Regulation and DeveloPment

Kegulation and DeveloPment

lndia's Policy Ex;rerience of Controls Over IndustrY

Second Edition

SHARAD S. ilITBATND
Under the Auspices of the Centre for Policy Rescmh

Sage

New Delhi /lter,vbury

flrblicatlons ParldLordon

Cop!'right Copyright

Cenne for policy Reseamh, 1986 @ Revised Etlition, Centrc lpr policy nesearllr,
@

lgig

All rights reserved. No part of this booli may be repmduced or urilised in

any fomr or by any means, elecronic.or mechanical, including photocop,\,ing, recording, or by any information r,r)r.age or rctrieval
s_vstem,

without pemnissiurr in vlTiting fiom the puulisheri

l-irsr published in 1966 -fhis rvised se(iond edition published in 1989 by

Sage Publicationo
Ne.w

Indb pvt Ltd

04E

M 32 crater Kailash Market I

Delhi tlo

Sage Publicaaiona
2111 We$r

Inc

SagP Publicatione Lrd

2E Banner Stret l,ondon EC1Y 6QE

Hillcftrst Drive Nervbury Park, Califomia 91:lZ0

(lhaman t)lfset Printers.

Putrlished by Teieshwar Singh for Sage publications India A/t Ltd and printed at

0-8039-962a,4 (U.S.)
61-7036-171-0 (lndia)

To the manY frorn whom I ledrnt

Contents

Iroreword heface to the Second Edition I\eface to the First Edition

I
10
11 13

lntroduction
1. 2. 3.

Eyolution ofThinking on Policies for Industrialisation Evolution of Industrial Policy - 1945-1973 tgislative Mechanism 4. 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 Industry

23 34 63
91

133

1U
180

ippendix I Statement of Industrial Policy, April 1945 ippenitix lt Schedules A and B Attached to the Industrial
Appeltdix
Appendix I lndustries Listed in Prss Note dated 2 February 1973 (Industries Apryndix M;st of Special Regulation Industries Requiring Special Regulation) Appendix v Bureau of Industrial Costs and kices
PolicY Resolulion' 1956

10, Conclusions Epilogue

203 231 255 282

308 323

III

325
327

331
335

Bibliography

.r

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 Development, 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 in 1985 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 Govemment 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 of India's industrial and related sectors is enorrnous' Prcf Marathe has succinctly brought out the lessons ofthe past and the challenges of the future with several very useful policy ideas' Hopefurly, policy-makers will consider them carcfully in the context of the formulation of the Eighth Plan'
Centre for Policy Research
New Delhi V. ,4. Pai

Panandiker Dircctor

June 1989

keface to the $econd Edition

Thie monogfaph n'ae first published in the last part of 1985. It

nel in government and in industqy.

was well neceived and widely and favourably revierved. There has been a demand for a less expensive edition so as to meet the rtquirements of students as well as institutrons con_ ductin5l courses and seminars for middle level and semor person_

- A_ number of developments have also taken book was first published.

place since the

of the book have aln:ady been reflected in the new policy initiatives. I have, therefore, added a new concluding chapter which tries to assess how far the hopes generated by ihe new govern_ ment under Shri Raiiv Gandhi have been realised.and also what the outlook for the future is. Even though the liberalisation pro_ cess has not been as drastic as some would have liked or its benefits as pervasive as one coulil have hoped for, there have been 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 activitlr will require radical changes in our present pen:eptions and poli cies. Towards the end of the l98Ds we saw lhe emergence of competitive impulses. The 1990s Will have to be devoted to man_ aging the consequences of that competition. These will not be limited to the economics of liberallsation but, even more impor_
management of its fallout. I am grateful to the Centre for policy Research and to its Dirc_ tor, Dr V.A. Pai Panandiker, for all the assistance in updating the book. Shri B.G. Shirgurkar undertodk not only the g,ping but also helped in researching the materiall needed for r-evisinq the con_ cluding chapter. Without his help lhe Second Edition-could not have been ready in such a short time. June 1989

Some of the comments or conclusions

tantly, they will relate to the poliltics of liberalisation and the

Sharad S. Marathe

Preface to the First Edition

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 comprehensive and fully clocumented rviel{' 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 a some importanl questlons with regard to the fbrmulation of
grcat deal has beelr

policy appropriate for the next decade or to write on this subject was, in a sense' it'repress' rft. "ig" and I considered my credentials lbr undertaking nie ible for

tu'o'

the task to be more than adequate As an bconomist b-'- t|aining 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> nlofe by accident iects or issues over any length of time But ty design, during the last two decades of mv work u'ith itran the Government'of India, I was fairly closely cotlnected with

1Z

PR!]FACI

l'o view the growth of industry in India and the policy framework in which ir took placb in its historical perspecrrve is not only interesting in itself but can also be of. some relevance to other countries sim arly placed. The main oon_ cern of this book, therefbre, is tO look back and view, to the extent possible, the developmenlts of the last two or three d:"ldg" in their perspective. No policy, and certainly no aspecr of Irrdian policy can be underst0od or assessed except in a given sociopolitical context. It is, therefore, inevitable that the analysis in this volume should deal not only with questions nelating to industrial policy in the nrext one or two decades, but should also consider certain baslc issues with regard to the sociopolilical choices for the future. There ane so many persons who have directly or indirectly contributed to the writing of this fook that it is not possible to acknowledge my debt to each one of them. The idea that I should attempt a review of induslr-ial policy was suggested by Dr. V. A. Pai Panandiker, Director, Centre for policy Research, New Delhi. I am grateful to hinrt and the Centre for all the assistance which was ungrudgi4gty given and also for the many valuable suggestions made by Dr. pai panandiker and his colleagues. I also lrcnefitecl fnbm the very perceptive comments of several eminent persons including Shri L. K. Jha, Shri S. Bhoothalingam, Dr. R. K. Hazari, Shri p. X. Dave and Professor Rai Krishna. Many of mty friends and colleagues in Government and in private and plublic sector industries have allowed me to use them as sounding boards for propositions about which I was not centain. Most of the research for the book was done by Shubhada Tulpule whose services as Re sean:h Assistant were made availdbkt lry the Centre fbr policy Research. I owe her more than slhe thinks. R. S. Deshpande, Senior F'ellow, Centre for policv Research, took the trouble of carefully going thmgh the text for editorial and other correc_ tions. Shir5;urkar not only did the typing but also took upon himsell thc rvork of pr.eparing the section on ,Notes and Beferenr:tls'. Without his able assistance the book could not have be r.'n ready for publication..
S. S.

the Ministru of Industry in one capacity o| another.

Marathe

Introduction

atternpts 10 do and even tlrorc so, pet'haps, lly making clear what it does not seek to do. lt is not intetrtled to be a cotnprehensive and lully documented review of lhe evolution of industrial policy and of the concomitant prot:edural changes; nor does it seek to review, in any depth, the iurpact of these policies on the structure and glowth of lndian industries over the last three decades. The main focus of the study is to trace the evolution of national thinking on malor issues of industrial policy, underlining the continuity as rn'ell as the shilis in emphasis over a period of tirne. An intenesting feature which ernerges in this context is that beginning with the rvritings of ear-l"v Indiatr economists like Daclahhoy Norvroii, G. V. Joshi and others a strong undercurrent of thinking in lavour of State inlervention can be clearly obserwed. Over a period tlf vears, the nature and scope of intervention by the State was elalxrrated; but even prior to independence, the dominant attcl legulatolw role of the State with regard to industrial der elrtpmtrrtt had treen
accepted.

It mqy be uselul to begirr lrl dr:strlibing rvhat the

sttttly

'Ihe Industries (Development and Rcgulation) Act, 1U5t and the rules framed under it provided the legislative lrunrewot'k for the active role to be played by the State, antl itt paI'ticular by the Central Govet'nment. 'Ihe legislative ltiston of this

14

INTRODUCTION

rmponant stalute nrakes interstilrg rcadin51. The main thrust of the legislation was to vest the Ce4tral Governmerrt with powers which, in effect, extended well beyond what the lrarners of the Constitution had irr rninrl legardlng the distributiorr of powers between the Centre and the States. The parliamenlary debate preceding lhe legislation brings out the fears and apprehen_ sions- some of which were iustified later* expressed at that time, and also the very clearly $tated assurances by Govern_ rnnt to ensure that the legislation would be a positive instru-. ment of development rather tharl of regulation. Against this background it would be instructive to see how, oven a period, the legislation was amended largely in relation to sections included in Chapter III which gives Government the power to takeover the management of a sick unit and how the omerging problems of scarcity of foreign exchange contributed further to the extent of centralisation and the complexity of regulations. At the same time, the sections in the, legislation pertaining to the consultative framework with industry progressively fell into disuse. This happened concurrently with an increase in the degree of detail in the regulatory provisions. Ihe Schedule to the Act was expanded, the lisl of industries under Specital Regulation increased and after .he enactment of the Monopolies and Restrictive Trade Practices Act, 1969, the larger investments or even minor investment decisions of bigger liusiness groups came within the purview of a separate and not always concurrent scruliny and approval system. In short, r'egulation took precedence over development, which was contrary to the verv obiectives of the Act, which the title itself showed. While this process was going on, there was, as seen from successive Policy Statements in the plan Documents and also reports of several expert committees, a growing recognition of the need to simpli$r the regulatory process. In pnacuce, however, the regulatoly momentum could not be checked; and the changes introduced in policy and procedures from time to time were peripheral rather than raclical. I o what exrenr was this the result of the adminislrative conrpulsions in administering a regulatory system ? To what exlent was this allribut_ able to the fact thal there was a strong vested interest in continuance of discretionary controls ? probably, there was

negulation and Development 75

yeai's,

maintaining the system of regulation. The bureaucnat, the politi cian and, to some extent, sections of the industry which dilectly benefited from the prctective consequences of the regulation, constituted a combined lobby in favour of maintaining the
system.

no malice aforethought; but it is cefiainly true that over the a formidable and pervasive vested interEst gyw up in

The regulatory system also received strcng suppoft at the pol-

itical level including ftorn many Opposition parties. Influential members of Parliament ftrcm the ruling party as well as the Oppositioo academicians, and othens involved in moulding public opinion demanded grater and more effective regplation especially in order to contnol the 'monopoly' of the large houses
and to assist or protect the weak. Thus, the licensing system was to be used to limit gnrwth of capacity so as to prevent unhealthy competition and to encounage new entrprEneurs by denying licences to 'large houses' in specified areas of activity. The cost effectiveness of investment decisions became secondary. The nationalisation of the banking sysem in 1969 and the passing of the Monopolies and Restrictive Trade Practices Act the same year wer instruments which gave enough leverage to pursue the obiective of curtailing the powen of the larger houses. The rapid growrh of the public sector, in any event/ was bound to rcduce the relative share of the private sector in industry and provide 'countewailing power' against large business houses. In the circumstances, one would have expected that the growth of lange business in private hands would have effectively slowed down. In practice, however, the total assets controlled by the lalge houses 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 of
the 1970sthe economywas under considerable strain. Early buoya ncy in irwestments and output in the private sectorwas replaced by caution and tardy and fluctuating growth in output. TherE were sve

ral reasons for this. One consequence was that a kind of dichotomy began to emerge between the public face' and the 'private face' displayed by Govemment. TheIE was no change in the offcial stancewhich maintained the old rhetoric against large business houses. The 'public face' remained stern and unbending. But in

the 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'eely function. lnevilably, tllese alas ones which required large investmellls. The soux,'es of and particularly long-lerrn finance, were by now entirely n:r The curious conse quence, lherefore, was that e the rhetoric and indeed, in confbrmitl, rvith the ollicially stated policy parameters, the 'value of assets' controlled bV ' houses' in the private sector increased very substantially after the MRTP prcvisions came into force. To a large extent, this incre4se was based upon the larger houses borrolving frum financial institutions. To what extenl was this a result of the emerging budgetary constraints which slowed down the pace of new.investmenl in public sector industry ? Or was it the result of the perceived limitations in the ability of the public sector to grow rapidly or mlke efficient use of the resources available to it ? Or wasit, as sofire political analysts have suggested, a devious but effective arr4ngement by which the money power ofthe large business housescould be kepton a shontleash so that it could be utilised for the benefit of the |uling party? In any event, the dynamics of dapitalist growth distorted by an environment of socialist postpres has possibly led to sut>

optimal results. India,n industry has tended to remain overregulated but, except in some instances, there is little to show by way of altaining the otriectives of such regulation. 'Ihe opening chapter of this volume seeks to place in a longer historical perspective the evotution of thinking on policies fbr indust|ialisalion. An interesting observation is that even before India attained independerlce there was almost universal acceptance of a very impoltant regulatory role for the State. On this issue there was 4 remarkable congruence of thinking. between those connectpd with industry and those lesponsible tbr moulding public Qpinion; and both considered that the State must not only prescribe the panern of industrial development but also control the process of industrial change. The one maior exception to this general consensus in' lavour of State intervention and the emphasis on largescale industry was Mahatma Gandhi. What he considered to be a desirable path for India was very ilifferent. No doubt the startinl point was the same, namely, thal poverty and stagnation in 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 sector. 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 patronage 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 ilf the important elements of the Industrial Policy Resolution of
1956 and the subsequent Policy Statements can be traced hack

to the 'statement of Government's Industrial Policy' issued in April 1945. This Statement issued by the Planning and Development Department nearly twoand-half years prior to independence- and when discussions on the future status of tndii were still undecided-is a remarkable document which no.t only anticipates in many ways the objectives but also, to a considerable extent, the approach and the mechanisms which were 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 of industrialisation were strong on statements of goals or objectives but were ssrnewh at fttzzy with regard to the operating slrategy and there was, virtually, no regular mechanism for the appraisal of policies. 'fhere was also a certain amount of

18

INI'RODUCTION

reluctance to make major cha4rges in policies; and, by and large, the policy pronouncements tended to contine thern_ selves to procedural changes. AS a result, over the years, the gap between objectives and achievernents, between what was intended and what actually happened, and between what the particular polic-v instruments wpre supposed to achreve, ancl what, in fact, thel' dicl achieve ccjntinued to widen. Chapter 3 lraces the history of whal is by far the most important single piece of legislation having an impact on lhe growth and structure of industrlal policy, namely, the Industries (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 national importance. But before long it tprned into a much more ela_ borate and administratively conlplex arrangement. The three main elements of the legislation are : first, the setling up of a consultative mechanism between the Government and indus_ try with a view to providing a basis for planned deveiopment of the industrial structure. Secon4 the establishment of a licensing system for regulating, creation of nerv capacity in major industries, substantial expansions of existing units in such industries and the produrition of new articles in the industrial categories covered by the Act. Third, the provision of powers to the Central Government for the takeover of the management of industrial undertakings under certain cir_ cumstances in order to safeguard public interest. The clrapter spells out in detail how the c4nsultative procedures were allowed to fall into disuse. It alsq traces the process by which the licensing systern was changed beyond recoglrition. Interest_ ingly enough, this was done not through legislative amendments, but w4s more a cohsequence of the administrative compulsions in operating tlire system. The chapter also lists the numenous amendments [o the Act which were made with a view to strengthen the pfovisions regarding the take. over of managements so as to enlarge the options open to the Government in dealing with Sick or closed units. In practice, these powers were never used very effectivelv. Chapter 5 analyses the evolqtion of industrial policy as reflected in the Five-Year plans. Successive plan Documents and the reports of the ad hoc Committees stressed that the

Retulation and lbveloPmenr 79

regulatory framework-industrial licensing' recognition/regulaiisation of capacity, clearance under the Monopolies and very Restrictive Trade Practices (MRTP) Act, etc'-had become as a whole had become countercomplex; and that the system proiuctivu. The approvals/clearances weFe, moDe often than and not concurrent; and there was a considen .rot, "equential of discretionary or semi-discretionary powers able accretion 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 corrective action. Perhaps, it was difficult to do so in the early years of Mrs. Gandhi's stewardship of the nation because of the pro blem of acute shortages in crucial spheres, namely, foodgrains 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 this po*e.. But there was evidence that politicians of different hues, 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 were not 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 important areas. 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 decentralised or household manufacturing activities'

INTRODUCTIO[\I

Therc are two main conclusiong which emerge firm an analysis of the past policies. First, there is a need to define our obiectives and to be clear about their relative importance. While wery democratic government will have to keep in viav a multiplicit5z of objectives, it has to be rcconised that Some of the objectives could, in particular cirrumstances, be mutulally conflicting and unless there is an awareness of a trade-off or an explicit acceptance of the prirnacy of one of the obiectives dhere is a danger of not moving towards any of the obiectives hst enough in an attempt to achieve all ofthem over a period of time. Sdcon4 it is necessar5r to periodically rwier,r, and rpassess both the ielatirrc importance of the objectives and the eftctivenegs of the mechanisms and instrumentalities being used for the pupose pf achieving certain obicctives. Experience has sihorryn that this sbrt of monitoring is a precondition for ensuring that the potential ofthe system is not inhibited or there is no grave in the use ofscarce nesouP ces. In the absnce ofeftctive policies continued to be in force because theyhadbeen at some point oftime; and

perpetuated themtotally alterd. An important lesson which ernerges is that was right and relevant in the sixties ceases to be so in the and more so in the nineties; and newpmblemswouldrequire tler,vanswers if theyare not tobe allornzed to becortle urunanageable. The question to be asked is: Is the objective still important and telenrant; and has the policy to achieve that obiective been effbctirlre? The concluding chapter brings fogether some of the important points emerging tom the earliel discussions. It also examines some of the crucial elements of the ideolory wtrich forrns the basis of economic poliry-making sinc the days of Pandit Jawaharlal Nehru. In retrospec! there is clear Widence to suggest that some of the major assumptions of the Fabian tradition which influenced policy-making in the early years of our Independence were of dqubtfr.rl validity. For instancg one of the major propositions constituting the Fablan tradition waq continuing extension of State ournership and control. It was asslrmed that ownership and management by the State of all crucial {ctivities as weH as the financial infrastructure together with demfcracy based on adult suftage would ensure a more equal socief5z. While the basic sFucture of socialistic democratic values whidh constitutes the value component of Pandit Nehm's ideologr c(rntinues to remain valid in the

administ'ative and procedural sehaes even when the context

Regulation and fbveloPment

2l

Indian context, the institutional forms or operating mechanisms a time has have friled to achiane the expected results' Indee4 comrnitment to the co-e *hen in order to effectively pursue our and basic elements of democratic socialism, i'e', growth' liberty aw-ay ftom some of necessa4l for us to move .qrfiay, i it "ag*ntly our raditional concepts Fegarding the efrcacy of State ownership of the means of production and detailed rguLation 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 inhibiting efrciincy and pmductivity in the Indian economy and particutuity itr the Indian industry, both public and private' For this orr"po"" it would be necessary to make drastic and substantial g"t in the policy. This procesq rather than step-by-step "hut 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 of obtining governmental clearance or apprural has been tied up in knots. 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 discernible. 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 very sigrrificant changes in the industrial scene. There have been such large quantitative increases in the output of maior industries u, i"^".rt, fertilisers, passenger fiurs, consumer and communication electronics, synthetic fibres and twowheelers' But equally important is the qua-Iitative impnovement in a wide range of capital goods. The increased competition is goods and durabi" "on"rr-"" culture on the Indian industr;r; and imposing a new discipline and tne focui of managerial effort is shifting away from manoeuwirg controls and procedures, and is moiing increasingly tor'vards improvement in quali$, reduction in costs and establishing
mar{<et shares.

22

INTNODUCTION

tions. Tladitiorral power relationsihips are beginning to break down but substitute structunes harre not .*"rgud to rcplace the traditional ones. The major political challenge during thl corning

trends on the resources ftont, -enviionmen! both fntemal and extemal. The basic pmblem of ovenspending at home And not eaming enough abmad has acquired menacing proportioris. The considJrable tightening up of fiscal discipline is a pre-condJtion for domestic gawth in an envimnment of reasonable price stability. tt i, U.J crucial for reducing the gmwing strains on the balance of pa5rments which have emerged in the last few years. The latter part of the lg80switnessed the emergence ofcompeti tive impulses. The pmcess of economic reform his started but the pace of change is stillvery slow. Thq tasks before the countr;r in the coming decade ar going to be forr4idable- The maforissues of the 1990swiil not be confined to the ecdnomic fall-out of the liberali sation or the consequences ofopenin$ up the domestic economy to increasing competrition both domesltic and, in due cource, interna_ tional. There are indications that the next ferv years will aiso witness major problems of political rcstructuring. in the absence ofintegrating forces such as effectiVe party organisation with sen_ sitive antennas at the grass-roots lqvel, there are gmwing fiustra_

competitivq cost conscious

While there has been some pmFrss towards creaung a morc

there are disturbing

not add to the ftustrations or re8ult in economic disparities amongst individuals or regions to such an extent as to place a strain on the social and political fatiric of the countv.

decade will be to ensur that the co4r"eqrrerrces of competitiondo

1
Evolution 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' the irnportalrce of industrialisation' Ra.rad" "ti:e"sed for instance, was the first to draw attenNowroii, Dadabhol' tion to ttre declirre of rraditional industries in India as a result oi the policies pursued by British rulers Against the background of this de-in dustrialisation thesis there were others like M.G. Ranade who stressed the importance of industrialisation as a remedy for poverty G'V Joshi a very perceptive obserwer was the first to talk about intercccupational idle imbalance and probably the first to use the term'enfbrced Thackersey ness'. B.IC Sircar, Lala Hal Kishen and Vithaldas the were amonlst the many who were active proponents of the demand for the Swadeshi -ou"-"r,t which gave impetus to and establishment of modern industry owned' financed

To the extent that the declrne of the traditional Indian indrrstt ,' was attributed to-or deemed to be the consequence

managed bY Indians.

?4

EVOLUTION OF THINKING ON POI-ICIES FOR INDUSTRIALISATION

The impetus to local industrialisatio-n provided by the First World War and the gprwth of certain industries like sugar and cement, as a result of the policy of discrimjnatory proiection, helped create during the inter-wa_r years a small b"ut influential industrial community. Unlike in lafer years, there was a remgrk_ able congruence of thinking on inpusiriat issues between those connectedwith industry and those tesponsible for moulding public opinion. Whilst the attitude of the Goverhment towards industry was initially one of lars sez-fafue, th..-rew4s a noticeable change after the First World War. A formal recognitilon of the change is seen in a despatch 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 folowing words:

decades of the twentieth century, there was a plea " Indian fbr private investment to be actively promoted and prctected by the covemment ftDm an unequal and lrnfair foreign ctmfetition. fhis took various forms over the years; for exampie, scep'ticism about the virtues of ftree-trade; ,drain theory,which attributld the povergz and backwardness of India to the farge outflows by way ot home charges, inter'sts, dividends, etc., r,rjtriih constituti a drain on Indian.economy; the plea for dJspriminatory prutection the and, somewhat later, the contnoveNy regarding the exchange rate; and the IndiSn view on the question of tFrperial Aeference. Under\dng the nationalist basis of all these i$zues was the conviction that Government policies and, to some extent, direct Government help was a precondition for industrial {eveloprnent.

tion. By the turn of the nineteenth century a.rj it

of-polices pursr,red by the alien Government there was consider_ able emphasis on the need for active stut" n.ff i-i.,dustrialisa_

n.*, *o

If the active participation by Gqvernment in industrial deveropment is to be accepted as one odits legitirnate functions a new policy is rEquird., With quickening of potitical life rhat wi follow the ^the grant of constitutional reforms, fhe demand for progness in administration and social ref$rms may be eif ected to become insistent, and if progresF is not to be hampered by

negulation and DeveloPment z5

have want of funds the taxallle capacitv of the people rvill of lndia to be increased. To this end the natufal resotlrces for the must be effectively utilized, as new opportunities that the i,-,.,""1-e,tt of capital prcsent themselves in order and the stanclard of comfort of the people mav be raised F'urther' as strength of the countrv mav increase in time "lono-i" the experience of the past few vears has short'n that her needs' of -ot trtalu cannot rely on outside sources fbr the matter is one in n'hich politi'cal expediencv' economic and accord advantage, and military securitv are coincidenl 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 adequate cannot- undertake this work unless provided with with reliable administrative equipment and forearmed 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 resources to stimulate industdal development on anv significant the pre scale, Therefore, Mr. Edwin Montague's acceptance of play 'an active uosition that in future the Government should was onlv i""f i" the industrial development of the courltlY of acaclemic interest. war Nevertheless, the inter-war years and needs of the growth of industrial activitv and further effort saw the on strengthening of the Indian industrial class The r /ritings problems during the inter-war years economic or industrial 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 by did not go into the need for planning for development' But of Pandit the miJ-thirties, mainlv uncler the inspiration

26

EVOLTJ'rION

Ot

'THINKIN-G ON pOLtC tES !-OR INDUS].RIALTSA]]ON

Committee. Instead, his main emphasis was on oblarnlng a consensus on lhe need for ccnll.ai economic plarrning. His'reason_ ing u'as that the Ccrnmittee,s en{lorsement for tie principles of planning rvould inevitatrtv leacl India ,torvards establishing of some of the tundamentals of rhc socialist structufe.,4 On the question of inrh.rstriiilisation the Cohl mittee noted,

policies relating to industriar dtvelopment .r""o ,o firrm a J)art. In 1tt38, a National planning Committee was constitutecl rrnder the chairmanship of pan-dit .Iawaharlal Nehru"at the rnstance 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 Village Industries Associations. I{ard heatled b1g business was there as well as people r.vho were calredl idearists and doctrinailes, and socialists and near comrnunislts.,3 pandit Nehru, as rran of the National planning Comnittee, appears toChair_ have deliberately avoicled discussions ort frasic sociai poticy on prin_ ciples of social organisations that woulcl necessaritv split the

Jarvaharlal Nehru, some earlv beginnings were macle in think_ ing in terms of a national policlr. lbr Jevelopmerrt of which

'Ihe pr.oblems of povertl, and unempioymel)t, ol. national defence and of economic regenetration in general calnot be solved w.ithout inrlustlializalion. As a siep torvards such industrializalion, a compreherisive scheme of narional planning should be fbrmulated. This scheme should pro. vide for the development of hea-vy key industries, medium_
scale industries and cottage industries.5

back to ltis visit to the Soviet Union cluring which he liacl been exposed to the methodologr of the Soviet F.ive_year plans, the first attmpt at Frlanning in the Indihn contexi appearcd in the fotrn of a book Planned Econonry .for India [ry'Sir II. Visr es_ varaya, a distinguished enginer-adFninish.ator lvho had been responsible for the trrlanning and ekectrtion of, several imoor: tant irrigation and power projeLtr;. The book was based on the ploposition that the country wnu_lct relquire a blueplint lbr action in the way an engineer needs his dtNawings to implt;ment lris

While Nehru's interest in natiorlal planning can be tracecl

negulation and DeveloPment 27

proieci. His starting point was, 'there ttas been no reasoned policy' aDd the .ro plao .ro p*gramme in the past to improve the income His booh therefore, was in two parts; trst' a *"utttr ottf," p"ople.'s kind of economic suruey, and the other, a reconstn:ction and dwelon opment plan. The main thrust of Sir M' Visvesvaraya s worklvas rapirl industrialisation;4pd, writing as he did tt. .r"gent need for 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 in the net value of industrial output over a period of ten years; but

trial emploSrment fi.om one-and-hal{ million ro ten rnillion arrd ftum fifteen million to fifty million. The$e tarlets, however, were
not based on even

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

a mugh estimate of demand, and his estimales in agricultural output werc relatir'"ely modest' of increases While Sir M. Vi$vesvaraya was the first to suggest a bluepdnt for development, the need for a plan for the economic dwelopment of &ee India was beginning to be generally accepted' There were' in fact, in the early and mid-fbrties several pians by persons with different persuasions-Gandhian Plans authord 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 the kind proposed bv us woulcl be possible or., the basis "*""pf of a central directing authorittv, and further measures of State control would be required to prevent an inequitable distribution of the financial burdens involved in ir. An enlargement of the positive as well as preventive functions of the State is essential to any large-scale economic plan_ ning. This is inherent in thp idea of planning and its implications must be fulh' sflrri;11s6. r t

The important point that emeFges is that even before India attained independence there was almost universal acceptance of a very important regulatoru rdle for the State which must not only prescribe the patterlt bult also control the process of

industrial change.

The one major exception lo this general consensus rn favour of planning wilh its emphasis on large-scale industry was Mahatma Gandhi. It is interesting in this context to observe in the writings of Mahatnta Gandhi, over a number of years, a very different but cohelent view of what he con_ sidered a desirable path.for India. He, like others, began with the proposition thal poverty and stagnatton in India was the consequence of British rule. In young India he wrote .
The Englishman has risen upoh the ruins of India,s commerce and industry. The talk of no discrimination between Indian interests and European is to perpetuate the Indian helotage. Before one can think of eq"ality between any classes, the dwarf must be raised to the heighl of the giant. Before we reach the state of eguality the levelling process will have to be gone through.l2

this levelling process. The main points of the Congress Wor.king Committee's Resolution wele :

The Congress Working Committee t-rnder Gandhiir,s aegis tried to fbrmulate an approach which woulcl contribute to

1. The companies owned and managed by foreigners but incorporated in India when repaid the capital hacl the effect 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 India demanded or required it. 3. Foreign capital or talent might be used if they were not available in India and when India needed them. 4. Swarleshi entelprise is one which is controlled, directed and managed by Indians. Such Swadeshi spirit is essential for economic indePendence. Candhiii firmlv held the view
Economic independence is not the product of industrialization 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

Nehru presented two completely diverse versions of what constituled an appropriate economic policy, there was a fairly large common ground, though with major differences of emphasis between the two leaders in many critical areas of economic policy. More important issues of economic policl' are, usually, those involving the determination of the right prc portion in which diffqrent forms of investment and organisaiior," 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 ownership or organisations. A careful study of the thoughts of Gandhiii and Nehru on specific issues would show that in most instances 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-

Of course, contrary to the popular belief that Gandhiji and

sidered to be the desirable level of consumption' Gandhili

explicitly believed in
tion.

material consump

He {who had made the ideal equal distribution a part of his being) would reduce his ants to a minimum bearing in mind the poverty of India..., Civilisation, in the real sense the term, consists not in the multiplication of wants, but their deliberate and voluntary restriction.

