growth and industrial policy reforms

8/7/2019 Growth AND iNDUSTRIAL POLICY REFORMS

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Growth phases of Indian

economy and EconomicReformsIndustrial Policy Reforms


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Industrialization and

Development Utilization of Natural Resources Balanced Sectoral Development

Enhanced Capital Formation Increase in National Income

Increase in Job Opportunities

Less pressure on land


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Industrialization and

Development (contd) Supplementing Export

Attaining Economic Stability

Accumulation of Wealth Support to Agriculture

Development of Markets

Contribution towards National Defence

Contribution towards Govt Exchequer


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Pattern of Industrialization in

IndiaInward Looking Economy Outward Orientation

Import Substitution

Public Sector

ImportanceDomestically

produced goods

Capital goods

imports for

Consumer

goods

Liberalization

Licensing & Control

Globalization

Privatization


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Four Phases of growth

1951-52 to 1964-65 4.1% growth in GDPannually

1965-81 3.2% growth in GDP annually

1981-88 - 4.8% growth annually 1988-89 till 2006-07 - 6.3% annually

1990-93 4% growth

1993-97 7.1%

1997-2003 5.2%

2003-2006 8.6%


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Changes in Sectoral composition

sectoral composition of output, 1980-81

Series ,

gric lt re,

Series ,

n str ,

Series ,

Ser ices, gric lt re

n str

Ser ices


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Changes in Sectoral composition

2004-05

gric lt re

n str

Ser ices

gric lt re

n str

Ser ices


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Reasons for such a trajectory

Reservation oflabour-intensive products

undersmall scale sector until late 1990s

Labour laws in industry much stringentthan in industry

Linear industrial growth had exponential

forward and backward linkages on service

sector


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Comparative Study of Sectoral

ChangesCountry Per capitaIncome in

US(1994)

Agri Share

in GDP

Industry

Share in

GDP

Services

Share in

GDP

US 25880 2 31 67

Canada 19510 3 30 67

Belgium 22870 2 31 67

UK 18340 2 32 66

Japan 34630 2 40 58

China 530 21 47 32

India 320 30 28 42

Source: World Development Report 1992, 1996, World Bank


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Important features in the growth

experience Growth pro-business

Reforms pro-market

Indias growth experience gradual butstable

No long-lasting economic instability

problem like two-digital inflation orprolonged recession

Political economy ofdemocracy


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Industrial Growth

Annual growth rate %Period Mining Manufact

uring

Electricit

y

General

1995-96 9.7 14.1 8.1 13

2000-01 2.8 5.3 4 5

2003-04 5.2 7.4 5.1 7

2005-06 1 9.1 5.2 8.22006-07 5.4 12.5 7.2 11.6

2007-08 4.9 9.8 7 9.2Source: CSO


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Growth of Production in various

IndustriesSector 01-

02

02-

03

03-

04

04-

05

05-

06

06-

07

Capital good -3.4 10.5 13.6 15.8 18.2 17.4Intermediate

good

1.5 3.9 6.4 6.1 2.5 12

Durable good 11.5 -6.3 11.6 14.4 15.3 9.2

Non-durable

good

4.1 12 5.8 10.8 11 10.4


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Meaning & Rationale of

Industrial Policy The term industrial policy refers to the governmentspolicy towards industry

To correct the imbalances in the development ofindustries

To direct the flow of scarce resources To prevent wasteful use of resources

To empower the government to regulate theestablishment and expansion of private industry

To demarcate areas into public private large scale &

small scale To prevent monopoly concentration

To give guidelines for importing foreign capital andconditions for permitting capitals to operate


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Industrial Policy Resolution 1948 &

1956 1948 - Acceptance of the importance ofboth public & private sectors

1956 - Division of industrial sector threecategories

Role ofsmall & cottage industry

Role offoreign capital recognized but

through regulation & control Harmonious relation between

management & labour


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Objectives

To accelerate the rate of economic growth and to speedup industrialization

To expand the public sector develop heavy and machinemaking industry

To increase employment opportunities To prevent creation of monopolies & concentration of

economic power

To reduce disparities of income & wealth

To expand the cottage village & small-scale industries

To achieve balanced industrial development


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Industrial Licensing as a Tool

Industries Development and Regulation Act1951

Major aim Industrial development in abalanced manner

No new entry or extension without licence fromCentral government- on size location import etc

Units with less than 100 workers and Rs 10

lakhs not under licensing


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Monopoly Restrictive Trade

Practices (MRTP) Act 1969 Anti-trust and competition issues Monopolistic Trade practice defined under

MRTP Act as unreasonably preventing or

lessening competition in the production supplyor distribution of any goods or in the supply ofany services and maintaining the prices ofgoods or charges for the services or in any othermanner

