 to Rs' 787 per

tonne.Sevenal issues are relevant in an examination of the price

control in the case of cement First, cement has been under

price control because it is an essential commodity and since

ih" fifti"" with the increasing emphasis on planned invest-

ment, the Goverqment and pullllic sector entilies al€ a sul)stan-

tial t:tlttstttttt:t. 01' cenrtjlll. ,l'lte |)l.ice ()Ollll.()l ()|1 (j(]l.l.l(]llt,

Regulation and [hvelopment 2qz

tberufbre, was also accompanied by a distr.ibution svstem basedon allocati<rns. The various (;overnnrent departnrents in the Statesand the Centre, large and small-scale industries, public sectorundertakings and institutional bu-vers constituted the majorconsumers of cement. The other category of cement user is thegeneral public whose requirements are mainly for reparrs ornew coostr.uclion of houses arrd although these may add up toa large number they are individually small. Based on theantir;ipated t.equirements ol the Government departments inthe States and the Cenlre atrd the other consumers in thereserved category, the Cement Controller determines theallocations and directs the allocation of cement to the prioritycategories. Since 1981 when partial decontrol of the price ofcement was introduced, the categories eligible for ailocationsof levy cement, i.e., approximately twGthirds of the prcduc_tion of each unit which is price controlled, were nedefinedand limited to the requirements of irrigation and power, otherpublic sector uses includin6; clefence, small-scale lnd ustry andmass housing conlblnring to certain stanclards of austeriiv.Fol the I'esl, cenlent vvas to be available in the li,ee market atprices r.vhich r.vould be tleterntinerl on the basis of market for-ces of dernand and suppl-v.

An important feature of the price control in the case ofcement is the concept of uniform FOR price based on freightequalisation. Thus, the uniform FOR price contains the fre_determined freight element which can be notionally reim_bursed to the manufacturer; and any producer whos.e actualaverage freight costs in respect of ler.y cement sold under theCement Controllels directions are less than this notional element'hakes payment into the.freight-pool, whilst the freight-pool pays out to the manufacturer whose actual freight costsare higher. Since the freight equalisation scheme offersuniform prices to consumers located in different parts of thecountry, it would normally result in increasing the dveragehaulage. This tendency is further. strengthened, when as inthe case of ceinent thg reserves of the essential raw material,namely, Iimestone are not evenly distributed throughout thecountry. One of the consequences of freight equalisation is toput a premium on locations which are closer to raw materialsources rather than to the markets. In practice, this has meant


that sites in South and West India have been .preferredalthough both the North and the East have been large and

growing consumers of cement. For instance, between 1971

and 1976 the consumption of cement in the North and East

regions rose from 44.7 per cent of the total Io 4g'2 per cent or

in absolute terms f'rom 6.4 million tonnes to 8'7 million ton-

nes. During the same period the surplus production ovef con-

sumption in the West and South regions increased from 2'2

milli,on tonnes to 3.9 million tonnes. In other words' by 1976

when the demand for cement was more or less equally

divided between the northern and eastern regions 149 per

cent) and the western and southern regions (51 per cent)' the

northern a.td eastern regions together produced only 31 per

cent, that is, only a little over 60 per cent of their requil€ments'

Another indicator of the impac[ of freight equalisation with

regard to cement is that the avenage,lead distance rvhich was

377 kilometres in 1960-61 rose to 468 kilometres by 1966-67 and

further to 635 kilometrcs by 1.973-7 4'r3

The important point to note is that while the impact ol

freight equalisation in respect of cement is no^t very. significant

e*"Jpt f- very long leads, its effect on profitability is quite

"ig.rifi"u.r, ir-t it-t" c."" of units located in the cement surplus

aias of the South and West Arl official investigation into the

consequences of freight policy showed that -the -reduction

in

construction costs waE only slight for leads of 1'000 kilometres'

even if freight equalisation of both steel and cement was

taken into J""or.ttt; and even fol a lead of more than 2'000

kilometres, the cbst of construction (at 1974 prices) would be

affected to the extent of only 6 per cent' As against this' the

disincentive to the producer in choosing a location which may

be slightly inferior in terms of delivered costs of inputs includ-

ing lilestone and grpsum, etc , was quite significant' when

he could not compensate this disadvantage by exploiting the

cost advantage ofihe nearness to the mafket Anolher conse-

quence of freight-pooling has b€en to discourage.the exploita-

tion of limited or lower quality limestone deposits in specific

locations which would be closer to the consumrng cenlres'

but which, given ihe equalised freight element in the FOR

orices, are not financially attraQtive to the producer'

A consequence of the pricd confol on cement was that it

Regulation and. Development As

tended to discourage or dampen fresh investment. In theearlier years of the operation of price control on cement, newentrants were able to overcome or, at least, to reduce substan-tially the disadvantages of higher capital costs by improvementsin technology and economies of scale. But by the seventies,the substantial increases in capital cosls per ton of oulpul as aresult of the increase in prices of equipment, civil construc-tion, etc., placed the new unit at a considerable disadvantage,and this could only be partially compensated by economies invariable costs. In an industry in which more than 50 per centof the capacity as on 1 January lgZZ was more than twentyyears old and nearly three-fourths of the capacity was morethan ten years olci, the weighted average costs in respect ofservicing of capital at charge tended to be much lower thanwhat was needed for a new unit. It was against this back-ground that the Government considered the question of ahigher retention price for new units. In its Report on CementPrices in 't974, the Tariff Commission had emphasised theneed for 'differential treatment in the matter of returns, fornew units, but had ended up with the recommendation which,in effect, meant an additional price of Rs. 10 per tonne tounits going into production after September 1923; and in r€epect of expansion, the extra production was to receive anaddition ofRs. 5 per tonne only. For new uniis going into preduction during the pricing period, that is, up to 1929, theadditional price was to be Rs. ZS per tonne.

In 1976 Government evolved a formula for fixing prices incase of new units which constituted a major departure frompast practice. First, instead of a rate of return on capitalemployed, the basis of price fixation was to be a ,net post-taxreturn on equity, that is, on the shareholders, funds includingreserves. For purposes of calculating post_tax returns, thestandard rate of tax was to be taken into account so that anyreduction in effective tax rates accruing to a unit as a result ofspecific tax incentives such as investment allowance, etc.,would be to the advantage of the investor. Second, in case ofadditional capacity it was decided that the capital cost pertonne of output was to be calculated uniformly on the basii ofRs. 650 per annual tonne of capacity irrespective of whether itwas expansion of an existing facility or a new production


facility. This had two consequences. Thene was a built-inincentive lbl opting lbr expansion of capat:itv w'ltetr:ver fi:asi

ible, because ordinarily, capital costs per annual tonne ofcapacity in respect of expansio4 would be lower than for'anew unit. Further, a fixation of a specific figure meant thatanyone who was able to set up 4 new capacity at lower costs

pen tonne either because of scalel improved technology or bet-

ter management would, to that extent, benefit. By the same

reckoning units which had capital costs in excess of the

stipulated amount would have lo forego part of the profitsbuilt into the cost formula

The new scheme was announced in 1977, and the test of itsattractiveness was that with thi$ announcement the irlvestorinterest in the additional cement capacity was very high Bet-

ween 1977-80 the additional capacity new units and expan-

sions-for r,vhich letters of intentr/licences were given, was as

much as 1tt million tonnes, that is, nearly 80 per cent of the

capacity existing prior to the ddclaration of the new. policy'

This is in marked contrast to the period between May 196ti to

February 1970 when cement was free from licensing restric-

tions, but continued to remain under the pricing formula ofthe TarifT Commission. The condlusion is inescapable Even iffor reasons of public policy it is ponsirlered necessary to keep

an industry untler price control, mechanisms need to be

devrsed to ensure that new inrlrestment is not discouragedThe mechanisms for ensuripg thls would vary ftom one indus'

tr-ri to another, but for the success of any price control

measure it is of the utmost importance that there is a built-inincentive for augmenting produlction without which a better

balance in demand and supply would not be achieved'

Another maior lesson to be lparnt from the experience ol

the last twenty-five years is that bome deglee of innovativeness

is essential in the formulation and irriplementation of price

restraints/regulation measures. Experience has shown that

statutory price controls (or sta{utory formula for fixation ofprices) resulting in uniform retelltion prices for the producers

is only one of several ways of achieving the desired r-esults;

and in many situations this particu'lal method ol enforcingprice discipline may not be eittier leasible or the most effec-

iive. A case in point is the policy adopted by Government in

Regulation and. Development z4z

1975 with regard to the pricing of commercial vehlcles. Therewas considerable concern about the fairly steep increase inthe prices of commercial vehicles. This, according to themanufacturers, was tEe direct consequence of an increase ininput costs of materials, bought out components and otherinputs including power. Any proposal to fix prices for dif:ferent models and makes of commelcial vehicles would haveentailed enfbrcement of price controls in respect of a verylarge number of components which were produced in small,medium and large.scale sectors, and many of these rt/ere prGduced by hundreds of manufactureps with varidtions in qualityand specifications. This, in turn, would have either requiredfixation of maior input prices such as fen-ous and non-ferrousmetals and special steels, or an escalation fom)ula to take intoconsideration variations in these input prices. In short, if thesystem of price fixation was not to be arbitrary, it would haveto be so comprehensive as to be administratively burden-some, and in practice, would have become extremell'cumbrous.

It was felt that what was required for the industry was a

system of continui4g and effective surveillance over the pric-ing policies of the units rather than flxation of prices per se.

In other words, public interest would be protected even if theproducirig units were given freedom to alter their prices-without prior approval of the Government provided theycould satis'$, tl-re authorities post facto that the changes madewere in conformity with the agreed paranreters fqr determin-ing the list prices. After a great deal of detailed investigationand discussion with the manufacturers, the Government sug-gested alternative criteria such as post-tax rate of return on,capital employed and the manufacturers were given the choiceto opt for one of the alternative formulae- The manufacturerswere required to substantiate their reasons for enhancingtheir prices, and provided these were in conformity with thebroad parameters agreed upon, the manufacturels retainedthe freedom to alter their prices. It was paft of the arrange-ment that in calculating the rates of return on equity or capi.tal employed, these would be related to certain minimumdegree of utilisation of capacity which was close to theoptimal utilisation; and that it would not be permissible for

AE PRICING POLICY FOR INDUSTRY

manufacturers to increase prices, using their monopoly powerto protect profits, even in the event of significantly lower rateof utilisation of capacity. There was, thus, a built-in safeguardthat price increases wefe not regorted to in exercise of themonopoly power enjoyed by particular manufacturing units.

Another interesting and important lesson with regard toprice regulation and control is provided by the experier-rce ofpooled prices, that is, separate retention prices for individualunits or categories of units comprising an industry and auniform pooled price to the consiumer which is made possibleby individual manufacturers making palmenls into or receiving

amounts lrnm a price equalisation account depending uponwhether their netention price is lower (or higher) than thepooled price. Such a system is inevitable if the industry is

highly capital intensiVe or one in which a major input such as

power varies widely from one ulnit to another. The system ofpooling lecomes administratively easier if there is a relativelysmall number of large units whose retention prices can be

detefmined on the basis of detailed cost investigation andeasily adiusted from time to time to take into account any

significant escalations. A typical lnstance bf this is aluminium.The system of pooled prices for aluminium has worked outreasonably well, and more importantly has acted as an assur-

ance to any new producer that he can hope to receit'e a rea-

sonable price which takes &ccouht of his higher capital costs.

An even moPe interesting example of the system of pooledprices is that of fertilisers. Unlike aluminium which is an

industrial raw material, fertilisers are an essential input forthe coirntry's largest activiiy, namely, agriculture Second,

unlike in the case of many other products, it is part of thepublic policy to ensure a rapid increase in the per hectareapplication of fertilisers. Third, the price to be paid by theagriculturist for the fertiliser he uses has to be low enough tomake it attractive for him to increase the usage of fertilisers tothe aglonomically. optimal level. On the other hand, apartfrom being a capital intensive lndustry, the fertiliser indus-

try, especLlly in tndia, faces another special problem. Thefeedstocks for the fertiliser industry in this country includecoal naphtha, fuel oil and natural gas. hices of some of these

tbetlstocks are administered plices, whereas the prices of

flegulation and. DeveloPment 249

others are determined by the iniernational market conditions'Cost var,iation on account of feedstock alone is substantial and

this is further compounded by variations in capital iosts

depending on the age of the plant, the scale and level oftechnologr. The type of technology and the scale of output

also have a significant impact on variable costs. Altogether,

therefore, a free play of market lbrces at this stage of development of the fertiliser industry would adversely affect not onl)the interests of the farmers but also the future growth of the

industry itself.Another important element in fertiliser pricing is the need

to make a distinction between the price to be received by the

fertiliser producers so as to make their operations viable, andthe price to be paid by the farmer taking into account the endprice for his product and also the need to maximise fertiliserusage. The two cannot be identical. Therefore, pricing anddistribution arrangements for fertilisers, apart from involvinga pooling of prices at the manufacturers' level, require a cons-

cious policy decision with regard to the extent of sutrsidisation

of prices to the farmer at a particular point of time.A system of retention prices for individual units (or a logi

cal grouping of units on the basis of feedstock, scale, technofogy, etc.) can, of course, easily degenefate into a system offeather-bedding even the most inefficient producer by ensur-

ing fol him h price which covers all his costs even if they are

inordinately high and, in addition provide him with a marginof profit. In fact, in any system of retention prices or differen-tial prices to units this is a real danger. This problem is tack-

led in the case of the fertiliser industry by defining anadequate rate of return which would be available to any pro-ducer provided he is working at a level of capacity utilisationwhich is technologically feasible; and provided that the con-

sumption norms envisaged in the project report or formingpart of the performance guarantees are being achieved. Therate of return is defined as 'post-tax net return' to the investoron his own funds, i.e., share capital plus free reserves. Inpractice, if allowance is made for all the tax incentives, thisrate of return, in most cases, works out to be a fairly attractivefigure; but this is available to a manufacturer onJy if he isworking at or near utilisable capacity and is not exceeding the


consumption norms in respect of lnputs including water, elec_tdcity, et.' The arrangement, thus, "n..,."" that fo'r an elTicien_

tly, functioning unil, irrespective of the feedstock used orother variations arising fronr the age of the plant, the technelog, used, or the scale of output, etc., there is a fairly attractiverate of return. The problems, in pfactice, have arisen becausein sonre cases or on occasions, the profitabilil-v of the unit wasseriously eroded as a result of faciors beyond its control suchas infrastructural deficiencies resulting in shor-tage of power,or nonavailability of coal. The systerrr of pooled pr.ices of thekind evolved tbr the fertiliser indu6try along rvith ihe adminis_trative mechanism evolved for continuous monitoring of inputcosts and operational experience of the industry in close con_sultation with manufacturers has succeeded in not only prci,tecting the interests of the industry but also of the iarmersand the community as a lvhole.

Anothel varianr of price conttol is the system of dualprice -a lower price fixed fol quantities made availablethrough a svstem of priority distribution as in the case ofcement or for certain.rationed qrrairtities as in the case of sug-ar. The logic underlying dual pricipg as a policy instrument isthat centain specified end-users or limited quantities in respectof all users should be made avallable at prices which arerelated to the cost'of production bqt are not adequate to main-tain a satisfactory level of profitability for fhe industry. Thenon controlled supplies which are sold in the market at pricesdetermined by demand and supply are expected to providethe extra element of profitability. thus, the ler,y prices in thecase of cement was lixed at Rs. il,lO till June 1983, and Rs. 492fiom July to December 198it excludfing l]eight, salesrax, exciseduty, etc., whereas ihe price received by the manufacturer inrespect of free sale quantities during 1983 varied around Rs.1,200 per tonne. Similarly, the ler.y price of sugar was Rs. 300per quintal while the open market Wholesale price varied bet-ween Rs. 380 to Rs. 510 per quintal.

DuaI pnicing is, under certain clncumstances, an attractivealternative; but it is importaltt to recognise that the economiclogic of dual pricing or its social utirlity is dependenr upon cer-tain preconditions being fulfilled. Thus, dual pricing as a

, mechanism can work satisfaqtcjrily only in respect of

Begulation and Development 251

homogeneous commodities with little or no variations iniiuality. and specifications. If the product is not homogeneous,

,that is, if there are a large number of varieties with variationsin production costs and/or market prices on accouut of con-sumer preferences, the operation of dual pricing can be dif-ficult or distorted. Further, two different prices for the sameproduct-{nd this is what dual pricing essentially means*canbe iustified only on the basis of differentiation between end-users atld also on the assulnption that cross-transfers betweenthem would be relatively small. The differentiation becomesrelatively easier under conditions where all the consumerE in.the system are potential users {e.9., sugar) and therefore,certain specified limited quantities can be made available toall of them at a lower price. Consumet's who desire to supple-ment this could meet their needs at open mar*et prices which,by definilion, would be highen. Where this is not the case

.e.9., cement) and'vhere nol all consunlers need the producton a continuous basis, the system of dual pricing would lraveto make a distinction between lhe needs of the end-use|s byspeci$ring certain end-users as deserving of special trealn)ent.Thus, the allocation of levy cement at lower prices is lirtritedto specified end-users such as Public lVorks Depaftment, it'fi-gation proiects, power proiects and railways, to lt,horn pe|iotlicallocations are made on the basis of their estimated t't:quit'e-ments calibrated for the evailability of lew cement. In tlleoly,therefore, these end-users could be allocated palt ol wholt'oltheir requirements at lower prices; and they could lle left li'eeto supplement these allocations by purchase in tlte opcn Irtat'ket.

Those who..are not eligible for lery ce rnent would pulclrasetheir requirements in the open market only.

In practice, however, the allocation system based on theconcept of priority users suffers from a basic limitation. jlheunderlying assumption is that all requirements of the eligibleallattee Ar€ of' equal importance. To illustrate, allocati,on of'oement, lbn $a)1, qtgilways or the lrrigation Department can beused for darir work or construction of a boundary wall (whichcan well be constructed without the use of cement) or otherless important types of construction' ln other words,allocations based on the end-user category inevitably dis.criminate against evpn the mor€ socially uselul or impontant

252 PRICING POLICY FOR iNDUSTRY

uses of the scarce commodity which have to be undertakenby the non-eligible category of cohsumers. If the difference inthe prices between preferential allocation and the open marketsales is significant the tendencv inevitablv would be tooverstate the requirements b)' eltgible allottees, and this, inturn, could leacl to substantial leakages into the open market.It is well-known, for example, that black maiket in cementhas been a thriving source ol black money and that substan-tial quantities of cement allocated to Governmer.lt departmentsdo, in fact, find their way into open market sales.

There is yet another aspect of dual pricing which deservesmention. In the case of sugar, fon instance, the dual pricingmechanisrn is further controlled thrcugh a system of releasesfrom the factories; and the quantum of these releases is usedto ensur€ that the open market prices of sugar remain at alevel which is deemed to tre acceptable or desirable in a givensituation. Thus,.larger releases by way of lely sugar increasingthe availabilitv for each consuming unit as at the time of fes-tivals, etc., is used to ensure that the open market prices donot rise unduly because of the seasonal increase in demand.On the other hancl, it is well-knowm that releases are limited ifit is found that the open market prices are tending to fall wellbelow the level deemed to be acceptable from the point ofview. of .the profitability of the industry. In this situation,decision-making with regard to the quantum of release isrotonly a very tricky operation but can become a source of politi-cal patronage or other undesirablq practices.

In the case of cement, on the other han4 the ler,y cemenrquantity is fixed as a proportion ef the industqy's productivecapacity and not the production lbvel during the period. Theionsequence is that if, for whateyer reasons such as powershortage, and lack of coal, the oulput of the industry is lower,the proportion of its total output which has to be earmarkedfor distribution under lev_v goes !rp. The situation is furthercomplicated by the fact that under an inforrnal arrangemenrthe Cement Manufacturers' Association with the tacit a[provalof the Government has fixed what it calls a fair open marketprice. With a wide variation in the availability of supplies tothe open market, what happens, irt practice, is that whenevercapacity utilisation in the industry is adverselv affected as a

Regulation and Developrhent 2!'3

'esult of a shortage of wagons or coal or power or for any

other reason, there is a more than proportionate decline inthe availability of cement in the market; and the ordinaryconsumer has to pay a price which is significantly higher thanthe price iit which factories are supposed to supply theircement to lhe distributors. Exlra margin is eilher apprGpriated by. the,distributors, or more likely, is shared betweenthem and the producers. The consequence is that the dualprice svstem in cement in its present form tends to create a

situation where beyond a certain level of capacity utilisation,the profit maximisation for cement manufacturers may wellrequire a lower rather than a higher level i:f output. Thereason being that the lower the quantities entering the openmarket the higher is the price; and considering that the profitmargin in free sales is much higher, the extra costs of lowerutilisation of capacity can be easily offset by higher realisationto the manufacturers, dire ctly or indirectly, from the freemarket sales.