Nehru, on the other hand, believed.in a good life, an .life-a aesthetically and hedonistically good position which was radically different ftom the Gandhian view. Not having thri religious terqper and disliking the rep ressions of religion ... the aesthetic bide of life-appealed to me and the idea of ... making ttre most of it and living a full
and many sided life attracted me.rs

Different attitudes to necessarily implied different positions in related fields policy. If one believes in auslere consumplion, as Gan did, it is consistent with this belief to lay more em on small unit production simple technologies and self-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 choice of the scale and techniques of prpduction become important. This is the reason why Nehrtr did not believe in the desirability of self-sufficiency to the same exient as Gandhiii: In fact, Nehru wanted a distinction to be made between the idea of decentralisation and tlie concept of village selfsufficiency. While he sfessed thE importance of Panchayati Rai as a desirable form of decentrnlisation, he was opposed to self-sufficiency of the village beqause,if it. leads to old and rather primitive methods of produ0tion ... we remain'poor.'.16 It is to be noted, however, that while the two leaders held sutr stantially different views on vill4ge self-sufficiency they had an identical position with regard to national self-reliance. The lundamental driTerence bbtween Gandhiji and Pandit Nehru and others is in relation tp their attitude to the State.

negulation and Development 37

,dccording to Gandhiji, 'State represents violence in a concentrated and organised form.' It is a 'soul-less machine which can never be weaned from the violence to which it owes its very existence.' This dislike and distrust of the State made

Gandhiii declare at one stage that 'violence of private

ownership is less iniurious than the violbnce of the State.'17 Thus, in Gandhiji's scheme of things with its highly decentralised economic and political i system the centre-piece was the individual; and the role of the State was to be niinimal. Pandit Nehru, on the other hand, with his Fabian orientation envisaged a dominant role for the State bringing about socialist development of the country and wanted the means of production to be owned, or at least controlled, by the State. In the Gandhian view' the emphasis was on decentralised processinpl and manufacturing largely to meet the needs of the local or limited area markets. With the emphasis on local self-sufficiency to the extent possible the whole framework of activity centred round the local resources to be processed locally for meeting local needs. It is important to note that Gandhiji's economic philosophy was not accepted in its entirety at any stage, either by those in charge of the Congress Government in the Provinces in 1937 or later, by the Interim Government of independent Indi:i. The only elements which were accepted or in varying degrees pursued actively as official policies were State support for khadi, handloom and some of the traditional village industries and crafts. The sup pont to these activities, however, was not as in the case of Gandhiji a part of a total coherent economic philosophy, but rather as a matter of economic (or political) expediency. Thus, the support to these activities was not so much out of conviction that the India of the future wuld continue to need a thriving decentralised sector processing local resources for meeting local needs. It was mainly because of the need for a holding operation in terms of maintaining employment, which was an economic and political imperdtive. The thrust of policy with regard to the traditional decentralised sector was, thus, dictated by the need to minimise displacefnent or ercision of existing employment, however partial. As distinct from the traditional {ecentralised sector the policy-makers, and indeed, the efforts of Government adminis-

32

EVOLUTION OF THINKING ON POLIQIES FOR INDUSTRIALISATION

tnation were increasingly addres$ed to the establishment and support of what is best called thE modern small-scale sector. There is a basic difference betwben this new sector and the traditional decentralised industry, although in public discussions very often the and village industries are lumped together. This tends to b the very inportant distinction between these two sector6. The modern small-scale industrial sector, defined of fixed capital employed other than land and is, in many ,r"in! technologies and production which are"ur"", not qualitatively different even though there wofld be a very significant scale difference as compared to modern medium- or large. scale industry. Second, the small-scale sector neither de-, pends on locally available raw lnaterials nor is it predicaled upon meeting local needs. Third, a significant part of the smail-scale industry is not engdged in producing an end. product-either a co'nsumer prodhct or a piece of equipment, but is essentially subcontracting materials on com. ponents needed by a larger unit, h concept which has little OI no place in decenlralised tra industries. The consequence of this has been almost te of what Gandhiji had envisaged. The decenbalised industries and, to a glater extent, the modern industrial sector has not only received support in t of Government's accepted policies but has, in varying been built up on the basis of State patronage and fiscal su n. The essential point here is that the pattern of growth of and support to the smallscale and village industries been at variance with Gandhian thought. This sector his become as nruch involved with the State apparatus, depenfling on State policies, and ,counting on the State support iri numerous ways. The pen vasiveness of State involvement pvith economic activity and especially industrial aetivity, wa$ complete by the time the tirst covernment of independent lndia began to address itself to the -issues of industrial policy.

Regulat.ion and DeveloPment 33

NOTES AND REFERENCES

1.

India, Fiscal commission, 1s27, neport of the Indian Fiscal Commission ofGovernment's

Simla: Central Government Press, 1922. 2. India, Planning and Development Depaitment, Statement Industrial Policy 1945.
3. Jawaharlal Nehru, Discovery

otlndia Calcutta: Signet Prss, 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. s 6. 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 Development oJfIndia, Bombay: Padma Publications, 1944. g. People'6 Plan for Economic Development o/- /ndia. Delhi: Federation of

Indian Labour, 1944. This Plan which was popularly known as the People's Plan was drafted by the post-war Reconstruction Commitlee of the Federation of Indian Labour under the leadership of M.N. Ro!,, and amongst its aulhors was the noted eaonomist, Professor G.D. Parikh of Bombay. Lhlike the Bombay Plan lsee nole 31, tbe People's Plan pliced irs main reliance on the surplus of nationalised production arid'laid down

10. Sir Purshottamdas

agriculture and other essential consumer goods as its priorities. Thakurdas et al., A Plan of Economic Development for lndia. Bombay: New Book Co., 1944, Part II, p. 23. This Plan came to be known as the Bombav Plan and was in two parts. Part I was published in January 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. 23913. Rai Krishna, Nehru-candhi Polarity and Economic policy. Mainslram, 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 would cover all policy measures intendpd to influence and control the pace and direction of industfial development. An Industrial Policy Statement would also try to spell out the long-term goal and strate6y of industrialisation in the context of the stage of economic development of the country, the socio political set-up, and the econonlic institutional framework. T'he two elements of any industrial policy enunciated by the Government wor-rkl, therefore, be a clear statement about the goals which are to be achieved antd the operating strategy pre posed to be pursued to realise these goals. Thus, among the issues which will figure in any dlscussion of industrial policy are : the role and weightage to be assigned to hear,y, light and medium industries, the ownership pattern to be aimed at for different industries in the procqss of industrialisatiort and especially the role of foreign capi{al and imported technology, sources of finance to be demarcated for various sectors of industry and the role to be assigqred to internal yersus external resources, reliance on instiftutional finance as against recourse to the capital market, etb. An effective policy frame work would also have tir take inlo account the technological

Regulation and Development 35

options involved, locational guidelines for establishing new units and for ensuring a fair regional dispersal of industrial growth. At the microlevel, the policy would have to address itself to issues such as operating size of the units, minimum or maximurn scale of production so as to ensure iost effectiveness taking into account the prevailing local c'onditions and factor availability. Finally, an important elen\ent of a viable industrial policy would include an appraisal mechanism so that periodically it is possible to review the progress made, the extent to which the stated obiectives of the policy are being approached or achieved, and to assess whether any changes in the stated objectives andr,or in the operating strategy to achieve these objectives are necessary. It will be seen from the analysis of the successive policy Statements that the enunciation of Government policies was relatively strong on statement of goals or objectives, much weaker on the elaboration of operating strategies and there was, virtually, no regular mechanism for the appraisal of policy. The appraisals undeftaken as part of the ptinning pro cess in the country were often inadequate in assessing the effectiveness of the strategies adopted for achieving partiiular .objectives in order to decide whether the policies needed modifications at the margin or whether a more basic change in direction was necessary. Further, such reviews as were undertaken, for example, Dr. Hazari,sl Report on Industrial Licensing, Subimal Dutts Inquiry Committee Report on Indus_ trial Licensing policy t7962),2 Report of the Study Group on Industrial Regulations and procedunes (G.V. nimakrishna, February 1978),3 and the periodic reviews of developments in successive Five-year plans, do not appear to have been followed up with. a view to either modifzing policies or impmving the mechanisms to achieve the stated obiectlves. As a result, .over the years, the gap between obiectives and achievements, between what was intended and what actually happened, and between what the particular policy instru_ ments were supposed to achieve and what, in fact, they did achieve continued to widen. There was a reluctance to mod_ if' or even to change the emphasis with regard to the various goals which a pluralist strategy of advancing on all fronts in pur"suit of multiple objectives of growth_equity, employment

36

EVOLUTION oF INDUSTRIAI, PoLIcM

1945-1973

and self-reliance-inevitably involves. At the same time the elaborate structure of regulatipn and controls-industrial licensing import controls, price and distribution controls, foreign exchange regulations, control over induction of foreign capital or technology and FERA/MRTP approvals, etc.-had a dynamics of its own. This system interacting with the social, political milieu of the country tended to create a powerful lobby of bureaucrats, politicians and industrialists, each having a vested interest in 4voiding any major modification of the prevailing system. Thds is reflected in the policies enunciated from time to time and in the unwillingness to act on the advice or recommendallions contained in the Plan Documents or reports of varflous committees including

It is commonly assumed, that planned industrial develop ment in which there was a signifrcant role for the public sector was a policy orientation whiqh originated and crystallised rn the post-independencp pqdod. The Industrial Policy Resolution of 19564 which was formulated. after Parliament had accepted the socialistic pattern of society as the objective of social and economic policies, io generally taken as the starting point for what constituted th$ main contours of industrial policy over the last two or three decades. However, this is not the case. Apart from a fairly long history of nationalist thinking- later supported by some degree of official endorsement-which gave the St4te a highly active and prominent role in industrial development, the official thinking even prior to independence anticipated many of the important elements of the Industrial Policy Resolution of 1956. The statement of Governmentf s Industrial Policy issued by the Planning and Development Dppartment in April 1945 is, in many ways, a remarkable docUment. The Stateinent was issued in the context of 'condititlrns in which India will find herself after the war...',s and no doubt, its contents were SXeatly influenced by the detrate and discussions on post-war reconstruction problems in Euiope and elsewhere which allotted to the State a much l{rger role than in the past. Nevertheless, it is quite remarkable to see how the 1945

Parliamentary Committees.

Regulation and DeveloPment 37

'Statement* of Government Policy anticipates in many ways the obiectives, and to some extent, the approach and mechanisms ouilined in subsequent Policy Statements.

The Industrial Policy Statement begins with the premise that the development of industries is, under the Government of India Ac! 1935, a provincial subiect' However, it is open to the Centre to declare by law that the development of certain industries under Central control is expedient in public interest and, thereupon, the development of such industries becomes a Central subiect. Till 1945 no such Act was passed by the Central Legislature with the consequence that the development of industries was entirely a provincial subject. The Policy Statement gives two reasons why the Government of India, nevertheless, felt the need for issuing the Statement of their Industrial Policy. Firsl the general economic policy had a profound influence on industrial development and to that extent the Central Government was involved in, and concerned about industrial development. Second, certain indus tries should be taken over under Central control in the ihterest of caordinated development. This was, in fact, contemplated by Parliament (in Britain) when the Government of India Act was passed. Against this background the Government Policy Starement issued a list of industries which
should 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 chemicals

8. 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 readily ayailable 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 'before coming to our final decision Government will consult provinces and the leading Indian Statesl'G It will be seen than this list bears a fairly close resemblance to the original Schedule of Industries brought under the purview of the Central Government by the enactment of the Industries lDevelopment and Regulation) Act of 1951. But this is not all. As stated earlier, the 1945 Statement anticipares rn rnany ways the appnoach, objectives, and mechanisms which are embodied in the subsequent Policy Resolutions. For instance, the Industrial Policy Statement, 1945 specifically states, 'It is axiofnatic in Government's policy that the additional wealth created by industrial development should be distributed in a manner that may be regarded as socially equitable. Powers musf be taken and consciously used to secure this purpose.'7 The Statement rcco(nises that
... continuance of their existing policy, in the conditions in which India will find herself after this war will not meet
the obiectives of sound post-waf development.s ...Government have decided to take positive steps to encourage and pro. mote the rapid industrialisatiOn of the country to the fullest extent possible. They attach particular importance to the development of those industries which constitute the foun-

dation of modern industrial life, such as the iron and steel industry, the heary engineerlng indu$tries. the machine tool industry, the heavy chernlical industry and so on. But while development of these industries must take high . priority, it must form part of a balanced plan in which due

Regulation and Development 39

place is given to consumption goods industries. It is ctear that if progress is to be achieved development of industry must be planned by Government in cooperation with industry and every effort mdde to make the plan effective.s Referring to the question of the exteltt to which the State would take part in industrial enterprise, public utilities and railways . which forrned a considerable portion of the total industrial enterprises were already largely State owned and State operated. Il had also been decided that the generation of electric power should, as far as possible, be a State concern. ]'he Statement goes on to say that apart from ordnance factories, public utilities, railways and generatiori of electricity, 'Basic industries of national inrportance may be nationalized provided atlequate private capital is not forthcoming and it is regarded as essential in the national interest to promote such industries.'ro Amongst the industries listed as falling in this category were aircraft,. automobiles, tractors, chemicals and
dyes, iron and steel, prime movers, transport, vehicles, electri-

nonferrous industries. This list, agaiq is not so radically different from the list of industries included in the 1956 Resolution as 'Schedule "A" industries' in which future development would be the exclusive responsibility of the State. All other industries 'were to be lefl to private enterpfises, under varying degrees of control.'11 It is wr:rth noting that way back in 1945 the then Government had come to the conclusion that 'they must take power to license industrial undertakings.'12 Again, the Policy State rnent anlicipates the future when it states:

cal machinery, machine tools, 'electrochemical and

One effect of this unregulated firedom to promote indus trial enterprises has been the concentration of industries in certain areas. For instance, franufacture of cotton textiles has been cnncentrated in Bombay and Ahmedabad, sugar in UP and Bihar, paper in Bengal. In some cases there are good grounds for concentration of industries in particular areas but in many cases, it has been the result of fortuitous and haphazard growth. There are vast areas in this country which though suitable for industrial developmenr.

.&

EVOLUTION OF INDUSTRIAL POLICY

1945.1973

have not been developed becairse industry has tended to flow in particular channels.13
Pointing out that the concentration of industries is not always the result of economic or technical considerations, the State. , ment furt her adds
Even where concentration appears relatively cheap on the basis of financial costs of production and distribution, it would, in many cases be foutnd, in the long run, both socially and economically cheaper to disperse industry, if regard is paid to the benefits of a widely spread industrial structure and its integration wit[r agriculture.la

Statement was that there was a tendency for capitalists to adopt scherqes which promised quick returns. This would lead to

The other reason for licensing mentioned in the policy

l,opsided development-a scrarnble for some indusFies with the danger of overproduction and excessive competition and inadequate attention tQ other industries which are equally necessaty in the national interest. To overcome this difficulty it would be necessary to fix targets, to allocate them on a re$onal basis, and to see that these targers are
achieved.ls

will be quite impossible.,lG The Statement recognised that in order to avoid unnecessary delays it would be desirable to exempt fi:om the proposed licensing smaller plants below a certain monetary limi! moderate expansion of existing plants, or replacements which do 'not add to the output. Further, in order to ensure. that the
pLanned industrial development

For this purpose the Government would have to assume power to license and establish new factories and for the expansion of existing factorieq because ,without this power

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 cona specific rbierence to the need'to enstlre that unhealthy persons or of a-special centration of assets in the hands of few community would be avoided.'1s For this purpose the Policy judi' Statemeni further suggests that this may be secured by issue control' and cious exercise of controls, such as capital 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 the malor issues of industrial policy All thinking on "ome'of the important elements referred to in this Policy Statement recur in subsequent Resolutions on Industrial Policy of April 1948 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 IndustrLt foticy Resolution of April 1948 marks the first stage of evolution 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 Congress 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 redistnibution of the existing wealth would make no essential difference to the people and would merely mean distribution of poverty.'20 While the Resolution begins with the premise that ihu'st.tu must play a progressively active role in the develop ment of indusries',2r it goes on to caution that 'the ability to achieve main obiectives shoutd determine the immediate extent of the State's responsibility and limits to private enterprise.'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 new units r:f pr.oduction in othe-r fields rather than on acquiring anci running existing units.,23 In thc light of this contexl, areas r,t,hich are to be lhe exclusive monopoly of the Centrral Government are defined. These are manufacture of arms and ammunition, pft)duction and control of atomic energy, ownership and nranagement of railway. transport. In respect of the foll,owing industries, the Resolution states that the State-ancl the Resolution specifically. clarifies that this inclucles Central, provincial and fonner Princely States, Governments as well as other public authorities like municipal corpo4ations-would be exclusively responsible for the establishmenl of new undertakings. There is a further clarification that ,thp Stale may itself secure the cooperalion of:private enterprisei in the national interest, sut> ject to such control and regulatidn as the Central Government may prescribe.'24 The activities listed for this purpose were :
I.

,
3. 4. 5.

Coal (tne Indian Coalfield$ Committee,s proposals be generally followed). Irorr and steel. Aircraft manufacture.

will

Shipbuilding. Manufacture of telephonre, telegfaph and wireless

apparatus, 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 these fields develop for a period of ten yeirs, during which they will be allowed all facilities for efficient and reasonable expansion.'i6 After a period of ten yeats the matter was to be reviewed and a decision taken in the light of circumstances obtaining at the time; and if it Was decided that the State should acquire any unit, ,fundanlental rights guaranteed by the Constitution will be observed and compen"ation will be awarded on a fair and equitat_rle basis.,z7 In addilion to these, the Resdlution also lists industries

negulation and DeveloPment 43

whose loc.ations must be governed by economic factors of allIndia 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

follows
:

as

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

8. Electro-chemtcal industries' 9. Non-ferrous metals. 10. Rubber manulaclures 11. Power and industrial alcohol' 12. Cotton and woollen textiles' 13. Cement. 14. Sugar.
15. 16. 17. 18.
Paper and newsPrint.

Air and sea transpofi. Minerals. Industries related to defence'

to .note that the Resolution' while defining areas or citegories .of industries whi0h vrould be subject to Central regulation and control, specitically guarantees that'it will consult Governments of the Provinces and States at all execustages and fully associate them in the formulations and

It is important

tion of the plans"28 Ilnlike 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 cooDerative enterprise and rneans fb| the lehabilitation of displaced 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 agricultural

implements.'30

fully regulated in the national '31 For this purpose it was proposed that suitable tion would be introduced which would provide for the and approval by the Central Government 'of everv case of panticipation of foreign capital and nt in industry. '32 General policy, of course, was that as a rule the maior interest in ownership and effective control, should always be in Indian hands; 'but power will be taken to deal with exceptional

The text of the Industrial policy Resolutioq 1948, also rfers to other issues such as association of labour in matters concerning industrial production and requirements of industrial housing. In the case of participation of foreign private enterprise and particularly foreign technolory, the Resolution accepts the Industries Conference .""o--".rdution that ,it is necessary that the conditions under which they rforeign capi_ tal enterprise) may participate in industry should be care_and

activities fall mostly in the sphere of provincial Governmenrs and former princely States, adds that the Central Government would investigate how far and il.r what manner these industries could be coordihated and integrated with largescale industries. The Resolution passed by the Industries Conference, 7948, had made this recommdndation and the Resolution, while accepting the recommendation, refers by way of exampie to 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 cottage industry. It further states that in certain other Jreas of prodtic_ tion like agricultural implements, textile accessories, and parts of machine tools it should tre possible to produce components on a cottage industry sc4le and assemble these into their final product at a factory. It was also proposed to investigate how far industries highly centralised ai p"e"ent could be decentralised with advantage.

The Resolution, while noting that

these

It will be seen that the rEpresents in some ways a underlyin5 the Statement of lome areas, such as the role

of the thinking Policy, 1945; but in small-scale an(l cottage

Policy Resolution, 1948

neguletion and Develoqment

lLS

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

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 conservative wing of the Congress Party became much weaker' The First Five-Year Plan ending in March 1956 was undoubtedly successful. Prices had declined over the FiveYear Plan period

annum. The disruption caused by the Partition and its after' math was being overcome; and the nation's mood was one of supreme confidence in facing the future. The Industrial Policy Resolution passed by Parliament in April 1956 is one which is rnost often referred to partly because it held sway for more than two decades; arrd partly trecause it sought to translate the ideological basis of the Congress under Pandit Nehru's leadership into a framework of policy for future industrial development' As time passed it acquired a little of the mystic character of the scriptures which could be quoted by people who had scarcely read it carefully. ;l'he association of the name of Pandit Jawaharlal Nehru with the formulation of that Resolution gave it an added halo; and even those who, in later years, wanted.to make some modifications in it in the lighr of changing circumstances had to swear by it. The changes had to be camouflaged as continuitY. As the Resolution points out, the eight year period following the previous Industrial Policy Resolution witnessed many important changes in the development of India' The Constitution of India had been enacted which guaranteed fundamental

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

46

EVOLTITION OF INDUSTRIAI POLICIY. 1945.1973

rights and enunciated Directive principles of the State Policy. Ptanning had been estatilished. on an orAanised trasis and in December 1954, parliamefrt accepted the ;socialist pat_ tern of socieb/34 as the object[ve of socjal and economic policy, thus giving the basic general principle enshrined in the Constitution, 'a more pnecise direction,.3s The starting point of the Resolution, however. is the same as that of its predecessor, namely, that the State is lo assume direct responsibility for the future development of industries over a wide area; but there ar.e llmiting factors which make it necessary 'at thi$ stage' to definq the field in which it rvould undentake sole resp6nsibility fo4 further development and to make a selection, of industries in the development of which it would plal' a dorninant role. Thb Resolution, therefore, categonises industries into three gmups : (a) indusries included in Schedule A the future development of which will be the exclusive responsibility of the State; (b) Schedule B consisting of industries which will be progressivelv State owned and where the State will, therefore, generally iake initiative in establishing new undertakings, nnd in which private entep prise will also be expected to qupplement the effort of the State; (c,l all remaining industries where future development will, in general be.left to the initiative and enterprise of the private 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 to facilitate and encourage the devr]llopment of these industries ln private sector in accondance with the programmes fon mulated in successive Five-Yeaf. Plans....' 36 The Resolution specifically mentions that whils the private sector undeF takings must necessarily fit into thp framework of the social anc economic poliry of the State, anld be subject to control and rgulation in terms of the nelevant legislation, the Government of India
it would, in ggneraf be desirable to allow such undertakings to develop with as much fueedom as possible consistent with the thrgets and objectives of the National Plan. When there exibt in the same industrv both
recognised that

negulation and Develapnre

nt

4z

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

Contrary to the common assumption that the Industrial Policy Resolution, 1956 established an area of activity which was not open to private industry and another in which the rnle of private industry would be increasingly circumscribed, the text of the Resolution allowed much greater degree of flexibility in operating the policy. For instance, the Resolution specifically 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 area of overlapping but also a great deal of dovetailln6 between the industries in the private and public sectors.'3E While refen ring to the possibility of State owned industries not included either in Schedule A or Schedule B, the Resolution also mentions that 'in appnopdate cases, privately owned units may be permitted to produce an item falling within Schedule A for nleeting their own tequrre[rents on as by'products.'3s Similarly, there was to be no bar to small privately owned units undertaking prcduction such as the making of launches and other light-crafts, generation of power for local needs and small-scale minirrg. In short, the framers of the Resolution envisaged situations where the public sector might enter areas normally reserved for tlie private secton and, to some extent, vice-vensa. Over a period of time, however, the trend was towards the State enterint areas not specifically neserved for 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. This reflected partly the political olimate; but, partly at least, it reflected the fact that the political and administrative system was becoming increasingly conscious of the advantages (at least to itselfl) of gneater contnol over and Par'ticipation in industrial activity by the Governmen! especially at the Centrc. Many of the States were also not far behind in emulating the Centre by starting a plethora of State level corporations which widened the scope for political patronage.

iI6

EVOLUTION OF INDUSTRIAL POLICY

194F1973

There is another aspect which merits mention here. Unlike the-Industrial Folicy Resolution of 1946 which, as pointed out earlier, defined State participatrion as including Central, pro_ vincial and State Governments, and public authorities such as municipal corporations, the 1986 Resolution makes no such mention. On the other hand, there is a somewhat cryptic reference in the Resolution stalting that ,the division of res_ ponsibility between the Central Goverqment and the State Governments in regard to indugtries has been set out in the Industries (Development and Regulation) 4st, +o The Indus_ tries (Development and Regulation) Act specified that in respect of activities listed in the Scheduls to the Act it may become expedlent in the puhlic interest to takeover the industries specified therein, i.e., the entire range of licensable industrial activity. Further, all the powers under the Act including the power to assume management or control of industrial undertakings in certaln cases, were to be exercised by the Central covernment only. Section 25 of the Act prG vides for the delegation df powers, other than the powers in respect of direct management or control of industrial under_ .takings, '...subiect to such corlditions, if anv., as mav be specified in the direction be ekercisable by such officer or authority including in the said expressions any Development Council, State Government or officer or authoritv subordinate to the Central Government, as rnay be specifiej in the direc. tion. In other words, the responsibility in respect of all Scheduled industries was that of the Central Government, although industry remained a ooncunent subiect under the Constitution. The industries lioted in Schedules A and B attached to the Industrial policy Resolution of 1956 are all included 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 Industriat Policy Resolution of 19461, the industrial policv Resolution of 1956, by implication, equated State participation with Cen_ tral Government participation in industry. Witn the exception of coal, lignite, mining of iron ore, chromium. and other ores, etc., all other activities listed in Schedule A were covered bv rhe 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 which might 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 of indusrial 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 concentnation of industries in certain areas had been due to the ready availability of power, water supply and transport facilities which had been developed there. It was to be the aim of national planning to ensure that these facilities were steadily made available to areas which were lagging behind industrially or 'where there is greater need for prnviding opportunities for employment, proiided the location is otheF lgise suitable.'az The objective of the Policy was to lead to 'a balanced and coordinated development of the industrial and agricultural economy in each negion.'43 The Resolution discussed technical and managerial resour' ces in terms of personnel and added that in order to meet the rapidly growing needs for the expansion of the public sector and 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 the measures being taken to meet shortages at supervisory levels and for extending the faining facilities in business manage ment in univensities and other institutions' On the question of management of public enterprises, the Resolution noted that 'speedy decisions and willingness to assume responsibility are essential if these enterprises are lo succeed''# There would have to be decentralisation of authority and management has to be along business lines. Workers and technicians shoul{ wherever possible, be associated progtessively in management and 'enterprises in the public sector have to set an

JO

EVOLUTION OF INDUSTNIAL POLICY

19,I.5-1973

tinuity in thinking in the succesdive policy Statements of

example in this respect.,ls Ir will be seen that there is a considerable degree of con
1945

the systern of import licensing, both these were Central subof- Planning and Industrial iects. But with the in Licensing, continued shortage of exchange meant that decisions.regarding the import of capital gobds as well as the availability of raw materials, or wholly imported, came exclusively unden the control of the Central Government. The significance of this was that the sector of small-scaie industry and even some types of iictivities in the decentralised sector, such as handloom, powbnloom or woollen textiles, came within the puwiew of the policies and administrative actions of the Central Govefnment. For over two decades, the Industrial Policy Resolution continued to remain the gospel a gospel not always care fully read..The two decades numerous important pact on the policies enundevelopments which had an ciated 'or implied in the 1956 lution and the procedures and adrninistralive mech evolved for the purpose required a review of the polic and procedures; in practice there was considerable resis to introduqing any maior
changes.