Asset limit of Rs 20 crores

Prevents mergers and acquisitions

Curbing the power of large industrial houses


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1977 thrust on small scale

industries reservation list expanded

1980 liberalization of industrial licensingMRTP FERA to facilitate modernization

Industrial Policy 1977 1981


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Industrial Policy 1991

Objectives

Self-reliance

Encourage Indian entrepreneurship promotion ofproductivity & employment generation

Development of indigenous technology through R&D Increasing competitiveness

Industrializing backward areas

Enhanced support to the small-sector

Ensure running public sector undertakings

Protect the interests of workers

Abolish monopoly in any field

Link Indian economy to the global market


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Major areas of change

Industrial Licensing abolished except forfew industries

Foreign investment 51% foreign equityallowed

Foreign technology

Public sector policy

MRTP Act Mergers & acquisitionsallowed Major clause of MonopolyConcentration removed


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Evaluation of 1991 Policy

Growth rate up from 0.9% in 1991-92 to

6.8% in 1996-97

Industrial growth registered 8% Impressive growth in exports & inflow of

foreign investment

Increase in productivity competitivenessnot deterred due to entry of MNCs


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Problems

Slowed down after 1994

Economic reforms initiated by state govt

but framed by centre Still a lot to be done in case ofabsolute

liberalization

Labour class affected by VRS by bothpublic & private


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Further Policy Initiatives

Coal & Lignite Petroleum and Sugar delicensed

in 1998-99

Only 6 industries having compulsory licences

Three sectors forPublic Sector reservation

arms & ammunitions atomic energy railway

transport

Location Policy beyond 25 kms of cityperiphery

FDI 2002-03 allowed 100% in several sectors


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Further Policy Initiatives (contd)

MSE Act 2006

-Division into Micro Small and Medium

-Entrepreneur Development-Access to credit easier


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Current Industry Growth Trend

Industry, especially manufacturing, was one of the key

drivers of the transformation in the growth trajectory of

the Indian economy witnessed during the post-2000

period. However, a cyclical slowdown began in the

industrial sector in 2007-08 and was compounded by the

twin global shocks in 2008-09. The effects lingered on

briefly in the current fiscal, but growth rebound is now

amply evident. Gross domestic product (GDP) growth

has clearly revived in the second quarter of the currentyear and the industrial sector has emerged as one of the

prime movers of the process.

Source: Economic Survey 2010


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Current Industry Growth TrendPeriod Mining Manufacturing Electricity IIP (percent)

2006-07 5.4 12.5 7.2 11.6

2007-08Q1 2.7 11.1 8.3 10.3

2007-08Q2 7.4 8.9 7.1 8.7

2007-08Q3 5.5 8.9 4.6 8.3

2007-08Q4 5.2 7. 3 5.5 7

2008-09Q1 4 5.8 2 5.3

2008-09Q2 3.8 4.9 3.2 4.7

2008-09Q3 2.0 0.5 2.9 0.8

2008-09Q4 0.9 0.3 3.0 0.5

2009-10Q1 6.8 3.4 6.0 3.8

2009-10Q2 9 9.3 7.5 9.1

2009-10Q3 10.4 14.4 3.8 13.2

Source: Economic Survey, 2010, based on CSO data


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Reasons behind recent

slowdown Reasons for slowdown from 2007-08 to2008-09

Petrol Prices and other raw materials

Industrial Credit shrinkage

Low Export demand


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recovery - Demand sideFiscal Stimulus package by Govt. -

Reduction of Excise duty by 6% and

service tax by 2%

Financial assistance to states through

Jawaharlal Nehru National Urban Renewal

Mission on Public transport

Govt Expenditure on physical and social

infrastructure


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recovery - Supply side Sector specific stimulus package Refinancing Rs 7000 crores to SIDBI

Interest subvention on pre-shipment andpost shipment credit to small scale

exporters

Liberal Monetary policy measures Liberal export promotion measures


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Competition Policy 2002

Replaced MRTP

In accordance with the WTO norms and

provision forglobal competition Prohibition ofAbuse of dominance

Prohibition ofanti-competitive agreements

Regulation ofcombinations Competition advocacy


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Competition Policy 2002

Behaviour rather than structure

Rule of reason

Minimises the costs of enforcementbecause removes requirement to show

that an arrangement is harmful;

No mention of joint venture


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Abuse of Dominance

4. (1) No enterprise shall abuse its dominantposition.

unfair or discriminatory condition or price

(including predatory price) in purchase or sale ofgoods or service

limits or restricts Production Technical

development

Prevents Markets Access

Uses dominance to enter into or protect other

markets

growth and industrial policy reforms

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