The point, therefore, is that dual pricing as an instrumentof policy can be successfully used only in special circumstan-ces; any attempt to generalise the application of dual pricinpwould lead to significant distortion and adventitious income,often untaxed, for those who are in a position to manipulatethe dual price arrangement. On the other hand, dual pricingcan be viewed as a transitional phase between comprehensiveprice and distribution controls and the operation of rnarketforces. For this, it is necessary to ensure that as a result oftheprofits to be earned in the free market, there is adequatB

inducement for investment so that over a period, there is a

substantial increase in capacity and output' To achieve this, itis essential that the concessional or preferential price is nolkept at too low a level and is adiusted over time to take intoaccount changes in input prices. If the preferential'price does

not cover all costs and provide at least some margin of profits,the overall profitability of the existing units would be advensely affected. This would tend to discourage new entrants anddefeat the purpose, namely, moving towards a better balance

between demand and supply. Sirnilarly, there has to be a con-

scious effort to reduce the gap between preferential or con-

cessional prices and the open nrarket prices The free market

N4 PRICING POLICY FOR INDUSTRV

prices would, no doubt, go down with increased availabilityin the open market; but the pi'ocess of reducing the gapwould be facilitated by periodic upward adjustments in thepreferential prices. If dual pricin$ is to be used as an effectiveinstrument of policy, it is essential to keep in view theseconsiderations.

1. India, Planning Commrssion, The First Five-Year PIan, A Draft Outline'

Delhi : Manager of Publications, 1951, p. 01.

2. IUd., p.32.3. India, Planning Commission, Second Fivdlear Plan. Delhi: Manager of Putr

lications, 1956, p. 3E.

4. ,bid., p. 3e.

5. Indi4 Planning commiesion, Third Fitt-yeer PIan Delhi: Manager of Publi

cations, 1961, P. 125.

6. rbid7. Ibid., p. rzE.8. India, Planning Commissiory Foufth Fivayear PIan 1969-74t A Drzfi Outline'

Delhi: Manager of Publications, 1969, p 1E.

9. Ibrd., p. 19.

10. Indi4 Planning commissiorL Draft Sixth Fiveyear Plan 7978-83' neised'

Delhi : Controller of Publications, 1979, pl 9.

11. Indi4 Statement of Indusn'ial Policy 23 December 1977 In Guidelines forInduslrie.s New Delhi: Indian Investment Centrc, 1979, Part I, Section Il,

10Conclusions

The discussion so far has been primarily limired to how thepolicies and pnocedures relating to the dwelopment andregulation of industry have evolved over the last thirty yearsand how, in practice, there has been a continuing and oftengruwing chasm between objectives and results and betweenprnmise and performance. Since the work on this monographbegan, many changes have occurred; and over the last ferw yearsthere has been a growing awar€ness both in Govemment and inpublic debate that a radical change is needed in our perspectivesand policies if the country is to march into the twenty-firstcentury as a viable and vibrant nation.

The change in the political climate and the emergence of anew and younger leadership provides an opportunity tocritically review past policies and to fashion them to meet theneeds of the future. Such a review does not, by any means,imply that past policies were necessarily wrong or ineffective.But the urgency of such a review is predicated on twoprcpositions. First, although a glBat deal hag been achieved interrns of widening and deepening of the industrial structure andsome steps have been taken towards making industry costconscious, much more remains to be done if the countqr isto make maximum use of the potential that has been built

?36 coNclustoNs

up as a result of development in all sectors of the economyover the last thirty years. Funthef, the policy parameters forthe future will necessarily have to be different What wasright or relevant in terms of policies in the sixties or even inthe seventies will not-and indeed cannot-be the correct pre-scription for the future. It is necessary to design policieswhich lake into account the changing environment and seekto build upon the achievemenls of the past.

The second proposition is also important. It would be srm-plistic, and indeed counter-productive in the Indian context,to assume that Government shorirld play as minor a role as

possible in determining the pattern of industrial Srowth orin the sectoral allocation of resoulces. Apart fnom being con-trary to the long tradition of thinking which has alwaysemphasised the need for active Government intervention inorder to accelerate industrial development, there can be nodoqbt that the social and cultural ethos of the country willnot permit a democratically elected government to largelyabdicate its responsibilities in thd e,conomic field. Indeed, inyearc to come, there will be an ingreasing trend to hold a dulyelected government accountable for its economic performance.

This does not, by itself, mean that Government's involve.ment in achieving resuhs in the economic field has to assumethe form of comprehensive and detailed regulation .and con-trol. In fact, experience has shown that whatever the originsof such controls, they tend to acqqire a life and momentum oftheir own and outlive their utility. For instance, many of thecontrols-control on textiles; rent control; pnoduction controlon indtrstry; aUocation of scarce raw materials, both indi-genous and imported; and foreign exchange and import con-trols-were introduced during the Second World War. Theirprimary objective was to conserve nesources for the war effort'and to overcome the special problems created as a result ofwartirne shortages. They continlued in the post-lvar yearsbecause in the earlier years of planning an era of shortagegincluding food shortages, formed, the backdrop for economicpolicy-making. Many of these cotrrtrols, therefore, wene con-tinued with relatively minor modifications. The savings ratein the economy was low, foreigir exchange was scarce andconserwing resouipes w4s cruciall The consequence was that


the main thrust of poliry-making and of the administrativemechanism was centred on managing an economy of shortages.

Over the last quarter of a century and more, radicalchanges have taken place in the economic and political environ-ment. The current savings rate is 23/24 per cent of the grossnational product instead of10 or 11 per cent as in the fifties. Theforeign exchange neserv€s are much more comfortable than wasthe case in the late sixties or the early seventies, and.althoughwhen the rcpayment of the IMF loans begins some strain on thebalance-of-pa5rments is only to be expected, it has also to benecdgnised that our base for export earnings has widened andremittances from abrrad are likely to continue as a sizeableelement in our balance-of-pa3,ments. The domestic content inthe development process-whether it is agriculture, transport,power or industry-has increased suffciently to make much ofthe development including industrial development internal tothe system rather than being dependent upon imports oftechnolos/, capital goods and raw materials ftom abrnad.

It is true that over a period of three decades till the beginningof the 1980s, the average annual rate of growth has been nomone than 3.7 per cent-a glowth rate which hofussor RaiKrishna of the Delhi School of Economics described as theHindu rate of gmwth. On an annual per capita basis, the gDwthmte has been around 1.4 per cent, i.e., apprnximately 50 per centover the period. This has to be viewed in the context of gmwthprolections made in the Finst Plan which envisaged a doublingof per capita income in twenty-seven years. It has to be notedthat in the last decade there has been a significant improvementin the gtowth rate. The Sixth and Seventh plan periods showed arate of growth of approdmately S per cent. The grcwth ratesconceal the significant development in the agricultural sectorwhene the tnend rate of gmwth in rEcent years has showm arising trEnd. Further, the amplitude of upward fluctuations in agood year is becoming sharper; and though there are downwardfluctuations in a bad year, they are becoming less sharp.

On the othen side, however, while we have a well diver-sified industrial structure as compared to the fifties and the

25E CONCLUSIONS

sixties there has been solne dec4leralion of industrial growth

pite these qualifications, the capital-output ratio still providesof the efficiency of

the use of capital stocks, botlt on the avefage and at the

nrarsin. 'lhe availatrle statistiCal itllot'Ination cotlfirnrs the

since the mid-sixties. T'he movemetrts in industrial outputhave become mofe enatic. Sur;prisingl.v, the per-iod ivhichcommenced with agricultune Ehowing a marked growthtrend has seen industry slipping badlv. One rvould haveexpected the reverse because dgriculture in India plovidesnot only the inputs for agro-based industnial activity, but alsoprovides a large nalket for the products of industry. As poin-tecl out in Ohapter'-l sevetal hvpotlrescs have been suggesttltlwhich attempt to explain the slowing down of the rate olgrowth of industrial production but a much more detailedinvestigation is required to test them.

The fact, however, temains that there was a slowing down ofindustrial growth which has been reversed only in the last three

on four ye:rrs. While there is some evidence of the be$nning ofagficultural modernisation and a decline in its share in theoverall income generation, and there has been considerablediversification of the industrial economy, the occupational

structurc bf the population has not shown much change' In

short, we have not made much ppg€ss towards the structuraltransforrnation of the economy which is the test of rapid growth'

While we have made a be$nning ivith regard to the pmvision ol

social seruices and the alleviation of poverty or, at least, its mor€

squalid and dehumanising fon4s and the rel,ated aspect oleipanding employment opporturtities,. unfortunately in terms ofthe physical quality of life India does not compare hvourablywith many of the low income countries.

'I o what can we attribute this strange and depressing

phenomenon of a high rate of domestic savings and a rela-

iively lorv rate of growth of income ? Essentially, what this

means is that capital-output fatios have been increasing i e '

with the sante amoullt of additional capital investment, we

are getting less bv way of an increase in incomes' Of course'

there are several lintitations to the concept of incrementalcapital-output ratios' lICORsl, arld to some extent, the capital-

output ratio will clepend upon the stage of development Des-

pite these qualifications, the capital-output ratio still provides

i useful, though somervhat crudle, measure of the efficiency ol

ntarglrl.

negulation arrd Development ZSg

conclusion that over the last three decades incremental relurnsfrom additions to capital stocks in the Indian economy havebeen declining. It is important to note that this is not restric-ted to industry but is also seen in ancillaries like power andtransport, and in the economv as a whole.

Recently, a great deal of intensive work has been under-taken in order to identify the reasons for lowering of themarginal output ratios. r Apart from the economic or techni-cal factors which have tended to reduce the marginalefficiency of capital there is; in a sense, a more fundamentalfactor which needs to be recognised in order to evoive thepolicy for the future. Following inclependence when the coun-try launched its movement towards planned development theobjective was clear; and what is more, there was a nationalconsensus about its desirability. At the time of the forrnulationof the First Plan in 1950 the objective of planning in the coun-try was defined very succinctly and pentinently as being threefold. The purpose of planning was to move towards a technGlogically mature society which would ensure self-sustaininggfowth and avoid concentration of income and wealth in thehands of a few individuals. There were three elements whichundenlined our approach to the development process_a lectr-nological transformation withoUt which it was not possible toimpart dynamism to the stagnant society; an emphasis on self-reliance so that economic development would be largelybased on domestic efforr and over time, would become self_sustaining; and finally, achieving this transformation in anenvironment which was socially acceptable by avoidingexcessive concentration of wealth and income and, conSe.quently, economic power in the hands of a few individuals.These constitute what professor Raj Krishna termed as thevalue commitments' of the ideology underlying the evolutionof economic policy-making in India.2

.Can we claim that over the last three decades we havetaken significant strides in. eabh of these imporrant con_stituents of economic policy envisaged for the country bycommon consensus ? The answer7 unfortunately, is, at best, amixed one. It is clear that the confidence ani elan seen inthe first ten or fifteen years after independence has graduallygiven \ /ay to doubts as to whether we are on the right path;

260 CONCLUSIONS

and certainly there are widely shared doubts about the

appropriateness of the policies and mechanisms adooted to

achieve these goals. Thene is a gtowing cynicism or lruslra-

tion depending on which side bf the fence one is There is

increasing disenchantment with the ability of the State

uppu.ut,r"=-o. indeed even its willingness- to achieve the

oliective of steadily improving the standard of living fbr all'

and the establishment of a'iust and equal society' Over the

veat's rvith tlre emphasis on acquirin54 tlte 'coulurandinf{ heights

'of the economy we have built i.rp a mammoth public sector

for all public utilities. Many essential inputs for-the economy

like steel, fertilisers, etc., and a large segment of manufactur'

ing activity are now owned and rnanaged by the State' Virtual-

ly, all instruments for mobilising savings in the economy have

been nationalisod.The State has become omnipresent and omnipotenU and

yet there is clear and percistentt evidence of how vrrlnerable

ihe political system is to corruption and to moneypower' The

garjantuan mechanism of a creaking administrative

ippia"ut.r" increasingly sublect to corruption and petty

*iiti"iSutio.t is no longer a credible instrument for achieving

ihe desirable and socially accdpted goals' Few people have

faith in the integnity of politicians and there are hardly any

established in$titutions-legisatures, courts, elected local

bodies, universities and other educational institutions or

administration at all levels- which evoke respect or continue

to enioy an adequate measure of credibility'This situation essentially reflects the weaknesses' conceP

tua.l as well as operational, of the Fabian tradition as adapted

to the Indian context under the leadership of Pandit Jawahan

lal Nehru. There were certain nraior propositions constitutin€

the Fabian tradition which Pandit Nehru accepted and which'

in retrospect.have proved to be of doubtful validity' Thus' an

essentiaf elernent oi the Fabiart philosophy was an indefinite

extension of Statb activity; and this'was the basis of Pandit

Nehru's thesis that socialism means the pu'blic sector grow-

ing all the time, Since the begirnning of planning in India the

stiess was on ensuring that the State should own or mal)age

all crucial activities as well as the financial itrfrastructure- a

rheory of controlling the 'cornlmanding lreiglrts Further' an

negulation and Development 26!

extension of State activity not only meant dn expansion of thepublic sector but also a fairiy extensive regulation of private

activity. Even in fields which were left to the private sector,

units had to be registered and controlled. The complex system of regulation had to be evolved to regulate investment,access to inputs, credits, production, prices, profits/ wages

and working conditions.Another impofiant element of the Fabian tradition inherited

by Pandit Nehru rvas that a more equal'society was bound toemerge in a democracy based on adult suffrage. It . wasimplicitly assumed by Pandit Nehru that even in a countrywith mass poverty and mass illiteracy the democratic process

would eqsure governments which would be committed to andeffective in the eradication of poverty. It was further assumed

that the system of public administration inherited from theBritish which was essentially based on avoidance of mistakesrather than achievements of particular socioeconomic goals

would be an effective instrument for establishing and runninga clemocratic sottialist fegime ollce it tl'as Inacle ac(loutllitl)le to

the elected leadership. As in the case of public admillistra-tion, the newly created public sector was expected to be theinstrument for achieving certain goals, e'9., prevention ofconcentration of incomes and wealth in private hands,

generation of surpluses for financing further investment, prcviding goods and. services for mass consumption and fordevelopmental activities at a low cost by operating at a highlevel of efficiency', and being a model employer by settingstandards not only in respect of emoluments but with regardto the place of labour in society.

It is clear that the results anticipated in the Fabian ideologyor more specifically, the expectations with regard to itsapplication in the Indian context have not materialised.Where has the Fabian approach failed ? A fundamental weak-ness of the Fabian approach in the Indian context has beenthe mistaken belief that adult franchise in a country like Indiawould produce in a poor society an effective prGpoor govern-

ment. Further, it was assumed that the nature and structureof public administration would be such as would be effectivein implementing pro-poor policies. Both these expectationshave remained largely unfulfilled. Similarly, the efficacv of

262 CONCLUSTONS

State ownership and managemeirt of productive assets or theutility of governmental controlsi in ensuring the pursuit ofr.lenrocratic socialist objectives has been increasingly open todoubt.

The theoletical basis tor State monopolies in public utilitiesas a whole and in certain types of manufacturing aclivitiesand selvices is that because of the exlelnal economiesassociated with such monopolies and the consequent lower-ing of costs, such State monopolies subselwe public interest.

on prlvatesector activity is that such contnols a,I'e des:igned to improvethe allocation of economic resourlces or- distlibution of incomeby nraking the scarce resources 4vailable to the more cleserv-ing weaker sections. In pna however, the theoreticalpossibilities of a reduction in co$ts as a lesult of State monGltolv hin,e, in rtranv cases, lteen nrole than olllet llv the:operational inefficiency of the phblic sector. The experienceof controls, by and large, has been that ttrough intended tohelp the small man, they have lleen effectively manipulatedby the et:onomically strong.

'flre important conclusion, therefore, is thrt while the basicstructure of socialistic dernocratic values which colstitute

'.. what Professor Raj Krishna calllecl the value component ofPandit Nehru's ideology continues to remain valid, theinstitutional fornrs or the operating mechanisms have failedto achieve the results expected from them. Indeed, lhe timehas come rvhen in order to effectively pursue our commit-ment to the values of democratic socialism, i.e., 6powth,liberty and equality, it is urgently necessary to criticallyreview and reconsider our traditional emphasis on Stateownership or monopoly of productive assets, and also thedetailed administrative regulatiqn and control over a widerange of economic activity. 'Ihere is enough evidence to sug-gest that a conscious policy of: progressively reducing thedegree of monopoly for public sector enterprises or. evensome of the public utilities may contribute more to the socialgood. Of course, the principle of Stulc nronopoll mav r.enrairrvalid in certain limitecl fields, e,g., atomic errergv, but eaclrsuch case of monopoly would harle to be lustified on rner.it.

This would be a departure from the traditional erpproach


which implicitly aimed at a proffessive increase in State

or,r,nership of the means of production and in the provision of

serwices. this approach involved two tlrings First, the public

sector was fi'ee to entel any field where its presence was

deernecl necessary by the Government. At the same time, wide

areas of activity were resen'ed for the public sector subsequent

to the Industrial Policy Resolution of 1956. No new private sec-

tor unit could enter these activities or even expand the

capacity of an existing unit unless the public sector unit andl'or

Governrnent had no objection lo suoh expansion' One of the

aims of detailed administr:rtive conttrls, e.9., industrial licens

ing and itllport' contt'ols, was to ensul'e that prlvate sector

activity did not encroach upon fields that were either reser-

ved tbr the public sector or where, according to the IndustrialI'oiicy Resolution, 1956, future growth was to be mainly in thepublic sector. This together with what may be termed as 'un-

planned' expansion of the public sector through nationalisa-lion of sick units resulted in a diversification of the publicsector activitv well beyond what was originally envisaged in

lhe Industrial Policy Resolution, 1956. In future it would be

necessary to be far more selective in permitting 'unplanned'growth of the public sector through nationalisation of sick

units. It n'ould also be necessary to identiff areas where newprivate sector activity could be permitted without delrimentto the basic obiectives of established policy because the publicsector has already acquired the 'commanding heights'. Insuch cases competition frbm the private sector can crnly be on

the basis of superior technolory, quality or services, andwould, therefore, be in public interest. Finall,v, a close reviewof the present policy would Lre necessary in respect of publicsector units which have consistently faced losses. In cases

where there have been large and persistent losses and whereon any commercial reckoning future prospects are bleak itwould be necessary to work out schemes includingamalgamation, or in some cases even outright sale to otherpublic sector or private sector units. In slrort, unlike in the pastwhen the growth of the public sector was limited only by theavailability of financial resources, in future such growthshould be determined by the extent to which il could achieve

an accepted socioeconolrric obicctivt:. It would also be r:ssential

u4 CONCLUSIONS

to detelmine whar would lre the lesser cost option of achiev'ing that obiective, e.9., expanding. an exislinS.pul)lic sectol'

unit ol utilising partly production tacilities either- in tlreplivate or pulllic sector rvith it vier.r, lo llliniIr)ising the initial(rapital cost in a tterv ttttit or r:stablishing a joitlt sectot'utrit illcooperation rvith a suitable partner in the private s€ctor' 'lhe

country can no longer alTord to plan allocation of resoutceson lhe assumption that an indefinite e.\tension of State

activitt' w,ould subserve public interest.nlong with the ideological emphasis on State ownership

the planning process, panticularly after the Second F ive-YearPlan, stresaed Plan allocations and investments rather than'returns. No doubt, substantial and growing levels of invest-ment are a precondition for the structural transformation ofthe econom-y. Without investmenl it would not be possible tosustain grolvth. Though it should be rerhembered that there ismore to growth than investment; and investrnent is not anencl in itself. As L.K. Jha and otkrer discenning critics have,obser\'erl:- rre have, over the years, .tended to emphasise outlaysrather (han output. I'he efficiency of investment is importantin anv context. In a poor countr,v tvhere savings involve realsacrifices ;rnd capital is the scarcest resource, one cannotafford not to get the most out of the capital there is and lsbeing added to. Productivity is as important as investrnent asan instrument of growth; and yet productivity growth in oureconomy has not been a significant factor contributing to theacceleration of growth.