The licensing mechanism as ell as the nelease of foreign for imports of t were relativelv uncomplicated in the first few years er the Industries (Develop ment and Regulation) Act, 1956 into force. For one thing, a great deal of time anci effort was spent in the socalled
exchange

Regulation and. Development 57

'Registration certificates'* as provided tor under Sectioir x relaling to the registration of existing industrial undertakings under the Indusries (Development and Regulation) Act. The clearance of foreign exchange for import of raw materials/ capital goods was also relatively easy till foreigr exchange diffi culties began to surface by 195s. As a result there was relatively little criticism of the working of the iicensing regulatory 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 and manufacturing new articles, all of which required prior approval began to increase. For instance, the total number of applications examined by the Licensing Committee increased from 1300 in 1956 to approximately 1900 by 1961 and to approximately 25oo by 1966. Conspondingly, the number of nequests entertained by the Capital Goods Committee for foreign exchange also increased significantly. The sheer administrative burden involved as well as the growing shortage of foreign exchange and domestic resources began io reflect itself in a chorus of criticism directed against the licensing syslem. The first appraisal of the licensing systema6 was done in 1964 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 undeF takings, 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 confer 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 SubSections 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 t''eign was especially the case in respect of several undertakings, including production of consumer goods, where their entry companies, engaged in the 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

certain conditions and speciffing a period of time within lvhich these conditions were to be fulfilled. In the event, these con&ions were not fulfille4 the intention was that the letter of intent should automatically lapse or in the event of adequate justification, to be extended for a specified period. In case the conditions were satisfied, the letter of intent may be converted into an industrial licence. Unlike the Swaminathan Com{nittee which dealt with the procedures, a more comprehensife enquiry into the role and purpose of the industrial policy ap an instrument of planning for an industrial environment which had altered considerably since the enactment of the Industries (Development and Regulation) Act, was entrusted fot,the time to Dr. R.K. Hazari. In 1964 the Industrial Development Bank of India was set up as an apex institution for industrial finance and in t969 all the maior commercial banks were n{tionalised, thus completing the process of Central Government's control over a predominant segment of the nation's savings and institutional lending for all purposes, including industly. The rupee was devalued in June 1966 by 57.5 per cent agBinst the sterling and tariff structure was instituted which, it was hoped, would enable the country to achieve greater viability in its balance of payments, without dependence on or excessive recourse to multiple exchange nates implicit in the system of Export Bonus Vouchers which had evolved in the eanly sixties as the maior instrument for export prorllotion. The Monopolies and Restrictive Trade Practices (MRTp) Act was enacted in 1969; and acting upon the Report of the Industrial Licensing policy Enquiry Committee under the chhirmanship of Shri Subimal Dutt, whose Report was published in July 1969,17 various restrictions were placed on new licences for the bigger industrial houses specified in the Dutt Comrfittee,s Report. A list of core industries consisting of basic and strategic industries was drawn up and the bigger industrinl houses were expected to contribute to the development of irldushies only in this sector. Thmughout this period the indlistnial policy was guided by

licensing procedures and allied matters. Its main recommendation was to institute a 'two tiey' Fystem. Under this system a puick preliminary examination of the application was followed by the Licensing Qommittee issuing a letter of intent, subject to

Regulation and Development 53

the approach outlined in the Industrial Policy Resolution, the findings or recommendations of various committees or Policy Statements made from time to time or the appnoach outlined in Plan Documents, there was no attempt to review the administrative mechanisms or pro cedures or to re.define priorities in cases where conflict between 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 the Planning Commission appointed Dr. R.K. Hazari, then pro1956. Despite

Industries (Development and Regulation) Ac! and suggest modifications, if any, to the licensing policy. His final report submitted in 1967 contains several important modifications and recommendations. Amongst the more impoftant conclusions were :48

fessor of Industrial Economics at the University of Bombay, as Honorary Consultant to conduct a study of licensing under the

1. The assumptions implicit in the Act that growth and allocation of resources should be looked after wholly or mainly by administrative guidance, promotion and ccntrnl 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 investment into desired directions appears extremely doubtful
(para 20.1).

3. The gains in terms of balanced regional development and wider distribution of entrepreneurship were at best
moderate (para 20.1).
4. Licensing

is only among the first of the many hurdles

that has to be crossed by a private entrepreneur so that a

licence does not automatically provide a package of

sarrctions and clearances (para Z0.Z).
J.

o.

There is vqry little follow up of Iicensing to see that approved projects fructify in time (para ZO.2). In attempting to cover almost the whole range of large scale industrial development licensing, the Act rnevitably loses sight of the relative importance of difterent proiects/products, i.e., whether critical to the economy or otherwise, all applications will undergo

I
54
EVOLUTION OF INDUSTRIAL POLI

19,t5-r973

similar pnocessing. Similarly, over the years, the lanning Commission seems to have realised that the framework of industrial policy and, more particularly, the mechanisrn for ensuring its implementation need to be reviewed. Thris, even in the First FiveYear Plan {1951), while underlying the need for a system of controls of new enterprises such as capital issues control, g ones, foreign exchange and large extension of allocations, import and export ntrols, controls on prices and physical controls including con ls on distributiott of commodities, the Planners were qulte explicit in stating that for the success of the Plan 'administration and periodical reviews of these controlq machinery for consultation and coopenation with the private sector will have an effective shate.'ae Discuss' ing the respective roles of the State and private enterprise, the Plan Document emphasised that 'harmonious working of these two sectors will depend, to a large extent, on decisions between the representatives an-ived at by mutual and business and industry and labour.'so of the Government Year Plan was drafted,'the Bv 1956, when the Seconc d a very prominent place in had ?lanning Commission official view, as enunciated the stnucture of Government. in the Second Five-Year Plan ent, was that while an e can go a long way in overall fiscal and monetary in desirable directions, 'a generating resources at thg comprehensive plan...cannot be seen through on the basis of merely overall fiscal and monetary controls.'sl The underlying logic was that 'if controls are administratively cumbrous and may act as dis.incentive, lack of them, it has to be remembered may create inequality and hardships to the prejudice
By the time the Third Five-Ydar Plan (1961-66) was framed,

of the long-term strategy for

nt that whatever the merits industrial develop

mances, between requirements and resources, and above all

tletween the institutional thmugh the type and scale of the existing

ework needed for putting of the working of

cal system. For the first

Regulation and DeveloPment 55

time, there was an awareness and mention of the fact that the operation of the industry depended not only on the needs of the people or markets for their products but also on the sup ply 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 and creating conditions for maximum production and employment and the development of human resources.'53 The adverse factors operating on the economy during the Third Plan period culminated in the drastic devaluation of the rupee in June 1966 and delayed the finalisation of the Plan. The Planning Commission was reconstituted in September 1967 with Professor D.R. Gadgil, one of the most distinguished economists in the country, as Deputy Chairman. Aftel a care ful review of the position the Commission concluded that with the lapse of time many of the assumptions and estimates of the Draft Outline of the Fourth Plan which was published in August 1966 were no longer valid. In any event, there were annual plans only for the years 1966-67 and 1967-68 and it was decided that for 1968-69 there should be an annual plan as well. In effect, therefore, the Fourth Plan which, ordinarily, should have commenced in April 1966 was dravr.rr up for the five-year period beginning with the fiscal year 1969-70. Against this background the Fourth Plan Document was much less complacent, more realistic and critical, particularly of the actual performance in relation to the stnategy and objectives. For instance, the Plan Document emphasised that 'the concern for speed, economy and efficiency has not been perwasive as it ought to be.'sa It further stressed that the 'public sector which had the responsibility of setting much higher standards of performance had as yet to fulfil its role of generating adequate surpluses for investment.'ss Even in respect of sensitive issues like income disparity the Fourth Plan Document was much more forthright. For instance, it begins with the proposition that 'in a rich country greater equality could be achieved in part by transfer of income through fiscal,

pricing and other policies. No significant results can be achieved through such measures in a poor country.'s6 The
path towards reduction of income disparities, therefore, was a 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 of economy, g1eater diffusion of enterprises and of the
ownership of the means of prodrnction, increasing the productivity of the weaker units and widening opportunities of pro ductive work and employment to the commotr man ..and particularly the less privileged sdctions of society.'57 Regarding the issue of industrflal policy, the Fourth plan listed a number of important poipts and many of these were either in contrast to the main stream of past thinking or cover areas often neglected in the past. For instance, it states that specific price and allocation pontrols and the general capital issue and licensing controls were inescapable in the earlier situation of considerable generall and specific scarcities, but with more efficient food management and greater availability of plant, machinery and other equipment in the country, a review of the past policies is required. This is all the more impon tant because 'the existing industrlal structure has led generally to a high level of costs and that the present system does not appear to have prevented concentration.'s8 The Planning Commission refers to the proposal of social control of banking and legislation of Monopolies and Restrictive Trade Practices; and of the assumption that would be operative in desired direbtions, a revision of the prcsent regime of controls was deemed desirable. There two main obiectives of the revisiori, first, 'it should en fully responsible decision-

making on the part of en

fixation of

targets,

licensing and some price and on controls seem to have affected the care with which the entrepreneurs should weigh the long-term prospects of their investment decisions.'se The second important uurLUtrv a of the policy revision, it was objective argued, should be 'to introduce an element of competitiveness ln the economy which would keep cost consciousness.'60 Referring to the sheltered condltions created in part by the operation of exrsting controls and liceqsing systems, which had reduced cost consciousness, the Plan Document stresses the need for increasing the element of competitiveness, paF ticularly when industrial activif begins to increase at the higher rate expected dufing the Fourth Plan period. The one direction in which greater vigilafirce by the Government was, accordinf to the Planning Comrhission, imperative was with

negulation and DeveloPment 57

and large city regard to the location of industries in metropolitan 'This should be effected in two ways-firstly' by positive

industry' and """rrt""r. assistance and incentives given for dispersal of and positive sec<rndly, by disincentives imposed in large cities '61 steps taien ior decongestion of metropolitan areas 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 of b 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 pro duction. .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 of Lconomic production.'62 In other words, the thrust for development was still in the main ftom import substitution which 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 industrial development 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 Commission showed greater awareness of the issues involved and also greater willingness to modif past approaches and practices. 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 develop ment has ro be considered $rimarily in relation to the aliocation of foreign Thrrs, import control and control on commodities in supply would have to continue. Within the broad of control in strategic areas, there is advantage in the market much fuller play. The supply of a variety- of industrial com_ modities has considerablv and the need is one of slimulating delnand and uction. With the broader industrial base and growing iiity of capital equip ment and raw materials from the country the need to control Jurther expansion in industries which are largely
based on domestic resounces ha$ assumed less importance.

Accordingly, the industrial licensing policy during the

Fourth Plan was envisaged as follows
:

1. All basic and strategic indr;sries, involving significant investments or foreign exchange, should be carefully planned and sublccted to industrial licensinA. It is necessary to ensure effective penformance and to- keep a close watch on the developmqnt of these industries. Hence, once the licence is granted, credit, foreign exchange and scarce raw materials wquld be earmarked for thet and made available in timd. This should be done for units both in (the) public and private sectors. 2. Industries requiring only marginal assistance by wav of foreign exchange for capital equipment may ' be exempted from the need to secure industrial licences. For this purpose, the foreign exchange ceiling may be stipulated at about 10 per cent of the total value of the capital equipment. The reJease of foreign exchange would continue to be regulated and the import of capital goods screened by the Capital Goods Committee. However, in industries in which, though the foreign capi_ tal equipment component is low, the maintenance imports component is high, it rvill be necessary to continue licensing. 3. Industries which do not call for foreign exchange for import of capital equipment br raw materials should be

negulatton and DeveloPment 59 nsit rg exempted from the requirements of ind usl rial"lice for private In these industries, there should be freedom to operate in accordance with the market

enterprise

requirements. proposed consequences-for above may in certain areas have adverse of industry example, it may increase further the congestion lead to undesirable i.r ,tt" tu"g" mltropolitan areas, may and competiti; with traditional and small-scale industries It is power' coul<l add to the concentration of economic and necessary to safeguard against these conlingencies --"u"r."r, certain indusincluding reservation of suitable the traditional and small-scale sector' would have tries for frr.rm to be devised in accordance with the requirements time to time.6s

The freedom trom industrial licensing as

In line with its approach to the question of licensing' the to lay down Commission p"oporud that it was not necessary industries' 'for the Fourth Plan targets for all
a limited Definite targets are proposed to be fixed onl1' fe" to ensure number of high priority industries ln order for fulfilment of these targets, full plovision will be made 'n;;;;; supplies, ani other facilities' For the remaining have industries, estrmates of requirements and production associations been proiected in consultation with industrial These prolections do not nepresent and other interests. targets or ceilings.66 a refreg While the Fourth FiveYear Plan Document showed to accept changes in hing realism and a willingness little' if anything dire"ctions of policy, in actual practice very .Ihe iicensing system continued much the same way as changed. beforle. Indeed, with the passing of the Monopolies resRestrictive Trade Practices (MRTP) Act in 1969 f'urther the placed on new licences for trictions were sought to be 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

quency with which these approvals were u^p-"dit"d by approaching the decision-makers at the politicai level. The rhetoric, particularly because of the political compulsions of the time, tendd to be more nadical; buiit was clear that conbary to the anticipations in the Fourth plan the growth of industrial production was far belo,,v the expectati;ns. Instead of the Srowth rate of8 to 10 per cent in industrial production, except for the year 1969-20 when indusirial output gnew by 6.8 per cent, the increase in output in the nexi three years of the Fourth Plan varied between 3.5 to 4.5 per cent annually. In the last year of the Plan, i.e., 1g7B-24 there was, in fact, hardly any incre-ase. The factors responsible for this unsatisfactory state of affairs were rnany, but by l9Z3 it was increasingly clear that the gap between promise and pepformance, betr.v'el., policies and their actual implementatio[r, between obiectives and their achievement had greatly widened, necessitating a criti_ cal review of both policies and procedures.

long-term finance, etc.:were endemic; and after the congress 1969 there was a marked increase in the number of decisions or clearances which were obtained, by approaching the political levels of decision_making. In fact, ii m'f not be a mere coincidence that there was a marked increase in the time taken for clearing applicati0ns for letters of intent or,for capital goods or for foreign co aborations and the greater rre.

split in

NOTES AND REFERENCES

1. R.K- Hazari,

Industrial planning and Litensing pollcy New Delhi: Gort. of India, Planning Commission, 1967. Dr Hazari was appointed Honorary corr sultant by the planning Commission to qndertake a thorou-gh examination of the industrial licensing policy. He subrnined an interim ;porr in 1966 and the final report in 1962. The final report ib in two volume" urrd i" dirridrd irrto
five parts.

2.

India, Industrial Licensing policy Inquily Committee, neport New Delhi

Go!'1.

of India, Ministry of Industrial Developmenl, 1969.

Regulatton and Development 87

3..c.\'. RamakrishDa, Chairlnan, neport o.f lhe .Studv Ot]dup on lndu.ttrial

Rcgulations 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 II, -fc,r lndur^trie.r New Delhi: Indian Investment Centrc, 1982, Parl l, Section
5.
6. 7. 8.

India, Planning and Development Department, Statetnenr of Government s

lndustrial Policy, 1945. Ibid., para 2.

PP.6'10.

lbid,

pal"a 3.
4.

Ibid., parc

9.
10.

ll
12. 13.
'..1.

Ibrd, para 5. lbid., paru 7 lbid., paraT.

.

Ibid., paru 10.

tbid
/bid., pam
11. 12. 13. 14

15. 16.
t7

lbid,
Ibid,

para para

. tbid.

'18. /bid ,

para

'

u.
No. 1(3)'14113)/48, 6

19.

Industrial Policy Resolution,1946.

for Industies.
pp. l-5, para
20. Ibid., parc 3. 21. Ibid. 22. rbid. 23. Ibid. 24. Ibid., para 4. 2s. Ibid
26.
27 .

New Delhi: Indian Investment Centre, 19E2, Part

April194E /nGuidelines l, S;ction It

2.

rbid. 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.
4. 10.

35. 36. 37.

3a4041.

Ibid., paft

lbid, para

Ibid., para 17. Ibid., para't2.

3s. rbid.

Ibid., pa,ra 7S. Ibid., para 73 42. Ibid-, para 75.

43. rbid.

A2
.14.

EVOLLITION OF INDUSTR|AL

POUOY

1945-1973

lbid, para 16.

Indusrrial Planning and Licensing Polic.y. New Delhi: Go!'t. of India, 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 of Pu[,lications, | 356. p. 38.
4E. R.K. Hazari, s2. 1b'4 p. 39. 53. India, Planning commission, lndia, Commission,

Third Five-Year Plan. Delhi: Manager of Publications, 191, htroduction" p. xiv. 54. India, Planninq Comrnission, FoLnh Five-Year Plan 7969-74, Draft. Del}].i: fndiu, Planninq Cornrnission, Fourth Five.Year Plan Manager of Publications, 1969, p. 8. s5. Ibid. 56. Ibid., p. 14. 57.Ibid., p. rs. 58. Ibid., p. 26.
pp. 26-27 p. 27.
.

ss- rbid. 60. Ibid., 61. Ibicl., 62. Ibid-, 63. Ibid-, 64. rbid. 65. /brd.,
66.

p. 36. p. 238. pp. 23E-39.

p. 23s.

Ibid,

Legislafive lrlechanism

INDUSTRIES (DEVELOPMENT AND REGULATION) ACT 1951 The evolution o/thinking on industrial policy and the elaboration of the strategy for industrial development, as pointed out earlier, shows a remarkable degree of continuity. From the early years of this century nationalist opinion had always stressed the need for active Government intervention with a view to protecting and encouraging the Indian industry. Even prior to independence the major elements of the subsequent policy had crystallised, for example, demarcation of spheres for public and private enterprises, planning and regulaiion by the Central Government in respect of certain industries of iinportance and the regulation of private sector growth so as to be within the broad framework of the plan priorities and policies. Prior to the Government of India Act of 1935 which provided for Provincial Autonomy, the policy for industrialisation was implemented largely through adlustments in the broader fiscal, monetary and exchange rate policies, for exam_ ple, policy of discriminating protection, Stores purchase policy, credit policies. But in the context of the new federal structure in the post-independence period and considering the wider range of policy obiectives such as regional dispersai of industries, avoidance of concentration of economic power

64

LEGISLATIVEMECHANISM

foreign 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 is in this context that one has to view the changes that lvere introduced in the first two decades after independence through the amendment of exist[ng legislation like the Com'panies Act of 1913 or the Foreign Exchange Regulalion Act of or the Imports and Exports (Control/ Act of 1947 In addi 1943 tion maior new enactments were also introduced, the more important of these being the Ifdustries (Development and Regulation) Act, 1951 and the Monopolies and Restrictive Trade Practices Act, 1969. In terms of its impact on the growth and structure of the Indian industry and also as an instrument for implementing the established industrial policles, the Industries (Develop ment and Regulation) Act, 1951 is by far the most important single piece of legislation; and its legislative histoly and actual implementation, therefore, desefve special attention in order to understand and assess the process of industrial transformation in India during the last three decades. It is interesting to note-though it is not as widely known that the original Bill introduced in Parliament in 1949 was entitled lndustrie$ (Development and Control) Bill 1949. A very important feature of the original Industries (Development and Control) Bill was that the powers under the proposed legislation were to be exercised by the Government thrpugh a Central Board consisting of three persons, all having 'wide experience of industrial, commercial, technical or iudicinl matters or in administration.' While the Central Board was to be appointed by the Govennment, the intention was that it would be empowered to exercise control over capital iqsues so that the Board would be in a position to use these powers for directing lilnited nesources 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.

in the hands of a tew, selectivity with regard to the use of

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

negulat[on and Developmenl 65

new, underlakings the Governnlent catr lay clolvtl ';onditions regardin6l locatiot't, tnitrintum size, etc, if
necessarv.
z.

The Gorrernment can nrake investigations inlo certain specified industries or undertakitrgs in industries (aJ rvhich show a fall in prodr.tction, a deterioration itr the quality of the product, a rise in the price of thc.product, oi r,r'hich short, tenclencies in these diI'ections; (bl rvhich use resources of national importance; and l(cJ r.vhich are managed in a manner likely to do harm to the intel'ests of the shareholders or consumel'si and issue Proper
directions for rectifying the drarvbacks. The Government can take under its o\vn management undertakings which fail to carry out its instructions frrr improvement in management and policies.

The Bill also provided-as did the subsequent Inrltrstries {Development and Regulation) Act. for the creation of Derrelopment Councils for enabling private industry to play its part in planrred national development. The rationale underlying the Development Councils as explained in the First Five-Year Plan Document is rvorthwhile recalling. This is pafticulallv relevant because over lhe vears, the role of the Development Councils rvas overshadowed by the opefative and regulatory sections of the Act. The provisions regarding licensing of nelr' units and of substantial expansions and proCuction of new afiicles and also the powers acquired by the Central Government in the matter of takeover of ailing or closed units were amended and enlarged over the years. But there w:rs hardly any change in the original provisions regarding the establishment and working
of the Development Councils.

With regard to the Development Councils, the Draft Outline

of the First Five.Year Plan stated the follorving
:

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

66

LEGISLATIVE MECI.IANISM

in relation to indusfy as of the kind of mar;hinerv rvhiclr can work from within each industrv and help to bring
about a steadv improvement in the standards of productivity, efficiency and managemeqt. It is only by establishing a svstem of mana{ement r.vhich is efficient in itself and is seen to function in the intenests r,rf the communitv as a whole lhat a system of private enterprise can, in future, gain the confidence of the putilic. It is, therefore/ necessary to provide for the establishment of such suitable machinery

for planning in industry'. Development Councils, one each for the important industries, consisting of representatives
of industry, labour and technical management hnd appointed by Government, would achieve this end. They would also serve as an effective link between the Central Board and the industries. In addition to advising Government these Councils should perform the following functions. 1. Recommend targets of production for securing fuller utilisation of installed capaqity. 2. Suggest norms of efficienc;r with a view to eliminating waste, obtaining maximum production, improving quality and reducing cost. Recommend measures for improving the working of the industry, particularly of i'he inefficient units. 4. Help in devising a syslem of distribution and sales which would satisfy the consumer;

The bevelopment Councils would thus be capable of dealing with all the important problems, which confront industry today. Obviously, eaph Development Council, in order to perform its functions satisfactorily, would need an adequate administrative and technical staff, which should be provided by Government. In course of time, the staff of these Councils would secure valuable knowledge regarding the administration of the different industries and their pro blems and as such would constitute a pool which could be drawn upon by the State for mbnagerial assignments.l
The Bitl was introduced
India (Iegistative) in April 1949 by Dr. Shyama erasad uukherjee, then Minister of Industry and $upply. He emphasised that

in the Constituent

Assemtrlv of

neg,ulation and

DeveloPment

67

the oblect of the Bill was 'lo select cefiain industries which we consider to be of all-India importance and to provide a machinery for the purposes of securing their regulation and development.'Z While defending the wide powers which the Bill sought to confer o.n the Government, Dt. Shyama Prasad Mukheriee made it clear that it was not the Govrnment's intention to exercise these powers indiscriminately, I may give this assurance that this power to direct and control management of particular undertakings can only be exercised in an emergency or in circumstances where Government felt convinced that an industrial undertaking dealing 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 vested

in the Central Government by law would, in practice, need to be decentralised and, therefore, they may be'delegated either to Provincial Governments or such authorities as Governmenl may consider fit and proper to constitute.'4 Sir Homi Mody, while conveying the general agleement with the principles of the said Bill on behalf of the industrialists in the country, emphasised that many questions like 'regionalization of industry, location of industry in suitable sites, and availability of raw material . . can be controlled and regulated by the Centre to the great benefit of the country as a whole.... However, he expressed some concern over the tact that the powers that were being sought were, 'very sweeping in character/ and he warned that 'if these powers are strictly interpreted and applied, the private enterprise will be left in name only.'s One of the critics of the Bill, intercstingly enough, was Shri T.T. Krishnamachari, later the Commerce and Industry Minister and one who moulded the operations of the Industries (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 the Centre to handle all the subiects that my Honourable friend envisages in the Schedule to this Bill.'6 He was also critical of the considerably high erosion of powers of the Provincial

68

T,EGISLATII'EMECHANISM

Governrnents. FIe sarcasticallv askecl, ,Is the Honourable Member going to increase the revenue bv rail traffic and air traffic by making more people conte to Delhi than those who come todav ?'; There n'as extensive debate on the Bill anci it followed a tortuous course through trvo Select Committees. The Finst Select Cornmittee emphasised the regulatorv provisions of the. Bill and inselted the word 'regulation, in place of ,conlrol, in the litle of the Bill. 'fhe Second Select Committee, however, laid greater emphasis on the clevelopmental aspects and elabo rated the provisions relating to the psl,slspment Councils. Legislation as finally passed, i.e,, Industries. (Development and Regulation/ Act, 19S1,E constitutes the legal tramework for control and regulation of a number of ke1, and important industries. T'hese were selected out of the three lists of industries in the Inclustrial Policy Resolution of 1948.s Although industrial policy was re-enunqialed in 1956r0 and certain important changes in approach to the problems of industrial development wene incorporated, no significant changes were made in the basic provisions of the Industries (Development and Regulation) Act relating to indusFial licences. The only substantive change was the addilion of a few industries in the First Schedule to the Act and their rearrangement. The additions were mostlv those nteritioned in Schedules A and B of the Industrial Policy Resolution, 1956 r,r,hich had not been listed in the First Schedule lo the Act earlier. In subsequent years there were nurnerous amendments to the Act, mainly in I971, 1C74, and 1979. It is interesting to note that Chapter II of the Act which deals with the Central Advisory Council and Developm@nt Councils has hardly been subject to any amendment over the last thirty years. On the

other hand, Chapter III dealing with the regulation of

Scheduled industries has undengone maxirnum number of changes with the primary purpose of strengthening the regulatory powerc. A new chapter III-A on ,Direct Manage ment or Control of Industrial tlndertakings by Central covernment in Certain Cases' was inserted by Act 26 of 1959 and further arnended from time to time. Another addition was Chapter III-AA on 'Managemertt or Control of Industrial Undertakings Owned by Companies in Liquidation, which

negulation and DeveloPment 69

with the was inserted by Act 72 of 1977 The chapter dealing various provisions regarding regulation of industries including diLct management or control of industriai undertakings under the different circumstances now accounts for over 60 per cent of 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 undertakings were introduced by Act 26 of 1953 and a Clause empower-

ing Central Govemment to rvoke 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. rvhich Central Government may assume the management or control of industrial undertakings. The original enactment empowered Central Govemment to authorise any person or a body of persons to takeover the management of the whole or any part of ihe undertaking after an investigation had been made under Section 15. The notified order under this Section, however, was to have effect for such period not exceeding five years, as may be specified expedient in public interest that any such notified order should
in the order. In 1965 a prDvision was added to the effect that if it was

A classic example is the provision lelating to the period for

of the period of five years) did not exceed ten years' In 1974 this was further amended to permit continuance of the order for 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

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 timg provided the total period of such continuance (after the expiry

70

LEGISLATIVEMECHANISM

the legislation setting up the Nat[onal Textile Corporation was likely to be passed by Parliament dnly after a few months.
A malor consequence of this appnoach to amending legislation was the tendency, in the first instance, to trat the provisions of Chapters III, ilI-A and III-AAA in a rputine manner by the administrative ministries concerned. Thus, the original Section 15 pncvides for an investigation into scheduled indushies or industrial undertakings and Section 10 provides for certain pbwers to the Central Govemment upon completion of irnvestigation under Section 15. The original Section 17, which made 'special provision for direct contrDl by Central Govemment in certain cases,'was repealed by the Amendment Act, 1953 and a nenar Chapter III-A was inserted empolvering the Central Government to assume the management or contrpl of undertakings in certain cases. This powerwas fuither enhanced by the insertion of Section 1&-AA by Anendrncnt Act 72 of 1971 which empowered the Centd Government to takeover industrial undertakings without investigation in certain circumstances. As mentioned earlier, the period over which such orders would remain in force was extenddd. By the same amendment in 1971 an additional set of provisions under Chapter III-AAA was inserted. These were aimed at pmviding powers to the Central Govemment for the rnanagement on control of industrial undertakings owned by companies in liquidation.

In order to enable these powers to be exercised, Section 15-A was added giving the Central Govemment power to investigate into the affairs ofa company in liquidation.,{ new Clause provided that ifthe Cenbal Government felt it necessaly to investigate into the possitliligi of running or restarting an industrial undertaking which is beingwound up by or under the supervision ofthe High Court, it can make an application to the High Court praying foran investigation into such a possibility. It was also provided that wherc such an application was made the High Cortnt shall, notwithstanding anything contained in the Companiesdct, 1956 orany other law being in force at the timq grant the permission pnayed for. On the

basis of sueh an investigation, Gdvernment assumed power to make an application to the High Court seeking permission to

appoint any person or a body of persons to takeover the

Regulation and DeveloPment 7t

manner management of an industrial undertaking in the same case too' the period as a takeover unden Section 18-A In'this

for takeover was extended from time to time ending with

to total of seventeen years, except that here the extension had 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 handperover the managernent of an undertaking to the authorised

son, he was'deemed'to be the Official Liquidator in fespect of the industrial undeltaking or of the concerned part as the to case mav be. Further, the amended Act, vide Chapters III-A 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 circumstances 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 Central Government, either by the appointment of additional directors or by the allotment of additional
shares.

'

The extremely wide and extensive provisions under Section 16-FF were meant to strenglhen the hands of the Government in case it decided to avail of the option provided under the relevant Sections to prepare a scheme for the reconstruction 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 expected 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 on the would be the least cost option. It rs a sad commentary

72

LECISLATIVEMECHANISM

nesponse to pressurcs emanating ftom those who, at any cost, wanted to prevent the closure of a unit. There was, hardly even, an attempt made to examine whether, and if so, at what cost the unit facing closure (or sometimes already closed) could be rcstarted.

forgotten. Relevant sections of the Act were used

(Development and Regulation) Act were, in practice, used that the original purpodes of the legislation seern to have been totallv

manner in which the provisions of Chapter III of the Industries

pri-;t;

Councils. The amendments conceming Chapter III were either pmcedural or arising firom a need to nemove certain lacunag for example, the provision for revocatio.n of re$stration. Some of the amendments which were substantive were primarily with a vieraz to extending the area of operation of the Industries (Development and Regulation) Act, for example, additions to or elaborations of the industries listed in the Finst Schedule and the provision requin ing registered or licensed units to otrtain a licence or permission for producing any new article. The 1979 amendment was enacted primarily with a vier,rz to enabling the Central Government to obtain powers for ensuring that the resprvBtion for small industries in nespect of certain items could be enforced. Legal authorigz for resewing certain items for the small.scate indusiry could be provided only when the item to be reserved was includld under one of the headings or sub-headings listed in the First Schedule to

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 by administrative convenience or needs; and the originaipurposes of the Act, namely, orderty dwelopm4nt, have bee"n given a secon_ dary place. Between 1953 and l9E3 fhe Act was am-ended no less than ten times, the first amendment being in 1953 and the last in 1979. As pointed out earlier, there wqre hardly any amendments in Chapter II of the Act dealing with the Advisory and Consultative machinery, i.e., the Central Advisoly Councii and Development

handtools, small tools, pnessure cbokers, cutlery, steel fumiture, zip-fasteners, and oil stoves hpd to be specifically added with a view to providing necessqry legat p-ower to reserve

the Act. Thus, items such ai plastic moulded goods,

netulation and Development 73

them for the small-scale industry. The major amendments were, .however, with a view to widening powers of the Government in respect of takeover of management and to increase alternative options open to the Government in any particular situation. Unfortunately, these amendments w-ere never utilised tbr the purposes of more rational policy regarding takeover. In thirty years of the operation of the lndustries (Development and Regulation) Act, some of the important provisions rvere allowed to go by default, for example, consultative pro. cedures and provisions for reconstruction. Certain provisions were so used as to distorl considerably the original purposes, for example, the provisions and procedures in respect of licensed capacity; and finally, the operation of the Act which was intended to be limited to certain industries of national importance, ultimately extended itself to almost any manufacturing activity rvilh the result that the constitutional pro visions which make inilustrv a State sublect were totally nullified. In retrospect, it is clear that over the years the original structure of the Indusfies (Development and Regulation) Act was altered. Sometimes these changes were deliberate, but at other times as a consequence of certain administrative procedures or practices which strengthened Ihe regulatory parts of the legislation and reduced, in actual working, the elTectiveness of the consultative procedures to which the original architects of the legislation as well as the
planners had attached tremendous importance.

To examine the question of consultative procedures, the Industries (Development and .Regulation) Act, 1951 as
originall-y enacted made a provision for the Central Advisory

Council and Development Councils. Chapter II of the Actincidentalll,, a part of the Act which has unrlergone minimum changes deals with the establishment and constitution af the Central Advisory Council for industries and specifies its functions. Among other things the Act lays down that the Central covernrnent shall consult the Advisory Council regarding the making of any rules other than the first rules to be made under Sutrsection (3); and also contains a provision that the Central Government may consult the Advisory Council in connection with anv other matter related to tl.re administration

74

LEGISLATI'VE\4ECHANIS]\I

of theAct. Chapter II also contains several pncvisions regarding the

establishment and constitution of tftre Development Councils and also pruvides for the imposition of cess on Scheduled industries not exceeding 1/8 percent ofthe valnre ofgoods produced. It is also pmvided in the Act that the Central Government may hand over the ploceeds ofthe cess collected rtnder this Section to the Development Councils established for that industry or gmup of indus-

tries; and where such cess is placed at the disposal Dwelopment Council it shall utilise the proceeds.

of the

1, To promote $cientific and industrial researchwith reference to the Scheduled industry or group of Scheduled industries in respect ofwhich the Development Council is established. 2. To promote improvements in design and quality with refurence to the products ofsuch industry or group ofindustries. 3. To provide for the training oftechnicians and labour in such industy or group of industrieg. 4. To meet such expenses in the exercise ofits functions and its administrative expenses as mpy be prescribed.

In the Industries (Dwelopment and Regulation) Act, 1951, therE was also provision for consultatiod in xercising the powers cdn{eued on the Govemment under 8ection 16 or Sub-section 1 of Section 17, that is, sections pertainlng to investigations into Scheduled industries or Scheduled unilertakings, and powers of the Central Government and special provisions for direct control by the Central Government in certain cases. Following an amendment in 1953, the provision for consultation with the Central Advisory Council in cases'where the Govemment was taking over the management of a unit was deleted. The argu-

Regulation and DeveloPment 75

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 practicable. In retrospect, it would seem that this amendment, in a sense, marked a change in the attitude towards the need for or usefulness of the consultation procedure, including Development Councils, envisaged in the Act. Ironically', the man responsible for piloting this amendment through Parliament 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 persuaded to believe that it was both necessary and desirable for the Government to exercise these powers under the Act without having the encumbrance of consultation with a large body like the Central Advisory Council or any other outside
body.

In fact, the reason for reiecting any proposal which would make 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 which can always call Government to account, there should be a pro vision for consultation with so large,a body on all matters. That means, the Hon. Member who seeks to float an amendment has no faith in this House;'11 This, essentially, is the doctrine of parliamentary supremacy. But underlying tlris approach was a certain shift in style. Within less than five years from the time the original Industries (Control and Regulation) Bill was inboduced in Parliament, political thinking had moved distinctly towards an unfettered use of Government's powers-something which was not envisaged in the earlier Bills, and negarding which assurances were given on

18

!-EGISI-ATIVEMECHANISM

the tloor of the House at each stage of the debate since the introduction of rhe Bill. f'his is not all. The Registrationr and Licensing of Industrial Undertakings Rules, 1952t2 which r.vere notified in July 1952 provided under Section 18 for a revien' of licences issued, refused, varied, amended or revoked ffom time to time. T-he Rules provided for a SubCommiXtee of the Central Advisory Council which would undertake such a review and also advise the Covernment on the 'general principles to be followed in the issue of licences for establishing new undertakings or substantial expansion of the existing undertakings.'ra Initially, such a Comntittee rvas, in fact, set up under the distinguished chairmanship of the late Pandit Hirdaynath Kunzru, an independerrit Member of Parliament. His successer as chairman was -another eminent person, Sir Ramaswamv Mudaliar-. But over a period the importance attached to the work of the SubComfiittee diminished. Meetings became less frequent and by 1968-69 meetinf{s of the Review Sub-Committee lvere reduced to one per vear. By the early 1970s the Review Subcomrnittee became defunct. f'he tenure of the Subcommittee being coterminus with the main Council, there was no Sub-Committee between Mali 1977 and Mav 1981 during r.vhich period the Council itself did not exist after tlre expirv of i1s lwGyear term before ilday 1977. Between May 1981 and May 1983 the reco4stituted Council met thrice but no meeting of the Review Slub-Committee appeared to have taken place. Even the Standing Committee of the Council which used to function in the initial vears was discontinued during the later part of the seventies. The importance attached to the deliberations of the Central Advisory Council or its usefulness in terms of the role envisaged for it in the Industries (Development and Regulation) Act diminished
SIeatlv.

In part, the size and the diverse composition of the Council and the tendency- unfortu n ately far too common in public forum in this country-for member's to read out long prepared texts, turned the meetings of the Central Advisory Council inlo 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 at the meetings in their representative capacitv on behalf of par_ ticular organisatibns; and they tended to use the Central Advisory Council to place on record the position of their constituents on particular issues. The result, therefore, was that the proceedings of the Council were more in the nature of a reaffirmation of the position of the Government, .represen_ tatives of industrial organisations, labour unions, etc., and there n'as little, if any, discussion or exchange of icleas with a l iew lo arriving al a consensus. The manner in whictr the meetings were organised also led to this situation. The inaugural speech of lhe Minister usually took the form of either zrn exhortation to industry to generallv behave better, or somelimes a long list of prescriptions for industry to follow. There was never anv aftempt to list out a few specific issues on which the discussion should centre; nor was any attempt made to revierv the actual working of specific Government policies with a vier,r, to improvinq their workirrg or changing their conlent. Ir is no rvonder, therefore, that during the period ofJanata Government and its successor cdalition Governmenl under ChoudhaD, Charan Singh, that is, between 1977 -aO there was no meeting of the Central Advisory Council and no one seemed to even notice it. A similar situation developed in respect of the rvorking of the Development Councils which were assigned an important role in the tndustries (Development and Regulationl Act.r1 The funclions of the Development Councils as envisaged rn the Act and lisled in tlre Second Schedule are as Ibllows:
1.

Recommending targets for produclion, coordinating pr<> duction prograrnmes and reviewing progress from time to time.

2. Suggesting

norms of efficiency rvith a view to eliminating waste, obtaining maximum production, improvin6; quality and rcducing costs. Recommending measures for securing the luller utilisation ol the installed capacity and fon imploving the working of the industry, pafiiculafly of the less efficient

units. Promoting arrangernents for better marketing and help.

--_r

LEGISLATIVE MECHANISM

rng in the devising of a system of distribution and sale of the produce of the induttry which would be satisfactory to the consumer. 5. Promoting standardisation of products 6. 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 discovery and development of new materials, equipment and methods and of improvernents in those already in use, the assessment of the advantages of different alten natives and the conduct of experimental establishment and of tests on a comrnerclal scale. 8. Promoting the training of persons engaged or proposing engagement in the industry and their education in technical or artistic subjects'relevant thereto.

9. Promoting the re-training in alternative occupations of personnel engaged in or retrenched from the industry. 10. Fromoting or undertaking scientific and industrial research, research into maiters affecting industrial psychology and research into matters relating to production or use of goods and tion and to the co
services supplied by the iridustry. 11. Promoting improvements and standardisation of and practice. accounting and costing collection and formulathe 12. Promoting or un tion of statistics. 13. Investigating possibilities of decentralising stages and processes of production with a view to encouraging the growth of allied smallscale and cottage industries' '14. Promoting the adoption of measures for increasing the productivity of labour, including measures for securing safer and better working conditions and the provision and improvement of arnenities and incentives for workers. 15. Advising on any matters nelating .to the industry (other than remuneration and oonditions of employment) as to which the central GDvernment may request the

Regulation and Development 7g

Development Council to advise ano undertaking inquiries for the purpose of enabling the Development Council so to advise. 16. Undertaking arrangements for making available to the industry 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 of the Industries (Development and Regulation) Act that it has not been found necessary to amend or add to the functions of the Development Councils. Indeed, it would be difficult to suggest even today a wider or a more crucial mandate. It is clear that such wide ranging functions would require a corresponding back-up in terms of resources; and it was for this reason that the Act provided for the imposition of cess on Schiduled industries, the proceeds of which could be placed at the disposal of the Development Councils. All this wa: done in an em,ironment marked by a genuine belief that consultation between industry and Government is necessary and desirable even from the point of view of improving the fon mulation and implementation of the Five-year plans. It is interesting to note, for instance, that in the First plan Document there are references to the respective roles of the public and private sectors, and the Document emphasises that ,har_ monious working of these two sectors will depend, to a large extent/ on decisions arrived at by mutual agreement between representatives of Government, business, industry and labour.'ls The First Plan also stressed that local and regional bcidies as well as industrial associations could play an effective role in the formulition and implementation of the plan. While underlining the need for a system of controls such as capital issue control; licensing of new enterprises and large extensions of existing ones, foreign exchange allocations, import and export controls, controls on prices and also physi_ cal controls, such as price and distribution controls, the authors 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 private
sector

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 of planning 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 lllevelopmenl and Regulation) Act. In the first few years the Development Councils did fairly useful work, especially i n terms of providing 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 drawing up plans for the developrnent arf their respectirre industries over the next five or ten vears and also to project the likely requirements of skilled manpower and input materials for achieving the proiected growth. In pleneral, however', lhe Development Councils were unable to play the role envisaged for them, largely because of certain badic weaknesses in their constitulion arrd fu nct ion ing. More otten than not the l)evelopment Councils were large bodies. This was either because different segments of industry were sought to be represented in one Council or an attempt was made to provide representation to different regions, associations, etc. On the other hand, in spite of the large size of the Councils which itself was sometimes a handicap, their composition did not include certain relevant or lopment Councils did not necessary inpuls. Thus, most institutions; nor was the include representatives of ive ministrv sufficientPlanning Commission or the of Development Councils. ly closely associated with the of industrialists and technlThese bodies became
of the Councils, however, was that they did not have lhe su1> usual for the Development ofiicer from the Direcirrangement was to|ate General of Technical Development (DGTD) to act as a secretary of the Council. This kind of part-time and often inadequate, if not casual, secretariat support greatly reduced the ability of the Councils to devote tlme and attention to the wrde ranging terms of referencb assrgned to them. At times the Councils were not reconstituted after the expiry of their

port of a competent and full.time secretariat. The

negulation and DeveloPment El

initial term; and even otherwise, in many cases the Councils met only very occasionally. In short, instead of becoming active functional bodies comprising persons closely connected with industry and policy formulation which could effec"tively interface with the planning process, these Councils-or at least many of them--tended to become social Satherings where industrialists met for exchangin5'views rather than fon mulating operational guidelines for the future development of
industry. Meetin$s of the Development Councils rarely engaged in a serious or detailed discussion about the changing technG logies, the position of raw materials, narketing conditions and financial parameters. In turn, credibility of the Development Councils, with some exceptions, and usefulness of the work done by them for policy formulation was gradually reduced. Wh.ile there were a few legislative amendments in relation to the Chapter on th consultative process, in practice, there was considerable variance between the intention and the frarnework 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 the original structure of the Industries (Development and Regulation) Act. Over the years there was a considerable increase in the extent of administrative involvement in the day-today working of industry. The controls over the pricing and distribution of raw materials, price control over the final products, allocation of foreign exchange in addition to a rigorous restrictive import policy, special requirements or conditions with regard to the activities of larger houses and similar other measures, undoubtedly contributed greatly to the ever growing presence of the Government in the industrial field. The regulatory system became increasingly complex. The continuing era of shortages and the extraordinarily high degree of protection meant easy profits for anyone who was able to secure the necessary approvals or permissions. This, in turn, gradually created an environment in which the administrative p"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

frnm the national point of view. The list of industries in the Schedule to the Industries (Develtopment and Regulation) Act was drawn with a view to ensufing that the Union Govern_ ment had the requisite powers. Tlhe original First Schedule to the Act was fairly broad with categorisations such as,Iron & Steel and products thereof. The Schedule was drastically revised in 1956 and to a Ieiser extent by subsequent amendments in 1962, 1923 and 1929. The result of these amendments was twofold. First, certain categories of indus. trial activity were added to the Schedule. Second, and more important, the description of industrial activity was given in much more detail. This ldtter ihange had a particular relevance in terms of expanding the coverage and degree of detail in regulation, because, as pointed out earlier after the amendment to the Act in 1959 licence was needed for the ptu duction of any 'New Article'. The structure of the Industrieg (Development and Regulation) Act was designed-and rig$tly* to provide the Central Government with powers to lay down that the establishment of any new undertaking (or sqbstantial expansion and later in 1953, manufacture of new article$.'shall not be except under and in accordance with the licertce issuecl in that behalf by the Central Government.'l7 The inclusion of an industry within the purview of the Act trlnsferred from the States to the Central Gover4ment the reqponsibility and power for legislating for its regulation, control or development. In the federal context, this was a necegsary and sensible piece of legislation because in the absence of such a law in respect of the major industries, different andl possibly conflicting control systems may, otherwise, have dev(loped in the countrv. The smaller enterprises originally defined as those iirvolving an investment of less than five lakh rupees in plant and equipment (suf,sequently raised by stages to twenty lakh rupees) were outslde the purview Of the legislation. In the initial years the adrninistritiort ol the Industries (Development

approvals or clearances from the Govet nment. The original intention of the lndustries (Development and Regulation) Act was to provide a framework in which the Union Government would be ablB to regulate certaitr specific areas of industrial activity which were sufficientlv important

netulation and

kvelopment

E3

and Regulation) Act did not. create many problems nor did it evoke much criticism. This was pnimarily due trl the fact that initially a large part of the administnative functions under the Act consisted of issuing Registration certificates in respect of existing enterprises which came within the purview o{ the law; and also the Act was looked upon as a simple but effective inslrument of planning in the field of industry by directing the resources according to the overall view of priorities in development. Normally, the requirement and, therefore, the scope for new licensing in different industries was determined from time to time on the basis of a survey of the existing capacity and iudgement by planners of the capacity required at a future date. Licensing of new units or expansion of existing ones was generally restricted to the limits so arrived at, though sometimes the targets were deliberately exceeded to allow for infructuous schemes. Generally speakin6 expansion of existing units was perrnitted, exceptions being comparatively nare. This initial phase, however, was short-lived. By 1958 ther was considerable pressure on the balance of payments resulting in fairly rigid control over the imports not only of capital goods needed for starting new industries or for substantial expansion of existing undertakings but also essential raw materials and components needid by the industry. The reslrictions on imports involved first, a more careful scrutiny by the relevant technical or sponsoring authorities to determine whether or not a particular item and in the proposed quantities asked for tre allowed to be imponted. And second, as part of the long-term strategy of development reinforced by foreign exchange to so organise new industrial activity as to reduce significantlv over as short a time as possible the import content of the new activity. All applications for imports of capital goods or of raw materials needed by the industry were scrutinised by the technical authorities such as the Director General Technical Development for most chemical and engineering industnies, Textile Commissioner or Jute Commissioner for cotton and jute textiles, Directorate of Sugar and Vanaspati for these two industries. The scrutinising or sponsoring agencies were required to clear import requirernents by certifying that the import and the quantities

E4

LEGISLATIVEMECHANISM

suggested \ rere 'essential' in terrfis of the production needs

of

the

indigerious prnduction of that itdm. In official iargon, the first came to be called scmtiny from the 'essentiality' angle; and the second from the 'irrdigenous' angle. It is important to stress that what started as a mechanism

unit and r.ere not either indigenously available or would not in an1, case adversely affect the existing or potential

for _the orderly development of [ndustries of national impor tance became a rnuch more elhborate and administratively complex arrangement largely bedause of the foreign exchange difficulties v,'hich became increRsingly acute during the sixtive needs of the sponson ties. In consequence, the their responsibilities were ing authorities for ents of the Industries mixed up with the stalulory

unless the product description fvas sufficientty detailed, the Director General Technical Development was not in a. position to sponsor the import rqquirerilents of components or I'aw materials and also determine v{thether or not the particular type of equipment or intermddiate or final product was domesticaliy available. It was aldo not possible for the officers concerned to lay down a phasetl manufactpring programme, i.e., a progressive I'eduction in tfre import content by increasing the extent of indigenisation df production. Of course, this could have beqn taken care of by stipulating that while the licence may be fo[ a broader category as it1 the original Schedule to the Industrlcs lDevelopment and Rcgulation) Act, but the undertakin$ would have to fulnish all necessary details about the product to the sponsoring authority. In other words, a distinctiotr could have been made between 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 administrative convenience was permitted to take precedence over

the legal provisions. The result was that the degree of freedom avaiiable to the manufacturer to alter' his pruduct
specifications or product mix was greatly reduced. This was particularly the case with units which carne within the amhit of the MRTP Act. In these units, the procedure for obtainint a iicence for the pmduction of a 'New Article' was particularly stringent; and in several areas of activity they were detrarred ftom obtaining a licence. From the early seventies thele was a further stipulation that all such cases would need to be cleared by the Cabinet Committee on Eco nomic 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, the pnocess of licensing acquired a very different character from what was orginally envisaged. Instead of limiting itself to sanctioning creation of new capacity in specified fields at approved locations, the licensing system tended to become an all pervasive rnechanism which laid down numerous conditions. There was also a tendency to introduce in the indus. trial licence-a document having a legal status, conditions or understandings which were essentially of an administrative character. For instance, many licences for new undertakings or substantial expansion of existing units carried, particularly in the sixties, stipulations such as 'no capital equipment will be allowed to be imported' or 'no raw material will be impon ted.' This had several undesirable consequences. In the same r
An extreme example of this-lbfiunately not very common-was the case of
an elevator manufacturer. The oiiSinal licence stipulated that the licensee was peimitted 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 Produce 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 thc administrative needs of the Dircctor General Technical Development; but the

conaequence was that for shifting production to meel the newly emerging demands the licensee had to spend several months going through the pmcess
of cldarance.

66

LEGISLATTVEMECIIANISM

industry, for instance, there w0uld be some units licensed earlier which would not be subilct to the onerous conditions being imposed on the new entrants. This was particularly true of, the socalled export otiligation. Many new units were licen$ed only on the condition that they would export specified qugntities or agree to expofi a specified proportion of their prpduction. Similar stipulation, however, was not applicable to the older and, therefore, betten established units. Fufther, the administrative arrangements for monitoring adherence to the conditions rcgarding. exports were totally inadequate. The result was that such stipulations only deterted the more reputed or well established entrepreneurB who lrad a neputation to maintain. The less scrupulous, 'fly-by-night operators' were willing to accept any conditions because t{ey had no intention of fulfilling them. Ther was, however, one ottier malor change which r,.as seen fairly early in the implementation of the legislation and which had serious implications for the licensing system. The Industries (Development and Regulation) Act stipulates that the Iicence may contain 'such conditions including, in particular, conditions as to the location of the undertaking and minimum standards in respect qf size to be provided therein as the Central Government may deem fit to impose.'l8 In other words, the intention obviously was to ensure that licensing pmvisions werr used to prevenf the creation of excessively small or fragmented and, thdrefore, unviable capacities. Similarly, the term substantial e;rpansion which is defined in the Act also makes it clear that the original purpose of the Act was not restrictive. Thus, the explanation to Section 13 of the Act states :
For the purpo$es of this Section 'substantial expansion means the expansion of an exlsting industrial undertaking, which substaritially increases the productive capacity of the undertaking, or which is of $uch a nature as to amount virtual.ly to a new industrial rJndertaking but does not include any such expansion as ls normal to the undertaking having regard to its naturt arld the circumstances relating to such expansion. (Italics minE.)

negulation and Development 87

Over a period, however, possibly without realising what

was happening, partly as a consequence of other factors such as the convenience of using the licensing mechanism for deal-

ing with problems of administrative allocation of foreign

exchange and partly through the sheer momentum of a sys" tem of controls feeding on itself, both these initial purposes were lost. The licence specified the ma;imum capacity of the undertaking; and soon the capacity began to be equated with maximum production permissible for the undertaking. Second, substantial expansiory instead ofbeing interpreted as intended in the explanation, namely, all expansion normal to the undertaking was not to constitute substantial expansion, the term was defined as anything which increased the

capacity py more than 25 per eent. It was but a short step from this to equate capacity with production and for the Government, and, even more, Parliament to look upon any increase in production beyond the permissitrle 25 per cent

over capacity as infringement of the Industnies tDevelopmeut and Regulation) Act. Shri S. Bhoothalingam, a distinguished civil servant who rvas closely associated with the policy-making relating to industry and also for a time with the operation of the licensing 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 controls including the Industries (Development and Regulation) Act. He said, 'Gradually, and as the controlling authorities gained experience, the range and depth of regulation was extended well beyond the initial objective of regulating only the growth of industrial capacity and the administration tended to become more rigorous, rigid and detailed.'1e As pointed out earlier, the capacity permitted in the industrial licence came to be regarded as ceiling for actual production.
Where by greater managerial efficiency or the practice of techniques not involving much capital investment an enterprise was able to produce more than stated in the indus" trial licence it had to do so at its peril even when the total production in the country was insufficient to meet the

demand. Again, an enterprise desiring to produce slightly

88

LEGISLAI'IVEMECHANISM

different artidles but with the same equipment required to seek fresh permisdion for undertaking lhe pro duction of a 'new article'. In the process of determining the number and capacity of new units required to achieve a plan 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 location of a unit often prevailed over the judgment of the entrepreneur ooncerned. The well-intentioned desire to spread new capacity equitably among ditTerent regions, combined with the need to do so without the risk of creating'excess capaciqy' often led to limitations on the size and technical character of new enterprises which hampened efficient functioning and growth. The limitations, in turn, led some entrepreneurs to seek dubious ways of getting over or around them. These, in turn, attracted countermeasures by way of more interference and policing than
was ever inlended.Zo

It was not that these distortiohs or adverse consequcnces went unnoticed. A number of committees and also authons of successive FiveYear Plans highllghted the inefficiencl, (and ineffectiveness) of the system. Foi instance, the high-powerecl Industrial Licensing Policy Inquiry Committeezr appointed iri July 1967 to enquire into the working of the industrial licensing system had recognised that ,the licensing system as it actually worked could not ensurd the development of industries mainly according to Plan priorities, {para 8.03).22 The Committee also observed that 'whlle licensing failed to prevent the Browth of capacity in less essdntial industries, it could not be expected directly to ensure thb creation of capacity in the most essential ones' (para s.03). ]lhe Industrial policy Inquiry Committce rightlv concluded that with all the possible improvc ments in the machinery for ddtailed industrial planning -in the Planning Commission, the Ministries, DG.[D, the Development Councils-it was not likely that detailed and fully coordinated plans would be forrrlulated in respect of all the inoustries covered by the Industries (Development anrJ Regulation) Act. What was importaht, however, was that industries 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 evidence that the li<;ensing system in actual operation \ /as not effective

in terms of either achieving goals or as an instrurnent for

planning. But the response frorn the system in terms of adjustment or shift in emphasis or change in direction was minimal. context of a This lack of responsiveness has to be seen in the.of grorvth indus[ial noticeable slowing down of the rate of capacity and output since the mid-sixties. It would be simplistic to attribute the deceleration process entifely or even mainll' to the working of the industrial licensing system but it was becomini increasingly evident that the totality of econornic policies and, in particular, the administrative mechanisms for implementing those policies were not only inadequate to meet the country's needs and objectives but were also likely to place a premium on the circumvention of law and regulaf ion. The complex regulatory system which covered industrial licensing import and export regulations, price controls and allccations of indigenously prrcduced materiils was also creating a large and powerful lobby of vested interests which comprised politicians, bureaucrats and fairly Iarge sections of private industry.

NOTES AND REFERENCES

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, ceedings 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 .

pro

7. rbid.

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

90

LEGISLATIVEMECHANISM

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 In Guidelines for lnduslries. New Delhi : Indian Investment Centre, 1982, Part I, Section II, pp. 1-5. 10. Induslrial Poli(iy Resolution, 1956. No.91r'CF,i.l8, 30 April 1950. In Guidelines 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 Licensini 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,

14.

lnclustl'ies (Developrrrent and Rd,gulationl Act, 1951, 65 of 1951. In Guidelines for lndustries. New Delhi: Indian lnvestment centre, 1982, Part

Rule 18.

llle

1.5.

L Section IIL pp. 1.J6, 36. tndia, Planning Commissiorl, I'he Fiist Fite-Year Plan : A Draft Outline.

Delhi: Manager ofPublications, 1951, p. 25. 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 Review
76.

October 1968.

lndustrial Licensing Polic), Inquiry committee, Reporl. New Delhi: covernnent of Indi4 Ministry of Inddstrial Development, 1969 22. c.V. Ramakrishna, Chaiman, Aepora of the Study Group on InduEtrial negulations and Pmcedures. New Ddlhi: Go\,ernment of India, February/
1978, p. 3.

20. Ibid. 21. India,

Industoial Pollcy Stnce 11976

production, pFevention of concentration of economic power, regional dispersal of industrieg cration of countervailing power through a rapid expansion of the public sector which would scale the commanding heights of the economy using the public sctor not only as an instrument for pursuing development along desirable lines but also as an instrument for mobilising nesounces for the plary protection to and growth of the modern small-scale sector and also the traditional household industries providing considerable employment; and that the system seemed incapable of resolving these conflicts with the result that in actual practice there was neittrer adequate growth nor was ther a discernible

dent that there was a conflict between the number ol individually desirable objectives of policy, for example, rational allocation of resources with a view to maximising

By the early seventies there was sufficient evidence and a cor. responding awaneneas of the inadequacy or ineffectiveness of some of the main elements of industrial policy and pan ticularly of the decision-making and administrative apparatus. The objective of 'gmwth with social justicd which was the central theme of the policy for the preceding twenty years was beginning to run into difficulties. It was increasingly evi-

92 INDUS RIAL POLTCY SINCE

1973

move towards grater social iustice. Frorn the mid-sixties there hacl beerr a marked deceleration

of

industrial growth. Acconding to a rcent study,r there was a marked slow-down in the gtowth of value-added in the industrial sector as a whole, and also in mining and rnanufacturing. The quantitative accuracy of the stud! can be questioned not on gmunds of the methodoloS' adopted but because of the linitations of the primary data. For irlstance, the non-inclusion or inadequate inclusion ofthe industEial output and value-added in unorganised oa'non-rgistered units can, especially in some industries like textiles, distort the picture sufficiently to affect the final conclusions, If one takes valrrre-added as the basis of measurement of change in trcnds in irldustrial pmduction, the con' clusions would be affected as a result of the impact of price controls which, in some cases, could distort the picture of valueadded. Similarly, in working oul the national income deflator for aniving at value-added at constant prices, the result can be distorted try the existerrce of several practices, such as open or concealed discounts (or pnemia), or the existence ofa faidy extensive black market where ransactions take place at much higher (though unrecorded) pnices. These Arc not reflected either in price indices or in national income stati$tics. Despite these limitations therc islenough empirical evidence to suggest that {a) the rate of gmwth of industrial production slowed doum somewherc around the mix-sixties, and (b) that prior to 1965 there rvas a fairly steady annual inclease in the index of industrial prcduction, and thereafter the bdhaviour of lhe index became rnuch more enratic. Thus, from 1965-66 to 1979-ti0 the index actually declined in two yeans, and incrEased by less than 3 per cent in fouryears. The increase in the indqx of industrial production was between 3 to 6 per cent in fouryeart, and the indexwas above 6 per cerrt in fiveyears, ttre highest being l0 per cent in 1976-77. This is in sharp contrast to the behaliour pf the index ftom 1956-57 to 19&-65 during which period the i4crease in the index was never less than I per cenl. It is not possible to attribute tliris diceleration to any single factor; nor is it possible to olfer a simple explanation in terms of acts of omission or commission b! the Govemment or industry which 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 nrore erratic in recent yeani and, as the Reserve Bank of India studl points out, the $owth of production potential has been relatively mone steady than the gnwth in output. This would imply that certain forces were at work in the system which made for a mismatch betr4/een elfective demand and output, or created a higtrly pmtected 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 pmlitahility wen when capacig utilisation was way below normal. A number of possible explanations have been analysed and tested for explaining 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 of time and prwided an envirpnment in which the impact of some other causatory factor was enhance{ fon example, the worsening of the efficiency of the system which aggravated the decelerating effects of slow-down in public investments. Certain other factors, such as poor agricultural output in a particular year, would
account for thewider variations in the rate of gmwth of industrial output as compared to the period pdor to the mid-sixties when changes in agricultuml output were offset to a grcater extent lry the growth impact of a fairly extensive import substitution. In shor! the uncomplicated and more or less steady linear glu/vth of industrial output which formed the basis of industrial pmgammes in the earlier Plans could no longer remain a credible basis for planning investment and pruciuction in maior industrial sectors.