Since the beginning ot'planning in the 1950s, plan exerciseshave made a distinction betweerr plan and non-plan outlays.The Plan outlays largely consisted of expendilures on newinvestments although there was an element of current outlaysof a developmental character whlch was also included in thePlan expenditures. The priority given to Plan (as against non-Plan) expenditures has continued in successive Plans; butwith the passage of time this distinction has often tended todistort prionities in the context of development needs at a par-ticular point of time. For instancd, non-Plan expenditures arenot, as is commonly assumed, necessarily or always non-development expenditures. High Priority development expen-ditule like docial servrces of sums spent on belter maintenance


and upkeep of past investments including burldings and othercivil works, or even provision of balancing equipment not prGvided for in lhe o'riginal project constilute significantelements of non-Plan expendilure.3 The scarcity ol resourcestogether with the political and,to some extent, economic com-pulsions of a larger size of the Plan have implied that out ofthe limited nesources available, the Plan pr-,ovisions used thebulk of resources and the arnounts available for non-Planexpenditure, however essential, tended to be inadequate. Theresult has been that although higher capacity utilisation andbetter maintenance are being accepted as essential elementsin improving the return on capital, the emphasis still con-tinues to be ou Plan outlays. It is, perhaps, time to reconsiderthe methodolo$/ of the planaing process and, in particular,the present emphasis on Plan expenditures in preference tosome elements of the non-Plan expenditure which could havecont|ibuted lar more to the growth of output. rn other words,the present bias in favour of outlays rather than output needsto be corrected.

The current distinction between Plan and non-Plan outlaysunder certain circumstances, gives wrong signals in respect ofpriorities and serves a rather limited purpose in terms of providing guidelines for the allocation of resources. Instead, itwould be more fruitful in the present context to think interms of allocating resources for the development of a par-ticular sector. In other words, the so-called Plan resourcesinstead of being utilised only for new investments can beused for other typps of related and complementary expendi-ture whose objective would be to improve capacitl, utilisationthereby lowering the capital-output rhtios.

Many examples can be cited in fhis context. For instance,the Plant Load Factor (PLF) in thermal stations which wasapproximately 55 in the second half of the seventies has nowdeclined to less than 50 per cent. Part of the reason for thedecline in PLF is the lack of adequate maintenance andbalancing equipment in power plants. Almost invariably, thefunds required for this purpose are much less than whatwould have been required if new investment had been incurned for the same amount of additional power. To put it dif-ferently, even l per cent increase in PLF would meall an

266 CONCLUSIONS

iidclitional polver generation of ds much as 400 mw, whichr,r'ould irnply an investment of over of Rs. 400 .crores in caseconresporrding addition to capapity was to be attempted.Apart from reducing the strain on limited resources such aninrlrrovement would also take ntqch less lime tha.n vr,;ould berequired to complete a 400 mlv power project. It is evidentthat whatever can Lre done to iprprove the PLF, even if itinvolves some additional investment, would have a better costberrefit t'atio thair additional invesiment in porver generationper se. For instance, investment in beneficiation of coal, bet-'icl' opel atior) and nrairrlenarrcc ofl machincs, 1tr.oi'ision of bal-ancing equiprnent and inrprovemerl in transmission anddistritrution -uvhich reduces power loss rvould cost much lessthan the investment cost of appft;xirnatelv rupees one crorell{r'nrr}gaiYatl and rvoulcl help rccluce the average c()st pef uniloulprll.r

A greater concern about output rather than outlays essen-tially implies a grcaler emphasis on increasing productivity.Many of the policies and attitudes which were crystallised inthe 1960s and 1970s require critic4l re-examination in the lightof experience. F or instance, mairv pecrple (;rnd rnost politi-ciansl lrave a filnr cor.rviction that employment can lle increasedprimarily bf introducing in a particular area large-scalemanufacturing activity. In Parliarnent, and cven more forcefully in the various Committees of Parliament, rnembersfrom different parts of the country wbuld argue in favour oflocating large public sector projects in their own States ortheir constituencies on the ground that it would help genenateemployment and reduce the backWardness of the State or thearoa. T'he implicit assumption is' that modern manufacturingindustry constitutes a maior source of employment creation. Itis time we recognised that direct shopfloor employment inrnodern industry constitutes a relatively small proportion oftotal emplolrnent even in the most advanced industrialcountries. Indirect employment creation, i. e. employmentgenerated in producing inputs for manufacturing industryand also the ernployment in srbbequent operations like trans-port and distibution, is much larger. The potential foremplovment in tht: senrices sectpr inclrfding banking, insur'-ance, etc., is quite significant. But even after making allon'ance

negulation and Developmeftt 267

for all these in a country of India's size and lylth a populationof over 600 million people, the modern rnallufacturing sectorcannot be perceived as the ntain provider' <;f direcl. andindirect employment. Of course, this does not mean that inthe structural translbrmation of tlre Irrdiarr econornv n'hichslrould be the rnain obiective of ll.re next trt'o decades, or)e canignore the neecl for creating as large a volume of agriculturalemployment as possible. Given the demographic compulsiorrarising from the population growth over the last thirtv vcarsand the resulting age compositiorr it is cleal that a very largenumber ot people would have to be provided rvith emplol.rnent not clilectll, related to agriculture.

In part, suclr emplovmen[ can take lhe form of othel aliiedactivities such as forestry, fishery and dairying. T'he process ofdevelopment whether in the field of agriculture, industry orminin5l also creates rapidly grorving opportunities in the fieldof transport and other sel'vices including banking, insur'ance, conllnunications, etc. A revitalisation including technological up€fradation of tladitionai industlies such as handlcorns,coir pi'oducts, leather products would also help generatemuch larger man-years of employrnent. -fhe essential point,however, is that while every effort has to be made to maxi'mise productivity and employment irr the system, this cannotbe achieved by trying to protect all existing employment inthe organised iridustry or insisting that the modern manufac-turing industry continues to employ surplus labour force inthe belief that such an insistence enhances opportunities foremployment. It does not. A steel plant or a petrochemicalcomplex u,hich is required to employ a work force manytimes more than what a similar plant in an industlial societywould employ soon finds itself uncompetitive internationally;and worse still, the existence of surplus labour force (and pre'ssures to increase work force with every increase in capacity)inhibits the ability of these units to undertake modennisationusing the latest technology.

It is often argued that with the relatively cheap labour inIndia a greaten degree of labour intensity is possible withoutadversely affecting the competitiveness of Indian industry.This is not always or necessarily trl-re. First, the relative cheapness of industrial labour in India has to be seen in the context

268 CONCLUSTONS

ofthe fact that quite often such labour requires greater super.visory inputs. If one takes this faclor into account, the relativecheapness of labour in India is reduced considerably. Second,modern technolog, using high speed production techniquesinvolving larger capital costs also results in a higher quality orfault-free production: The higher degtee of automation and,consequently, low employment cdefficient per unit of capitalor output is likely to make industry abroad much more com-petitive even in fields where, at one stage, it was felt thatmany industrialised countries would, no longer, remain com-petitive. Textiles is a case in point, High speed machinery andequipment producing large volumes of output of uniform andsuperior quality is now a common feature in many segmentsof manufacturing activity in the industrialised countries. Com-parative advantages for the newly industrialising, countries inthe developing world arising from a large reservoir of laboursupply will be fast dissipated if organised labour succeeds inperpetuating surpltrs labour or in preventing the induction ofnewer technologies in the belief that this would protect theexisting employment. An uncompetitive or obsolescent indus.try cannot tre an engine of growth or a provider of expandingemplovment.

As a result of the development process over the last threedecades the Indian economy and, in particular, the.Indianindustry has become much more complex. The pace ofchange-pafi icularly technologlcal change- has beer-r accelerat-ing the world over. If we ale to keep pace with the rest of thewonld, it is essential lhat the process of decision-making inGovernment and the administrative infrastructure for this punpose be reoriented, so as to ensuie a speedier response to theemerging changes. In order to do this there has to be a farmore prompt and accurate supply of statistical and other ilrformation to those responsible for decision-making vvhethen at the

micr,o-level of the industry or at the mact'olevel of policl'rnaking. Rapid changes in comtnunication artd conrputer techrlr>logr in recent vearc provicle an opportunity to build up a

meaningful iifbrrnation system and this must be gi\'en highestpriorit_v.

Thp thrust of policy in the comlng years, thenetore, has tobe toWards removing systematidally the constnaints rvhich


have inhibited elliciency and productivity in lnclian industry,both public and private. The efforts made in the last few years

towards liberalising controls and adopting more constructivepricing policies have had only marginal impact on the overallthnust of industrial policy, The framework of the industrialpolicy continues to be restrictive both in its substantive andprocedural asPects.

Many points referred to earlier have been made or accel>

ted by those responsible for deciding Government policies.The announcement of policies in areas like telecom-munications, electronics, attitudes towards computerisationand steps towards liberalisation of licensing policy, etc., marka departure from the past although there is a reluctance (or ahesitation) to adnit this. The result is that while ad hocchanges in particular fields are announced, these cannot be a

substitute for an enunciation of a clear and coherent policv. Inthe absence of clarity about the directional changes which thenew Government proposes to introduce, the process of policyihanges tends to acquire an ad hoc character; the pace ofchange is necessarilv slow if not hesitant. It is clear that if thecounlry is to move forward on several fronts simultaneouslyat a pace commensurate with our requirements the practiceof gradualism will not work. Much can bb said in favour ofopting for a directional change which is clearly understood ancl

accepted. Specific policies affecting maior sectors or in respect of crucial issues can then.be worked out. This appnoachinstead of stepby..step adiustments in policies and procedqreswould help in overcoming some of the constraints ondevelopment which have emerged oven the years.

The first step in this direction is to declare unequivocallyGovernrnent's intention to review and modifu past policies inthe light of experience. The basic questions which the Govern-

ment should ask itself are :

1. Are the policies right in terms of ensuring speedyachievement of a givep set of obiectives, such as indus-trial growth, generatlon of employment, promotion ofbalanced regional development or conservation offoreign exchange.

2. In case one or more of the oblectives are either inconsistent

270 CONCLUSTONS

or are conflicling in a given context, what shoutd be thetradeoff between the variotis obiectives, that is, whichof the obfectives need to be emphasised in a givensiluation.

3. Even if the obiectives dne not inconsistent and thepolicies are appropriate, arc the procedures or adminis_trative mechanisms suitahle ?

In the field of industrial licensing and controls, the newGovernment should be asking at every stage 'why conhols, insteadof 'why not controis'. In other words, every control wouldneed to be justified on grounds of clear necessity for theIarger good before it is imposed or allowed to be continued.Thus, controls should become the exception justified by gooCreason rather than becoming a,rule as has been the case overthe years. {)nce. such a statement of intent has been made, ilwould be both possible and easier in terms of acceptability forthe new administration to take and defend individualdecisions. In short, these decisions [^/ould then be part of a newpolicy rather than indivrouar battles to be fought each time.

What then could be the main arrias of policy changes ? It isneither possible nor is it the intefition in this monograph tospell out the many ingredients of indusfial policy for thefuture. In fact, such detailed analybis of the policy parametersfor the futune and the policy profiles for each of the maiorindustries such as coal, steel, texliles, electronics and petrochemicals, would be a pnoiect by itselfl What is attemptedhene, therefore, is much more limited, viz., on the basis of theanalysis of the pnesent situation .and one,s perception of thecurrent needs, what would be the appropriate directions forthe future polic_v.

The first major step should be lo announce that all indus.trial activit),, i.e., new indusfial underiaking, substantialexpansion of existing industry, or production of a new anticlewould be exempted from the requilrements of licensing underthe Industries (Development and Regulation) Act, with theexceplion of the follon ing :

1. tr\'l)ere itenrs of production are F'eserved for the small-scalE,

Regulation and Developrnent 271

2. Where industrial activity is exclusively reserved for thepublic sector under the existing policy.

The only stipulation should be that all units coming withinthe ambit of the Industries (Development and Regulation) Act,that is, units with total investment in excess of Rs. 5 croresshall report, for satistical purposes/ all additional investmentsand additions to capacity within a specified period from thetime such capacity comes into existence.

Such an exemption from the licensing provisions, however,would not, in any way, dilute or alter such other regulationsas may be in fotce regarding the location of industries, i.e., noindustrial activity would be permitted in specified met-ropolitan or urban areas nor would the exemption overrideother existing legislative provisions in the present or amendedform, e.9., Monopolies and Restrictive Trade Practices Act.There would, of course, be a need to closely examine thelegislative framework and the procedural arrangements forimplementing ttre legislative intent of impoftant statutes suchas the MRTP/Foreign Exchange Regulation Act, etc. Forinstance, having raiped the assets limit for the application olMRTP legislation it is equally necessary to examine the pro-cedures by which de-registration can be expedited. It is com-mon experience, for instance, that despite the raising of thelimit a large number of companies are still waiting to be de-registered. Perhaps, a simpler procedure could be evolvecl. Anapplicant would file an affidavit supporting his eligibility forexemption from the MRTP Act unless his plea is rei€ctedwithin a specified period, say sixty days, the unit would standderegistered. If, on the other hand, it is found that thestatements made in the affidavit are false or misleading orfacts have been suppressed it is always open for Governmentto take cornective action, and impose heav.v penalties throughthe nornral processes of law for a false affidavit.

The main purpose of liberalisation should be to ensure thatinvestment decisions regarding modernisation, creation ofnew or additional capacity, and diversification are taken onthe basis of their viability, arld not because thele is little or nocompetition in a particulal activity and ll'ee entrv is not beingpermilted. Financing inslitutions r,t,ould then decide on tlrt:

2'.r2 CONCTUSTONS

basis of tneir technical and final'rcial appraisals whether par-ticular proposals deserve to be supported. The locationalangle would be taken care of by the proviso that new activitjwould not be permitted in ceitain excluded areas. By th(same token it would be for the Government to announce fromtime to time specific locations which are out of bounds fornew industrial activity or particular types of industrial activityfor social or ecological r€asorrs. But, it should not be the effortof policy to direct the industry to a particular location. Incase, it is desired to attract the industry to particular areas,fol' e.9., backward districts s1 'nqr-industries-drstricts' it shouldbe done by nroviding the infrastrlrcture and by having a gradedsyslem of incentives. But the final choice of location outsideexcluded areas should be lefl to be worked out by economicconsiderations and entrepreneurral preferences.

In order to ensure that rne reservations for the small-scalesector or reserwations for the public sector are not permittedto come in the way of speedier growth thele should be amechanism for reviewing periqdically the list of reserveditems. Such a review should be based on testing whether, inpractice, the reservation is serving its purpose, namely, to pru.vide for the public oector the lcommanding heights of theeconomy' with a view to protecting public interest. The list ofreservations for the public sectof should be scrutinised to seewhether there is still a case for exclusive resen/ation, orwhether in view of thd dominant position attained by thepublic sector, compe.lition from new entities should be penmitted. The object of reservatiorl should not be td protect thepublic sector against competition, but rather to ensure thatpublic interest in terms of the basic obiectives of policy isbeing served by such reservationi

In the case of reseruation for the small-scale industry, suchreservation is iustifiable,only where the scale factor is notdeemed to be significant; and the product is one which canbe produced in adequate quantily and is of acceptable qualitythrough the efforts of entrepreneurs in the small-scale sector.In cases where a particular industry or product is being reser-ved fgr the small-scale sector, action programmes should beworked out for enlarging and improving the productioncapabilities. Further. measures should be taken to introduce


quality control standards such as ISI marking or compulsorytest report so as to protect the interest of the consumer. Oftenin the past, reservation for the small-scale sector meant short-ages, and even more frequently products of indifferent qualitywhich mean, in effect, taxing the consumer.

A guestion may be asked here: What would be the result ofthis apparently drastic liberalisation of the system on licensingfor imports of capital goods and,/or raw materials ? It is poss-ible that in the first flush of the announcement of liberalisa-tion there would be a scramble for new capacity creation/modernisation or diversification. . But, past experience hasshown that the system very soon settles down to a normal pat-tern particularly when the get-rich-quick section of the business community realises that the liberalisation is universaland not likely to give it any kind of edge over others. It wouldalso be essential to make it clear that the import of capitalgoods or raw materials by existing units or new undertakingswhich would be a result of de-licensing, would continue to besubject to the import policy in vogue; and that ehanges in thepolicy would have to be made fuom time to time taking intoaccount the foreign exchange availability, the extent of tariffprotection available, availability and quality of indigenousproduction and other relevant factors. In short, decisionsregarding new investmentg expansions or diversificationswould not per se involve an entitlement of importedmaterials. At the same time, subject to import regulations andtariff rates in force,* anyone would be free to import and thatsubject to the constraints of foreign exchange availability, itwould be the Government,s policy to reduce to the maximumextent quantitative restrictions on imports as well aslimitations on the eligibility to import such as actual user.only or canalising agencies only.

Even prior to the liberalisation of imports along these lines,early steps need be taken to liberalise import of technologzfrom abroad particularly in order to enable modernisation ofIndian industry. For ,this purpose it would be necessary torevieil/ and eliminate some of the restrictive features of the

It will be necelisaly, of coufse, to eDstue that the import and e)icise struc_lut'e odequateh lellects polic! pliot.ilies, lbl e.6., discouragi[g inessentialimports and encoura€(ing pl ogl'essive indigo!lis tion.

274 CONCLUSTONS

current technology policy. However, it is not, merely a rnatterof ,more liberal import of technollory for industries consideredvital fon our future It should also be ensured that inthe choice of technologies, ter t is given to theviews of the users of the technolbgies than to the views of thegeneralist administrators or technologists turned bureaucralswhose knowledge is not only rqsty and out of date but whostill continue to wield power to determine technologychoices. This is both necessary and possible in the presentcontext. After three decades of development, Indian industry,both in the public and private sector, has developed a degt'ee

of competence which rs far superior not only to what it used

to be in the past, but is also generally superior to the level ofcompetence available in the governmental system for deter-pining what are the best available options.

The fear that therE would be ;indiscriminate and repetitiveimports of technolog,z can be exaggerated. Such a fear wouldbe legitimate if there are resfictions on technology importswhich gave to the early entrants or the favoured recipients ofnew technology a competitive edge in a protecterl market.

Once it is known that the degree of protection against otherdomestic producers and prognepsively, against imports tromabroad is likely to be. reduced, there would be . a morecautious calculation as to whether a particular technologicalinput is worth the price that is being asked.

Regarding the Monopolies and Restriitive Trade Practices

Act, unfortunatell', the original purpose of the Act, namely, to

prevent concentration of economic potyer or use of marketdominance 'to ihe detliment pf public interest has been

ignored. This has happened beoause the present coverage ofthe Act in respect of non-dominant undertakings is

excessivelv large. The timit of rrlpees tr'venty crorers in terms

of 54ross assets which rvas fixed nearl-r' fifteetl vears ago has

tentied to bling \1.ithin the ambil ol that legislatiotl, at currentprices, units ot'business gloup$ which were llever intendedto be covered. 'I'his has two implications. On the one hand, ithas led to avoiclable papet'rvorll atrd unnecessarilv llul'denedthe administrative svstelns resqlting in considerable delavs'

On ll-re other hand, the unneces$at'il)' compreltensive covenage

of the Act ha.s reduced the :rbilitv of the :rdministllatil'e agelrcies

Regulation and Development ZZs

to deal with the socialll, impot'tant cases of concentration ofeconomic power or the use ol monopcrlistic strength in the formof rcstrictive 1-)rtctices to the common detriment.