94

INDUSTRIAL POLICY SINCE 1973

that gfbater responsiveness to changing circumstances has to be built into the system. Such increased responsiveness 'woul{ on the one hand, require 4 considerable strenf,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 consider 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 of the fiamework itself. For instance, in Feb "ffeitirrenes"'Government (havinp carefully reviewed their ruary 1973 policies relating to indusrial development in the light of experience gained ...'a suggested certain modifications' The obiective of the Policy Statement was 'to update the indusrial licensing policy in order to refleot apprcach to the Fifth Plan and taking into account thle legal and institutional ur"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 rstrictions placed on the activities of MRTF units in terms of the Industrial 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 concerns and subsidiaries and br4nchee of foreign companies

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

Regulation and. Development gS

wene also eligible

industries not included in this list.,z Theywere, howwer, eli$ble to invest in industries where pncduction was predominantly for export. In the case of foreign companies, their lnvestmenr propo_ sals were to be examined with special reference to technological aspects, export possibilities and overall effects on the bahnCe of payments. The exemption limit trcm the licensing prnvisions was lo continue to be rupees one crore try way of fixedissets in land, buildings and machinery. But this exemptlon was not to apply to larger industrial houses and dominant undertakings as defined in the MRTPAcI and foreign companies irrcluding theibranches and subsidiaries. In addition, the exemption *u"-ul"o not to apply to existin licensed or registerd undertakings with fixed assets exceeding rupees five crores. These were, hereafter, to be subject to the licensing provisions of the Industries (Development and Regulation) Act both in respect of ner,v undertakings and expansions and diversifications in the delicensed sector. The new policy also gave its blessings to the ioint sector {which was to be a promotional instrument), as, for instance, in cases where the State Govemment went into partnership with medium-scale and new entrepreneurs in order to guide them in developing a priority industry. The joint sector, it was clarified, was not to bi permitted 'to be used for the entry of larger houses, dominant undertakings and foreign companies in industries in which they ar otherwise prccluded on lhein or,rm.'s
The purpose of the policy announced in February 1973 was to pmvide 'greater cenainty in the investment climate, ind .stimulate gpowth in all priority industries ,6f impontance to the Fifth plan subject to a more effective enforcement of social objectives.,s The Statement also strEsses that it was pnoposed to further streamline licensing and connected procedunes, whereven necessary, so as to expedite the investment process in all its stages. As a follow-up of the announcements of these decisions on

to participate in industries specified in the list-Appendix I to the policy Statement.* Both MRTp units as well as foreign companies would ,ordinarily be excluded {iom the

List ofAppendix.l industries is given in Appendi{ IIL

96

INDUSTRIAL POLICY SINCE l9?3

industrial policy, the Government undertook a comprehensive examination of the procedures relating to preinvestment foreign upf"o*tuf", such as letiers of inteht, industrial licence' approvals ciilabo"at;on approval, capitai gqods clearance arrd it was 'both under the MRrrP Act, 1969' It wis recognised that Industrial necessary an<l feasible within the flamewolk of Policy to reduce the time lags Gtlrrently involved in issuing sys. these approvals.'10 In order to expedite clearance- a new approvals lvas introduced with effect tem for'issuing industrial from 1 November 1973. The essential objective of the new system 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' ih" time for 5living clearance was to be 150 In MRTP "u"ot days. The Government also advlsed industry that' wherever possible, entrepreneurs should come forward with composite applications for industrial licencb and other clearances' such clearance' u" ioreigt collaboration approval and capital goods of Secretaries, namely' Pro A new irter-Ministerial Committee ject Approval Board (PAB) was formed to deal with composite
applications. -

cribed in detail how the new system for a Secretariat for Industrial Approvals (SIA) would function' The intention' cleat lv, 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 of applications for letpolicies and make exPeditious capital goods imPofis or ters of intent, foreign
clearance under the MRTP Act. ents. These included greater liberalise the licensing the same grouP of Sche freedom for diversification duled industries, recognition of additional capacity as a result 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' rcognition of excess productibn over licensed capacity for

ih"

Gorr""t

-ents

announcelrrent of 31 october 1973 des.

In

1975-1976

a number of

were taken io further

Regulation and

Development gz

fuller utilisation of installed capacity, and de-licensing of cer tain industries. The establishment of the Secretariat for Industrial Approvals was, no doubt, an important organisational innovation and led to a significant improvement in expediting clearances. The requirement that decisions would have to tre conveyed within specified time limits did, up to a poin! ensure that administrative lapses were avoided. But experience has shown that the insistence on time limits resulted in an increase in the proportion of cases rejected. For example, in 797 5-76 and later during 1980-81 to 1982-83, the 'number of reiected applications exceeded the number of approvals. 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. The reason was that the administrative system's response to the insistence on time limits was either to return the initial application on the ground that it was not ,complete in all res. pects'; or if the time limit was about to expire to send the party a letter of rejection, which, under the normal pro cedure, always contained a clause that the party could repre sent its case within twenty-one days. It woul4 however, be fair to say that even after allowing for these gimmicks the SIA
as an organisational innovation was reasonably successful.

The impact of the various licensing policy liberalisations announced from time to time, however, was much more limited. In part this was because none of the liberalisation measuFes were automatic, i.e., removed the need for applying for permission and, further, many of the Iiberalisations carried small print caveats which, in practice, grEatly limited the likely impact. For instance, in October 1975 ,pursuant to Item 14 in the zo-Point Programme of the prime Ministe/ proposals for the establishment of a new undertaking, substantial expansion and manufacture of new articles by medium-scale entnepreneuns were made exempt from licensing in respect of twenty-four industriesll and from the licensing provisions of the Industries (Development and Regulation) Act. This delicensing, however, was subiect to the condition that no impoll 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

within the purview of applicable to undertakings rwhich panies under the Foreign or were foreign the MRTP Act nat rne' also laid down that the Exchange Regulation Act. It nofan al expansion of of a new article or manufacture ble in respect of anY item not existing activity was sector. which was reserved for the smalllbr an automatic glowth of Similarly, the provisions capacity allowed to selected engirieering industries in August 1975 permitted an automatic growth of 5 per cent per annum or 25 per cent in five years in o e or more steps over their licensed capacity. This increase was to be over and above the normal permissible limit of 25 Per cent over the licenced capacity. While the fifteen engineering* 12 industries were certainly important the automatic growth was to be subject to several conditions. For instance, the investment should be met by an internal generation of funds and no import of capital goods should ordinarily be involved' It was also stipulated that the undertaking should not be dominant (i'e', it should not have a share exceeding 30 per cent of the production in the country). These and similar other conditions, in effect, dis' qualified some of the rapidly grdwing or larger units which had established a substantial manket share in terms of sales, although quite often in terms of irlstalled capacity in the country they hid a much less dominaht position' It is also significant 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; conveying

equipmenti diesel engines; pumps; crhnes; earth movin& mining and metallur$cal equipment; hydrauJic equipment; industdal machinery, including chemical plant and machinery; machine tools; textile machines; power transmission and distribution equipment (other than cables and rvires);

+ ln a sen"e, this is a ielling conrmetrtat on the

power transformers; and swilchgears.

pr'(rcess of polic'-making The 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 olher Departments/'Ministries rvere either not too keen on anv such automatic increase in capacity being permitted or Were not persistent in pressing their

claims.

Regulation and Development gg

The same kind of half-hearted or hesitant approach was reflected in liberalisation pertaining to capacity based on inhouse R&D or de-licensing of units which were set up with technology developed by National Laboratories.l3 For instance, in August 1975 it was announced that creation of capacity based on results obtained by in-house R&D efforts would be freely permitted; but with regard to MRTP/FERA undertakings this facility was restricted only to industries listed in Appendix I. Xegarding non-Appendix I industries they could avail of this facility, if R&D was undertaken with prior approval of the Government (Department of Science and Technologi). In any case the creation of all such new capacity would continue to need 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 of technolog5r developed byr any of the laboratories established by the Council of Scientific and Indusfial Research, according to the Notification of March 1976, licensing provisions of the Industries (Development and Regulation) Act would not apply.rs As always, this was further qualified by the proviso that it would not be applicable in the case of MRTP companies or foreign companies; and that this would also be sub ject to the condition that the item is not one reserved for the public sector or the small-scale sectoi or was governed by Special Regulations.* In retrospect, the main emphasis of the Government during the seventies was on reducing the restrietive and complex features of the licensing policy which, in the rqain, were due to the manner in which the Industries (Development and Regulation) Act was implemented. The results, however, were not very impressive. This was due to several rea3ons. The provisions of the MRTP Act implied that there was yet another ' dimension added to the administrative procedures for various approvals. The time taken for giving glearances was sq,ught to be reduced; but at the same tirne in respect of MRTP/FEIiA companies, around 1972-73, a new system was introduced
' lnterstingly, the list of Special Regulation industries has grown over lime. 'There have been no instances of an industrial activity being removed from the list. The details are given in Appendix IV.

1OO

INDUSTRIAL POLICY SINCE 1973

which required that every case involving MRTP/FERA companies for a licence, whether for a new undertaking' substaniial 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' for added several weeks, even months, to the time taken
thls By conveying approvals. BY far the rnlost important reason why conveying did not add up to much was that there phase of liberalisation was an unwillingness at the pplitical level to recognise or

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 modification 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 in dealing with applications,'16 the regulatory system continued to be much more elaborate than was originally envisaged in the 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 continued operation of an elaborate system of regulation in which different 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 influential party member-and also, to a considerable exten! sections of industrialists who benefited dinectly from the protective consequences of the regulations constituted a powerful lobby in

negulation and Development loa

favour of maintaining the system. Nevertheless, the working of the system was found unsatisfactory both by those who were in 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 more balanced regional dispersal of industry preventing concentra-

tion of economic power in private hands or creation of additional capacity in consonance with the Plan targets' The
system seemed to have failed in curbing the role of the larger business houses, nor did it have sufficient clout to prevent or correct 'excess production in relation to licensed capacity.'17

discussions in Parliament and elsewhere there were repeated references to several instances where industrial units, chiefly large houses or foreign companies, continued to produce with impunity far beyond their licensed capacity. The critics were particularly concerned that such excess pno duction was largely in the case of consumer goods, such as footwear or biscuits, where the decentralised sector was being encroached upon or in other relatively srmple items of manufactune, such as metal containers, which were being pmduced by new medium-scale and small-scale entfepreneurs. rn the field of drug formulations, many foreign drug companies, it was alleged, had exceeded their licensed cap acity or had illegally enhanced their productive capacity' The new entrants in the field of formulations, mainly medium-sized Indian companies, were the most vocal critics and were supported by legislators from all major political pan ties, who were highly critical of Government's inability or unwillingness to stop excess production. At the same time, those who were generally in favour of a freer economy continued to be concerned about the fact that the licensing system prevented the normal operation of market forces by not permitting the growth of more efficient units' Despite the pro cedural improvements, delays were endemic and a great deal of managerial time and attention lyas spent on dealing with re8Ulatory mechanisms rathet than concenlrating on lnore crucial aspects of rnanagement. This was the position when lor the first time since

In

.7O2

INDUSTRIAL POLICY SINCE 1973

been unrealistic to expect a cofnmonality of approach or a coherent econornic philosophy, While the constituents were united in their opposition to the trends of political thoughts and action represented by the declaration of Emergency in 1975 there was no such unanimity on issues of economic policy. The Janata Parly's manifegto reflected, in the main, the,

independence, thene was a real change in the Governnient at the Centre. The Congress Party which had been in power at the Centre since I was badly mauled and the nervly formed Janata Parq/ rode the crcst of a popular wave which gave them and their a clear twothird majority in the Lok Sabha (Lower House Parliament). The change in Government at the Centre co have provided an excellent opportunity for radical departupes from the past. But apart hom the fact that the Janata pafty itself was, probably, taken by surprise at its having to form a government, the political ideologies of the different constrituerit parties which merged to form the Janata Party were so different that it would have

were selected to constitute diversity. At one en4 there were in the new t senior politicians like Morarji Desai, the Prime ; Jagjivan Ram and Bahuguna who had held positions in earlier Con8Fss Governments at one tim or another. These senior leaders and their followers nted a degree of continuity with past governrnental policies. At the other end, there were several elements comprising the new Government who had at no time been part of the government and had been persist-, ent and vocal critics of past governmental policies. But they past were individuals with diverse political and ideological back_ ground. There were, for instance, former members of the Socialist Party, drawing inspiration from the writings and leadership of Dr. Ram Manohar lLohia, perhaps the most strl Manohar stri

In terms of the individuals the Cabinet also there was

negulittion and DeveloPment IOJ

dent critic of Mrs. Gandhi's policies; and also members of the old Swatantra Party which had been a strong advocate of a lturn to a mar{tet economy. The Jan Sangh group, rEpresenting largely the urban middle class and the trading community, also had strong predilections in favour of lesser Government rcgulations or interventions. The Lok Dal led by Choudhary Lharan Singh with a substantial following within the Janata Parqr' was committed to curbing large-scale mechanised industry with a veiw to encouraging 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 Fernandes, 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 rgand to the
desirable pattern of industfial development still remain valid, the results ofactual policies in the industrial field have not been up to the expectations or declared obiectives.'1e Thus, the purpose ofthe new policy was 'to nemove the distortions of the past so that genuine aspirations of the people can be met within a time bound

programme of economic development.'2o The inadequacies of the working ofthe Industrial Policy Resolution 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 ofreal investment 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 distorted ind 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 industrial policy to the needs of the economy as a whole and to define the role of the large-scale sector i4 the socioeconomic context of the country. In other woids, the industry was important not in itself nor as a contributor to the growth of national income, but as an instrument for more rapid development of agpiculture and activisation of rural manpower and the technical and managerial skills developed over the last two or three decades. The recognition of the interaction between agri cultural and industrial sectors reflected the recent experience in India and other countries. Not only was p. substantial part of the industridl production based on domestic agricultural production, but the level of agricultural production or the growth of productivity was also dependent upon the availability of inputs like power, fertilisers, pesticides, etc., which had to be procured fiom the industrial sector. The lack of ade quate power or cement or steel is as important for levels of aeFicultural oulput 'as it is for indpstry. The poticy Statement also recognised for the first tirne an important facet of economic reality in India, namely, that ,the prosperity and distribution of income arising from the broad-based growth of agricultural and related activities in the countryside has to provide the basic demand for a wide range of industries pro ilucing articles of consumption.'2r The Policy Statement mention$ the vast rural manpower and the reservoir of highly trained scientists, engineers and technicians as a maior resource for economic ana industrial developmenq and argues that ,the emphasis of industrial policy so far has been mainly on large industries neglecting cottage industries completely relegating small industries to a minor role. It is the firm policy of this Government to change this approach.'zz In pursuance of tltris new thrust of policy, the Statement lists specific actions that were proposed to be taken. These include significant expansion in the list of industries which would be exclusively feserved for the small_scale sector. The Statement, how,ever, qualifies the reservation policy by an emphasis that produqtion in the small-scale sector has to be 'economic and of acceptable quality and that capacity creation in the small-soale sector should not be allowed 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 to the small-scale sector is efficient and is also contiually expanded 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 specific fecognition of the need to encourage the 'tiny sector, i.e,, activities with investment in machinery and equipment of rupees one lakh or less and situated in towns with a population of less than 50,000.'2s The Policy Statement emphasised promotional measures and declared its intent to introduce special legislation for protecting the interests of cottage and household industries 'with a view to ensure that these activities which provide self-employment in large numbers get due recognition in our industrial development.'26 As part or the organisational restructuring in order to achieve these objectives the Statement announced a scheme for setting up District Industries Centres. The underlying logic was that'in the past, there has been a tendency to proliferate schemes, agencies and organizations which have tended more to confuse the small and rural entrepreneur than to encourage and help him.'27 In order to recti$r this, the focal point of development for small-scale and cottage industries which tended to be in the maior cities and State capitals should be shifted to the district headquarters. The proposed District Industries Centres would provide under one roof all the services and support required by small and village entrepreneurs, such as economic investigation of the district's raw .materials and other resources, supply ot machinery and equipment, provision of raw materials, arrangements for credit facilities, and an effective set up for marketing qualitl' control, research and extension. This new organisational pattern was to be extended to cover all the districts in th country over a period of four years. The emphasis on the decentralised sector and the concept of District Industries Centres which would provide support for the decentralised sector and would shift the focal point of decision-making and approvals to th di3trict headquarters, away from the State capitals, constituted a major departure from the 1956 Industrial Policv Resolution.

106

INDUSTBIAL POLICV SINCE 1973

While discussing Khadi and Village Industries, the Statement mentioned increasing the share of village industries in the total production of items like iootwear and soap and also emphasised the need for adopting modern management techniques in working out detai.led plans for the deveiopment of village industries. It makes 4 reference to khadi where a 'breakthrough'28 is in sight with prospects of spinning and weaving polyester fibre along with cotton fibre. The Statement also makes a pointed reference to the need for the development and application of technologies ,appropriate to our socioeconomic conditions.,2e The emphasis was to be on the development and widespread application of suitable, small and simple machines and devices for improving pro ductivity and the earning capaoity of workers in small and village industries. Having outlined its approacln to and preference for the, small and decentralised sector, the policy Statement proceeds to define the role of largescale iyrdustries. The role envisaged for 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 agriculture and other small industrieb. 3. Capital goods industries needed for producing the machinery required for or in basic industries in. agriculture and in the small sector: 4. Finally, other manufacturing activities of a kind which would not ordinarily be cajrable of being undertaken in the small-scale or decentrallsed sector.
Having defined the role of the Statement proceeds to discuss argued that in the past, ceeded in restraining the
Houses.'30

modern sector, the

The definition of

role of large houses. It t policies 'have not sucnate Srowth of Large term'disproportionate',

however, is important because it marks a departure fnom tne past and conventinnal wisdom. The Statement stresses the point that'the growth of Large Flouses has been dispropon

negulation and Developmenl

7O7

tionate to the size of their internally generated resources and has been largely based on borrowed funds from public financial institutions and banks.'31 The obiect of the policy would be to reverse this process; and, therefore, one of the important principles laid down in the Policy Statement was that henceforth large houses would have to rely more on their own internally generated resources for financing new ventures or expansion proiects. The operative part was While an appropriate debt equity ratio will be permitted in the case of industries like fertilizers, paper, cement, shippin& petrGchemicals, etc., which are relatively more capital intensive in nature the debt equity ratio in the case of other less capital intensive or less sophisticated industries will be so fixed as to reflect the greater use of their own internally generated resources by the Large Houses. 32

This approach to the large houses implied a significant

departure from the past approach which was to identifu areas where large houses could operate. These were so defined as

to include a fairly wide range of activities. As a result the

existing units belonging to the large houses had a fairly wide

field to operate. For instance, the list of industries which

were to be open to larger houses, along with other applicants, included broad classifications such as organic or inorganic heavy chemicals, industrial machinery, cornmercial vehicles, specialised ancillaries, iigs, fixtures, tools, dyes, equipment for transmission and distribution of electricity, steel castings and forgings. Second, many indusries, such as fertilisers; chemicals, drug intermediates, cement, and paper required substantial new investment and this necessitated dependence upon large borrowings chiefly from public financial insti tutions. The result was that despite the MRTP Act and the declared policy of the Government to curb the role of larger houses in the industrial economy, their control over assets rose sharply in absolute terms in the decade following the implementation of the new policy. In fac! the real counterpoise to large houses had come not in the form of effective restraint on their expansion but through the growth of the public sector. As the Policy State-

108

INDUSTRIAL POLICY SINCE 1973

ment points out that 'apart frorn oocializing the means of pro duction in strategic areas, publip sector provides a countervailing power to the growth of Large Houses and large enterprises in the private sector.']33 The policy, therefore, was to provide an'expanding role for'the public sector in several fields',3a including that of an effective stabilising tbrce in maintaining 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 wide range of ancillary industries and 'contribute to the growth of decentralized production by making available its expertise in technologv and rlranagement to small-scale and cottage industry sectors.'35 This, again, was a significant departure in the' sense that the role of the public secton was to be integrated with the socioecorromic objectives of the new industrial policy. It was to be a pace-setter in providing necgssary suP port for a more rapid and viable growth of the decentralised
sector. On the question of foreign investment, the Policy Statement

reiterated Governrnent's intentior,r to enforce the provisions of ;he Foreign Exchange Regulation Act srictly. This implied that, where required under the FERA, foreign equity holdings would have to be diluted in accordance with the guidelines. The Statement also went on to state categorically that after the process of dilution under the FERA had been completed 'companies with direct non-resident investment not exceeding 40 per cent will be treated on par with Indian companies, except in cases specifically notified and their future expansion will be guided by the same principles as those applicable to Indian companies.'36 This was a significant affirmation of the policy because in the past, while FERA companies were required to dilute foreign equity in accordance with the guidelines, there was some fuzziness about whether or not they became eligible for the sdme treatment as any other Indian company once the foreigr\ holding was 40 per cent orl lcss. There was occasional uncellainly about whether lbreign investment wa$ to be deemed ds direct non-resident investrrlent or whether irrdirect foreigri investment (i.e., investment by the Indian companies in whibh there was a foreign holdingl, was also to be taken into acoount.

negulalion and Development

'Og

The Industnial Policy Statement of 7gZ7 was a departure from the past practice in that it covered other crucial issues which have a bearing on industrial policy such as the policy with 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 favourable changes that had taken place in the foreign exchange situation and the progress that had been made in the industrial field 'should now enable us to selectively dispense with import quotas and quantitative nestrictions, while retaining protection given through tariffs.'37 Similarly, on the question of export of manufactures {where understandablv the Government was willing to consider fully owned foreign companies in 100 per cent export oriented cases) and the role of compulsory exports, the Policy Statement was very specific. The Statement noted that in the past compulsory export obligations wene imposed in approving new industrial capacity either because of the need to ensune that imported raw matt rials and capital goods wene paid for througl-r future exports or because some relaxation from industrial policy or licensing policy was involved. However, equal attention was paid to ensure that these commitments were fulfilled. Apart fi.om strengthening
the supervisory and surveillance machinery of the Govennment,

the Policy Statement clarified that 'compulsory export obli gations, merely for ensuring the foneign exchange balance of the proiect would no longer be insisted upon,'3E nor would a limited period of export commitment be given the sarne weightage as before in any relaxation of rhe industrial
licensing policy.

On the question of pricing policy the Statement was very clear-cut. The objectives of the pricing policy were to be a reasonable degree of price stability and a fair parity between agricultural and industrial products. The Policy Statemenl noted that in the past there had been a tendency to regulate prices of industrial products which were vital to the needs ol development in a manner which made their production less attractive than the production catering.to the needs of the elite. The Statement categorically assured that the policy of llle Government ivould be to ensure :

1IO

INDI. STRTAL POLICY S]NCE

1973

Where there is price control, the controlled price will include an adequate return td the investor. Provided the industry is operating at a fairly high utilization capacity and is conforming to the technologik;ally attainable norms it will be permitted to earn sufficielnt return to provide for a reasonable divldend to the shf,reholder and also adequate funds to plough back into buslness for modernization and
growt
h.3e

These are rather strong words coming from a committed socialist speaking on behalf of 4 government which had all the hues and tints from pale pink to deep blue reflected in its
ranks.

The Policy Statement also had something new and more specific to say about the role of r.rvorkers-the most important single resource of the country beling 'the skill and hard work of the people.'4O The aim of the policy was to use effectively the abundant supply of labour and the existing reservoir of technical and managerial persqnhel. This, however, could be done only 'in an environment in which the workers and managers develop a sense of personal involvement in the working of the enterprise'.ar While family controlled business is'an anachronisrn' arrd has to be dubstituted by pn:fessionalism in management, ways and meanb have to be simultaneously found to create amongat workers, both in public and private sector industries 'a stake in the efficient working of their unitSla" For tnrs purpose two ptrssibilities were being examined : (a) the possibility of. encguraging wonkers' participation in the equity of industrial units, without in any way adven :ely affecting thein interests; and (b) an active association of wonkers in decision-making frorri the shopfloor level to the Board level. These are shades of West German form of 'Capitalism' and are certainly a fal cry from the general exhortations on the questron of the role of labour in earlier policy leclarations. There were two otheJ specific issues in which the Policy Statement had something concrete to say. One was a relatively new phenomenon and, therefore, not referred to in the Indusrrial Policy Resolution of 1956 ol in subsequent Policy Statements. This was the growing inpidence of sickness in both

Regulation and Development 717

largescale and small-scale units. h the past, the almost automatic response to closure, or'possibilities of closure,a3 of largescale units was to bring the management under the Industries (Development and Regulation) Act under Section 18A or 18AA. Indeed, the Act itself, was amended several times in order to strengthen the powers vested in the Govern_ ment in this connection. The policy Statement of 1927, however, stated emphatically that ,while Government cannor rgnore the necessity of protecting the existing employment, the cost of maintaining such emplol.'rnent has also to be taken into account.'aa In the past'large amounts of public funds have been pumped into the sick units which rvere taken over buf these continue to make losses which had to be financed bv the public .exchequer. This process cannot conlinue indefinitely.qr'fhe Policy Statement, therefore, announcecl the new Government,s policy that the 'takeover of rnanagements of units would be resorted to selectively and onl-v after careful exarnination of the steps required to revive the units.,16 lhe setting up of the high level Screening Committee to scrutinise the rakeover proposals, ensured that indiscriminate takeovers under politicar pressures or some special interests were avoided. There were two other prescriptions to be followed
:

1. Considering the cost of overcoming sickness in industry is much more manageable when it is diagnosed at an early date, the Government in cooperation with the Reserve Bank of India would institute arrangements for monitoring incipient sickness in industries so that coF rective action can be initiated at an early stage. 2. Government would also consider measures whereby managers or owners who are responsible for mismanaging and turning their units sick are not permitted to play any further part in the management of other units.'.r; In other words the not unknown disease of units getting sick while the management/owners remain prosperous would not be allowed to continue.

in the Policy Statement was with regard to the locatron of

industries. The Statement noted with concern that most of the

Another important and specific announcement contained

'712

INDUSTNIAI, POLICY SINCE 1973

industrial development that had taken place since independence concentrated around metropolitan areas and large cities. The consequence was rapid deterioration in the living conditions, especially, of the working classes in the larger cities and the attendant problerms of slums and environment pollution. The Government, thefefore, 'had decided that no more licences should be issued lo new industrial units within certain limits of large metropolitran cities having a population of rnore than one million and urban areas with a populatioh of more than five lakhs as per the 1971 Census.'1E This was to be further buttressed by requebting the State Governments and financial institutions to deny support to new industries in these locations in cises which did not require industrial licences. Further, the Government'of India, the Statement emphasised, would also 'consider providing assistance to large existing industries which want to shift from congested metrupolitan cities to approved looations in backward areas.'4e This was by far the most specific announcement of locational policy and one which could be implemented straightway, without creating, in the pnoces$, any serious cost disadvantages to the existing or proposed indusrial units Thd Statement noted in conclusion thal 1977 'had been a year of historical changes and people's expectations in the political and economic fields ane high. It is hoped that the new direction that is being given to the industrial policy of the count{y will help in the creation of a iust and equitable society.'so As event$ turned ou,t, however, this r't'as to be almost the last constructive step to be taken by a Government which came to power on a wave of e4pectations and goodwill, but which soon became inlvolved in personal iealousies, petty bickerings and worse. In consequence, follow-up of some 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 any radical change in the operation of the complex system of regrrlation and control which lTad evolved over a period of nearly twenty-five years. The covernment did appoint a Study Group on Industrial Regplations and Procidures with fairly wide terms of reference td review the roie of the Industries (Developrnent and Regulation) Act in the promotion of

negulation and Develoqmetrt aa3

industries. The Group which had been asked to examine and recommend changes in the existing policy and procedures came to the conclusion that 'although the setting up of Secretariat for Industrial Approvals has considerably streamlined the procedures, it has not been possible to take full advantage of this organizational improvement as the rationalization of procedures has not been adequately matched by necessary changes in policy.'sr Against this background and in the context of the Industrial Policy Statement issued by the new Government on 23 December L977 the Group, inter alia, considered'it was possible to move over to a system of licensing which would preserve the merits of the present system while discarding useless paper work and nemoving unnecessary irritants to the entrepreneurs.'s2 Interestingly, an alternative considened by the Group was to 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 in items reserwed for small-scale, village or rural industries. 2. No further capacity, without approval of the Government, would be allowed in industries which would be specifically listed. 3. No new units would be allowed in metropolitan townq
as specified by Goyernment.