The main consideration in the operation of the MR1lp Rctshould be to decide whether the concentration of economicpower or particular trade practices are to the common detriment.The thrust of policies and procedures, however, should be suchas to ensur€ that the operation ofthe MRTP Act does not crEateconditions adversely affecting constant technological upgrada-tions. It has to be recognised that a certain degree of market.power is often an essential condition for an orgairisation toundertake a maior new investment or technological upgradationinvolving substantial expenditure. Even the largest units in Indianindustry by and large, are much smaller in terms of investmentand output as compared to their counterpants abroad; and to theextent that the scale factor is an impodant deterrninant of theability to compete in international markets, it would be necessaryto keep this aspect in view in the administration of the MRTilegislation.

f'he lilreralisation suggested in respect ol the plivate sectoris t.'trlrt rno|c u|grtrrtly rrecdecl lilr-.thr: ;tUlrlic sector. A J{r(j.ildr,.al ol ernlrh:rsis is-and rightlv-being plar:t:d on lrnprovrngthe managclial environmen t lbr. lhe public sector and onnreaninglirl accountabililv of public sector manager.s. There isno doutrt that therc is r:onsiderable scope.fbr improving lhemanagerial perfornrance both at the functional level, i.e. praduction, rnarketing. finanr:e and perconnel; ancl also in teimsof leadelship lty the chief e-\ecutives. Havir)t{ .lcccpted the lacttlrirt prrlrlic cntc.l)r'isos rrtxrrl lxrrtcl r)iu)irg.r.s, it l)irs tr) lre r.ccog-rrist:tl tlrat rrrr<ir:r. llrt: l)r.osr)t)l at'r'illgcntctlts, prrlrlic t:rrlrtlpr.iselDanilge|s lraVc rrrtrt:lr. lcss llrrtlrlrtrri in tC|nrs tll decision_making tltan thei| coul)torlliH'ts in lhe private sector.

'I'he pl'esent structural relationship between enterprisesanrl thc (;ovr)l'nment is such that (iovernment. is not merelytlro owi)(!r', lttrt it also plavs arr activo. in nlanv cases, a donti_nant rrrlc irr llre stlatcgio nl.lnlH(:ntcltf ol ptrrirlic t,trterpris€s.Whether it is investment clecisions, Iines of new activities, cor.porate obiectives or personnel policies or p|icing and market-ing clecisions, the ptrblit; sectof l)ril t)agcrs ale almost lotallvtlependenl ur) Ao\ er'r)nrrttal rlccisiorrs. lrrtleed, tlrc abilitv of -

276 coNcLUsloNB

public sector management to take or implement decisionswhich are in the best interest of the public sector corporationin terms of the objectives are, rnore often than not, dependenton the ability or the stature of the Minister or Secretary con-cerned rather than on the viability of the proposals them-selves. In this contgxt it is not qnough to conc€ntrate only onimpnoving the managerial calibre and performance in publicsector enterl4ises. It is. even nrori impoltant to closely examinethe system itself. Unless we car"l ensure that Government dis-chalges its own responsibilities in respect of the public sectorwith a gleatel sense of pufpos@ and realises that all policiesand pt'ocedut'es in t'elation to tlre working of the prtblit: sec-

tor have to be geared to making the public sector an instru-ment of growth, mere managerial strengthening catt achieveonly limited results.

r\parl from these basic chat)€{es, there are at least two areas

whelc inrrnediate action is llotlir possillle atld ttecessary. 1'hefilst one is in relation to the present procedure for theclearance of public secto+' pro,ects bv the Public InvestmentBoard {PIB).s This is lotally itraflequate. Tltet'e are numerouscases of substantial overruns in the proiects which have beencleared and many new investments approved by the PIB have

hecome unviable even befole commencement of production.There is an urgent nced to strengthen the proiect evaluationand project management svstenls.

As a first step in this direclion it would be desirable tospecili that hencelbrth any new il]\,estment proposal comingto the Public lnvestrtrel)t Board would not be cleared unless

the Boald is satislied about tbe proper- selection of the projectmanager and about his retention in the proiect from the stage

of clesign to ccrmpletion and stirrt-up. No banker would lendmone1, lvithout being satisfied aboul the competence and

track record of the managemerlt and the chief executive; andthere is no reason why the Govqrnment should.

The other area where something can be doneimmediately is to enable public sector enterprises to takequick decisions on additional investments, not originallyenvisaged but which are essential to make the project viableor more profitable, It is not uncommon, for instance, for a

maior 'public $ector proiect lo find itself in a quandary

Retulation and Developnent l7Z

because some of the earlier assumptions at the,proiect stagerrave not '' materialised. The connecting road may not havebeen completed by the concerned agencies, or a high tensionmotor may be burnt out, or power supply may need to be supplemented, or a new opportunity for profitable prtduction mayhave emerged. In all such cases the present procedures whichinvolve budgetary provisions or timeconsuming administra-tive scrutinies result in funds either not tteing available orbeing excessively delayed. !t would be useful if as part of theSeventh Plan, some amount could be earmarked for public sec,tol undertakings .and placed at the disposal of financialinstitutions. The undertakings should be asked to submit theirproposals for evaluation by the financial institutions; anddepending upon the viability and pay-back period., the institu-tion should be able to clear the applications quickly. Suchscrutiny by public financial institutions would also ensurethat the proposed investment$ are well conceived.

Promotion of a more balanced regional development isanother area where some reorientation of poticy is qrgentlycalled for. It needs to be stressed that a more balartcedregional development can come about only by a more effec-tive utilisation of local resources, i.e., appropriate investmentsin agriculture, irrigation, forestry, fisheries, traditional indu+tries and dlso by locating new industrial uriits which act astriggering off points for further development. It is wrnng toassume that a wider geographical dispersal of modern manu:facturing industry would make a significant contribution tothe eradication of regional disparities in the Indian conte-\t. Itwould only result in sub-optimal locations for substantialpublic- or private investments thus contributing to the con-tinuation of a high cost structure.

The emphasis should be on Plan allocation to the Stateswhich would enable them to improve infrastructural facilitiesin the identified backward areas. From a social point of view,such investment in infrastructure is to be preferred to theplethora of incentives which different State Governments andthe Central Government have offered to establish iildustry inthe backward areas. A special fund for the promotion ofinfrastructure in selected centres in the back#ard areas of dif-ferent States together with a limited scheme for gtaded incen-

274 CONCLUSIONS

lives to overcome the inertia itr nroving 1(-) a l)cw locationwould pay bettel dividends in lelms of dispersal ol inrlustlv.In such a systeln lhe choice of location woukl llc l lrlarrage-ment decision sublect only to a negative list of lor;ations andtaking into accounl the lotality oli cclnsidela t ions.

Similarly, as part of the effbrts fbl eur;oullging a widel dis-persal of industry, special ellb|to slroukl lle nrado liu' r'olor:at-ing some of the existing industlial units in t:ongestedmetropolitan cities. A set ol tax and olhet'incentives need 1o

be wonked out to euable industries like textilt's, re-r-ollingmills, foundries, etc., to nlove eut ol big cities like }Jonrbavand Calcutta. In this way the land thus leleast:d could be used

for other socially appropriate piurposes and theleby teducethe intensity of civic problems in these cities. The tax lawsand municipal legulations should be so revised as to enablethe units moving out of the cilips to use the appreciation inthe value of their land and other assets for reinvesturent inother places or for setting up new industries outside the met-ropolitan areas. While employnlent is an important obiectiveof economic policy it has to b€ emphasised that economic

Srowth would be seriously obslructed if thele is insistence onthe same percon being employed in the same lob itr the samelocation.

There are two other points of a more general nature whichneed to be bornd in mind. First, over the years, for variousneasons, there have been so many age4cies exercising con-trols that the regulatory power$ ltave not only become verycompl€x but the whole process of obtaining approvals hasbeen tied up in knots. Any attempt to untie each of theseknots separately would be time,consuming and until there isadequate movement on several fronts, worthwhile improvements would not be disce|nible. lt is necessary/ therefore, totake certain calculated risks and make a concerted movelowards simplification of prooedqres and liberalisation ofpolicies on several fronts simultaneotrsly.

It is not merely a question of liber alisation of licensingpolicy. It is equally necessary to initiilte ppr-op|iate consequen-tial changes in other areas such as cotrtt'ol on uronopolies andrestriciive trade practices, impo of technology, r'egulationsregading inflow of foreign c:ipital, regulation of imports,

Regulaliotr and DevelopInenI 279

fcmoval ol inrPcdirrtt:trts in utilisirtg trrodet'tr itllbt'tnatiott svs-

terrrs and lucililies of- laster comrnunicatiotrs--tlatiorrall-r' atrdintelnat ional lv. .\ n€ln'policv orientation would alscl Irecessitate

r: r'evieu' ol the flsr;al policy, par'lit:ulallf in so I'itr as it aff'ectstlre ccllpolalc sut:tol and tlte sntall clltrol)rertcur. The task, thus,is both lirlnriclable antl <:orrrlrler. tlnless this is recognised,tl)ofo ir.i a |eal dangel ol tht: initial entltusiasm lbf change €fet-

ting slvarrrped bv a setrse ol fl'itstlation al tlle vely slor,v pace ofvisil)le oharrgc.

'l'he second poilrt is that in acldiliolr lo changes in policies;rnd procedrrles, a change in the administl'ative ethos and cul-lure would be essential if these policies are to succeed. Overthe vears regulatoly policies and procedures in tlle systemhave been modified and lefincd in the light of experience.'The aim of these refinemenls was lo ensure compliance withthe legulations and to fenlove ahy loopholes. In a sense, theadministrative system has built up a degree of expertise inregulation per se. The minutiae in respect of indu-stl'ial licens'ing, impolt controls, foreign exchange and a whole range ofspecific types of regulations has been rnastered by the adminis.trative apparatus. This expeftise has also m€ant that the prDcesses of policy-making have relied upon the ability of theregulatory apparatus to prcvent certain events. But thereguLatory system was not in a position to make things happen.

lf one is to move away f'rom the system of physical con-

trols, a major change in the administrative culture would bebssential. For'example, in the traditional regulatory systemcreation of over capacity was, in sevenal cases, preventedthrough the use of the licensing svstem. If the area of licens-ing is to be reduced, then clearly it r.vould be necessary tobuild up mechanisms by which the creation of excesscapacity could be avoided. For instance, it should be ensuledby the Goverr-rment that financir.rg institutions, the lrirectol'aieGeneral of Technical Developmenl and other technical l\'ingsof administrative ninislries, Development Councils, or betterequipp6d hdustrv Associatiol-rs are nlore efTectivelv used todissernirrate inlofn)atior) t'egitr<ling aleirs \\ hele lurtlrer'capacitl. cleation woulcl be lrazardolrs l() tllc ne\\ elltfe-preneurs and also highliglrt rrreas rr'lticlt otlel irlvtlsttnentopportunities.

zao CoNCLUSIONS

The emphasis woulct have to move away from physicalcontrols to more effective pnojeotions of effective demandsand investment opportunities. In such a system the right kindof signals would need to be ransmitted through fihancinginstitutions who would make it clear that they woulfl beunwilling to finance substantial additional investments rn par-ticular sectors taking into account the present and prospectivedemands, and the emerging pattern of risks and profitabilityof new investments. Unless the p s of greater liberalisa-tion is accompanied by a change of this kind in the manage-ment of the economy, it could welil happen that at least in theinitial stages, considerable of resources couldoccur with disastrous co particularly for the newand smaller entrepreneurs.

The recent political changesstrength and resilience of the

d the emerging signs ofdian economy provide a

tremendous opportunity for a m and essential overhaulingof the system. Such opportunities come only rarely; and it rshoped that the new leadership woruld be able to recognise thehigh stakes involved in s implementing the newpolicies and also recognise that a onalchange in policycannot be either an instant or a painless process. This is par-ticularly so in the Indian context hecause, over the years, thesystem has increasingly tended to be one in which social costswene being incurred for private benefit. Any directionalqhange which emphasises that in future social costs will beincurred only when there is a corresponding social benefit,and not private'or sectional gain, would hunt those who havelearnt to derive large sectional betrefits by developing specialskills in finding their way through the maze of controls. Thesesections have considerable potentlal to sabotage the introduc-tion and operation of new policies. The next tlr,o or threeveals, thereforer can be crucial lbr the future of the h-rdianeconomv and, indeed, for India's political system.

Regulation and Development 2El


1. For details see, Isher Judge Ahluwalia, Industial Stagnation in India cincgthe l{td-sixtiee 0956-57 to 7979-ad. New Delhi: Oxford Universiw h€ss,t 9E5.

For an incisive analysis of the issues involved see, M. Narasimham, SomeThoughts on Planning. Based on the speech delive|ed at lhe Forum ofFinancial Writers, New Delhi. Sachin Chaudhari Memorial Lecture on 30March 1984. State Bank of India Monthly Review, Vol. xxxiii, No. 6, June1984.

2. For an analysis of the ideological basis of the economic policy in India andthe institutional regime which was established, see, The Coromandel Lec-ture 1984 by Professor Rai Krishna of the Delhi School of Economics.Secunderabad : Coromandel Fertilize16 Lld.

3. M. Narasimham, Some Thoughts on Planning. See note 1 above.4. Ibrd. Publrc Investment Boad (PIBI under the chainnanship of Secr€tary to

the Government of India, Ministrv of lrinance (Departntent of ExDendrture)includes Secretaries of olher. ministries. departmenls, e.g.,lndustry, plan_ning and Economic Affairs. All investment proposals exceeding a fairlylow limit have to be screened and clearcd by the pIB before the approvalof the CabinevCabinet Committee is souslrt.

Dpilogue

By the time work on this monograph was nearing completion, a

new Government under the leaderphip of Shri Rajiv Gandhi hadtaken over. While there was no offidial resoltrtion or Statement ofPolicy which spelt out the ne\ / Govemment's policies, there wasclear evidence of the direction in which the ner,rz administrationwanted to pncceed, Several changbs nelating to taxation, indus-trial licensing and import policy including import of technologrwene being initiated. The Seventtr Five-Year Plan was placedbefore Parliament after discussion in the National DevelopmentCouncil, and this document spelt out in some detail the rationaleof the nerar policies and what was sought to be achieved in thenext five years-and in some cases over a longer period*as aresult of the new policies.

The basic thrust of the new polidies, which were taking shapewhen this monograph was bein$ published, was that Indianindustries in future must be competitive internally an4 in duecourse, extemally; and that Indian research and developmentshould not seek to rediscover what is already a part of the inter-national stock of knor,vledge and which, thereforc, generally canbe obtained at a price, but rather ooncentrate on a few selectedareas in which we have or can crBate capability. There was also a

clear indication that in the nerv policy initiatives, to a much

Regulation and DeveloPment 2a3

greater extent than before, decisions regarding investment

should be governed by the needs of the market place, domestic

and intem;tional, rather than by adrninistrative decree' There

was a refteshing willingness to look afiesh at the relevance and

effectiveness of policies which-had evolved in the first decade

after Independence and which over the years had almost become

Eacrosanct.It was strEssed in the 'Epilogue' to the first edition of the book

(1986) that the accelerating pace of modemisation of the econoriry

and socieqr cannot be li*it"d to the industrial sector' lt was

pointed out that the induction of modem technologr and PrD-

duction practices in agriculture, irrigation works, roads, railways,

ports and hartours, generation and distribution of electricit5r,

etc., is not only vital but is a precondition for modernisation ofindustry. In other words, the task for the future had to be viewed

as a multidimensional one. It was also observed that while the

scenario for the future was fuIl of hope, ther€ wer€ many dangers

ahead. Amongst the dangers predicted was the ever pr€sent

danger of expectations running ahead of what could be delivered'

Another danger was that if the new policy initiatives run intorough weather for internal or extemal reasona, the forces whichhave vested interests in the old system of regulation and detailed

controls would undoubtedly want to prrt things in reverse gear'

These vested inter€sts, it was pointed out, which had consoli-dated themselves in the sixties and the early seventies werE por /-

erful in terms of money, resounces and political clout' The

convergence of interests which has emerged over the last twodecades between politicians, bureaucrats and powerfrrl sections

of Indian industrialists had a major stake in perpetuating a com-

plex r€gulatory system. The conclusion, therefbre, was thatunless reform of the political and administrative machinerywhich was sought to be intrDduced percoLates to the bottom rungor in cefiain fields begins ftom below as a result of local initia-tives, the results would not be in conformiqr with the avowed

obiectives.Attention was also drawn to the magnitude of resources

required to catch up with the shorttall in various sectors of the

economy, e.g., housing and infrastructure such as roads, rail-

ways, corrununications and ports. ln addirion, very substantial

r€sounces wer€ likely to be needed for achiwing imponant obiec-

rising trend of imports. Even ifcement and fertilisers could be

2U EPILOGUE

resources unless there werE concetted efforts to mobilise andconserve domestic nggournes and them with maximumcost effectiveness, arrd on a selective basis.

The seriousness of the resounce on the extemalaccount was also stressed. It was out that the relativelvrapid rate of growth of the economy in the last few years and thelagged effects of import were likely to result in a

imports like edible oils,

-and this should bepossible-there could be no doubt additional demands for

in the coming yeals. Itfor less detailed contml

imports on a broad front wouldwas equally clear that the new strawould not be consistent with the strict and elaborate arran-gements of import contmls. In view cif this situation, there was an

nal resources.

urgent need for increasing exports. But even with a fairly rapidgrowth of exportg there would still i'emain a sizeable balance ofpayment gap on current account whlch would havg to be met byforeign exchange inflow in other fdrms, e.g., remittances ftDmabrcad, particularly ftom non-resideht Indians, inciease in bilat-eral or multilateral aid on concessidnal terms, and raising non-concessional extemal resourceg i.e., bommercial bonowin$s andprivate forEign investments. It was cqncluded that $ven the con_straints on sizeable increases in cofcessional flows, there wasperhaps no escape finm a larger flow of non-concessional exter-

In the context of the difficult resoun:e .position and also keep-ing in viov the fact that the conditions in the eighties a;dnineties are likely to be totally different from those oi the fiftiesand sixties, it had been pointed out ihat while there would be aneed fpr a degree of governmental qontrol, the role of Govern_ment and of governmental or public ihstitutions would have to besignificantly differerit tom what haH evolved in the thirtv-fiveyears after Independence. In the futule, Govemment wouljhave

Rerlt ation and Development zAs

to be the agency for monitoring development and.-s a catalyst ofchange. The main and indeed the cmcial-function of the Stateapparatus and authority would be to take a mor€ compr€hensiveview than is possible for individual participants in economicactivities; and having taken such a view to devise systems throughthe use of State powers which provide the necessary frameworkof incentives and disincentives and deterrents which would leadto the desired results.

The Epilogue vwitten as it was in the early days of the RajivGovernment's administration ended on a hopeful note. To quotefrom the text

There is a breath offresh air in the corridors of power, and forthe first tiine in many years there is a willingness to accept thata change in policies to deal with situations is not sJmonJmouswith repudiation of the past. All responsible sections of thepopulation wish the policy-makers good luck; but for policiesto succeed there has to be a political restmcturing in terms ofisolating and neutralising the lumpen elements which havetended to dominate the political scene. This would be a maiortask for the political leader'ship because without this a crediblepolitical system and a reasonably honest adminisbationwould not be possible.

Looking back over the last three or four yeans, to tvhat extenthave the hopes been realised or the dangem materialised? EvenmorE pertinently, what is the prEginosls for the future? What kindof strateSr and conesponding policy tamework would enable usto move mone purposefully towards the basic goals' to wtrich theeconomic policy has been geared since Independence?

It is a matter of satisfaction that since the first edition waspublished several s,rggestions/conclusions in the mono6raphhave been acted upon. The definition of MRI? compa.nies hasbeen altered so as to become applicable to corr.pa.nies with asseteof Rs. 100 crore instead of the earlier limit of Rs. 20 crpre. tMRTP/FERA companies were also exempted tom licensipg in as

'Itrese goale are: 'Mo,e tolv8rds a technologlcally rrlaturt EeiotJ, wtdch wouldensuE s€lf-suEtaining golivtb and avold concentration of inco[re and r Eilth inthe hands ofa ftr / individuals.' See Chapter 10.

tsee p. 275, Chapter 10.