The Group recognised that this alternative had several attractive features. Such an amangement woul4 ordinarily, be able to achieve all the major obiectives of licensing and any funther control that the Government wished to exercise in public interest could be enforced at the financing stage by issuing suitable guidelines to the financial institutions. ,However, the Group felt that 'this radical departure from the past's3 may lead to certain problems. The report summed up the pnoblems as follows :
1.

It may defeat the

purpose of regional dispersal of indus tries since the entrepreneurs would be free to establish investments in areas which are not specifically pre hibited. Financial institutions may not be able to exercise

114

INDUSTRIAL POLICY SINCE 1973

an effective control on the locational aspects of industry. While it was recognised that the previous record in this
Fespect was

not an enviable one, a measure of control over investment decisions at least above certain levels

was considered desirable.

for a large segment of industry may create probler4s for planning of infrastructure/ particularly that of power, railway capacity and road netwol'k. etc. 3. As a general exemption would not by itself enable the above obiective io be achieved, it would then be necessary to extend the list of indu$tries to which exemption would not be available. The negative list would become so long that it would defeat the original purpose of exemption. The licensing s),istem may, in fact, become more 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.
2. Total abolition of licences

No doub! not all these problems or difficulties were imaginery; but the crucial issue lwas whether or not regulation of industry was to be by exception or whether the regulatory mechanism should cbntinue to remain all pen
vasive. Clearly, the Group did .rot feel confident that the time

was ripe for a reversal of the all pervasive regulatory

framework by moving over to a system of licensing by excep tion. It is a moot point whether this judgement was right or whether it was yet another evidence of the fact that the line of thinking of many in the new Government and in the Parliamentary Party was not very/- different from rhat of their predecessors in office. In any ca$e, in the absence of a clear and shong political direction it wBs very unlikely that a Foup of senior officials wduld venturq out into new policies and procedures which would subst4ntially reduce the areas of intervention and, consequently, the extent of power and patronage exercised at the political and administrative levels. In the absence of a strong political direction to dismantle and not merely tinker with the elaborate regulatory framework, there was, probably, considerabld justification for the Group's

negulation and Development 775

in respecl of FERA,/MRTP companies and industries which were governed by some special regulatrons. The task of the Group was further complicated by the fact that it was the declared policy of the Government to assign an increasingly important role to the tiny, r,illage and smallscale industries. The approach of the Government was that whatever could be produced by tiny or village industies should not be allowed to be produced by the modern small-scale intlustry; and, similarly, whatever could be pr.oduced by the small-scale sector need not be permitted for prnduction by the large-scale sector. In order to hasten the development of tiny and small,ocale industries, it was proposed that where such prorluction was being undertaken in the large-scale sector, arrangements should be made to phase it out over a period. The mechanism by which the tiny/village/small-scale sectors were to be developed was twofold: la) specific reservations for sectors which, in turn, necessitated a fairly elaborate regulation of . new capacity creation; and {b/ second, requiring existing units to curtail in a phased mannen their production of items which were to be reserved for the tiny/village/small-scale sector, which would also necessitate continuing detailed intervention.

,eighty industries. * This list would have been further enlarged making nonsense of any across the board liberalisation except

report this list was already long and included as many

fear that any significant liberalisation in polic-v and procedules peftaining to the working of the Industries (Development and Regulation) Act would, in practice, add to the list of indusries which are to be treated as 'special'. At the time of the Group,s
as

It is not surprising, therefore, that the Group rejected the more radical solution and contented itself with a recommendation for enlarging the present area of exemption and making it somewhat flexible.'sa At the time of the Group's report industrial licence was nol required in the following cases :
1,

If the items of manufacture relate to an industry which is

not included in the Industries (Development and Regulation Act.

List of industries gover.ned by Special Regulations is given in Appendix IV.

116
2.
J.

INDUSTRIAL POLICY SINCE 1973

Small-scale and ancillarY units

Investment 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 per cent {c) import of components dhould not exceed 10 production three years of ex-factory value of annual 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 as because of the conditions attached to the exemption such for import of raw tlmits of foreign exchange requirements 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 per the exemption. The Group's investigation showed over 30 licences related to cent of the approvals given for industrial -belo* rupees o!:re crore but with foreign investments 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 rcommendations 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 certain other existing stipulations, namely, the item of manufacture should not relate to industries neserved for the public sector and the small-scale sector, industries subiect to Special regulation, and other specitied industries. f'his was ploposed in onder to ensure that there was no encroachment on the smallscale sector b1, large units (a concept lvhich u,as dear to the nen, Governmentl; and there was to be no erosion of the role, ol the public sector by permitting creation of capacily lly private sector units in Schedule 'A' industries. In order to ensure that liberalisation did not circumvent either of these stipulations and also to ensure adequate availability of information with the Government on developments in the field of industry, the Group suggested that all units would, nevertheless, still have to get themselves registered rvith either the State Director of Industries or the Director General of Technical Development, depending upon whether they rvere smallscale 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 be raised from the present level of-rupees one crore to
rupees three crofes.

2.

The existing stipulation negarding the overall limit of

3. The existing stipulations regarding the

investment ol'rupees five crores mav be deleted. limits of import of raw materials and components ma),' also be deleted. Such imports will be governed by the import trade policy in force from time to time. 4. Other existing stipulations, i.e., the item of rnanufacture

should not relate to industries ieserved for the public sector and small-scale secton, industries subiect to Spe cial regulation and other specified industries should continue to apply. 5. The de-licensing of specified industries, announced in 1975, Il].ay be withdrawn, in view of the fact that exemF tion limit fon investment is being raised to rupees three crores without the present stipulation regarding foneign
exchange.

118

INDUSTRIAL POLICY SINCE 1973

If the intention of the Study GFoup was to reduce the number of applications received, thqs enabling better scrutiny of applications, or whether it was {o fi'ee the system of unnecee sary nestriclions there is little evidence to suggest that this actually happened. Due to the increasing number of applications the work of licensing aclually increased. Barring the applications which were returned to the parties as defective or incomplete applications, the remaining which were dis posed of by the Licensing Cornmittee increased. Total dis. posal work of the Committee which was about 1000 applica tions a year in 1976 and 1977, increased to around 1300 in 1978 and 1979 and was in the range of 1800 to 2000 applications during 1980-83. This divengence between intention and outcome was, in a sense, built into the structure Of the Government's decision itself. The relaxation did not apply to -ither MRTP/FERA units imespective of the ty?e or scale of activity, and even in the case of ploduction of new articles, however small the investment, lhey continued to requine Government's approval in the form of licences or endorsements on existing licences. Second, the foreign exchange limit created a number of problems including problems of interpret:ition. Further, because of the long list of industries subject to $pecial negulation, there were numerous applications which, for most part, remained under examination for extended perioSs of time in the administrative nrinistries. There were two other major recommendations of the Study Group which also had implicalions for the working of the industrial policy. The Study Group observed that the monitoring of implementation of letterg of intent was 'either inadequate or non-existent.'ss Atthoqgh the initial validity of the letter of intent was one year, extensions were being granted freely by the administrative ministries. The standard conditions of the Ietters of intent usually rclated to the accep tance by Government of foreign collaboration terms and the application for capital goods import. The Group pnoposed that singe every new undertaking wquld be approaching financial institutions for assistance, it would rnake far better coordination if the letter of intent stipulated a period of time, say, six months within which the entrepreneur should submit a

negulation and Development 7lg

complete application to the fitrancial institution. Industrial licences could be issued only after the institution had given lhe nccessary approval with regard to lhe financing of the proiect. This particular recommendation, however, was not

'

implemented. The other maior recommendation pertained to the work of

the Development Councils. The Group observed that under

the Industries (Developrnent and Regulation) Act, the Develop ment Councils were expected to provide the mechanism for

developing a coordinated approach for orderly and dynamic development of industries specified in the Schedule. The functions of the Development Councils as.specified in the Second Schedule to the Act were compnehensive and included, inter alia, recommending targets of production, suggesting norms of efficiency, proposing measures for maximum utilisation of installed capacity, promoting standardisation, assisting in the distribution of controlled materials and suggesting improved marketing strategies. The Councils were also to be entrusted with certain other responsibilities such as promotion of scientific and indusFial research, standardisation and improvements of accounting and costing methods, collection and compilation of statistics, in addition to training of personnel engaged in industry and also retraining of surplus personnel. An important function of the Development Councils envisaged in the Act was inves. tigating the possibilities of decentralising the stages and pro cesses of production with a view to encouraging the growth of allied small-scale and cottage industries. It is a ribute to those associated with the formulation 0f tite Industries iDevelopment and Regulation) Act that it has not been found necessary to amend or add to the functions of the Develop ment Councils. Indeed, it would be difficult to suggest, even today, a w-ider or more crucial mandate. In practice, however, the functioning of the Development Councils has fallen far short of the mandate envisaged for them in the Act. The mle assigned to them in the planning process was never actually performed or indeed, expected. There was very little, if any, interfacing between the Development Councils and the planning process. In part. of course, the failure bf the Development Councils

I2O

INDUSTNIAL POLICY SINCE 1973

to play the role envisaged for thefir arose out of certain weaknesses in their constitution and firnctioning. More often than not, the composition of the Development Councils was not rlepresentative of all relevant necessary expertise or experience. Thus, most Develop ent Councils did not have

any representatives of

institutions; nor was the.

Planning Commission or the a minislry sufficiently 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 not have the support of a competent and full-time Secretariat. The most common arrangement wa.s fbr the Development Officer from the Directorate of Technioal Development to act as Secretary of the Council. This kind of part-time and often inadequate Secretariat support gratly reduced the ability of the Councils to devote trme and attention to the wide ranging terms of functions assigned to thdm. The size of the Councils often tended to become very l4rge, particularly when an attempt was made within the imdustry to represent diverse segments or interests. Sometimes, the Councils wene not neconstituted after expiry of theii [nitial term; and even other wise, in many cases meetings of the Councils were not sufficiently frequent. In short, instead of becoming active functional bodies consisting of ipersons closely connected with industry and policy formulafiion, these Councils tended to become more like a social gathering for exchanging views rather than formulating operational guidelines for future development of industry, taking into account the changing technologies, position of raw materials, marketing conditions, financial parameters, etc. The Grpup recommended that the Development Councils needed to be activised and equipped to perfonm the entire range of functions assigned to them in the Second Schedule to the Industries (Development and Regulation) Act. For this purpose the Group made the following suggestions : 1. Each Development Council ohould be presided over by the Secretary or Additional Secretary of the concerned administrative ministry and should have not more than fifteen members including trepresentatives of industry

Regulation and DeveloPment 121

(wherever appropriate), the Department of Industrial ll..,utop-".t't, the Planning Commission' fittant:ial and institutions, concerned national laboratories' BICP CounDGTD. The Membersecretary of the Development cil will be the Joint Secretary concerned in the administrative rninistry. full-time 2. Each Development Council should have a small support working in Secretariat with adequate technical 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 rheif stage of technology achieved in othe| countries' of inducting desirrelevance to our sltuation; means able improvement in indigenous technologli establishment 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' its marieting and pricing policy, its problems' Srowth pros-

pects, et;., and to make recommendations for speedy ind orderly growth of the industry' The recommendations 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 of further licensing.56 3.5 Sitnilarlv, the view taken bl' the Development Courrcil where representatives of the planning Commission, financial institutions and cdncerned ministries would be present, would permit the financial institutions also to take into account the reco{nmendation of the Develop ment Council with regard to the likely demand and future requirements of capacitl, in that industry. The synthesised view should help in promoting coondination at the stage of iicensing and financing. 3.6 Both for the purpose of stflling in respective Develop ment Councils and fol pro.,'iding adequate technical input into tl)e examination of industrial licence applications by the Administrative Ministries, it may be necessary to strengthen lthel technical staff available in some Administrative Ministries.sT
"Ihe proposals of the Study Group were designed to place the Development Councils in ttre key position assigned to them in the fnamework of the Indusries (Development and Regulationr Act. While the rationale underlyiqg a smaller but more composite Council was sound, in pructice, the situation did not vastly improve. The earlier tradition of the planning prccess following its own path rcmainbd strong. This was partly because not many Development Councils were in a position to make any authentic contribution to the improvement of the planning process, and partly because over the year-s the plan_ ning process had tended to la)4 greater store by technical sophistiiation in refining the plan modcl and in developing greater internal consistency of the major macrovariables. In practice, the availability of resour.ces in real terms was almost invariably short of requinements hnd, therefore, the tendency was to sweep some of the unple4sant realities under the carpet. For this style of planning the detailed or down-toearth specific recommendations of the Development Councils were either irrelevant or positively incdrnvenient. While there were clear advantages of a Secretary of Additional Secretary of the concerned ministry being the Chairman of the Development

Regulation and

DeveloPment

723

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 Secretary 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 with the 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 would irave 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 of past policies. It was an aggressively political document which rnfused to accept any inadequacies in the earlier firamework of policy or its implementation. According to the new Government it was only because the thirty-threc month rule of the Janata Party and its successor which interfered with the prc cess of industrial development that corrective action was needed. The Statemenl claimed While the country had redched a take-off stage in [the] mid197os, both the growth channels*optimum utilization of installed capacity as well as expansion of industries-were choked 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 policyframe for the past quarter of century' retlects the 'value

I24

INDUSTRIAL POLICY SINCE 1973

system of our country and has sholvn the lrerit of constructive flexibiliqy'.ss The implication was that there was no need to

review past policies or practices or assess how far they had been effective in achieving the oliginal obieetives. Obviously, twenty-five years after the Industrfial Policy Resolution of 1956 had little to teach and there was evidently no need to learn: the return of the Congrpss Party to power at the Centre in 1980 with a massive mandate also brought to the foreftnnt individuals who would have liked td,erase fiom the records the existence of a nonCongless Goveinment. The intensity of this feeling is best illustr.ated by the curious omission of any reference to the Industrial policy Statement of December 1927. The Policy Statement of July 1980 made curious reading. It is a combination of mixed metalbhors, general exhofiations and broad statements of intent, whic[ like the Ten Commandments would have few objeqtors. But above all else, it is essentially and unashamedly a ,pafty document,. For instance, it stresses that'new thrusts need to be made to establish a dynamic indusfial economy as indicated in rhe Election Manifesto 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 preferential development of industrially backward areas. Strengthening of the agriculturhl base by according a pre ferential treatment to agrobased industries, and promoting optimum inter-sectoral relationShip. Faster promotion of export-oriented and import substitution industries. Pmmoting economic federalisnfl with an equitable spread of investment and the dispersal of returns amongst widely spread over small but gfowing units in rural as well as
unban area s.

Consumer protection against hi6h prices and bad quality.6l One could hardl;, disagree with the desirability of any or all of 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 initiative was a reference to what was termed as 'economic federalism'.62 The Statement claimed that during the last three years, artificial divisions wene sought to be crcated between small and largescale industry unden the misconception that 'these interests are essentially conflicting'.*63 It was now

proposed under the new policy to 'promote the concept of economic federalism with the setting up of a few nucleus plants in each district, identified as industrially backward to generate as many ancillaries and small and cottage units as possible.'65 It is, perhaps, appropriate to quote the relevant pas$age explaining the concept of a nucleus plant: A nucleus plant would concentrate on assembling the prc ducts of the ancillary units falling within its orbit, on pro ducing the inputs needed by a large number of smaller units and making adequate marketing arrangements. The nuclei will also ensure a widely spread pattern of investment and employment and will distribute the benefits oI industrialization to the maximum possible. The nucleus plants would also work for upgrading the technologr of small units. Small is beautiful only if it is growing. Just as the phased manufacturing prograrnme with a view to rcducing reliance on imported components and materials played an important role in diversifying our industrial structure, a carefully worked out, time bound programme

for greater ancillarisation in certain industries will

' However, having talked about the perveNe poticies of the previous C'overnment of creating artiticial divisions between large and small industries, the Policy Statement blandly states the following : Policies regarding marketing support io the decentralized sectors and rservations of items for small-scale industries shall continue to be in force in the interest and growth of the smallscale industries, encourage ment fbr village industries and correcting |egional imbalances by giving setting.up of units inLindustrially special concessions and facihties
backward areas.64

'for

An interesting point in the Statement was that a review woutd be undertaken and the nurnerous incentives that had been provided to the industries from time to time so as to ensure that the incentives have fulfilled their initial purpose.

726

INDTJSTfiTAL POLICY SINCE T973

conlribute consideral)ly tolvartls dispelsal of industrv and

gf,owth of entrepreneurship.66 The Policy Statement covered several other issues, such as

financial support to small unitsi, buffen stocks for critical inputs, marketing support and re$ervation of items for small
scale industries.

In operatronal terms, the Statelnent quoted with approbation the decision taken in 1975 with regard to the recognition of additional capacities under certain circumstances and went on to state that in the view of the Government, in several industris which were importani from the point of view of' national economy or were engaged in the production of articles of mass consumption, the productive capacity endon sed on the original licences or ag amended in terms of 1975 Notifications, 'may not reflect the full productive potential of
the unit.'67 This may be due to 'iricreased labour productivity or technological impmvements' I aird il rvas pmposed, therefore, 'to recognise such capacities on a selective basis'.6e The pro capacities was to be cedu|e for endorsement of issued separately. Similarly, the cility fon automatic growth number of industries in which was extended to a sel es included in Appen1975 was to be extended to all dix I to the Notiflcation issued i4 February 1973 announcing .the classification of industries wer to be treated as by large houses, core industries and opcn for Even in cases where the Policy Statement proposed to continue the initiatives taken by thB previous Government, in terms of the Industrial Policy Statlement, 1977, care was taken to avoid any accusation of conti uity. For instance, for pre serying regional balance and encouraging dispensal of industries, the Statement affirmed that 'steps have been taken to ptvent growth of industry in the metropolitan cities and larger towns. Setting up of ndw industrial undertakings within the limits of such urban cdntres is not permitted.'7o It was further added that the Government 'proposed to provide for selective relaxation to remove genuine difficulties, but without detriment to the basic obiectives.'7r This was, of course, without any reference to the fact that such modification was

Regulation and

DeveloPment

127

made even during the previous regime.* Sirnilarly, it was stated that necourse to'takeover the management of a unit under the Industries (Development and Regulation) Act would be only in exceptional cases on grounds of public interest where other means for the revival of sick undertakings were not considered feasible; and every attempt would be made to detect sickness at an early stage with a view to taking correc-

tive action. This was no different l'rom the previous Government's Policy on Sick Industries as announced in
Parliament in
1978.72

The thrust and content of the Policy Statement of 1980 is best illustrated in its penultirnate paragraph, the text of which reads as follows: 4l.Industrial development rs an inter-discipiinary concept. It pertains not only to the manufacturing activity but to all related infrastructural development: licensing and con porate policies; financial, fiscal, trade and pricing policies; industrial relations and management; scientific and technological - developments and broad socioeconomic policies. As such, the implementation of the industrial policy requires close and effective coordination and moni toring at various levels at the Centre as well as between the Centre and the States. lts ultimate supcess will also depend on 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 neverthe less, the Statement concludes on an optimistic note that 'the obiectives set out in this Paper and the measunes outlined herein' would receive the support of all sections of the
people.+
December 1977, lhere was for a period of several months a rigid insi$tence that no new industrial licences either for new units or tbr substantial expansion or even for new articles would be given to a unit if the location was in lhe prohibited category. B)' mid-197a the GoverDnrent had, in the light of experience, decided to make some relaxations with a vierv to ensuriilg that cases of genuine hardship could be dealt. with seleotivel-r,, \vithout reducrng the elfectivenes$ of the
poUcy.
+

' After the announcement of the Policy in

Important polic!, changes effecled subsequent lo lhe 1980 Poticy Statement through 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 different policy prescriptions. This was borne out by the various measures which were adopted hetween 1980-84 in pursuance of the announced policy. For in$tance, soon after announcing the new Policy Statement in July 1980, the Government

allowed an automatic gfowth at the rate of 5 per cent per annum up to 25 per cent over a of five years (i.e., ending August 1985) for basic and core industries included in the list of in Appendix I. This was in addition to fifteen engineering tries for which automatic growth 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 subsequent
years. In order to restrict the

medium and larger and Regulation) Amendment the Government to call for the appnopriate conditions on their

of 'reserved items' by the Industrial (Development of 1984 empowered

in 1981-82 related to obtaining of Registration certificates. Following the amendment oi the Industrial lDevelopment and Regulation) Act in 1971, the Goverfiment had issued notifications to industrial undertakings holding Registration certificates without the indication of productive capacities to submit their Registration certificates for endorsement of productive capacities on them. Productive oapacities for the purpose of endorsement were to be based on the best production achieved during the three years prior to 29 August 1973. In 1981-82 this matter was reconsidered and as a measure of further liberalisation, it was decided that productive

Aegulation and Development tag

Another feature introduced in the new Industrial policy was to use the instrument of licensing to promote indus" trialisation in the bac'kward areas. For this purpose, eightyseven districts were identified as ,No-induitry-distiicts, an4 over.riding preference was to be given to them for the grant of industrial licences. Noindustry-drstriatsi were also to be given priority for the required infrastmctural development.+ Even in the case of industries whjch were exempted ftom licensing iequirementq the technical authorities Oike the DGTD) with whom the industrial undertakings werc required to b registered for purposes of procuring raw materials, etc., were required to bear in mind the new thrust of the

capacities for endorsement would be fixed with refernce to periods after 29 August 1928.* The incorporation of productive capacity in the Registration had assumed significance because of the policy of reserving more and tnore items for exclusive pnoduction in the smallsector. As a measure of further oppor. tunity for maximisation of utilisation of installed capacity based on pnoductioir, units were permitted to get their re,gis. tercd capacities enhanced on the basis of pr.oduction achieved during the year 1982-83 or 1983-84.

up to rupees three crores were exenrpted from the re_ .licensing. quirements of This limit was raised to rupees five crores from Apnil 1989. The important point to note, however, is that this raising of the limit was stili subiect to the same conditions as before, i.e., this would not_be applicable in the case of MRTp and FERA unitg or in respect of items which hdd been reserved for production in the small-scale sebtor and 'that this exemption would not be extended to activities under Special peguLations. In short, in real terms, that is allowing for changes in the valub of money, the so called liberalisation announced with much fanfare meant little, if anything.
'
+

In order to make it.easier for new and medium sized undertakings to come up, the limit in lerms of fixed assets up to which undertakings l^/er exempt from the requirements of licensing was further raised. Earlieo .units witti fixed assets

locational policy.

Cl. Chapter IlI, pp.77-aO. Fof more details see Chapter VIII, pp. ZZ4-40.

13O

INDUSTRIAL POLICY SINCE 1973'

Policy Measures adopted in pursuance of the Industrial even when a Statement of 19E0 once again l'evealed that greater degree of freedom for the industrial system was tremendous deemed to be necessary and desirable there was by the reluctance for this enhanced freedom to be determined other irrstruments of control in the -u"f.ut forces on to use the exarlnple, taxes' tariffs' lending t una" of Government, for institutions' fofi"iu" ,qf nationalised banks or development which etc. rhe emphasis was still on easing of regulations and coirtinued to be administered by fthe Central Government; themainconcernoftheadministrativemachineryresponsible for the regulatory framework was to ensure-that the investment decisions were not allowed to be influenced by the of the market fortes except within thq'rather narrow limits administrative liberalisation'

NOTES AND REFERENCES

1; Isher Judge

Ahluwalia,
Nervv

0s56-sz i

tgzgso).

!' lndusrial Stalnation in India since the Mid-Sixties Delhi: oxlord uiniversity Press' 1985'

oJ-lndia 2. lndustrial Polential. Reierve Bank

Bullein
'

3, See note 1 arrove. z February 1973 i. Irraiu, rtarr"t"i"l Folicy-Govemrnent Decisions Pless Note'

In

Gluid.elines

Part I, Sction II, PP. 12-16, Para 1' 5. Ibid., para 3. 6. Ibid-' para 4. 7 . lbid., para 5. a. lbid., para 11.

centre' 19Ez' for lndustries' New Delhi: Indiat lnvestment

s. lbid., pana 1z Note' 31 october 1973' 1o. India, Streamlining of Industrial Procedures Press of lnvestment P{ocedur for Stimulating Production' 11. India, Liberalisation Industries' Prss Note No. 721'1,3s)/LP175,25 Octotler 1975 ln Guidelines for lnvesrment Centre! 19E2, Part I' Section lV' pp 5-6 Also New Delhi: hdian 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 lgt't' ltr (lDidelines as am;nded by Notification No 735(!'J' 16 November (ienlre 1970' Part L Sectlon Jbr ln(lostrie; New fjeihi: Indian lnvestment
l'975'

lV, pp. rlt 20.

the yarn up to a capactiv of 50'000 sPindles; man-nlade manulacture ol cottoll fibre$ up to 50,000 spindles; solvent extraction of oiVoilcakes fronr nrinor
seeds including cotton seeds;

the t*"nti.fotr" specified industries we'e: cotton spinning for

wrilin6, printing and wrapping paper Irom residue and waste; ravon grade pulp fronl bamboo; refracagricultural tories; waler pumps beyond 10 cnr x 10 cm; colton seed linter pulp; ractor drawn 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 switchgears; mat'hine toolsi induslrial and scientific inslrumenls; hasic insecIndia, Ministry of Industry and Civil Supplies, Depadment of Indu6trial
Developmeni, Notificati6n
Nb. s.

ticides; sanitary-waie, HT insulatom; tiles of size 4" x 4" and above'

12.

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, fndus
74.

rries. New Delhi: Indian Investment Centre, 1982, Part I, Section lV, p' 3' 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 lndustrial negulations and Procedures. Ne!r' Delhi: Government of India, February
197E, p. 5. 17.

Ibid., p. 7 , para 1.21. 1E. India, Statement of lndusirial Policv, dated 23 December 1977. 't9. lbid., para 7.
20.
27.

Ibid, para 2. Ibid, pa'|a 3.

5. 6.

22. Ibid., pa'ta 23. Ibid., para 24. rbid.,

25. 26.

lbid' para7. 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).

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.,

$.
44.

rbid.)

Ibid., para 31.

4s. rbid.,
46. Ibid., para 35. 47. rbid., 4E. ,bid., para 31.

ls.
50. 51.

tbid.,

/bid., para

c.V. Ramakrishna, Chairrnan, nepof,t of the Study Croup an Induslrial

38.

Regulations 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,

48, para 2.

19E0.

In

Guidelines

tries. New Delhi: lndian lnvestment Centrc, 1962, Part I, Section ll, pp. 41-

for

Indus'

59. tbid., para 1. 60. /bid., para 5. 61. Ibid. 62. Ibid., para 10. 63. rbid.

tu. /bid., para 65. lbid., para

66.

16. 10.

Ibid.' para

11.

67.Ibid.' para zr.

68. rbid. 69. tbid 70. lbid., para 30. 77. Ibid.' para31.