2A6 EPII,OGUE

many as 52 industries, i.e., Appendix I industries, if they set upunits in centrally declared baclavard areas. A number of policyinitiatives have also been taken with a view to limiting the role oflicensing; and to some extent rEverling to the original concept'ofthe Industries (Development and Regulation) Aci, 1951, by broad-banding certain industries with a view to providing flexibility inthe range of manufacturing. The system of broadbanding nowextends to a wide range of indu$tries including metallurgicalmachinery, earth'moving machinery, auto-ancillaries, textilemachinery, synthetic fibres, sl,nthqtic filament yams and a widerange of chemical industries. Even ln the case of consumer dura-bles, the new policy permits diversiification into a range of 'white'goods, such as refi:igerators, washing machines and vacuumcleaners. In short, the rigidity and overprotection rarhich were aconsequence of the elaborate and complex system of licensingane sought to be greatly reduced. Ah equally important change isthe introduction of the concept of minimum economic scale ofpmduction-again a reversion to the original concept of Indus-tries (Development and Regulation)Act+ - so that not only wouldthe new units be of economic sizie but the existing units alsowould be fieely pernitted to expand until they reach the mini-mum economic scale of produition. Government allowedexporting units to meet firm exp0rt orders without acquiringlicences to do so; and it was also decided that provided a unitpruposed to export all pmduction over and above the permissiblecapacity, it may do so without the need for a licence. There hasbeen considerable relaxation with regard to re-endonsernent ofcapacity on the maximum production achieved by a unit. Impor-tant indqstries like cement** and allrminium have been removedfi'om the ambit of price control$ ahd generally a more rationalpolicy has been followed in res6iect to administered prices.Attempts are being made to incr€dse the autonomy++ of publicsector units by intnrducing a system of Memomnda of Understand-ing between public sector units and govemment departments. Inthis way, public sector enterprises would be answerable to Govem-mer)t only in terms of well afticulated obfectives, and the invol-

" See Chapter 3, especially p. EZ onwards.' See Chapter 3, pp. 87, 86.

" Cf. pp. ?A14a, Chapter 9.tt See p. 200, Chapter 7.

Begulation and Devcloptnent 287

vement and interfer€nce of govemment departments in normalmanagerial decision-making will be avoided. The last thrce orfour years have seen a directional change in policies and proce-dures, but in this NetIIu centenary year there are'miles to go'.

Even though the liberalisation process has not been as drasticas some would have liked or its benefits as pervasive as one couldhave hoped for, there have been maior-and even radical-changes in the industrial scene.

In several areas of industrial ploduction, such as fertilisers,cement, passenger cars, consumer, communication and elec-tronic goods, sl.rrthetic fibre and trvo-wheelers there have beenvery large quantitative increases in capacity and production inthe last few years. But equal$ important has been the qualitativeimprovement in a wide range of products including capital goodsand durable consumer goods, on a scale unparalleled in the lastthirty-five years. The industrial sector is in the midst of a pro-.found transformation. The availability of industrial raw materials,intermediates and goods has expanded substantially; and therehas been a significant relaxation ofthe infrastructural constraintsto rapid industrial expansion. Industrial investrnent has beenbuoyant. The increased competition is imposing on Indianindustry a new dibcipline and culture, and the focus of manage-rial effort is shifting away firom manoeuwing controls and proce-dures and moving towards establishing market shares. Techno-logy is becoming an increasingly important determinant ofcompetitive strength. A new class of entrepr€neurs is emergingand the relative ranking ofbusiness houses is undergoing a rapidchange. Domestic liberalisation coupled with relaxation of importcontrols, limited though they might be, has initiated the processof making the Indian industry cost, quality and productivityconscious.

Another encouraging feature of the industrial scene has beenthat the expansion of industry in the last few years has been quitebroad-based. For instance, according to the Seyenth Five-YearPlan 1985-9O, Mid+errn Appraisa.l,' about 40 per cent of all indus-try showed rates of growth exceeding 8 per cent. .These includebasic metals, chemicals, paper and paper prociucts, electricalmachinery and appliances. In keeping with the buoyancy in thegrowth of industrial output, the pace of investment in the indus-trial sector has also been fairV rapid. The public sector outlay for

2.88 EPILOGUE

large and medium industries in tlre central sector was envisagedto be Rs. 17,268 crorEs at 1984-85 prices., According to the latestestimates, nearly two-thirds of t$e planned outlay had alreadybeen undertaken in the first three ['ears of the Plan. Private corpo-rate investment is estimated to h4lve risen by about 26 per cent atconstant 1984-85 prices,: as compriared to the trienniums centredon 1981-82. The buoyancy of industrial investment is also conlbo-rated by other indicators, such asl industrial approvals, consentsgiven by the Controller of Capital Issues, and assistance sancti-oned by all-India financial institqtions. For instance, the assis-tance by the three all-India financial institutions and the StateFinance Corporations and the State Industrial Development Conporations increased from Rs. 3,605 crores in 1983-84 to Rs. 5,3(Xcrores in 1985-86, to Rs.6,848 crcr€s in 1986-87 and to Rs.7,625

. crores in 1987-88.4 Disbursals also increased t'om Rs. 2,529 cmresin 19E3-84 to Rs.5,482 crores in 1S87-88. This increase in disbur-sals has to be viewed in the context ofthe very large increases innesources raised tom the capital market by the private sector-Rs. 2,339 crores in 1986-87 as agalnst Rs. 1,157 cmrcs in the pr€-vious year.s Thu$, the overall invQstment climate in the countsyplovides sufficient gmund for an{icipating impmved investmentand output in the indusdal sectoh in the coming years.

Available data also indicate ttmt there has been a distinctimprovement in the capital-outpurt ratio in manufacturing indus-tries in the last five or six years. Ifirproved capacity utilisation aswell as the completion of long Eestation projects where largeinvestments were made in the preceding years would have con-tributed to this improvement. Thip trend, however, mal not con-tinue for two reasons. First, modernisation of existing ilantswhich will help reduce the cost of pmduction in an industrywould not necesoarily result in an increase in output commensu-rate with investment in modertrisation. Similarly, additionalinvestments which would be needed to minimise the environ-mental impact of industrial activity will also tend to raise thecapital-output ratio.

There is a comnon assurnptioh that Indian industry, for themost part, is a high cost producEr. While, no doubt, there aresegments of manufacturing activity where local costs of produc-tion ar€ out of line with interna$onal costs, but an analysis ofstudies undertaken by the Burearl of Industrial Costs and Prices

ReE ation and DergloPment 289

(BICP)* shows that in a number of Indian industries the costs are

amongst the lowest in the world, e.g., bulk drugs and formula-

tions, petmleum refining, industrial boilers and passive elec-

tlonic cemponents.Second, even in those sectors where, on an averagei the cost for

industry as a whole may be higher than the international cost'

therE ane several units whose costs are much lower and in many

cases at near international levels. This is true in the case of alum-

inium, newsprint and cement. There is also evidence to suggest

that in a number of sectors the costs are declining as the new

units settle down and master the new technologies or improve

the productivity of the worKorce. The studies also show that in a

number of cases where, in financial terms, coEts may appear to be

higher, the domestic production is competitive in terms of

domestic Fesounce cost, and the apparcnt high cost is the conse-

quence of administered prices of major intermediate inputs' e'8''

ciemicals, petro-chemicals and such metal-based industries as

are highly material intensive. In other words, experience and a

detailJd analysis of the working of the industrial sector wouldseem to suggest that provided apprDpriate cornective measures

are taken, there is considerable scope for making the industrialeconomy intemationally morE competitive.

These changes would involve changes in pricing policies, les-

sening the licensing constraints on the mor€ efficient units, andalso changes in a number of govemmental policies. For instance,

while there is need to insist on a phased manufgcturing pro-gramme, gl€ater ca.ne needs to be taken to ensurE that substitu-tion of imports is not undertaken at exorbitant real costs. The

attempt should be to optimise the perEentage of domestic inputrather than maximise it in€spective of cost' Similarly, the admin'istened prices for a number of imponant interrnediates such as

naphtha or non-fetrous metals would need to be brought dovvn,

over a period, to approximate international prices; and also byensuring that fiscal levies on the inputs needed for production of

*Dudng the period 1962-87 the Bur€au oflndustrial Costs and Prices undertook

studies of2o8 industries covering a numb€r ofimportant industries. On the basis

ofthese studies cer{ain interesting and important conclusions emerge. These ar€

contained in a paper (unpublished) entitled 'Stmtegies for Cost Reduction-Somelcssons from B.I.C.P. studies', which was circrrlated as a discussion pap€r at ageminar held on 2 MaY 1988.

29O EPII.OGUE

domestic capital goods are not fi*ed at a level which make thedomestically produced capital godds significantly higher pricedthan similar products abroad.

Thene is, however, disturbing news on the resources ftnnt, bothintemal and extemal. The preference for soft options, lack offirmness in insisting on performance at all levels which, in asense, is an essential ingredient Of a competitive environment,and an ambivalent attitude towafds enforcing a link betweenproductivity and eamings, especidlly in the last few years, havebrought the economic system under increasing strain. The basicprcblem of over-spending at hofne and not earning enoughabroad has, by now, acquinsd menacing proportions. Forinstance, the total outlay at the Centre and in the States/UnionTerritories in 1980-81 was Rs. 96,845 cmrcs and constituted nearly27 per cent ofthe GDP. By 1984-85 the outlay had increased to Rs.

72,825 $orP-s, i.e., nearly doubled, andwas close to 32 per cent ofthe GDP. In the Eudget Estimates of 1988-89 a provision of Rs.

127,780 crorEs, i.e., close to 34 per cent of the GDB has beenmade. Even mone worrying is the fact that while dwelopmentalexpenditures during the decade increased by approximatelythree-and-a-half times, i.e., from Rs. 22,42;6 cr!,res to Rs. 78,107

cror€s, the non-dwelopmental expenditurc had risen more thanfounfold.o The gap between current revenues and current expen-ditures amounted to Rs. 12,282 crDres in 1980-8l which had morethan doubled in 1984-85 and had toFrs.47,7M crures inthe Budget Estimates of 1988-89.7 This gap had to be filled byincreasing r€liance on of one kind on another, inter-nal or extemal, and at fairly high rates of inter€st, or by creatingnew money. In consequence,to Rs. 2,957 crnres in 1980-81l9E6-87 and further to Rs. 16,109 cr1)res in the Budget Estimates of198E-89. Despite large borrowingsr the overall budgetary deficitwhich was steadily being brou$trt down since 1980-81 andamounted to Rs.2,135 crores in 1883-84, n3se to as much as Rs.

9,150 crores in 1986-87 and remaihed at a high level of Rs. 8,356

crores in the Budget Estimates of 1988-89.EThe implications of financing thp current deficit with a combi-

nation of borrowing and note-printing ar e evident. Borrowing at ahigh rate of interest entails a sharply increasing inter€st burden.This in turn worsens the revenue deficits necessitating even

Regiulation and Development Nl

higher bonowings and noteprinting. Second, these bonnwingshave to be repaid; and when large repa5rments ar€ to be made,these will have to be increasingly dependent on printing moneyand thus further fuelling inflation. Thftd, with Government pro-gressively acquiring a laqger share in the savings in the economy,credit resources available even for essential or high priorityinvestments in the organised private sector tend to get crowdedout.

Unfortunately, for many years there has been a degree of com-placency about the continuing budgetary deficits. While somelook upon these deficits as inevitable, otherr take refuge behindthe argument that in a dweloping counuy like ours,'historicalexperience has shown that budgetary deficits (and consequentincreases in money supply) are not necessarily or fully reflectedin price rises. This argument, however, is fallacious for two mainr€asons. Fi6t, the price rise which is relevant for the ayeragecitizen, i.e., wage goods such as foodgrains and other food arti-cles, and essential services, has been higher than is reflected inthe wtiolesale price index. The consumer price index which has ahigher weightage for these items has always risen at a faster ratethan the lwel of vr*rolesale prices. Secon4 the impact of budge-tary deficits in the last two or three years has tended to be mod-erated by drawing down on the foreign exchange reserves. Thedecline in reserves acts as a contractionary influence on moneysupply. The scope for further drawing down of the resewes isnearly exhausted. Moreover, the cushion built up in terms oflarge foodgrain neserves which, in a sense, are a forrn of foreignexchange reserves is also no longer present.

In short, ther€ is no room fon complacency. This is all the moreso because with the continuing budgetary deficits, ihe cumula-tive increase in money supply has already built up a latent infla-tionary potential. So far monetary authorities have tried to keep incheck the adverse consequences of increased primary rnoneysupply thmugh restrictive monetary policies, such as successiveincteases in CRR (Cash Reserve Requirement) and SLR (StatutoryLiquidity Ratio). But ther€ is a limit beyond which this is notpossible. The socio-political consequences of persistinginflation-and also expectations of continuing inflation-areextremely serious. A highly,unequal distribution of incomes in acountry like India gets further accentuated thmugh persistent

292 EPILoGUE

inflation. Basicallv the tax evadert, organised sections of societyincluding government servants, cirganised labour in public andpri/ate sectom, and those who have 4n opportunify to be corruptwhether in public or private $ectof or in Govemmer-rt thrive at theexpense ofthose who are the poof€st, unorganised and hglpless.The rich get richer while the poor, particula-rly the poorest,become the victim of rising prices. Govemment's efforts to borrowby offering all sorts oftax exemptions and attractive interEst ratesbenefit the relatively bettenoff. Vafious schemes like Indit a VikasPatra, wealth and gift tax exernpt bonds and other similarschemes contribute to launderin$ black money. This is no recipefor social or political stability.

There is, of course, recognition of the need for containment ofthe budget deficits and prudent dranagement of public expendi-turc., The Economic Survey for 1988-89 as well as Surveys inearlier years have highlighted the need for fiscal discipline. Forinstance, the latest Economic Survey'o points out that the 'threemaior elements in non-Plan eiperlditure, namely, intercst, subsi-dies and defence, which had accounted for Rs.25,954 crores int986-AZ, increased to Rs. 30,906 cror€s in 1987-88 (RE), and fur'therto Rs. 35,359 croles in 1988-89 bUdget estimates.' Similarly, theSurvey recognises that 'restoration of better balance betr,r'een

Sovemment revenues and expenflituns is not only essential forbringing about the desired improvement in public sector savingsper{ormance, but also for enhan(ing futur€ prospects for pricestability.'rr On the question of balance of pa3zments, the EconomicSurvey attributes the pr€ssurc on the balance ofpay'rnents duringthe Seventh Plan to several factors including

... deceleration in the growth of domestic oil production, pm-tectionist tendencies abroad, Wlatility of maior intemationalcurrencies, bunching of repayrnent obligations to the IMF andother sourres and an unfavoufable intemational climate forconcessional assistance. The prlessures arising ftrcm these fac-tors have aggravated during 198E-Eg by a surge in the importbill.1,

It is true that these factors have enhanced the difrculties inmanaging the extemal sector. The liberalisation of the systemtogether with the relatively higtl rate of industrial Slsu/th-

Regulation and Develoqment 293

g per cent on an average between 1985-86 and 1988-89 as com-pared to 5 per cent in the preceding th€e years-has also meanta spurt in the import bill; and this was further accelerated by theadversc tncnd in agricultural output necessitating import ofvegetable oil and foodgrains. But the fact remains that in a mor€fundarnental sense, the balance of palments prohlerns leflectimbalances in the domestic fiscal situation. As the Economic Sur-vey points out:

though it is not often appreciated, it must be recrrgnised thathigh levels of deficits ter"ld to spill over and contribute to higt!current accounl deficits irr the balance of pay'ments. Anirnprovement in thc current account of the balance of pay-ments rrequires a commensurate reduction in the overallsavings-investment gap of the economy.l3

In fairness to the Finance Minister who had to fi'ame thebudget in the context of the difficult situation and in a pre-election year/ one must recognise that he has managed to keepundel control the pressing claims of the spending departmentsand the political pressures for populist measunes. For instance,he has been abie to keep the defence expenditure pegged to thesarne levei as in the previous year in nominal terms. This repre-sents a reduction in defence expenditune in real terms of theorder of nearly 10 per cent. This is certainly creditable when seenin the context of the mounting expenditune on this accounl yearaftel year. Defence outlays have increased each year ever sincethe fifties and the increase during the eighties has been quitesharp. The total defencc expenditure which was Rs. 3,571 croresin 1980-81 increased to Rs. 6,647 crorcs by 1984-85 and was Rs.

t3,iOO crores in 1987-88; and demands from the Ministry ofDefence for 1989-90 wer€ rcported to be to the tune of Rs. 17,000

cmres. Similarly, the various schemes for the welfare of theweaker sections, such as distribution of dhotis and saris, mid-daymeals and employment for at least one penson in wery house-hold, which were strongly supported by the All-India CongressCommittee at its meeting olrly a few months before the Budget,would have meant a total burden in the neighbourhood ofaboutRs. 2,000 crores. On a rough estimate, the Finance Minister hasheen able to contain this demand to arnund Rs. 500 crores. He

294 EPIIOGUE

has also made an effort to mise additional nesounces qnd the netincrease in tax revenues in the pmposed budget amolnts to Rs.

1,287 crcrcs, a figurc higher than in any previous year.14

The Finance Minister deserves commendation on anothercount. As he has pointed out in his Budget speech,15 the Govern-ment has rcsisted the temptation to cope with the short-termdifficulties in our balance of paJ,/rnents by ad hoc import regula-tions through detailed import licensing. It is also interesting tonote that the rEason for not succumbing to this temptation is thechanging composition of our im$ort trade. At the beginning ofthe decadg 65 per cent'of our imports consisted of a few bulkcommodities like foodgrains, edible oils, fertilisers, petroleum,and fuirous and non-ferrous metals. In respect of these imports itis relatively easier to regulate the total quantum of such importsthmugh foreign exchange allocations. Of course, the subsequentallocations between the users in cases like ferrous and non-furrous metals became quite cofnplicated. But when importscoven a wide range of raw materiflIs, capital goods, compone.ntsand chemicals, the system of foleign exchange allocation andimport control suffers ftpm inordinate delays and inefficiency. Asthe Finance Minister has pointed out in his Budget speech,r6 by1987-88 imports of bulk commodities accounted for only one-third of our imports, i.e., only half as much as at the beginning ofthe decade. The strategl for maintpining a curb on importg therefoie, can no longer be detailed forgign exchange and import reglr-Lations but other rnacftt-economic policies such as exchange rateand tariffpolicies. For the finst time, the Government has spelt outthe lo$c behind the policy of reducing the arca of elaborate anddetailed controls. It is to be hoped that this policy will continue.

While these rccent policy direotions augur well for a greateremphasis on fiscal and monetary the task in the com-ing years is likely to be far furmidable than is generallyrecogtrised. First of all, the of the fiscal problem andthe period over rvhich fiscal has been permitted toprevail do not alloru much for gradualism. The need for

pointed out earlier, the magnitude of resources rcquircd to catchup with the shortfalls caused b5,t inadequate prcvisions in thepast in crucial sectors like education, health, housing or specialemploJzrnent pmgrammes is itself going to be so large as to put a

reducing budgetary deficits is On the other hand as

Regulation and Development zss

strain on the available nesounces. In addition, massive invest-

ments ar€ likely to be needed for infrastructural industries, e.9.,

coal, electricity, railways, transport and communications; andalso for capital intensive segments of industry in the public sec-

tor, e.g., steel. In short, in the next fewyears a concerted effort willbe needed to generate and mobilise domestic investible resour-ces to the maximum possible and to utilise them with maximumcost effectiveness.

It is against this background that the decline in the rate ofdomestic savings becomes a matter of serious concem. The gross

domestic savings which hovered around 10 to 11 per cent duringthe First Plan period had risen to around 15 per cent by 1969-70.

There was a sharp increase in the gross domestic savings ratetowards the end of the seventies. The average domestic savingsbetween 1976-77 and 1980-81 werc 23.'1.4 per cent which camedown to approximately 21 per cent on an average for the thnee

years 1985-86 to 1987-88 (both inclusive).l2 The deterioration in thesavings rate-as the Economic Survey (para 9.3) points out-canbe largely attributed to the deterioration in savings by the publicsector and especially to the sharp increase in dissavings onGovemment account. Year after year the Economic Surveys havebeen drawing attention to the tendency for the growth of currEntgovernment expenditures to outstrip curent revenues, thusleading to rising rates of dissavings and growing reliance on bor-rowed funds for financing govemment expenditure. By 1987-88

the gap between grcss capital formation out of the budgetarynesources ofthe Central Government and thegross savings oftheCentral Govemment had risen to over 9 per cent of GDP. Fmm thepeak of 5.2 per cent of GDP which public savings had attained in]p76-77, they had fallen to a merE 1.9 per cent of GDP.

The turrraround in public savings performance is crucial forfinancing the lwels of public investment necessary for continuedstrong economic growth in the medium terrn; and this turn-aruund must come both from an impmvement in the budgetarybalances of the Central and State Govemments as well as

increased surplus generation by public sector enterprises. Animprovement in the fiscal situation both at the CentrE and in theStates will depend not merely on steps to enhance the buoyancyof tax revenues and measures to bruaden the effective base oftaxation, but also on Government's abilitv to enforce strong curbs

296 EPILOGUE

on the 8lo\Mth of cunEnt The scope for enhancingthe buoyancy of tax rerrenues exists, but the tempta-

enhancing rates on ation to incrcase tax ngvenues bvrclativelv narrow taxable base to be rcsisted. Experiencehas shown that beyond a point the rates of dirccttaxes is counter-productive; and sifnilarly, a steep increase in therates of excise and customs dutie$ not only distorts the rel,ativestructure of output costs and priges, but it also necessitates acumbrDus and dilatory system of set-offs to assist exports byoffsetting the disadvantages suffered by exporters as a result ofhigh and multiple taxation at local, State and Central covemmentlevels. The thrust in future will, thercfore, need to be on broaden-ing the tax base, maintaining a statlle and relatively more neutraleffective incidence of taxation, indinect taxatiort andremoving irritants in the fbrm of interpnetations of tax lawsin respect of direct and indinecteffort, not to speak of the financialtry incur as a result of ambiguities in the interpretation of law isonly a part of the costs. The and wen more worr5ringdimension is the very increase, rvhich apparentlyhas occumed in the last few years, in the extent of corruption inthe tax collecting agencies. The thenefore, is not onlv foraugmenting tax rEsouK)es but fol' doing so through methodswhich are perceived to be fair and equitable.

The other maior thrust of policy [n the years to come has to bein terms of reducing the gro$th of government expenditures andespecially consumption expenditlrres. According to the Eco-nomic Classification of the Cerltral Budfret,la consumptionexpenditure rcse fi\om Rs. 5,f74 ctores in 1981-82 to Rs. 18,743crores in 1987-88. The need to borrtw in order to finance currentfinancial expenditures, as pointed out earlier, has meant a rapidincrease in borrowings. Consequently, the proportion of expendi-lur€s on inter€st payments has incteased fiom 10 per cent of thetotal expenditures in 1980-81 to abdut 17 per cent in 1988-89. Theresult has been that while the propDrtion of consumption expen-ditur€ to the total expenditure renhained mor€ or less the sameduring the eighties, there has been a decline in the propoltion ofexpenditures in capital formation ftom ove,r 40 per cent in theeighties to a little over 35 per cerlt in the budget estimates of

The amount of time andwhich trade and indus-

1988-89.1e

Regulation alrd DeveloPnent 297

The control over govemment expenditur€s, however, wiilinvolve not merely mar$nal adiustments like curts on travelexpenditures or stationery, but far more basic changes in thestyle of functioning of both Cenral and Stat€ Governments. Whatis required is a careful revie,rv of the whole gamut of Spvernmentactivities in order to establish that they arc still relavant andessential in the cufrBnt context. Equally, it will be necessary tokeep a close watch on whether the way of doing things needs tobe modified so that more can be achieved with the samr.' expendi-ture. This will n:quire, among other things, a raclical ne'

orientation of govemmental pnrcedures and lvork norms.Control over public expenditures, however, is not by itself likely

to be adequate. It is even mone necessary to ensur€ that thecommunity gets a reasonable return by way of public sector sur-pluses. The nation has invested over Rs. 60,000 crcres at historicalcosts in enterprises owned and run by the Central Government;and while public enterprises may have made many contribtttionsto the development of thb industrial strength of India, fbr themost pa they have failed to Senerate adequate surpluses.' Forinstance, in 1986-87, profits of public enterprises amounled to Rs.

2,742 crrrre-s, of which Rs. 2,142 cmnes wene generated in thepetmleum sector alone. If the petmleum sector is excluded--andthere are good reasons why il should be excluded in analysingthe working of the public sector as a whole-the ratio of netprofits to capital employed in all other profit-making publicenterprises is amund 2.5 per cent. The ratio for all public enter-prises, i.e., including loss-making ones, is negative with lossesamounting to 0.9 per cent of the total capital employed. Further,these losses for the public sector as a whole have been increasingtom Rs. 1,112 crcr€s in 1984-85 to Rs. 1,710 crores in 1986{7.There is obviously a need for a concerted effort to improve theprofi tability of public enterprises.

The efficient operation of the pub[c sector is to be seen in theconlext of the need to raise nesourcea in a non-inflationaryrRanner, If thene has to be a stratery for the creation and suste-nance of a competitive envirnnmen! the turnaround of publicenterprises has to play a very crucial role in that stratery. Indian

'For a detailed discuseion Eee Chapter 7, 'hrbuc Sector aE an Inshrrment cfGrcwth.'

Z9A EPILOGUE

industry cannot be .made internationally viable unless publicenterprises which pmduce the bEsic raw materials and inputsare also intemationally competitive. Much has been written andsaid on this sublect; but the sfu61;point is, as indicated by Shrh

Abid Hussain, 'the commanding helghts have, at some stage, to begood for people other than the cornmanders themselves.'zo Thiswill require action on several finnts and will be a subiect by itself.But there are some points which deserve special emphasis. Thewave of liberalisation over the last few years has really affected theprivate sector. The public sector cqntinues to be under shackles.The stranglehold of ddministrative departments makes a mockeryof the corporate form which was designed to establish an ann'slength r€lation with Govemment. Irt is time that they cea$e to beundertakings and become enterprilses. Second, future directionsofthe growth of public enterprises need to be charted out. Thereshould be no a priori restrictions on the grcwth of public entenprises. Public enterprises have to gtrow, expand and diversi$r in acompetitive environment like any business. They will need tochange in response to market condlitions and in keeping with theemerging needs of the economy.

But by the same token there is an urgent need to undeftake areview of the existing portfolios of public investments in theindustrial and rclated secto6. The suggestion by Abid Hussainzrthat public enterprises should be encouraged to vacate low tech-nology, smAll-scale and non-strate$c areas of operation so thatthey can concentrate their resources and focus their capabilitieson high priority and technologically demanding areas, deservescar€fuI consideration. A consciouE policy of disinvestment mightin some cases involve sale ofthe enterprise to the private sector.In some cases, it might rcquile abborption into an existing andefficiently managed public enterprise. There are several othervariations.

Third, a hard look is needed with regard to the future of entenprises which have emerged as chrcnic loss-makers. An analysis ofthe public investment portfolio will show that around 40 enter-prises which have been incurring cash losses continuously forfive years account for 75 per cent ofthe total cash losses inculredby all public enterprises in 1986-87. The total losses ofthese unitsamounted to over Rs. 1,000 crone$ in that year. While to someextent these losses reflected the operations of the units that have

Regulation and Develoryent 299

been taken over by Govemment, in a large measune they areattributable to deficiencies in the ori$nal investment decisions.In consequence, it is necessa{r that these deficiencies in the forrnof inapprnpriate location, improper technolory covering theknow-how and equipment, irrational pncduct-mix and unsuitablemarketing arrangement will need to be rectified. Maior technologi-cal and finahcial rcstructuring will be needed to make the pere-nially loss-making enterpri.qes viable.

Finally, operational autonomy is a 'must' for all public enter-prises. Autonomy and accountabiliqr go together and therE is noconflict between the two {see pp. 198-99). The necent initiatives inthe form of the Memorandum of Understanding are still at apleliminary stage and will need to be refined to ensure bothautonomy and accountability. Cunently, the question of theMemorandum of Understanding; their conted and their useful-ness for iud$ng the performance of individual enterprises isbeing examined in depth. The question, howeven, is not merely ofdrawing up of such MOUs; even more important is the wholeattitude towards the role of public enterprises and the need togive them adequate operational autonomy. The real pmblem hasbeen that having created corporate entities in the public sectorand thus drawing a corporate veil to reduce theit expostir€ toadministrative and political interference, Parliament no less thanGovernment did everything possible in the sixties dnd seventiesto ensur€ that the autonomy for public sector enterprises waa nogr€ater than that for subordinate govemment offices!Unless therEis a change in this attitude of treating the public sector at theGenFe and particularly in the States as a hand-maiden for thepoliticians, there can be no real imprcvement in the functioningof the public sector.

Ttre resourre crunch is the other dimension of an acute strainon the balance of paymeiits. Except foi nvo year, i.e., 1972-73 andL976:77, since 1948 Indian merrhandise imports have cost morethan the exports. The annual deficit on the trade account hasincreased from amund Rs. 100 cmres per annum in the earlyfifties to figures ranging between Rs. 5,000 and Rs. 9,000 cror€E inthe eijhties. On pr€sent indications, the annual trade deficit willcontinue to be between Rs. 7,000 to Rs. 8,000 crores despite thenecent incnease in our exports and the efiorts at importsubetitution.

3OO BPILOCUE

The deficit on fade account, hov{,eran is not by itself a matterfor grave concern. Despite the oil cr{sis trndia was able to manageits balance of pa;,.rnents with a reaponable measure of success,primarily trecause of the sharp irlcrease in invisible rcceipts.These include remittances fiom abltrad hy nrigrant Indians andalso deposits undex the scheme available to non-resident Indiansfor keeping deposiis, convertible otr non-conveftible, in Indianbanlcs al atlractive rates of interest. 'I'he invisible rreceipts whiohhad fluctuated bel&€en 500-600 million doliars in the sixties andseventies.rose sharply to arnund 7,500 urillion dollars.in 1980-81.In 1sE5-86, these amounted to Z8S5 million dollars. Althoughilrdsible fJalrnents have aiso increabed frorn anrund 700 milliondollars to 3,700 rniliion doilars in '1986-87, the net surplus oninvisibles has risen shaqply, cnnsequenlly bringing down the cur-r€nt account deficit. Nevertheless, the deficit in the balance ofpaJments has continued to bemillion dollars thruughoul the

ntial hovering around 3,000except in the J,ga. 1984-at

when it decreased sharply toThe balance of paJtrnents

extemal assistance or by dralvingsallocations of SDRs. Except for

1,000 nrillion dollars.22can be financed either bv

the Fund or by additionallast method, the other

methods of meeting the deficit, i.e., rclying on extemal assistance,drawings ftnm the Fund or drawing down of resewes has a costimplication. Externai assistance, parl'ticularly borrowings on nearcommencial terrns, have to be servicdd and repaid. Drawings fi'omthe Fund bring along with it conditlonality which involves basicchanges in policies even if int perccptions arrc at varian cewith the Fund's prescriptions. It is this background thatan adequate level of foreign reserves becomes animportant constituent of

Since 1985-86 therc has been a sharp decline in our reserv'eswhich in nrpee terms have declined ftom Rs. 7,384 cror€s as on 31

March 1986 to Rs. 5,819 crores by the end of June 1988.13 Therese,rves in rupee terrns, however, understate the extent of erD-sion of foreign exchange reserves b4cause ofthc depreciation ofthe Indian rupee in terms of olher cprrr.ncies drfing that period.ln terms of SDRs, i.e., on the basis of a common denominatorwhich takes care of the depr€ciatiol'r of the extemal value of therupee, the neseryes declined ftom 5,f28 million SDR at the end ofMarch 1986 to 3,598 million SDR at the end of June 1988.24 This is

'4ulation and Developme SAT

a matter of some concefn.Apart tom the curtailment of nur teedom of action as a result

of the decline in reserves, there is another worryzing feature. Thefigure of n:serves at the end of December 1988 is bolstered up bythe accrction to and increase in FCNR (Foreign Currency denom-inated Non-Resident) deposits.* The dollar designated depositshave gone up tom an equivalent of499* million dollars as on 31Marth 1985 Io 4,!34 million dollars. by the end of December1988.rs The net accr€tion in the course of the year ending June1988 was Rs. 1,398 cnrnes, i.e., nearly 20 per cent more than thecorresponding period in the pre,vious year.z6 The uptrend inFCNR deposits has continued in the subsequent period as well.These represent investments made by non-residents through thebanking system in the form of attractive intenest bearing depositswithdrawable in foreign currency. The fact that these are repatri-able means that the inflow as well as the outflow of these depositswill depend upon the investors' confidence in our abilit5z to man-age our balance of pa3rments without imposing new restrictionson the repatriation of interest or principal. A continuing strainon the balance of pa;rments can create a psychological atmos-phere where the depositors' confidence is adversely affected. Anyattempt at rcstructuring the outflow can only mean slowingdown of ifrflows. Any large claim by way ofwithdrawals can makethe extemal account extremelv vulnerable.

This only highlights the uryLncy of dealing with rhe stmcruralprotrlems associated with our balance of payments. One elemen!of course, is the need for domestic fiscal discipline because, aspointed out earlier, restoration of better balance betweengovernment nevenues and expenditure is not only essential forbringing about the desired improvement in public sector sirvingsperformance, but also for enhancing future prospects for pricestability. This task is not going to tre easy because there are othermedium terrn adverse factors which will require adequate andpmmpt conective action.

These include deceleration in inrtigenous oil production,uncertainities with rcspect to the inflow of remittances ftom

"These fi8uree exclude deFnsit8 designated in pounds eterling.I,Vith eff€ct fioml Augu8t 196E, ITCIIR deposit8 could be deeignatod in yen and D.M. These ar€ alsoexcluded

302 EPILOGUE

Indians workin$ abrcad, bunching of repayments of past loans

tpm the IMF, prurectionist trends ln international trade, and an

unfavourable intemational climatB for concessional externalassistance. In vierry of this situatiorl, the strategy in the next fewyears will have to concentmte on ensuring a strong and sustainedgrowth in exports of both goods an{ services. This will need to be

supplemented by an economically efficient effort at import sub-

stitution. There has been recently a sharp increase in imports. Inpart, it has been caused by temporhry factors such as unusuallyhigh international prices for sorne commodities like metals,

chemicals and edible oils, lalge imports of certain bulk commodi-ties on account of the drought in [987-88, and also the general

uptrcnd in industrial production. In addition, there is ewidence

that in certain areas capacities ane being set up which are heavily

dependent upon imported compdnents and inputs. The basic

problem is that even today medirtm and large scale industrialenterprises are dispmportionatel).i oriented towards domestic

market sales.A sustained programme for ensuring that India's manufactur-

ing sector makes a transition towards an intemationally competi-

tG environment is a preconditidn for a healthier balance ofpayments. Unless Indian industry domestically operates in acompetitive, cost conscious envirdnment with adequate oppor-

tuniiies for technological upgradation and economic scales ofoperation, there cannot be a shapp increase in the export ofmanufactures. The balance of payrnents problem needs to be

tackled with urgency and determiriation because the alternatives

have serious implications for our dconomic future. If we cannotbring the external payments into balance through faster expofigrowth, therc will either have to be a rcduction in the import billior essential items which would ieopardise price stability and

also adversely affect investment in growth. Alternatively, the

country will need to rely on external borrowings at levels whichcould lead to unsustainable debt servicing burdens.

The creation of a competitive, cost conscious envirorlment'however, will necessitate radical cfranges in our pr€sent percep-

tions about scale, technolo$/, prdduction practices, marketing,

and, most importantly, the degreg df flexibility available to the

management in operations both al home and abroad' Some seg-

ments of industry will have to shrink, others will be growing very

fregulation and Development 303

slowly and many activities, some of them entirely new, will be$CIwing very rapidly. In such a situatioq the only way for indi-vidual units, or in some cases industry as a rvhole, to nestor€bal,ance and recover viabiligi would bc thncugh a drastic n-.struc-turing. Modifications or upgradations of technologr, changes inpmduct specifications, manpower usage and pricing policieswould be necessary; and unless the system as a whole is onewhich permits or encourages such fledbility, industrial sicknesswill be even more pervasive. The wide range of basically unviableunits will continue to be propped up through artificial respira-tion in the form of additional funding to meet cash losses. This,however, will only mean postponing doomsday. As experiencehas shown, the takeorrer of such units by State or CentralGovernment is not a cost effective solution. The wav out is toaccept the pnDposition thal changes in the forlunes ofa unit orindustry are a fact of lifu and therE is nothing sacrosanct aboutnot permitting the continuance of unviable units. Similarly, unitswith dishonest and/or inefficient managements should be fteelypermitted to change hands or in some cases even shift theirlocations.

The latter part of the eighties witnessed the emergence ofcompetitive impulses. Having intnoduced the forces of competi-tion in the late eighties, the nineties must be devoted to managingthe consequences of that competition. As Abid Hussain hasemphasised, the real issues of the irinbties will not be confined tothe economics of liberalisatiory but more fundamentally they willr€late to the politics of liberalisation and the management of itsfallout.r? As Abid flussain has pointed out, 'to attempt restructur-ing in a pnotective environment that still prevails in India wouldbe like mnning in a potato sack race; once the pafiicipants reacha certain speed, they cannot accelerate further unless they droptheir sacks.'28

The process of making Indian industry internationally compe-titive is likely lo be a long and arduous one. It would be unrealis-tic to ignore the social context in which the transitioE fi-om pro-tected to cornpetitive industrv will have to take place. The focusof policies will have to be on expanding the contribution of theindustrial sector, directly or indirectly, to emploJ,ment genera-tion. While output and the value-added growth nate have beenencouraging over the past few years, the rate of new lob cr€ation

in the organised sector of industry. has been extremely low. In the

otganised manufacturing sector as a whole, emplo5nnent elastic-

ity with respect to output has ddclined from around 0.5 in thesevenlies to about 0.28 in the eighties.ze The relatively favourable

emplo5rment elasticity in the rnarlufacturing sector is mainly the

consequence ofa high figure for tfre unoqganised segment of themanufacturing industry. There isp of course, sufficient evidence

that certain segments of Indian industry att overmanned andrationalising the labour force is a precondition for intemationalcompetitiveness. At the same time, however, the thmst of policywill need to be on creating productive emplo5zment opportunitiesin manufacturing industry. There is obviously a need for a specialprogramme for encouraging smaill and village,/rural indusuy inareas like wool sericulture, food processin6 garment-making,

and leather-processing. If the experience of countries like Chinaor Japan is any indication, there is a great deal more that can be

attempted in these sectors as also in encouraging sub-contracting,and ancillarisation. The existing fiscal arrangements incluorngsales tax and octroi will need to be calefully reviewed. The scope

for knowledge-based industries in which we have a decidedlycomparative advanta€ie, e.g', co{nputers, informatics and soft-

304 EPITOGUE

ware, needs to be exploited;

The process of economic pace ofchange is inordinate$ slow winds of change which are

sweepihg acrnss the world and societies that have

been more closed aqd insular ours seem to pass us bY. The

same old sterile nhetoric, the old vested interests in politics,

in administration and in continue to hamPer the Pro-cess of reform. The elan, the of 1985, seems to have

disappeared. In the absence of hn integrating force such as an

effective part5l organisation with sensitive antennas, local level

tustrations are mounting. In scime cases economic impulseshave been generated, but these oannot be accommodated in theexisting social or political systern. The traditional power relation-ships are inevitably bleaking downr, but substitute structures have

not rcplaced traditional ones. As Abid Hussain points out:"" it isimportant to initiate the pmcess of institutional reform' Policies

rre changing but our economic 4nd technical organisations and

neguhtion and Development 30S

rnstitutions have ossiffed. The major challenge ahead is the rede-sigp of such institutions at all levels.'3o

The tasks before us in the coming decade are indeed formid-able; and there are many who throw up their hands in despairabout the future of the economy and the polity. But in the fourdecades of independence, the democratic poliqr has shownremarkable resilience and an ability to meet the challenges. Thefirst challenge was essentially one of overpoming the economicstagnation which was an inheritance ftorn the colonial economy.After several decades of stagnation, the economy has shown asteadily rising trcnd even though the per capita gtulvth has beensmall. The other challenge facing the country in the sixties andsevendes was one of self-reliance especially in food and fuel. Thiswas met by achleving self-srrffiCiency in food and thmugh a signi-ficant increase in self-reliance in the enens/ sector thrcugh largerproduction of oil, coal and electricigr. Now the countqr will needto face up to the third challenge which is to ensur€ a mar{<edincrease in factor productivity in order to attain intemationalcompetitiveness. There is no reason why we cannot meet thischallenge as well. But this will require a political will and a wil-lingness and abilit5r to escherv soft options. The concluding por-tion of the Epilogue to the first edition remains as relevant todavas it was then. To quote:

The future not only of India but of many other deveiopingcountries in this part of the world and elsewhere woulddepend largely on what they are able to achieve or fail toachieve in the next decade or two because beyond a pointaccurmulated problems can become so large as to be beyondthe competence of the system to handle. No orderly solutionsarE then possible. Fortunately for us in India, it is not thatproblems are not knorvn or that solutions ar€ still to be found.The main prublem is that there is a stmng tendency to opt fora soft option in the hope that it would be adequate at least for.the time being. The argument usually is that politics is the artof the possible and that in a democratic society there is dangerin moving too fast even if the direction is right. It is incrcasinglyclear, however, that the time has come when the dangers ofgoing too slow ane far gteater than the dangers of moving fastin the matter of reform and restructuring and in any went, lust

306 EPIITOGUE

as politics is the art ofthe possible, effective politics is essen-

tially the art of making things pgssible. Bad economics is narely

good politics except in the short mn and it would, therefore,be necessarl,' lo ensurE that in the years to come we do notonce again accept populist solptions as substitutes for maiorreforms.