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 the Five'Year Plans

in the preceding chapters has highliShted the long tradition of depending on Government inteNention in order to accelerate industrial development. The discussion also reveals how, over a fairly long period, certain basic approaches with regard to industrial policy remained, more or less, unaltered. In part, this was due to the fact that ever since independence-for nearly thirty years - the same party continued to be in power at the Centre; and there was a marked unwillingness to either recognise or to accept publicly the need for any significant, if not radieal, departure from what had been accepted officially earlier. There was also a reluctance to review criticalty the actual performance in terms of the policy obiectives in order to assess whether the mechanisms for implementing the policy were effective. The major exceptions to this, however, were the occasional glimpses available from the successive Plan Documents revealing the planners' awareness of the changing needs of the economy. By the time of the Fourth FiveYear Plan there were indications that the Planning Commission was becoming aware of the need for radical changes. The distressing part, however, is that what was stated in the Plan Documenl
Tfte discussion

13J

INDTISI'RI/\t, POI,ICY A^'I]'I'HE !'IVH,.YEAR PLANS

regarding the industrial policy on changes therein and what was actuall.v done were not always or adequately reflected in the policies pursued. In the sectior-l on Industrial Dqvelopment and Policy of the First Five-Year Plarr, there is d pointed reference to the decline in productivity of indusitry in general since 1939.'1 Accorcling to the Plan Document, on a rough estimate, prG ductivity had declined by 'about 20 to 30 per cent'.2 This was attnibutable to various factors ingluding running down of the capital equipment during the Second World War. While the Plan Document did not consider lt possible to allocate to each factor its specific share of respon$ibility for the loss in productivity it was clear that 'industrv is now using [aJ much larger volume of real resources per unit of output than it used to consume before, and this is partly responsible for inflating the level of prices.'3 It is interesting tO note that in this context the Finst Plan Document often refers to the respective roles of the State and of private enterprise and emphasises that a 'haF monious working of these two sectors will depend, to a large extent, on decisions arrived at b)l mutual agreement between the representatives of the Goverrtment, business and industry and latrour.'a It envisaged that local and negional bodies as well as functional associations c$uld play an effective nole in the formulation and implementation of the Plan. While underlining the need for a system of controls such as capital issue control, licensing of new enterprises and large extensions of existing ones, foreign exchange allocations, import and export controls, controls on prices and also physical controls such as price and distribution contnols, the authors of the Plan were quite explicit in stating that 'in. the Plan, administrartion and periodical revlews of these contmls, machinery for consultation and cooperlalion with the private sector

will have an elTective shale.'5 Equally significant were the $tatements in the First FiveYear Plan on the question of interfacing between private industry and Government. The Flan Document begins with
lhe 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 work from within each industry and help to irhi"h "un 'steady improvement in the standards of pro bring about ductivity, efficiency, and management

"'

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

By the time the Second FiveYear Plan was adopted by the

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 to bring about a structural change in the economy, which wouid enable the county to move towards the goal of a technologically mature society, which could ensure self-sustaining growth in a more equal society by avoiding excessive conceniration 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 Ministey's authority in maior areas of economic policy' Not only did

it gain in

envisaged between

status and power but the demarcation originally the advisory functions of the Planning Commission and the decision-making responsibility of the Central Government tended to get blurred'

13ti INllUSt

RtT\1, p.Ol.tCy

,tNt)

HIi trVE-fti,\R pL,\NS

prepared lry the Indian Statisticai Institute under prof.essor Mahalanobis' supervision, there was little difference 'bet_ ween the two in terms of outlay, Fectoral allocations, rargets and recommendations on sociGeconomic policy. Manv of those associated wilh the formulation of rhe iecond plan ditl, however, have some reservationq about the administrative and political feasibilities of some !f the p"oposals contained in the Plan for achieving a comirination oi economic and social goals. Certain fundamental structural changes in the economv were envisaged in the pl{ln. Not only were mo.dern manufacture and mining to accouft lbr a much larger share of the Gross Domestic product, bqt even within the modern sector there was to be a shift afva1, from the creation of capacity for the production of cqnsumer goods. The main thrust of both poticy and allocatiqn of resources was to be on the creation of additional capqcity anri expansion of the output of intermediates and capithl goods. In the organised indlsllial sector as a whole, not only was there to be an absolute increase in the size of public investment, but ils share in relation to private investrnlent wds to be sisnificantlv higher. These proposals were cqmbined with "!"o--"r_ dations for transferring large in t resources from the private sector to the State. These included proposals for the nationalisation cf the Imperial and the Life Insurance industry; the creation of a State Corporation andfollowing up the report of r Nicholas Kalders which suggested major revisions in the tai structur_an irrcrease in income tax and the i.ntroduction new taxes on wealth and expenditure and capilal gains. The PIan Document emphasise{ that the major point of departure in the Second plan was the precedence accorded to the public sector in industrial and tnineral development. ro In terms of magnitude, the First plan tlad a totai pnor.,ision of Rs. 94 crores for the establishment of lalrge_scale industries in the

Economic Division of tlre Ministry of Finance (Franrervork 'fol the Five-Year-Planj were circu latdd for discussion rn March 1955. But as both drafts were based on the Working papers

. Two prelirninary outlines of the Second plan, one prepared by Professor Mahalanobis {Draft Recommendations tbr the Formulation of the Second plan) anel the other irv the

negulation and Development 737

'public sector was a shade higher than the total estimated new investment of Rs,575 crores for industries and mining in the private sector. Thus, while the private sector was expected to continue to play an impoftant pan in the process of indus. Fialisation, there was a clear shift in emphasis in favour of projects in the public sector so that over a period of time the public sector would occupy a dominant position and attain 'thii commanding heights' of the economy. The second rnajor departure was with regardr to the composition of investment in the industrial sector. Practically, the entire proposed outlay of Rs.690 crores was for large-scale industries such as iron and steel, coal, fertilisees, healy engineering, and heav_v electrical equipment. The Second Plan emphasised, for the first time, that a Plan was not merely'a statement or list of things lo be done.'1l The function of economic policy in the context of the Plan was 'not merely to mobilize the financial resources needed but also to promote in all ways it can, a pattern of consumption and of utilization of the real resources which conforms to the requirements of the Plan.'|2 The Plan Document went on to state that the democratic system of planning could not rely on direct commandeering of resources and had to operate, therefore, 'mainly through the price mechanism.'13 In order' to ensure that such a mixed economy succeeds in bringing about not merely the desired allocation of resourceg but also the desined structural changes in the economy, two types of techniques needed to be employed. First, there was the overall regulation of economic activity through' fiscal and monetary policy. Second, there were specific regulatory der.ices like export and import controts, licensing of industries, price controls, and the system of taxes, subsidies and allocations which influence and regulate activities in a par ticl:lar sector or sutlsector of the economy. While the Plan Document stressed that the overall fiscal and monetary dis. cipline could go a long. way in channeling resources 'at the margin'r1 in desirable directions, 'a comprehensive Plau rllrich ainrs at raising the inve$tment level in the economl

public sector as against an estimated programme of new investment in the private sector of Rs.233 crores. In the Second Plan the provision of Rs.690 crores for largescale industries and mining (including scientific resbarch) ,in the

13E

INDIIS'IRIAL POI,ICIFJS AND IHE, FIVE-YEAR PI-ANS

sul)stantialh' ar1d has a delinite ortler'of pliorities in vieu' cannot lle seerr thlough on the basis nteleh of orelall liscal and ll)olx)talv contnol.'l; l'he undellvihg logic rt,as tltat 'if controls at'e administt'ativelv cunilrrous and rnav act as disincentives, lack of tltem, it has to be lememlieled, ntav r;reirte inequaiities and haldships, to the plejudice ospeciallv of the classes that need protection nrost.'rrjThe Plan flocunter)l entptrasised the point that such contlols should ncit be legaldcd as srrfficient bv thethsclvcs. Tlteit' irnposition should be accompanied b1.measules to simultaneouslv inr:rease supplir:s. Tlrc stiction dealing with 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 promoting and lacilitating a balanced attainment of the economic and social objectives in view, the Plan has to have sanctions or regulatorv devices which bperate within the existing structu|e. But more and more, the structure itself has to change so lhat the desiled balance of incentives and rest!'aints gets built into it instead of having to be brought about through ad-hoc controls dnd correctives.lT

Ilr retrospect, these were strong words and it was not clear wheihel the authors of the Plan fully understood or accepted the implications of the kind of structural changes needed in the economy and the society which would enable a 'des.ired balance of incentives and restrainls'rE to be built into the socitteconomic structure itsell Any such structural transforrration would have required, by definition, an increasing acceptance by the social and political svsteru of a set of values and of a work ethic which would so trarisform the structure that no external controls or corectives dre needed. There was little evidence that there was any systlematic effort either through the educational system or through the working of the political rnechanism to materially alter the dominant value system in

nrent resources from the private sector to the State necessitated 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

society. The consequence was that the transfe| of large invest-

negulation and Develoqment 139

all income in excess of a certain level. Indeed, it was stated on behalf of the Government from time to time that the
egalitarian ideal was being achieved through this taxation system. An income, say of rupees five lakhs together with wealth amounting to rupees twenty lakhs would necessitate payment of total tax by the assessee which would requine him to disinvest his assets thus, r'educing his wealth. Technically, tltis was true if taxes were paid, which of course, they were not. The growth of black money or socalled parallel economy which was not subiect to the effects of fiscal or monetary policies has been, in a large measure, the consequence of the, lact that lhere was a wide gap between the taxation, pricing and regulatory policies pursued by Government, and the social and political ethos of the country which never fully accepted the morality or equity of the regulatory system or of the structure of taxation. There were no inhibitions atrout ciF cumventing price and distribution controls or against conupting political or administrative systeins through the use of money po!\, er nor was there any social stigma attached to the acquisition of income and wealth through means which could only have been illegal. The consequence was tirat around the mid-sixties and certainly by the mid-seventies the rhetoric in the Plan or in the announcement of public policies began to be increasingly irrelevant to what was hap pening at the grassroots. The Third Five-Year Plan (1961-66) was firamed in much more difficult circumstances than the Second Plan. The sharp dlawing down of the accumulated foreign exchange reserves, the spurt in prices, both wholesale and retail, and gXowing difficulties of foreign exchange formed the backdrop at the time of the preparation of the Third Plan' The planners were made of sterner stuff and were not daunted unduly by the immediate problerns. Instead, the Third Plan was'the first phase in the scheme of long-term development extending over the next 15 years or so.'re During this period not only was the Indian economy to expand rapidly, but at the same time it had to become increasingly self-reliant and self-generating' The long-term approach was to provide 'a general design for development,'Zo atrd it was in this context that the Third Plan set its obiectives and targets for the five-year period.

lir(,

INDUSTRIAL FOI,ICIES AND THf, FIVb.YEAR PLANS

necessary to emlri comparison with the past and not in relation to the needs or the nation,s phasise that 'they rargets) gre lar6e only
{

InterEstingly, the Plan Document found

it

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 and cn creating conditions for the inaximum pnoduction and emplovment and the development of human resources.,z? Regarding the approach to industrial development the Third Plan emphasised lhat ind has a leading role in securing rapid economic As between agiculture and industry which must be ed as 'closely linked parts of the same pnocess of devt t',23 industry was to have primacy as an instrument of ; and the development of basic heavy industries was to be as part of the comprehensive design of development

capacity to achieve.'21 As a further assurance to their earnest-

smaller towns and villages brfinging them into a close relationship with one ?rnother, ttnus, assuring a high degree of mobility and economic integrl'ation within the economy
as a whole.za

ullimately linked the industrial and rural economy, the economy of the large-scale and qf small-scale units and the economy of the major industrial centres as well as of the

secured in the industrial field during the periods, the Third Plan'recogrised :
This success, considerable though

While underlining that fanrqaching gains had been first two Plan;

it is, has so far been insufficient to make any great irFpact on the general con. ditions of the masses of the popqlation or radically alter the structure of the economy. MorFover, compared with the industrial targets which the country had set to itself, there
have been some large short-falls.tr

falls that had occurred were maihly in iron and steel, fer. tilisers, certain items of industriall machinery, heavy casting

The Plan Document further went on to concede that the short-

ne.

guletion and Development tL7

and forgings, aluminium, newspiin0 cement and certain

chemical industries such as soda-a$h, caustic soda, and dye ptuffs, i.e., 'the very industries which are of crucial impor. .tance and have deprived the econ6rrry of the benefits which were reckoned on for thg start of tfre Third Plan.'26 It further observed that in spite of large investments-about 30 per cent mor than in the Plan estimate-the fiscal targets set under the Second Plan were broadly estimated to have been achieved 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 industrialisation over the next fifteen yearS. It was, therefore, 'essential to prcss fonvard with the establishment of basic and capital and producer goods industries-with special emphasis on machinery building programmes-and also on the acquisition of the rclated skills, technical know-how and desi6rring capacity... etc.'27 For the first time, however, there was an awareness of the fact that the operation of industries depended not only on the needs of the people or mar*ets for their prgducte, but also on the supply of raw materials, power, fuel, and facilities for transport. The Plan also took note of the fact 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-intensive pnrcesses was likely to be foregone. Similarly, for the first time there was a mention that amongst the industrial priorities, accent would have to be on 'proiects which by contributing to exports will earn, or by replacing the impqrts save foreign exchange. It will not be possible to allow significant expansion of industries which are heavily dependent on import.of raw With rcgard to the putrlic sector programme for industries, the primacy of plage for the public sector was not in any way to be diluted, but hard realities were begfnning to b reflected. For instance, the Plan rncludes a whoh chaper on ttre 'Organisation of Public Enterprises and another one on Administration and Plan Implementation', which inter-alia conmaterials.'2e

tains a section on 'Projectg in Public Secto/. It

is

interesting-and somewhat depressing-in retiospect to note that 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 continue to be talked about today, in the cpntext of the working of the public sector. The Plan bemoans tfre fact that 'consciousness of profit in costs is not also as widespread as is necessary.'Jo The aim of the management should tre to secure economic efficiency; 'cost consciousness is necessary to achieve the desired results.'31 Among the important aspects of 'calling for suitable action', the Third Plan Document spoke of public accountability and the danger that'exposed to cqnstant scrutiny the management will be afraid of making the day-today decisions necessary in commercial undertakings andl an ostensibly autonomous enterprise will be virtually stifleil by ned tape and bureaucracy.'32 There was also an extensive discussion about the nature and functions of the Board of Directors and the need to enhance the powers of the Board; the need for continuity of tenure and relating reward with performance in order to ensune that the Managing Director/Chief Executive provides leadership and guidance necessary for successful operation;

the role of the Financial Adviseri and the need for advance plannin6 etc. In terms of priorities for publio sector proiects, the proiects
wer to be gmuped into three catqgories:

1. Proiects under execution

Second Plan, assured wholly or partly.

fnd carried over from

the

2. New projects for which external credits are already 3. New proiects for which external credits have yet to be
arranged. The Plan Document further noted that after taking into'account Rs. 300 crores which were to becbme available from the inten nal resources of public sector und,ertakings for financing indus trial investment, there would stilll be difficulty in financing the industrial and mineral progfammes of the public sector. Excluding the defence industries and prdjects of ministries of railwayo

transport and communications designed to meet their own operational requirements, the ovdrall cost of public sector pro iects was estimated at Rs. 1,882 Drcres. A provision that was possible, 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

implementation will

stated, their full

take rather more than 5 years.' In short, by Third Plan period it was increasingly evident that whatever the the merits of the long-terrn strates/ for economic and in particular indusfial development, there was a widening gap between

targets and performances, between requirements and resouF

ces, arrd above all, between the institutional framework needed for putting through the type and scale of development and the working of the existing administrativecum-political
system.

and Plan commenced. strains that work on the Fourth Five-Year The Planning Commission presented a Mernorandum on the Fourth Plan to the National Development Council in October 1964, which envisaged a total outlay of Rs. 21,500 crores at 1963ff prices. After further work a document entitled 'Fourth FiveYear PIan Resources, outlays and Programmes' 33 was presented to the National Development Council in September 1965. However, as the country faced serious hostilities around this time, the Council authorised the then Prime Minister, Shri Lal Bahadur Shastri to make such adjustments in the Pran that he deemed necessary for meeting the emergency and safeguarding the countqy's security and long-term necessities. While the Planning Commission undertook a series of studies for determining the changes that would be necessary in the changed context, there was another mafor development in the form of devaluation of rupee on 6 June 1966. This necessitated a complete re-examination of the Plan resources, priorities and
oullays.

It was against this background of growing sfesses

In the context of these uncertainities in the preparation of the Fourth Five-Year Plan, the Annual Plan for 1966-67 (first year of the Fourth Plan) was formulated in advance of the Dnaft Outline, which was to be submitted to the National Develop ment Council, to obviate any delay in the implementation of programmes to be undertaken in that year, In the Draft Outline of the Fourth Five-Year Plan, which was published in August 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 scheme will be inclucled in the annual plan unless it is fully worked out in all details and unless thbre is a neasonable assurance that requisite resources will be available for its completion as scheduled.s

This was, virtually, an admissidn of the fact that the planning exercises in the past had failed to take note of the emerging situation, that many schemes were included in the Plan even before thev were fully workdd out and even more disturt> ingly, the size of the Plan was not always related to 'any reasonable assurance that rgquisite resources will be available.' The Draft Outline noted with concern the disappointing record in terrqs of growth of national income during the Third Plan period. Thiq was in mankrid contrast to the Finst Plan which had achieved consideratlle success both in terme of increa.se in output as well as st{bility in prices. In the Third Plan, however, while financial toutlay was about Rs. 8,630 crores, substantially higher thaln the oniginal provision of
Ffan period was less than envisaged in the Plan As a result, the pef capita income at 19601 prices, which was Rs. 326 in 1960-61 at that lbvel and in 1965{6 was estimated to be 4 little less. It was becoming clear that the between an increase in investment in real terms and in terms of Smwth output and nalional income was weaker; and that the emphasis on a higher rate of in investment was not, in the Indian context, _sufficient foF achieving the goal of selfreliant growth. Of course, in many respects the Third PIan peniod was ;somewhat abnorrnal. Three o{rt of five years witnessed unusual adverse weather condiftions; there were two wans with Pakistan, though each wasi of short duration, and the delay in tying up extemal creditd at the beginning of the Plan period as well as suspension of credits by the USA towands the end of the Plan period furtller aggfavated the situation.

national income during the

haH of the rate of 5 per cent per

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 per annum. There was also a substantial increase in the production of items like aluminium, automobiles, ball and roller bearings, electric transformers, machine tools, textile machinery, power driven pumps, diesel engines, sugar, cement, petrcchemical products; and the rate of growth of capacity was even faster than that of production in a number of these
items. To some extent, this reflectedthe spill-over of investments or implementation of schemes fiom the Second Plan or lags in capacity creation and output gfowth. Though it also highlighted the point that as long as there are viable opportunities for import substitution, trends in industrial production did not have to coincide with the rate of growth of the economy as a whole.

The adverse factors operating on the economy cturing the Third Plan period, culminating in a drastic devaluation of the rupee in June 1966 delayed the finalisation of the Plan. Aften the reconstitution of the Planning Commission in Septembet ' 1967, with Professor D. R. Gadgil as Deputy Chairman, and after a careful review of the positionr the Commission came to the conclusion that, with the lapse of time, many of the assumptions and estima.les of the Draft Outline were no longer valid. In any event there were only Annual Plans for the years 1966-67 and 1967-68 and it was decided that the same should be done for 1966-69. The Foufih Plan which should have commenced in April 1966, would commence with the fis. cal year 1969-70. The total outlay provided in the draft of the Fourth FiveYear Plan was Rs. 24,398 crores including the currEnt outlay of Rs, 2,146 crcres.s This was in terans of 1967-68 pric$' In real terms the Plan was substantially smaller than the ambitious programmes envisaged in the Draft Outline oI the Fourth FiveYear Plan in 1966. This is borne out by the fact that the Draft Outline had proposed a minimum PIan with a ' total outlay of Rs, 23,750 crors at June 1966 prices. The index of wholesale prices which was 169 in 1965-66 had advanced to 273 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 complaisant 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 were refenences to major failures in lmplementing the Plan pra glarnmes. For instance, the Report stated that'the concern for speed, economy and efficiency has not been pervasive as it ought to be.'37 It further stressed that'the public sector which had the responsibility of settingl much higher standands of

performance had as yet to fulfil its role of generating adequate surpluses for investment.'38 Even in relation to sensitive issues like income disparity the Fourth Plan Document was much more forthright. For instance, it made the proposition that'in a rich country greater equality could be achieved in part by transfer of income throulgh fiscal, pricing and other policies. No significant results can be achieved through such measures in a poor country.'3e Thb way to reduce income disparities, therefore, wa6 a more difficult one-'more rapid growth of economy, greater diffubion of enterprise and of the ownership of the rneans of production, increasing .productivity of the weaker units and widening opportunities of pro ductive work and employment to the common man and particularly the less privileged sections of society.'40 On the question of industrial pplicy the Fourth Plan made a number of important points and lnany of these were either in contnast to th'e mainstream of piast thinking or cover areas often neglected in the past. For instance, it noted that specific price and allocation controls and lhe general capital issue and licensing controls were inescapalDle in the earlier situation of considerable general and specific scarcities, but with more efficient food management and greater availability of plant, machinery and other equipment in the country, a review of is all the more important the past policies was needed. has led generally to because 'the existing industrial present system does not a high level of costs and that appear to have prevented concentration.'41 The Planning Commission referred to the proposal of social control of banking and Restrictive Trade Pracand legislation of the Mo that these would be operative in tices; ahd of the assumption desired directions, a revision of tlire present regime of controls main obiectives of the reviwas deemed desirable. Of the should encourage fully responsible sion, the first was 'it entrepreneurs, fixation of decision-making on the part

negulation and Development 14?

targets, licensing and some price and allocation controls seem

to have affected the care with which the entrepreneurs should ryeigh the long-term prospects of their investment decisions.az The second important obiective, it was argued,
should be 'to introduce an element of competitiveness in the economy which would keep up cost consciousness.' Referring to the sheltered conditions created in part by the operation of the existing controls and licensing systems, which had reduced cost consciousness, the Plan Document stressed the need for increasing the element of competitiveness, par. ticularly when industrial activity begins to grow at the higher rate expected during the Fourth Plan period. The one direction in which greater vigilance by Government was, according to the Planning Commission, imperative was with regard to the location of industries in metropolitan and large qity centres. 'This should be effected in two ways-firstly, by positive assistance and incentives given for dispersal of industry, and secondly, by disincentives imposed in large cities and positive steps taken for decongestion of metropolitan areas.'43 The views of the Commission on industrial policy were also reflected in its ideas about the rate and pattern of industrial development. In the long-term perspective of ten or fifteen
years, the Commission concluded that an overall expansion of

I per cent in the net output of mining and manufacturing

industries and construction was required for achieving the projected growth in aggregate income and agricultural pro duction. The pattern of industrial expansion had to be guided by 'the necessity of meeting the requirements try the domestic production of a wide range of manufactures which admit of economic production.'aa In othei words, the thrust for development was still in the main from import substitution which 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 import. dependent. Fortunately, the most significant branches of industry which needed attention from the point of view of import substitution were the ones where Inclia 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 ensure economic and efficient production. In conformily with its thinking and approach to the que6tion of industrial development, the Fourth Plan concluded that 'both from the points of viqw of accelerating industrial development and improving the administrative efficiency, the exis'ting system of controls, would need a review.'s What the Fourth Plan had to say about industrial licensing policy is wofih reproduction mainly for the reason that even fifteen years after its publication, it is stlll relevant and has not been implemented:

The primary purpose of Control is to ensure proper allocation of scarce resources. Regulation of industrial development has to be considered primarily in relation to the allocation of foreign excllange. Thus, import control and control on commodities in short supply would have to continue. Within the broad framework of control in strategic areaE, there is advarltage in allowing the market much fuller play. The supply of a variety of industrial commodities has considerably eased and the need is one of stimulating demand and production. With the broader industrial base and gr-owing availability of capital equip ment and raw materials from rwithin the country the need to control further expansion i4 industries which are largely
based on domestic resoutces has assunied less importance'

Thus the authors of the Plan realised that freedom fi-om industrial licensing as proposed above might, in certain areas, have adverse consequence's. For example, it mighl increase further the congestion of industiy in large metropolitan areas, lead to undesirable competition with traditional and smallscale industries and could add to the concentration of economic power. Hence il was necessary lo sal'eguard againsl these contingencies and suitable measures 'including reservation of certain industries for th@ traditional and small-scale sector, would have to be devised in accordance with the requinements from time to lime.'+7 In line with the approach to the question of licensing, the

negulation and Development 149

Commission proposed that it was not necessary to lay down for lhe Fourth Plan targets for all industries.

Definite targets.are proposed to be fixed only for a limited number of high priority industries. In order to ensure tne fulfilment of these targets, lull provision will be made for finance, supplies, and other facilities. For the remaining industries, estimates of requirements and prc
duction have been projected in consultation with industrial associations and other interests. These proiections do not represent targets or ceilings.a8

By the time work on the Fifth FiveYear Plan was completed and the draft prepared in 1973, it was clear that contrary to the anticipations in the Fourth Plan, the growth of industrial production had fallen far short of expectations. Instead'of the growth fate of 8 to 10 per cent in industrial pro duction, apart from the year 1969-70 when industrial output increased by 6.8 per cent, the increase in the output each year varied 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 but fbr 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 installed capacity, primarily on account of the operational problenrs. These included lack of maintenance, design deficiencies
resulted in reduced demand for industrial machinery adversely affecting the level of output ,of the capital goods
industries.
*ae

and towards the later part of the Plan a widespread short. tage of power and coal. Inadequate pace of investment

The Fifth Five-Year Plan Document, the drafi ol which was ready by the end of 1973, tried to define the objectives and

* Il is nol cleal
econonlv,

as to how a more adequat level ol investmenl was to bc errsured ir) irrduslry iD lhe faoe ol shortage of coal ancl power, worsenlng induslri.ri relatiotrs and a general slackenin6l ol the rate of growth of

lso

TNDUSTRIAL

pot,lcy AND THE Flvi-ynan plars

policy frames for the Fifth Plan in the context of theJong-term perspective. For the first time agin, the Fifth Plan took into account the demographic perspective, that is, the size of the population, 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 important challenge to development planning during the perspective peniod.'5O The other objectives for the long-term perspective wene self-reliance and removal of poverty, the last being 'reflected in the working ou! for the first time, of a national pro gramme of minimum needs. Surprisingly, (or perhaps, not so surprisingly) the Fifth Plan had very little to say with regard to the policy in respect of economic development and in particular, industrial develop ment. The section on'Policv towards Public Investment,' for instance, came up with prescriptions which were no different than either the convntional wlsdom or the prescriptions repeated in the earlier Plans. For instance, it stated :
Olganisation and management of public enterprises need to be reviewed from the point of view of efficient production

and profitability..., the organisational structure has to be professionalised and the process of decision-making left to the enterprises themselves except in matters which are of major policy significance from the point of view of national
economy.sl

It goes on to say

nust form an essential part of the policy frame.... Small industries which exist merely because of subsidies, which may be given in one form or another do not serve the same social purpose as small industries which can stand on theil own, once the ' imperfections in credit markets and products markets are
Encouragement of small industnies obviated through government policy.... T'here should be an

appropriate liaison between small industries and large industries where government can plav a useful role.i?

netulation and Development 157

Perhaps, the only area where the Fifth Plan was fairly forthright with regard to the policies to be pursued, was in the sphere of diminishing concentration of economic poweL The Plan Document begins with the proposition that 'in nur situation, concentration of economic power in the industrial sector arises ftom the narrow size of the home market, pre sence of impoft contrrols, and lack of finance and professional
management on an adequate scale.'s3 Regarding the measures to tackle the problem, the Plan Document gives-and rightlyimportance to measurs for the 'rapid growth of the home

market through ensuring improvement in productivity, especially in agriculture,'s4 Other important areas of policy were the creation of an efficient and dynamic public sector, and encouragement of new entrepreneurs. Apart from the
i,Ionopolies Commission which could play an important role in preventing restrictive price and output policies in crucial sectors of the econom, the Plan Document comes out, for the first time, in tavour ol using public ownership of financial institutions as an instrument for exercising an appropriate form of 'social control'. The general strategy, however, was not significantly different from the earlier policies. The twin objectives of 'selfrellance and Slowth with social justice's5 underlying the Plan necessarily implied that the main thrust was not on growth or removal of impediments to growth. But it was to be on rapid growth of core sector industries like steel non-ferrous metals, fertilisers, mineral oil, coal and machine building. .,\t the same time 'surpltis capacity' had to be created in certain industries for encouraging the gxowth of exports of mariufactured goods. In order that there was an adequate supply of mass consumption of goodq it was necessary to have substantial production of essential commodities like cloth, edible oils and vanaspati, sugar, drugs and corrsumer durables like bicy cles. '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 sections of the population.'56 Moreover, there was to be a restraint olI the production of inessential goods. The other areas of action were encouragement of village and small industries, develop ment of industrially backward areas, and the application of

152

INDUSTRIAL POLICV AND THE FIVE.YEAR PI,ANS

industries which were open along wiih other applicants for participation of largei industrial houses and foreign companies. These included 'core industries of importance to the national economy in the future, industries having direct link_ ages with such core industries and industries with long_term exlgort potential.'s8 While larger houses and foreign com_ panies were made eligible to palticipate in and coniribute to the establishment of these indu$tries (provicied the item of manufacture was not.one that was reserved for production in the public sector or in the small,$cale sector), they were to be 'ordinarily excluded from the industries not specified above, except where pruduction is predominantly for export., The other measures which were enVisaged included ,encourage ment of competent small and medium entrepreneurs, along with cooperatives who will be dncouraged to participate in the production of mass consumption goods with the public sector also playing an increasing role.'5e Other investors were allowed to participate in the production of mass consumption goods only 'if there were speciAl factors such as sizeable economies of scale resulting in reduced prices, technological improvements, large investment requirements, strbstantial interesting point was that having clearly demarcated a large area of industrial activity and oire requiring a considerable 'quantum of investment, the 1923 Policy excluded larger houses and foreign companies from all dther fields of industrial pro. duction and investment. The assuinption being that new entre pneneurs, small- and medium-scale, r,r,ould be able and willing to enter these fields on a scale adequate to meet the require ments of the economy and also generate a degree of competitiveness in the system whidh would ensure adequate discipline in terms of prices and quality. The corollary to this,

science and technology to the ,irnmediate development needs of the economy.'s7 On the question of industrial policy the plan Document reaffirmed that the Industrial policy Resolution of t9S6 would continue to govern the direction of the industrial policy dun ing the Fifth Plan, i.e., two decades after it was first announced. But in terms of licensing policy, the operative policy was to be the announcement in February 1923 which listed the

export possibilities or as patt of

modernization.,60 The

negulation and Developmena 15,3

of course, was that the entry of larger houses in the wide

ranging capital intensive industries wotrld mean a relatively faster growth of the volume of assets which such larger houses would control. While this was implicit in the policy announcement of February 1973, this implication was never fully or openly accepted, with the result that every time there was a question of growth of 'Monopoly houses' after the passing of the MRTP Act, the spokesmen of Government tended to adopl a defensive siance. Apart from the policy in relation to larger houses, the Plan mentioned. the following as means by which obiectives of industrial 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 be
achieved expeditiously.

4. The creation of new capacity in accordance with the priorities in lhe Plan. 5. The initiation of advance action on long gestation pro
iects keeping in view the requirements of the Sixth Plan.