1. lndia, Planning Commission, seventh F\ve-Year Plan Lgs,'go, Mid'term Appzi-6d. Pani 5.3

2. IUd., pq.ra 5.7.

3. It'id., pam 5.8.

4. tndia Ministy ofFinance, Economic SlnYey 1988{9. Delhi: Controller of Pub-

licationD 19E9, Table 4.8 ofAppendtur p. 5-56

5. Res€rve Bank of Indi& Bombay, fieport on Cuflency and Finance 7987-8a. voln: Statistical Statements, Statement 67, P. 87.

6. In.fir. Minisuy ofFinance, Economic Sltn4Jy 198849. Delhi: Controller of Ptrb-

Ucations, 19E9, Table 6.1, p. 69.

7. Ibrid., Table 6.1.

E. Ibid, Table 2.1 Appendi& p. $36.9. speech of Shri S.B. Chavan (Minister df rinance) prcsenting central Govem-

ment Budget for 19s9-90, Part A" paras 10 and 11.

10. tndia, I|'inistty of finance, Economia surr9J/ 798839. Ilelhi: contmller ofPublicationc, 1969, para 62.

u. Ibtd" pam 9.5.

12. Ibid, par€ r.29.13. IDt"d, para 9.6.

910.lE lbid, Table 6.5, p. 77.

rs. ftidzo. Hui8aln, Abi4 'lndian Industy in the lggos-challenges Ahead' (17th hank

14. Cent|e for Monitoring Indian Economyl Bombay, 'A Review of Cdntral Budget:

19E9-9O,' February 1989, Table 1.9.

15. Sp€ech of Shri S.B. Chavan (Minister Of Financ€l pr€senting Central Govern-

rn€nt BudSet br 1989-90, Part A, pala 15.

16. rhld.17. India, MiniEtry of Finance, Economic SWey 1988-89.'table 1.6 of ApPendirr p.

Begulation and Development fiz

Moraes Menorial l€ctur€ deliver€d at Madras on 3 January 1969, iointly orga-nised by United Writeru' Association and the Southem India Chamb€r ofCommerce and Industry), para 16.

27. Ibid., parc 17.

22.lndia, Ministry of Finance, Economic Suttey 198dd9. Table 6.2 of Appendix,p. 5-66.

23. Reserve Bank of lndia, Annual Eeport 1 7&a.'fable 38, p. 60.

u.rud.25. India, Ministry of Finance, Economic Suyey,ISSE-89. Table E.4 p. 106.26. Reserve Bank of lndia, neport on Cur|ency and Financg I9g7$A. Vol. l:

Economic Review, p. 382.27. Hussain, Abid 'lndian lndustry in the 1ggos-Challenges Ahead' {17th Frank

Moraeo Memorial t€cture deliw.rn.l at Madras on 3 January 1989), psra 41.U- Ibid, pala 17.

25. IUd., pala U.fi. Ibid., para 42.

Appendix I

STATEMENT OF INDUSTRIAL POLICY, APRIL 1945

The Government o/Indiir have ipsued the following statement

on Industrial PolicY:

The Government of India ftrave reached a stage in their

planning of industrial develdpment when they consider itwould be in the public interest to make an announcement

of the conclusions neached by them on vaLious aspects ofpolicy. There has not been tirne to consult either provincial

bou""n-".,tt which are, at present, constitutionally res'

pdnsible for indusrial develppment in Provinces- or States

L"t*."r, whom and Britiqh India a high degree ofcollaboration will be necessary if the maximum results are

to be achieved fror.n a vigorous industrial policy' Some ol

the proposals will eventuall$ have to be placed before the

l,egislature for approval. Although, for these and other

ieasons, the conclusions reaEhed are, to some extent' prcvisional, thq Government of thdia consider that an announ-

cement of their views may hBlp to clean up the uncertainty

which appeam at Present to be impoding planE of develop

mont by private indusuy.

2.

nwlation and Deltelopment 309

Under the Government of India Act, 1935, the development of industries is a provincial subject, |ut is open tothe Centre to declare by law that the development ofce ain industrieS under Central control is expedient inthe putrlic interest and thereupon, the development ofsuch industries becomes a Central subject. No such Acthas, in fact, been passed by the Central Legislature withthe consequence that the development of industries is atthe moment wholly a provincial subject. In view of this,some explanation is necessary as to why the Governmentof India feel themselves called upon to issue a statementof their industrial policy. The reasons are two-fold. Inthe first place, the general economic policy pursued bythe Govemment of India under their own constitutionalpowers exercises a profound influence over industrialdevelopment. It is a matter of history, for example, thatthe cotton textile, the iron and steel and the sugar indus-tries have made rapid strides in I ndia largely Js a resultof the fiscal policy pursued by the Central Government.In the second place, the progress of planning has madeit abundantly clear that certain industries must be takenover under Central control in the intercsts of coordinateddevelopment. It was indeed contemplated by parlia-ment, when the Government of India Act was passed,that industries in which a common policy was desirablewould be brought under Central contrul. Governmentconsider that for achieving the foregoing object thefollowing industries should be centralised, but beforecoming to a final decision they will consult the provin-ces and the leading Indian States.

1. Iron and steel.2. Manufacture of prime movers.3. Automobiles and tractors and transport vehicles.4. Aircraft.5. Shipbuilding and marine engineering.6. Electrical machinery.7. Heavy machinery, such as textiles, sugar, paper, min.

ing; cement and chemical.8. Machine tools.L Hea\,y chemicals and fine chemicals, chemical dyes

310 APPENDICES

10. ElectrGchemical industry.ll. Colton and woollen texliles.12. Cement.13. Power alcohol.14. Sugar.15. Motor and aviation fuel.16. Rubber manufacture.17. Non-ferrous metals industry.18. Electric power.19. Coal20. Radio engineering.

fertilisers and pharmaceutical drugs.

When the necessary legislaXion rs pass€d by the Centre,

the Government of India willl have direct constitutionalauthority for shapiitg the prosress of a number of indus-tries of vital importance to the country's development. Itmay be pointed out, although the point is 'clear enough/that this arrangement has no long range constitutional implications. It is intended to be in operation for so long as thepresent Constitution lasts; and to what extent it will survivebeyoid that period is a matter to be decided by the future.3. The policy to be pursued by Government must be

governed by what they con$ider to be the proper obiec-tives of industrial developmbnt and the steps that will benecessary, in the conditions in which India will find her-self after the war, to enable these objectives to be achieved.

Govemment consider lhat thd fundamental obiects of indus.trialisation are three-fold:

(i) To increase the national wealth by the maximumexploitation of the countryf s resounces. It is well-knownthat there are considerabl€ unused resources of man-power and material; andl clearly Government policymust be directed towards btimulating their fullest andmost effective utilisation.

(ii) To make the country better prepared for defence. Theexperience of two wars has demonstrated the dangers,both to India and to the nest of the Commonwealth,inherent in India's depetrdence on overseas suppliesfor vital commodities requi[ed for defence.

fi4g:ulation and &l€,opfnerrt 3ll

(iii) To provide a high and stable level of employment. Atpresent the volume of industrial employment is com-paratively speaking small, but if the country's industrialresources are developed to their maximum possibleextent, industrial employment, including employmentin ancillary trades and professions, will considerablyaffect the volume of total employnient in the country.GovernmeDt consider that their industrial policy shouldbe directed lowa|ds maintaining employment at thehi6Jhest possible degree ol stability and volume.

It is axiomatic in Government's policy that the additionalwealth created by industrial development should be digtributed in a manner that may be regarded as sociallyequitable. Powers rnust be taken and consciously used tosecure this purpose.4. 'I'he atlitude of Government towards industry in the past

was, for many years, one of laissez faire. Till the war of1914-18 this policy was maintained in the beliel ryhichwas in accordance with the current economic doctrine,that industrial progress was best achieved by unregulatedprivate enterprise. . This attitude undervyent some modi-fication after lhe lasl war through the adoption of thepcrlicy of discriminating protectipn. The Secretary ofState, Mr. Edwin Montague, in a despatch to the Govern-ment of India in fgig'on the Fiscal Commission report,announced a new policy. He said,

If tbe active parti6ipation by Government lit industrialdevelopment is to be accepted as one of its legitimatefunctions a new policy is required.

Wirh the quickening of political life that will follow thegrant of constitutional reforms the demand for progress inadministration and social reform may be expected tobecome insistent, and if progress is not to be hampered bywant of funrls the taxable capacity of the people will haveto be increased. To this end the natural resources of Indiamust be effectively utilised. as new opportunities for theinvestment of capital present themselves, in order that thestandard of comfort of the people may be raised, and theeconomic strength of the country may increase. Further, ie

312 APPENDICES

the experience of the past few years has shown that in timeof war, India cannot rely onthe rhatter is one in which

sources for hen needs,

advantage and militarytical expediency, economicare coincident and accord

with the interests of the EmpirB as a whole.I accept the lwo fundamen(al principles, underlying the

recommendations of the n: first, that in futureGovernment should play an ve part in the industrialdevelopment of the country; secondly, that Governmentcannot undertake this work unless provided with adequateadministrative equipment arid forearmed with reliablescientific and technichl advice.

This despatch was soon followed by the Government ofIndia Act, 1919, under which induslries became a provin-cial subject. The Government of India, therefore, lost directinterest in industrial developrlent and the Provinces hadneither the financial nor the tEchnical resources to stimu-late development on any significant scale.

The Government of India consider that the continuanceof their existing policy, in the conditions in which Indiawill find herself after this war, will not meet the oblectivesof sound post-war developmentf Though industrially strcngerthan in 1939, India will find h$rself in a position of rclativeinferiority, In other countries lechnological advances havebeen immense and, as a resrtrlt of the naturc of modernwarfare, there has been a striking increase in the totalvolume of skilled industrial laboun. If India is to m4ke rapidheadway and if the standard of living of the masses is to beeffectively raised, a vigorous and sust:riued efforl isnecessary in which the State fio less than plivate industrymust take a part.5. Government have decided 1o take positive steps to en-

courage and promote the lapid industrialisation ol thecountry to the fullest extent possible. They attachparticular importance to lhe development of those indus-tries which constitute the fbundation of modern indus-triql life, such as the iron and steel industry, tbe heavyengtneering industry, the machine tool industry, the

so on, But wlrile the


developrDent of these industries nrust take high priofih,,it must form part of a balanced plan irr rvhiclr tluc placcis given to consumplion goods ir-rclust|ies. It is cleal tlratif progress is to be achieved, the development of industlrmust be planned bv Govelnment in ooopel?lir)n \vitl) thrlindustry and everv ellbrt made to nake the planeffective.

6. The formulation of a tariff policv appropriate to the post-war needs and conditions of the country is under activeconsideralion. The subiect, however is one of great com-plexity, and will require a little further time for theGovernment of India to determine its policy and devisethe machinery for implementing it. In the meantime, theposition of ildustries which have been established ordeveloped in rvartime requires consideration. Some ofthese are covered by the announcement made in 1940 inregard to the glant of an assurance of post-war pnotec-tion to esbential wartime indushies. Outside the scope ofthis announcement, howeven, lie a large number of indus"tries which have helped to sustain the national economyduring an exceptionally difficult peniod. The provision ofassistance to or protection of such of these industries ashave been ebtablished on sound lines is likely to assumea measure of urgency during the period of transition.Government propose to set up machinery without delayfor the investigation of the claims of such industries forassistance or protection. This is a short-term measurepending the formulation of a long-term tariff policy andthe establishment of a permanent machinery for thepurpose.

7. (r) A primary point in induStrial policy is the extent towhich the State will take part in industrial enterprise.In India, ordnance factories, public utilities andrailways together forming a considerable proportionof the total industrial enterprise are already verylargely State owned and State operated. This arrange-ment will naturally continue. Further, Governmenthave recently decided that the bulk generation ofeletric power should, as far as possible, be a Stateconcern. This decision falls within the existing

3I4 APPENDTCES

pattern of State and private enteqrrise. Apa|t fi.omoldnance factolies, publiq utilities and railrvavs, basicindustries of national importance may be nationalisedprovicled adequate private bapital is not forthcomingand it is regarded as essential, in the nationalinterests, to prom()te such industries. For the purposeof Government poiicy, ba$ic ir-rdrrstries can be definedas including aircraft, automobiles and tractors,chemicals and dyeg iroh and steel prime movers,transport vehicles, electrical machinery machinetools, electrachemical arid non-ferrous metal indus-tries. It is contemplated also that Government maytakeoveris much

certain industri in which the tax elementmore

and it is necessary ancl venient for thetakeover the industry. example of suchthe paSt is 'Salt Man

All other industries be left to pnvate enterpriseunder varying deglees ol contml. There may be nocontrol except such, as is fequired to ensure fair con-ditions for labour, in the case of such industries asthose catering for ordinary consumers' demands andsubject to free competitiorl, while in the case of indus'fies of a semi-monopolistic nature or which controlscance natural nesources there may be a stricter controlvarying with the circumstances of each case.

The views expressed in [his paragraph regarding thescope of nationalism will tte discussed with the Provin-ces and also with the more important Indian States anda further statement issued as to whether the scopeshould be enlarged at all and if so to what extent.

Within the field considered open for State enter-prise, the question whethor the existtng units whichare privately owned should be taken over by the Statewill be exsmined on the inerits of each type of suchcases. The Reconstructiorl Committee of the Councilhas decided with regard to electricity undertakingsthat, as licences fall due, they will as far as possiblebe taken over bi the State

than the profit elementState to

action in

The case

negulation and D.welopmena 31S

separatelv.

(ii) Certain industries of national importance such asshipbuilding and the manufacture of loc -motives andboilers will be run by the State as well as by privatecapitalists.

(iii) Normally State enterprises will be managed by theState. In special cases the possibility of managementthnrugh a private agency for a limited period may haveto be explored.

(iv) In some cases, State enterprises may be operatedthrough public corporations. Iri order to gain experience of management through public corporations,further experiments will be tried:

Goternment Assistanqe to Industrv

8. Goverllntent have a primary responsibility, which theypropose to dischar.ge without delay as soon as war con-ditions allow, for developing certain prerequisites ofindustrial progress. One of them is the development oftransport facilities. 'Ihis is a matter in which both theCentlal and h-ovincial Governments as well as the lndianStates are vitally inter.ested and steps to ensure a ceordinated policy have already been initiated and madeconsiderable headway. Another prerequisite is the dev-elopment of powen. f'he Govelnment of India-have madegood progress in ensur.ing co-ordinated development inthis field. In many cases, power schemes-particularlywhere they are combined with irrigation-are the primaryr6sponsibility of Provinces, but whene regional projects,which overrun Provincial and State boundaries, are con-sidered necessary, the Government of India are takingaction for the development of resources on a regionaltrasis. 'Ihe survey of minenal resources is another fieldn'here the responsibility falls squarely on the CentralGovernment. Steps arc being taken to extend theGeological survey and to put it on a footing where it canbe of the maximum service lo the country. Another pre.requisite of indusirial progress is scientific and industrialresearch; the Governmeni of India have alreadv

316

panicularly through high gfade technological institutes,a4d technical training of personnel required lbr skilledemployment are also matter$ in which the Government ofIndia have initiated actiorl which will directly assistindustrial progress.

9. In addition to discharging their responsibility for thuslaying the foundation of indtustrial progtess, the Govern-ment of India are prepared to assist industry in one ormore of the following ways '

(i) Government will take either by making loans ortry subscribing a share of the capital in indusfial undentakings which are to be of importance tothe counlry's but for which adequate priroatb capital may not be Within this categorymight fall such industri as those manufacturing air-craftt, automobiles and tinactors, chemicals and dves,irpn and steel, prime transport vehicles, elec-trical machinery, machine tools, electrochemical andnon-ferrous metal industries. This list will be modi-fied tiom time to time ab circumstances warrant' In-

expenditure aYrd for certdin a_ppointinents.Govemment might provide in suitable cases capitalequipment like buildings, serwices and/or machineryon terms to be settled on the merits of each case. This

dustries receiving thisto a greater degree ofFor example.,tion on the Board of

or undertaking to meetbor of yearq subiect to

of assistance will be subjectcontml than others.

might rcquire representq-ent and that their sanc-

might in.certain cases the form of bulk covern-ment orders for capital .

allocated to industrialistswhich might then be

on suitable terms.(ii) In special cases, enterprise wiII be encoun

aged by guaranteeing a um dividend on capitalue losses for a fixed num-

condition that Governmentwould have a voice in management and that a ceil:

Regulation and DevEloPment 31?

ing wi! be fixed for the return on capital. where thisprocedure is followed, profits in subsequent yearc over

and above the ceiling will be appropriated towardsr€turning the funds paid by Government and after thishas been done, such excess profits as continue to ac-

crue will be divided by the Government and the Com-

pany in agreed ProPortions.(iii) Government will be prepared to give adequate finan-

cial support to research organisations set up by Indus-

trial Associations representing organised industries andto provide for grants to Universities for approvedschemes of research. Such assistance would be in addi-

tion to the direct Government organisation of research

as, for instance, through the Council of $c-ientific andIndustrial Research.

(iv) Subiect to reasonable safeguards as to the quality andprice, Government will continue to encourage Indianindustry by buying its products in pfeference to others.

(v) The Government of India are examining the questionof the promotion of an Industrial Investment CoF

poration or a similar institution.(vi) Govcrnment will undertake to examine from time to

time, the tax system with a view to ensuring tha! whilesecuring the ends of social lustice and national budget-

ary interests, the taxation does not tend to act advePsely on development,

(vii) Government will assist in the procurement of capitalgoods required by industrialists. They propose to set

up an organisation in the UK and in the USA for thispurpose.

(r4ii) trn certain branches of industry, the advice of expertsis particutarly essential. Government will help in mak-

ing the services of such experts available to industry.

L[censing of IndustrY

10. Government have come to the conclusion that thdymust assume power to license industrial undertakings.They have at present nQ powel' excepl lbr emergencywartime controls, to regulate the growth of indu$try;

normally a pefson mav sel up a factory wherever helikes and may manufactufe in it whatevqr commoditvhe chooses. 'I'lrere alt:, oll course, locrrl larvs whicl.tIegrrlate the size of tlre buildings, lhe proportiorl ofopen space, public health rleeds and so lblth and it ispossible under these leguhrtions to refuse pennissionto put up a lactolv ltuilcling, l)ut such relusal cartnot bebased on consider.alibns r:f lndustrial develorrment. Oneefl'ect of this unlegulated Ileedour to plorirore indus-tlial entelprise has been the corlcentration of industrvin certain ar.eas, for. instanctb, the ntanufactrlre of cottontextiles has been conceltrated in Bombay and Ahmedabadsugar in the United pr.ovince$ and lliltaq paper in Bengal.In some cases, there ale good glounds for the concen_tration of palticulal industriies in panticular areas, butin manv cases, it has been lhe lesult of foltuitous andhaphazard g|owth. There afe vast afe.ts ilt this countrywhich, though suitable for itrdusrial development, havenot been developed because industty has tended to flowin particular channels

11. The effects of such concentfation are economic, socialas well as strategic. It seems unsound from the strategic

318 APPENDICES

point of view that so lange a

is that concentration de

manufacture where bothmarket are situated. EvenreLatively cheap on the basis

of industrv should

important considerationother areas of the country

raw material and theconcentration appears

be concentrated in a few cities which might well bevulnerable to attack. On.th( social side it is clear thatconcentration creates housidg problems of a most acutetype. Perhaps, an even m

of the beneficent effects of versified economy. Lastly,it is not clear that concentfation is necessarilv econo.mically sound. The markets for textiles, for instance, aresituated all over India, and cotton, the main raw material, is also grown in parts of Ihdia. From the

it would nbviously be rightpoint of view of theto cut out unnecessary tion costs and to locate

costs of production

Begulation and Development 319

disperse industry, if regard is paid to the benefits of awidely spread industrial .,-tructure and its inteArationwith agriculture.

12. Contnol over development- would be necessary fromanother point of view. In an unregulated industrialeconomy there is likely to be a tendency for capitaliststo go in for schemes which promise quick returns. Thiswill lead to lopsided development,-a scrarnble for someindustries, with the danger of overproduction and ex-cessive compelition and inadequate attention to otherindustries which are equally necessary in the nationalinterest. 'fo overcome this difficulty, it would benecessary to fix targets, to allocate them on a regionallasis, and to se€ that these fargets are achieved.

13. As Governmenl has no authoiitv al present to do thii,they will have to take polvers by legislation. Govern-ment proposb that they should take power to license thesta ing of new factories and the expansion of existingfactories, for, without this power, planned industrialdevelopment will be quite impossible. At the same timein order to avoid unnecessary delays, it is proposed toset a monetary limit to the plants or proiects riquiringlicence so that very small plants, moderate extension ofexisting plants or replacements which do not add to theoutput should not be subtect to licensing. Details of thisIegislation are under consideration. E-ven on o pre-liminary examination, it is manifest that the power prt>posed to be taken by Government must be used in amanner that will command general public confidence,It is equally clear that the administration of the licens-ing system must be such as to assure Indian States thattheir legitimate desire for industnial development is noloverlooked. It is accordingly proposed that a Boardshould be constituted at a high level to advise the Cen-tral Gove, nrrtent in the matter of granting licences forindustribs specified in paragraph z above. betails of thepersonnel of the Board, its function, and other connec_ted matters will be decided later.

32O APPENDICES

Other Coitrols

. 14. rn a planned economv it is irnpossible to do without con-

trols. Government consider that such controls should be

the very minimpm required. They propose that apart fromliiensing control should bp undertaken to achieve thefollowing objects:

lil To secure balanced investment in industry, agricul-ture and the social services. It will be necessary, afterthe war, to ensure that the available capital resourcesare utilised on a balarrci-'d plaa oJ agricqltural, indus.trial and other developnlrent and that inside the field ofindustrial developmen{, a balance is kept betweenmanufacture of capital pnd consumer goods. Agricul-tural development will be undertaken almost whollyunder the auspices of {he State. This is because thebulk of the holders of larrd 4re poor and cannot them-selves finance, at any rate, initially, improvementssuch as contour bundinfi and irrigation by lift pumps'In many cases it will bp possible to recover the costultimately, but the capital expenditure will have to beadvanoed by the State. The State will also require toborrow hear.y sums eilther directly for itself or on

behalf of local authoritiBs for financing road development, irrigation, electrical power, public health andother social services. 0fi any reasonable estimate, th€capital resources requifed for these purposes will be

hear.y, and it will be ne4essary to ensure that the State

is in a position to mobfilise them from the counSssavings. This will make it necessary to maintain con-

trol over'capital issue$; for, otherwise, capital mayflow excessively in one direction and lead to lopsideddevelopment.

(il) To secure for industrial workers a fair wage, decentcondition$ of work and living and a reasonable securityof tenune. It is a fundaFnental objective of industrialdevelopment that it woUld enable the general standard

of living to be raised. It would be a frustration of this'obiective if industrial workers do not get fair wages

Ragrlation end DewloPment 321

and decent working conditions. In the past, these mat-

ters were left largelylo be settled between the employem

and the workers, but it may be necessary'for the State

to intervene with statutory powers. This question is

engaging the earnest attention of Government and thenecessary legislation will be undertaken from time totime.

(iii) To prevent excessive profits to private capital ln the

case of private undertakings, subiect to free competi-tion, it would be a mistake to discourage enterprise by

undue restriction of profits. The risks of such enter'prise are considerable and if industrialists are to beal

the losses, they must also be permitted to reap the profits. In the normal course, the tax system may be

expected to prevent any excessive accumulation olpnofits. Where, however, conditions of free competi-tion do not exist and as a consequence, excessive.pror

fits accrue, special steps would be necessary. These

can only be considered on the facts of each case as

it arises.(iv) To ensure the quality of industrial products in the

interests ofboth internal and external markets' It is ofthe utmost importanie to ensure good quality for theinternal as well as the external markets. This involves

standardisation of products and administrative ma-

chinery to enforce standardisation.(v) To ensure that unhealthy concentration of assets in

the hands of a few persons or of a special communitywould be avoided. This may be secured by a judiciousexercise ofcontrols, such as capital isSues control andthe licensing machinery for the regionalisation ofindustry.

(vi) To require necessary technical training of personnel

and to extend the benefit of such training to minodtiasand backward communities'

15. The Government of India prcpose without delay to.enterinto discussions with the Provinces and with the Indian

States in the light ofthe policy stated above and are confi-

dent that it wiil be possible to evolve a machihery which

322 A"PPENDICES

will enable an agreedpolicy to be implsmented in practlce

Planni ng and Developme nt Depattment,New Delhi, 27 Apri\ 7945.

in a spirit of friendly cooperation on,the part of allparties concerned.

Appendix II

SCHEDULES A AND B ATTACHED TO THEINDUSTRIAL POLICY RESOLUTION, 1356

Schedule'.A

l. Arms and ammunitionequipment.

2. Atomic energy.3. Iron and steel.

and allied items of delence

.4. Heavy castings and forgings of iron and steel.5. Heavy plant and machinery required for iron and steel

production, for mining, for machine tool manuractureand for suc.h other basic industries as may be specifiedby the Central Government.

6. Heavy electrical plant including large hydraulic and

7

8.q Mi,nrlg of irorr ore, manganese ore, crome ore, €ypsum,sulphur, gold and diamond.

10. Mining and processing of copper, lead, zinc, tin, molytrdenum and wolfram.

11. Minerals specified in the Schedule to the AtomicEnergy (Control of production and Use) Order, 19s3.

stearn turbines.Coal and lignite.Mineral oils.

3A APPENDICES

la. Aircnaft.13. Air transPort.14. Railway transport.r5. Shipbuilding.

Schedulb B

1. All other minerals except 'Erinor minerals' as defined in

Section g of the Minerals Concession Rules, 1949.

2, Aluminium and other non-ferrous metals not included

in Schedule A.

Machine tools.

16. Telephones and telephone cables, telegraph and wire'less apparatus (excluding radio receiving sets)'

rz. Geneiaiion and distributibn of electricity.

3.

4.5.

Ferro alloys and tool steels'

Basic and intermediate prqducts required by

industries such as the mariufacture of drugs,

and plastics.Antibiotics and other essen{ial drugsFertilizers.Synthetic rubber.Carbonisation of coal'Chemical PulP.Road transport.Sea transPort.

chemicaldye-stuffs

6.

E.

L;10.

x1.12.

Appendix III

APPENDIX I INDUSTRIES LISTED IN PRESSNOTE DATED 2 FEBRUARY 1973

I. Metal I u rgical lndu.stries(a) Ferro alloys.{b) Steel castings and forgings.(c) Special steels.(d) Non-fen'ous metals and their alloys.

2. Boilers and Steam Generating plants3. Prime Movers.tOther than Electrical Generators)

(a) Industrial turbines.{bl Internal combustion engines.

4. Elect ric al Eq u i p me n-t(a) Equipment for transmission and distribution of electri

'"itY'(b) Electrical motors.(c) Electrical furnaces.(d). X-ray equipment.(e) Electronic components and equipment

5. Transportation{a} Mechanised sailing vessels up to 1000 DWT.(b) Ship ancillaries.(c) Commercial vehicles

6. Industrial Machinery

!28 APPENDICES

7. Machine Tools7 A.]IS$, F*tu,'€s, Tools and Dles of Specialised Types

8. Agricultural MachineryTFaetors and power tillers.

9. Earthmoving M achinery1d. Industrial instruments indicating recor.ding and regulat-

ing devices for pressure, temperature, rate of flow,weights, levels and the like;

rl. Scientific instlumenls.12. Nitrcgenous and phosphatlc fertilisers lalling under 11)

Inorganic fertilisers underr '18, Fertilisers' in the FirstSchedule to the I (D&.R) Act 1951.

tl3. Chemicals (Other than Ferri!iserst{a) I norganic heavy chemiculs.{b) Organic heavy chemicals.(c) Fine chemicals, includi4g photographic chemicals.id) Synthetic resins and plastics.(e) Synthetic rubbers.fl Man-made fibres.{g) Industrial explosives.(h) Insecticides, fungicides, weedicides and the like.{i) Synthetic detergents.

f') Miscellaneous chemicals (for industrial use only).t4. Drugs and Pharmaceuticalg

(a) Drug intermediates frcrh the basic stage for pnoduc.tion of high technolog5r hulk drugs.

(b) HiSh technology bulk drlrgs from basic stage and for-' mulations based thereort with an overall ratio of bulk.drug consumption (from own nr:rnufacture) to for-mulation from all sourcd of 1 : 5.

!5. Paper and Pulp including Paper Products'.16. Automobile Tyres and Tubasu. Plate Glass,7d. Ceramics,.

(a) Reli-aetories.(b) Furnace lining bricks-acidic, basic and neutral.

Lg. Cement Pmducts{a) Portland cetrent.1b) Asbestos cement.

Appendix IV

LIST OF SPECIAL REGULATION INDUSTRIES{INDUSTBIES REqUIRING SPECIAL REGULATIONI

Schedule IV

1. Coal falling under (1), Coal lignite, coke and their der_ivatives unden the heading ,2, Fuels,.

2. Textile falling under the heading,23, Textiles (includingthose dyed, printed or othenvise processed) Manufac_tured, Produced or processed on powerlooms,.

3. Milk foods falling under ,(Z) Milk foods,; malted foods fall-'ing under'(3) Malted foods, and roller flour milling fall_ing under'(4) Floul under the heading 22, Food prncessingIndustries'.

4. Oil-seed crushin! falling under,(1) Vegetable oils includ_ing solvent extracted oils, and Vanaspati falling under'(2) Vanaspati' and under the heading Za, Vegeta-ble Oilsand Vanaspati'.

5. Leather falling under the heading,31,Goods and pickers,.

Leather, Leather

6. Matches falling under ,(3) Matches, under the heading'J6, Timbef products,.

326 APPENDICES

7. Distillation or brewing of alcoholic drinks falling undenthe heading '26, Fermentation Industries'.

8. Hoi rolling cf sentie, bars, wire rods and (A) structuralsections of steel.

9. Tractors and self-propelled combine harvestors.*

1.

OTHER.ARTICLES

Sched,ule V 0)

All qualities of steel manufacturedfrom electric furnacesbased on scrap, falling under (1) Iron and steel (metal)

and'(6)Special steel'under the heading'1. MetallurgicalIndustri-es': A Ferrous'.Iron and steel pipes and trubes and stainless tubes fall-ing under '(5) Iron and steel pipes' under the heading'1. Metallurgical lndustries : A. Ferrous'.Bright ba rs.

Tin containers and metal crontainers.Drums and barrels.Wires of mild steel, special steel and alloys steel-coated

2.

3.t+.

c.6.

and uncoated.7. Cold and hot nolled sfips, $heets and plates of all

categories of steel including box strappings.The above items i to 7 fall under '(7) Other .products ofiron and steel' under the heading '1. MetallurgicalInduslries : A. Ferrous'.

8. Non-fernous semi alloys, flat products and extrusionsfalling under the heading '1. Metallurgical Indus-tries : B. Non-Ferrous'.ACC/ACSR Conductors fallling under '(6) Electrical cablesand wires' under the heading'5. Electrical Equipment'.Cold rolled lormed section.Hamilton poles.Tubular poles.Steel structurals.Sheet metal components.

9.

10.

11.'12.

13.

74.

(4 Added vide notification No.* Added on 30.3.19a4.

s.o. 657 lD dated 19.11.1975.

negulation and DqeloPment 329

15. TV receivers.16. Sheet, figured and wired glass'

r;. Pli,r.vood, decorative veneers, block boards and flush

dools.18. Sugar.19. Transmission line tolvers.20. Sewing machines hand operated' machine operated'

industrial or otherwise21. Da iry machinery induslrY22. Fooi processing machinery and equipment industry'

23. All types of rubber based conveyor beltings, PVC con-

veyor beltings and fan and V belts'24. Calcium carbide.25. Caustic soda.26. Potassium chlorate.27. Carbon black.28. Calcium carbonate.29. Elemenlal PhosPhorus.30. Sodium chlorate.':31. Malathion technical.32. BHC technical.33. Endosulfan technical.34.24-D.35. Synthetic pyrethroids'36. Aniline37. Acetanilide.38. Meta-amino Phenol'39. m-Dinitrobenzene.40. Nitrobenzene'41. Para-nitrochloro-benzene.42. 0rthonitrochloro-benzene.43. ParanitrGtoluene.,14. Orthonitrotoluene.45. Metanitrotoluene.46. Alcohol-based chemicals.47 . Pig iron and sponge iron.48. Ferro alloYs.49. Electronic components'50. Computers, mini computer/micrn processor based sys-

tem and allied items

330

51.

oz.Two-\,r.av radio communications anrl alliecl equipment.Digital electronic vvatches.Che nicals &, pharmaceutic[], maclrinelv irrcluding nrix-ers and reactor- kneading mills, turbo rnirers ond th"like, filteration equipment- filter press rotarv filters andthe like. Centrifugal macb.ines, evaporators. distillationthe like. Centrifugal machequipment, crystallisers, driers

54. Borax-Borax.55. Boric acid.56. Chemical lime.57. PVC power cables with58. Acetic acid.59. Distribution transformers.60. Dry batteries.61. Welding electrodes.62. Electric fans.63. Overhead cranes.64. Railway wagons.65. Industrial gases.66. Formaldehyde.

Note: (1) s.o. 49(E) dated 25.1.E2.l2) S.O. s56(D dated 6.8.E?.(3) S.O.603(E) dated tZ.a.a2.(4) S.O. 6(E) dated 6.1.83.{5) S.O. 352(E} dated 4.5.83.{61 S.O. 634{E) dated 3.9.83.

aluminium conductors.

APPENDICES

67. Vanadium pantoxide catalyst.368. Hydrogen pemxide.a69. Nylon chips/nylon moulding powder.a70. Industrial explosives, including detonating fuse, safety

fuse, gun powder and nitro"cellulose (explosive grade).571. Polyester chips/polyester moulding powder.u

Appendix V

BUREAU OF INDUSTRIAL COSTS AND PRICES

During the pre-tndependence perio{ there were no importconrols like we have today. Therefore, tariffs were the onlyinstruments by which the Governrnent of India granted prGtection from imports to Indian industries. The industry seek-ing tariff protection had to apply to the Governmerrt for thepurpose. If the Government anived at an opinion that therewas a prima-facie case for giving protection to the industry bymeans of tariff, ad-hoc Tariff Boards were appointed to inves-tigate the question. The recommendations nrade by the TariffBoard were examined by the Government. If the Governmentaccepted the recommendations, the existing revenue dutieson imported articles were converted into protective duties orhigher protective duties, as recornmended by the Tariff Board,r /ere imposed on imports of like items till the period forwhich protection was recornmended by the Tariff Board.

Immediately after World War II, a need was t'elt forestablishing a tariff body on a more long-term babis forexamining the question of protecting the Indian industries byimposing tariffs on imports. Accordingly in 1945, the Govern-ment set up an Interim T'ariff Board for two years. Later, theTariff Commission was constituted by the Government as aslatutory body for, among other things, examining cases of

332 A.PPENDICES

tariff protection to Indian industpics. Apart from recommending protective tariff duties, the Tariff Commission was alsoentrusted with the function of observing the performance ofthe protgcted industries and to rqcommend ex-works prices ofcertain items referred to it by the Government.

The Tariff Commission perforrned a useful nole till the firsthalf of the fifties, i.e., until therre were no problems arisingfrom shortages of foreign excharlge and, hence, there was noneed for imposing import controls. From the second half ofthe fifties, the need for import controls arcse mainly onaccount of the exhaustion of the accumulated sterling balan-,ces. Consequently, over the years import controls were mademore and more widespread and rigorous. With either a com_plete ban or quantitative restrictions on imports, the device oftariffs for according protection to industries becameincreasingly superfluous. The only worthwhile function pelrtbrmed by the Tariff Commission in the sixties was that ofrecommending prices for selected items as might be referedto by the Government of India.

In the meantime, the Government of India particularly theMinistry of Industry felt a need for an expert body to advicethe Ministry on costs and prices of industrial products. With.the setting up of the Bureau of Industrial Costs and prices forIndustrial Products in the Ministry of Industry in 1920, thecontinuance of the Tariff CommisdiOn w:rs no Ionger necessary.Both the BICP and the Tariff Co/nmission coexisted only till1972-73 following which the Tarifl Commission was abolished.The Resolution constituting the BlCp is reproduced below:

Resolution dated 15 January 1970 Constituting the Burcau ofIndustrial Costs and prices

Government of India have had under consideration forsome time the recommendatibn of the AdministrativeReforms Commission concerning the setting up of a body toprovide advice on a continuing tiasis on industrial costs andprices. Government have now deeided to constitute a Bureauof Industrial Costs and Prices in the Department of Industrial '

Development to render advice to the Government on variousissues pertaining to cost reductiori, improvement of industrial

fq/ulation and Det'elopment 933

efficiency, and pricing pmblems in relation to industdal costs2. In order io advise the Government on these igsues, the

Bureau would undertake cost studies pertaining toi4dustries referred to it, with reference to costs of inputs,possibilities of technological improvements and prcperutilisation of capital and materials; present costs in rela-tion to the optimum efficiency of industrial units; costs inrelation to import substitution schemesl and the scopeand methods for achieving cost reduction together withan assessment of the implications thereof. Apart fromthe specific industries on which the advice of the Bureauis sought by the Government, the Bureau rl;,av suo mototake utri cost studies for other industries, where it feelssuch investigation to be desirable, and advise the Govern-ment suitably after'a study of the cost structune of theindustries in question. The Bureau ma, at its discretion,and in order to obtain maximum results at minimumcost, hire consultants to assist it in its deliberations.

3. The Bureau would be headed by a Chairman and willfor the pnesent have two wholetime members drawnfrom among economists, cost experts, engineers andmanagers with experience of the working of industry,assisted by suitable supporting 'staff. The DirectorGeneral, Technical Development and Economic Adviserto the Government of India (Ministry of IndustrialDevelopment) would be ex-officio members of theBureau. The Director General of the Bureau of PubticEnterprises would be associated with the work of theBureau as and when necessary in connection with coststudies for public sector projects.

4. The Bureau would have an independent status, theChairman being a person of sufficient seniority, statusand experience to make it a really effective organisation.In order that the Bureau is able effectively to adviseGovernment on important issues relating to industrialprices and costs, the Bureau would function like anindependent Committee, and the Chairman would haveappropriate admin istrative powers.

5. The Bureau would have full powers under Section 19 ofihe Industries (Development and Regulation) Act of 19s1

334 APPBNDICES

to call for any data, records or papers pertaining to anyindustry listed in Schedule I of the Industries Act, or totake such action as is allowable under the said Section ofthe Industries Act.

6. The Bureau would maintaitn close contact with otheragencies dealing with matters that have a bearing onindustrial prices and costs. In this connection, theBureau would determine ils own procedures; call fornotes memoranda, results of studies, data and any othermaterial relevant to its wprk from official and non-official bodies and also hold discussions with them. TheBureau would submit confidential reports to Govern-ment as and when necesqary in respect of differentinduotries or Sloups of indusries on which its advice hasbeen sought, or even with refenence to any particularaepect of cost reduction perfaining to any industry, er itmay deem fit.

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