T'he last was in recognition of the need for continuity in planning for growth of indusFial capacity, especially in areas where the gestation period was necessarily long. The empt-rasis of the Fifth Plan on maximisation of output from existing capacity or on technological improvements and expansion of existing units for achieving additional production expeditiously, ran into the problem of regularising excess capacity, that is, cases where some units in a particular industry had achieved levels of production in excess of the production capacity endorsed on their licences. The recognition of higher capacity was not only relevant for maximisation of output fi.om existing capacity, but it was also often a precondition for permitting expansions or moderhisations involving techno logical upgradation which would result in increased production. Unfortunately, though not surprisingly, many of these cases 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 them except on the basis of substantial exports. The Sixth Plan (1978-83) was prepared after the elections and the ensuing change in Government. The Commission com_ prised new members except for one member rvho had been associated with the work of the plAnning Commission under the previous regime. This was also reflected in the plan Docu_ ment. For instance, the Plan I)ocument began with a review of the achievements of the past quarter of a century. euoting from the F'irst Five-Year plan rhat tlre objective was to translate ... the goals of social and edonomic po\icy prescribed in the Directive Principles of the C0nstitution ... into a national progranme based on the assessment of needs and resour ces,'61 the Plan Document sought to assess ,the achievements and $hortcomings so that we rnay better plan the course of nation's lbture development., Unlike the reviews in the earlier Plans, the main theme of the rcView was that while a great deal had been achieved in ahnost every sphere of national life, much of the benefits had accnued largely to the lelativelv affluent sections. Tho pattern of industrial development which had emerged was based On the structure of effective demand, which, in turnj was clelermined by the cjistribution of incomes and involved certain costs to the communitv. The concentration of economic powef had increasecl in the sense thal within tlre corporate sector, tbe assets of bigger con porations had increased more rapidly, lhe expansion of largescale industries had failed to absorb any signiiicant proportion of the increment to the labour force, and in some cases had even led to a loss of income for the rural poor engaged in cotta{fe industries like textiles, leather, pottery, etc. The indus_ trial structure, based as it was on the demand of a relatively small class of the more affluent segment of society; tended to use an unduly large proportion of resources in production which related directly or indirectly to maintaining or improv_ ing the living standards of the tligher income groups. This meant that further expansion of industry was , likely to be limited by the narrowness of the market. As a result ,further import substitution of consumer goods or capital goods can_ not, at the cument level of demand, afford any great impetus for continued industrial growth.'62

fregulation and. DeveloPment 155

For the first time the Sixth Plan spoke in specific terms about village and small industries. It began with the proposi {ion that, 'as in irrigation/ resources (for village and small industries) are not the constrainls. Past experience shows that the grcwth of these industries ir" limited by organizational, manageriaf and training effort needed to increase the capacity of the sector to absorb more investment.'63 Against this background the Plan suggested (or endorsed) specific measures being adopted such as the concept of DiStrict Industries Centres so aE to minimise the number of contact pbints that small entrepreneurs have to deal with; or the increase in ttre number of items exclusively reserwed for development in the small
industry sector. Another innovation envisaged in the Plan Document was that a number of industries were to be studied including textiles and su8ar to analyse 'the available technological options.'64 The intention was to evolve policy measures so as to ensure a desirable technolog;, mix in industries, pan ticularly mass consumption goods industries, with a view' to enabling a much more widespread dispersal of entrepreneur. ship and production. The industrial policy for the Plan was to be in terms of the Industrial Policy StatemeDt announced in Parliament in December 1977 , whiclr, as pointed out earlier, placed emphasis on preventing further industrial concentration in towns with a population of more than half a million and providing assistance for shifting of existing industries to rural 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 required by entrepreneurs-technical and marketing assistance, credits, raw materials, etc. It was also envisaged that these Centres would work in close collaboration with other agencies in the district engaged in the development of cottage and small household industries. In manning the DICs, it was proposed to select, as far as possible, motivated persons with adequate practical knowledge who would actually be in a position to help and advise the small-scale units. In order to recruit the right person as Manager (Credit), for instance, the nationalised banks 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 may continue to remain on the pay rqlls of the banks themselves. It was envisaged that the DICs would be able to exploit the considerable scope that existed for developing new products and improving and adapting proce$ses and techniques so as to raise the level of productivity, rEduce costs, and improve the quality of the products of cottage industries, particularly in villages. The intentioD was to place grealer emphasis on re. search and technologr transfer to the small and household sectors and use the DICs in collaboration with other existing agencies, to effect this lransfer. Similarly, glearer ptannin! was done for expanding substantially training facilities in fields such as calpets, handloom weaving, processing leather, and manufacture of leather goods, etc. Greater attention was to be paid to inputs for prototype development centres, ITIS, tool room, etc., with a view to equipping rural or semi-urban unemployed for gainful employrhent. In the sphere of marketing-which in many cases was the weakest link in the chain-emphasis was to be on replacing middlemen by producers' cooperatives as far as possible. Apart from price preferences in Government and the public sector for purchases from small-scale and village industries, the Plan proposed exploring possibilities of utilising the existing network of thousands of rethil outlets under the aegis of the Khadi and Village Industrial Commission. The Plan also mentioned that 'an important policy change will be made in the area of choobing technologu which further contributed to the raising of empiloyment without adding signi ficantly to cost$ of production.,Gs Resetvation of items for industries in the small-scale and cottage sectors, as spelt out in the Industrial poliry Statement, was one of the instmments for achieving this purpose. The other important shift in policy was
Given lesources limitations anfl national prioriries it follows that while there r.r,ill be a step up in the public sector outlay on industries and nrinerals in albsolute terms, its shar.e of the public sector outlay will have to come down. For large and

medium industries and minenals, the public sector outlay will grow from Rs.9,660 crorEs to Rs. 13,992 crores but its

negulation and Developnent 157

share of the public sector outlay

20 per cen1.66

will fall from

25 per cent to

As against this decline in the relative proportion of .the largescale sector the investment in cottage, village and small
industries was to be tripled.

The deliberate decision to invest less in highly capital intensive public sector could create a situation where the availability of crucial commodities like steel, non-ferrous metals or fertilisers could suffer. The Plan envisaged a'conscious slralegy'67 of utilising foreign exchange resources by planning imports of such commodities as iron and steel, fertilisers and non-ferrous metals; and it was intended that this way a large proportion of the domestic resources could be made 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 certain minimum rate of STowth 'is a necessary precondition of indus' trial health';s and., therefore, the policy was to be to permit such growth even in the case of large enterprises so that they were not allowed to become sick units. The reason underlying the permission lbr such glowth was that 'in socioeconomic terms what is important is that the economic power they (large houses) wield is not used against public interest.lGe For this purpose, for the first time, it was intended to use the leverage pmvided by equity and loans which had been sanctioned by term lending institutions and scheduled banks. It was Drt> posed, therefore, 'to examirie ways and means by which [the] financial stake of Govrnment controlled institutions can be put to better use'70 in terms of ensuring that the economic power of large houses was not used against public interest. The mechanism for bringing about closer coordination between the financial institutions and Government so that funds wou ld flow preferentially into priority aneas were also to be examined, and instituted. On the question of growing sickness in industry- an increasingly troublesome problem-the Government announced 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 identi$zing incipient sickness and taking prcmpt and adequate corrective action. In this case the approach suggested in the Policy Statdment-and endorsed ih the Plan was to bring about 'a closer and more vigilant ifivolvement of the financial institutions.'71 The specific proposal was to operate through a gmup of professional direct6rs who would be full-time employees of the financial instiitutions, and would be norn inated to the Board of Directors of companies with a management of doubtful comfetence or integrity and in which financial institutions had a stake. Suspected cases of malpractice, etc., would bd reported to the financial institutions by these direclors and these cases would be inves. tigated by an inter-institutional $roup to be set up under the chairmanship of IDBI. In respect of units which were already sick; it was, for the first time, t[re Government's announced policy to 'first explore avenues for ' rehabilitation either through the State Governments or financial institutions pro viding financial and manhgeripl support, or through the merger of the sick units with the healthy units in the private sector.'7z Takeover of managertrent under the Industries (Development and Regulation) Aot which, in the past, was the most commonly used instrumentf was to be the last resort. The Screening Committee set up to examine the possibility of revival of sick units (referred to in Chapter 4) was to take into account factors like investments required to rehabilitate the unit and to compare this witfr the costs entailed in setting up a new plant of the same capacity; the additional investment required in relation to the number of employees in the unit; and most important, the $ossibility of the undertaking becoming viable in the' foresqeatrle future. In short, the Government's policy was no longer to ensure the revival or' each and every sicl unit for the purpose of maintaining employmbnt, irrespective of the, costs involved. The shift in approach was in conformity witlh the rather bold stand adop ted in the Plan that industries 'which are basically not viable or cannot stand up fo limited international competition in cen tain product areab which the llberalised import poiicy will create will be allowed to close ddwn.'73 This r6view of the to indu$trial policy in sucrecommendations cessive Plan Documents and the

ne gulat

ion and Develo pme nt

159

for modifications in policy clearly reveals the inertia of the or in the mechanisms. No doubt, the Sixth plan drawn up
under a new Government riding on the crest of popular wave did atternpt some interesting and important departures from past policies. But what the Sixth PIan had to say on industrial poliiy or the Industrial Policy Statement of Decemb er lgZT was not translated into a practical action programme; or even in cases where the necessary administrative initiatives were taken, as in the case of Disfict Industries Centres (DICSJ, the original purposes were considerably diluted. The inordinate hurry to expand the network of DICs all over the country within two or three years resulted in the Centre becoming not the prototype of a new decentralised institutional arrangement, but a largely bureaucratic set-up at the distriit level. The effective delegation of powers to the DICs by different agencies in the State Government, which indeed was the precondition for this major step towards decentralisation, was, by an{ large, neglected. In any event, the initial enthusiasm of the new regime for exploring different options for achieving the sociGeconomic objectives which formed a part of their mani feeto was soon replaced by vicious infighting and political manoeuwing which left little tirne for evolving or implementing new policies. The major conclusion which emerges from the. review of industrial policy is that till the mid-sixties there was no attempt to critically appraise the results of the policies being pursuod. This was understandable in the earlier years because it could be argued that a few years was too short a period to assess the effectiveness or otheni/ise of policied which aimed at structural changes in the economy. But by the late sixties, although it was clear that the policies being pursued wFe not taking the country towards the socioeconomic objective rapidly enough, there was a marked reluctarice to accept thib, fact. Politically, perhaps, it wris difficult to do so in the early years of Mrs. Gandhi's stewardship of the nation. It seemed that the most impofiant factor was that by the mid-seventies the 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.
system which prevented any radical changes either in approach

160

INDUSTRIAL POLICIES AND THE FIVE.YEAR PLANS

The regulatory framewonk- indubtrial licensing recognitionL/ regularisation of capacity, clearapce under MRTP legislatiory import controls and the rest-had become very complex and in many cases the approvals/olearances were sequential ralher than concurrent. The result was that at various levels of administratiory including the non-decision-making levels, there was a considerable accretion of discretionary or semidiscretionary powers. Even when no discretionary power was invoived there was always the power inherent in the administration of any regulatory mechanlsm, viz., the power to delay matters. This accrual of power ahd the consequent scope for conferring or denying favours tO the admiiristrative system had its counterpart in a similar acfrual of power to the political system. If anJ^hing over a period of time, the political sy$tem became more adept at using these levels of power to funher its own political (sometimes even per8onal) ends. At the same time the business communif'-and contrary to common assumption, not merely the large houses-had adjusted itself to the plethora of con'hols and regulations and ltrad evolved its own wavs. of dealing with the system. Those lvhdr wene mone efficient in tlrms of openating the system through means which wene, at best, amoml and mort often, patently illegal, began to dwelop a vested interst in a system which gave them an edge over others. The basic reason why any maior changes were either.not conceived or not vigorous.ly pursued was the emergence of this vested interest-of politicians, bureaucrat$ and businessmen.

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

lbid.' tt.26. 6. llrid. I p. 157.

5.

7.
8. s.

Delhi: Manager of India, Planning commission, Second ltivevear Plan

bublications, 1956, P. 2.

Ibid., p.3.

P-;;":." Ni"lt.las Kalder,

later Lord Kalder' an eminent British economist and prepare a \yas invited by the Government of India to visit the country

rcport on the methods for mobilising resources for development'

Pro-

the establishfessor Kaldt:t, in his rcport to the Government' recommended

in proposed imposts on incorne and wealth Recommendations contained report were imPlemented by the Government but with Proiessor Kaldeds 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. 16.

tax' ment of an integi'ated system of direct taxation comprising income also recomexpenditure (ax, wealth tax, gift tai and inheritanc tax He the other mended a reduction in the level of income taxation in view of

Ibid.

fbid., p.39.

r?. Ibid., p. 42. 1E. Ibid.

19.
20. 21.

India, Planning Commission, T-hird Five-Year Plan. Delhi;Manager of

Publications, 1961, Introduction, p. xiv. Ibid.

Ibid
lbid., p.

22. rbid.
23. Ibid., p. 24.
24. 252s.

tbid, p.
lbid.,
tbid.

26.

4s3. pp. 4s3-s4.

4s7
.

27.
28-

lbid, p.

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
34. 35.

INDUSTRIAL PCILICIES AND TIiE FI\IE.YEAR PLANS

Ibid, Introduction,,p. xiii.

India, Planning

Commission, Fourth Five-Year plan 1969-24, Dralt. Delhi : Manager of publicarions, 1969, htroduction, p. xii.

36. Ibid., p. z. 37. Ibid-, p. 8.

s8. rbid. 39- Ibid., pp. 74-7s. 40. rbid. 47. Ibid., p. 26. 42. rbid.

Ibid., Ibid., as. Ibid., 46. tbid., 47. Ibid.,

43. 44.

p. 27. p. 36.

238.

pp. 238-3s.
p. 23s.

7g74-7g.Delhi Controller 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.,
53.
55-

Ibid ,19. lndia, Planning Commissior! O"aift fifth Five-year plan)

4a.

p. 21.

Ibid-, p. 22.

54. rbtd.

lbid,
rbid. rbid.

Vol. II, p. rae.

s6.

57.
58.

Ibid, p. r34.
Ibid., p.
135.

59.
60.

tbid
Ibid., p.

62. 63.

3.

Ibid-, p. 23.

u.tuid
6s. 66.

Ibid,

p- 343.

lbid., p. 344.

67. Ibid. 6E. Itud.

69. rbid.

70..rbid.
71:

72. Ibid 73. Ibid-

rbid., P. 34s.

Im1rcrt S Some Co

nces

n-

chapters al] attenrpt was nracle to trace the evolution of national thinking on issues related to industrial policy. It was seen that over th years the mechanisms or specific measures adopted for adhieving some of the malor obiectives of policy were found to be inadequate; and although these inadequacies were noted tiy various committees and also in the reports of the Planning Commission, rhe modifications introduced were, by and lhrge, marginal. Relaxations in the regulatory system were often hedged in by several caveats which reduced their usefulness; and the tendency, generally, was to avoid any radical change either in the regulatory system or in the basic policy frame in the light of changing circumstances. In the following pages an attenhpt will be made to review the effectiveness of policies in certain important areas with a view to focussing on the. kind of changes which would be needed to bring these policies in line with the needs of the next one or two decades. It is obvious that policies which were

In the prcceding

valid and rlevant in the mid-fifties or the mid-sixties need not-and indeed cannot-be relevant or appropriate in the
same way in the rnid-eighties. A cdrtain willingness to accepr

Regulation and

Development 165

the need fon change in policy orientation, to take account ofour own past achiwements and,/orfailures, and also of the chan$ng intemal and global environment is a precondition for a realistic and effective industrial policy. Unless the necessa4r changes are made, it would not be possible for the system to overtome the weaknesses in the industrial structurc or even to utilise the soun ces of strength which have bgen developed over the last twentyfive 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 the context of the totaligz of economic policies. The follorviag discirs-

sion on industrial policy, therefore, is implicitly based on the assumption that other policies - such as, fiscal and monetary policles, tax policies, policies relating to agricultur and rural development, and energr - arE gmwth oriented; and generally the framework of economic policies ofwhich the industrial policy forms a part n'ill be mutually reinforcing. Second, industrial policy should not be confused with specific regulatory mechanisms like industrial licensing, import rcgulations or control over forcign technical and financial collaborations. Licensing policy and other relited regulatory measunes ane instnments to be used for eftctive implementation of a given set ofpolicies; and the precondition for a viable policy fi'ame is a clear perueption of the oblectives of the policy. It has to be rccogtrlised that no county-and certainly no democratic govemment-can avoid a multiplicigr of objectives. For instance, in the Indian context, apart tum a widening and deepening of the industrial system and accelerating the pace of industrial development, avoidance of concentration of economic power in the hands of a few an@, therEforB, measurEs for rEstricting the grDwth of large or interconnected business houses; grcater rgional dispersal of industry particularly with a view to dweloping industry in backward- areas; encouragement to small-scale industry and to the gfowth of entrepreneurship; moving towards greater self-reliance through an orderly process of import substitution and technological self-reliance; and protection of the environment. The more important issue, however,

166

IMPORT SUBSTTTUTTON

SOME CONSEqUENCES

is how to ensure that this multiplicity of objectives does not obstruct an adequate rate of giowth. Some of the objectives could be mutually conflicting. For qxample, rapid dwelopment of industry or rapid progress towards self-reliance in technology could, in some cases, be hampered by the pursuit of other desirable objectives like limiting the growth of or role of larger houses or encouragemettt to the small-scale sector thruugh reservations or other special measures. The essential point is, as the last two decades have shown, that unless there is a clear recognition of the possilbilities of such a conflict and an explicit acceptance of the primacy of one of the objectives it would be difficult to evolve a ratitonal system of trade-offs and would result in a great deal of cnnfusion in the implementa. tion of policies. In,the Indian context the prlmary objective of industrial policy, and, indeed, the main thfust of all economic policies, has to be on a high and sustained rate of growth so that the country can move forward towards the obiective of self-sustairh ing growth. Since the early days of planning the obiective oI planned development has always been very clearly identified, viz., the creation of a technolo$ically.mature society which would enable the country to rirove towards self-sustaining gmwth without undue concentraltion of wealth and economic power in the hands of a few. Evdn today this definition of the objective of planned development remains valid. But, experience over the years has shown that neither the objec tive of a technologically mature society nor the objective of more equitable distribution of wealth and income are capable of being attained except in the context of rapid gfowth. In assessing past policies, therefore, or in identiSzing the areas of policy which need to be modified, the test should be whether these policies have tended to infribit the growth potential of the system or distofted the use o[ scarce resources to the detriment of the community. There are, of course, other dimensions such as whether, in practice, certain policies impose such heavy burdens on the admlnistrative system as to make il impossible for the policies to'be rationally implemented. Similarly, one has to keep in view the implications of a given set of policies for the broader sooileconomic framework. For instance, unrealistic pricing resulting in penasive black

Regulation and DeveloPment 167

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 but have 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 pro cess of growth and also inhibit a rational or optimal use of
resources.

It is in thts context that an attempt will be made to review briefly some of the major elements of past policies These
dre:

1. Import controls and import substitution for ensuring rapid self-reliance in technolog;z and production and the implications of thgse 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 industry including the decentralised or household manufacturing activities. Before turning to an appraisal of past policies one point needs to be emphasised. In a large and complex country like India, with a long tradition in favour of active Government intervention with a view to assisting industrial growth, it would be clearly unrealistic to proceed on the basis that the Government has little or no role to play. In the past, Government intervention or involvement rrlas looked upon as a prerequisite for growth. Increasingly, and more so in the years to come, the electorate is bound to hold the rulers accountable for the results of such involvement. In years to come the Government r'vill corrtinue to play a maior nole; but its accountability will be in tenns of performance and not rhetoric, results and not ideologies. The main issues, therefore, are how in order to be productive in terms of results, the role of Government can be made more selective than in the past; and how the consultative machinery envisaged in the early years of planning and embodied in the Industries (Development and Regulation) Act, 1951, can be effectively activated to provide

166

TMPORT SUBSTITUTTON

SOME CONSEqUENCES

the necessary inputs for evolving the right set of policies and to give feedback on the results of policies. An important feature of the inrflustrial policy ever since the mid-fifties has been the emphAsis on import substitution, which was looked upon as an integral part ;f the strategy for seH-reliance. To a considerable extent, howevet the mechanisms for import substitution as well as the general approach to the question of substituting irnports by domestic production, wherever possible, were a direct consequence of the continuing and offen acute shortage of foreign exchange. To

the extent that import subslitution was forced upon the system as a result of non-availability of foreign exchange, it caF ried with it an inevitable bias in favour of import substitution
at any cost-

In retrospect, it seems clear {hat the concept of ,import substitution at any cost' took hold in terms of import licensing somewhere around the early 19q0s, i.e., towards the beginning of the Third Plan. No doubt, increasingly severe restrictions had been imposed on impgrts during the Second plan period; but the shortage of foreiglr exchange was even more acute during the Third plan perioil and as a result the import policy became extr'emely restrictive even in the ca6e of essential 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 reipects abnormal. First, the weather conditions were adverse in three out of the five years of thp plan period. Second, the country witnessed the traumatic Chinese aggression on the North-East frontier and the hostiliiies with pakistan in the last year of the Plan period. Third, the delays in obtaining external credits and the virtual suspensior]r of bulk credits because of the US decision during the Indo-pak conflict, further added to the difficulties. By the mid-sixties, the country had reached a stage where drastic banning of imports implied that in many cases even imports of essential coinmodities for maintenance and enhancement of production could not be provided for. An elaborate systen of rationing antd allocation of the scarce foreign exchange meant that what a particular unit could pro rlrrce was increasingly dependent upon its foreign exchange allocation; and this in turn was, b$, and targe, deiermined by

Regulation and

Development 169

had utilised during the previous period' In order to increase the degree of control over foreign exchange utilisation, 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 the foreign exchange expenditure to what was available, the authorities concerned, e.g.. the Director General of Tephnical Development or the Department of Economic Affairs, Ministry of Finance, stipulated that as against the assessed requirements on the basis of productive capacity, all units would 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 and constituted a serious curb on increased production by the more efficient units. Decisions on the allocation of foreign exchange .for individual units in an induslry were based on past allocations and, therefore, the t'nter se position of the units tended to remain frozen except to the extent that new entrants were permitted some foreign exchange allocatioil in order to utilise part of the newly created capacity. But even here the tendency was not to permit additional capacities to be created so as to limit the foreign exchange requinements irl future. For the same neasons, only schemes which did not require either imported capital equipment or raw material or which, on completicin, would greatly reduce imports got past official scrutiny and received clearance The question of domestic cost of production as compared with international prices was considered to be almost irrelevant. The result was that the pressuie'on the industry in terms of rapid indigenisation and early and substantial reduction in i'nports content was gjreatly increased. This trend was further accentuated because 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 adversely affected by an acute shortage of foreign exchange; and) on the other hand, the anea over which, given imports restrictions and high customs duties, the indigenous production became attractive, was considerably enlarged.

what

it

17O

IMPORT SUBSTITUTION

SOME CONSEQUENCES

often than not such high cost productive was permitted to be established, because the policy "upu"ity total indis_ of almost criminate protection in order to promote import substitution was an integral part of the politipal, administrative and busi_ ness ethos. Of course, in part the domestic production costs were high because some of the inputs whictrwere being pro_ duced domestically (or had to tre imported from high-. cost sources and attracted heavy ad valorem duties) were at much higher prices compared with the international level. In addition_ to this, the higher cost of domestic production was attributed to dis-economies of scale, lags in process techno loey and generally less concern with containing costs because of the protected market situation. Another aspect of the policy cif import substitution deser ves mention. The quantitative restrictions on imports, includ_ in6 in some cases, a total ban on lmports combined with high rates of customs duties meant an effective eochange
"a"te

thinking on the qirestio., of mpo.t substitution. The rontinuing and senious ioreign e*chanie difficulties were further aggravated by the fact that most of"the bilateral aid available to India under the Consortium arrangements, under the aegis of the Internatito.al Bank for Reconstruction and Development (IBRD), was country-tied, i.e., purchases against the aid amounts had to be made oaty in the donor country. This added yet another dimension io the already complex exercise of distributing scarce foreign exchange amongst competing alternative irses. The result was that, in terms of desirable areas for import substitution, the svstem began to receive misleading sighals. Domestic p"oa""ii*-oi certain items which were bein6i imported seemed attractive on the basis of landed costs, i.e., CIF price plus customs duties, etc., but the landed price itself was distorted because international purchases were not being made from the most competitive source and the customs duties (mostly ad valorem) were fairly high. It was not uncommon, therefore, fir a manufacturer to approac[r the Government with an applii:ation for a licence to produce an item,/s where on his own reckonin& his cost of prodrictionL,/selling orice would be twice or thrice as high as the international price; and more

, a sense, developments shape rational

In

dur,ing the early srxtres tended to

negulation and Development a7l

which was much less favourable than the official rate of exchange. 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 dollar being 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' It should also be noted that while the effective degree of protection 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 upon import substitution irrespective of the effective cost of such a poiicy and tended to discriminate against the growth of' exports 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 combined with an elaborate system of quantitative restrictions on imports continued to influence investment decisions by rais ing, often arbitrarily, the landed costs of imports Of course, in cases where imports were banned and this was not uncommon-because one ,or more indigenous producers were able ,to (or made claims to) produce the same item, the protection was absolute. Even after the more recent liberalisation of imports 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, uncompetitive in 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 exported is proof enough of the accepiability of the product abroad in terms of price, quality and delivery. Even if, as is common in international trade, export prices are lower than the corresponding domestic prices and allowance is made for incerr tives and any special benefits available to the exporter, it is found that in batch-production type of goods or where specifications and perforrnance parameters are custom-made'

I72

IMPORT SUBSTTTUTION

SOME CONSEQUENCES

intermediates).

componlnt") o"where the process and scale ar important determin;nts of cost (e.g., many continuous pnccess chemical industries or basic drugs

policy of import substitution, often regardlEss of cost, und ihe high and continuing levels ofprctectiory has resulted in the Indian industry lagging far behind its internation4l competitony i., u tul.ly _ia" f$e 9f engneering and chemi$al industries. These include industries where technological ofsolesc"r"e i" .r"f (e.g., eiectronic components or compuler technolos/) "upid oiwhere both the cost and quantity are considqrabfy afectei Uy the scale of prnduction (e.g., large volume standardised

the capability of Indian industrSz c(mpares favourablv with thar the advanced industrial countries. On the other handl'tne

of

aia

import substitution policies were based on:

1. Using the annual import

The- administratlve mechanism fon import substitution also contributed to rigiditieis and consequent distortions. For

instance, the

part of the import licence, the irtems which would be permit_ ted to be imported by the actiral user and sometimes even specific quantities of the itemsi to be so imported. 3. By laying down and enforring the phased programme of manufacture which rcduced tlie import content of domestic

production over time.

These arrangements wer effective in terms of pushing the import substitution efforts so ag to maximise the domestic production of items which wert till then imported. On the other hand, these mechanisms were also I esponsible for introducing arbitrariness in the use of foneign exchange and increasing enormously the porivers and p"atronage at the bureaucratic {and sometimes at the political) levels. Thus, what the system ensured was fiot merely that the import content of a particular line of prtrduction in a manufacturing

fregulation and

l)e|elopnent

1?3

unit would be reduced from, say, 20 per cent to 15 per cenl and finally to 10 per cent over a period of three or five vears; what it did ensure was the cu ailment or eliminaticjn of specific items of imports, on the basis that these were (or would be) available. To the extent that these anticipations were not fulfilled either the manufacturer had to scurry around and obtain the necessary modifications in his import licence-a time-consuming process even if the applicant finally succeeded. This arrangement was all the more detrimental to production and efficiency in a situation where for extraneous reasons, such as strike or lock-out, or some internal problem, the unit supposed to supply an input {and ordinarily capable of doing so), failed to make supplies for fairly long periods. By the time the actual user was able to convince all concerned of the need to import, on account of special circumstances, his production had already suffered. Second, the application of the so-called indigenous angle often was such as to force a manufacturer to accept unsatisfactory quality or a price which was significantly higher than the landed costs, or in some cases suffer on account of premature gr exaggerated claims made by manufacturers regarding indigenous availabili ty. It was not uncommon for someone to claim that he could pmduce qn item which was till recently being imported; and if was always a matter of dispute as to whether his claim was jus tifiable. In any case consideralions of quality, price and delivery
became secondary.

At one stage the intending user of a material or a component was required to obtain noobjection certificates from all those who were allegedly capable of producing that item, before his request for import could be considered. C)f course, in practice, it was not at all uncommon for one or more of these suppliers to either refuse to give a nGobiection certificate or simply fail to respond to any such enquiry or request. The whole system was geared to giving a whiphand to anyone who claimed pro duction capability of an item which was imported in the past. In order to minimise the difficulties of actual users a new procedure was introduced in the latter part of the sixties. The revised arrangements specified that anyone wanting to import capital goods in excess of given value would have to advertise

in suflicient detail in the Inclian Trade Journal

putrlished

174

lMpoRT suBsrlruTloN

SOME CONSEqUENCES

monthly by the Ministry of Forelgn Trade. If for the t@ of equipment so advertised there were no concrte indigenous offers within a P,qnod of forty-fivd days from the date of adven tisement the parlty would be allowed to import the capital goods. A copy Qf the offer was to be concurrently marked to the sponsoring authority-the Director General of Technical Dwelopment, 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 to import capital goods could still be held up by someone who wai interested in selling his output (or by someone who was already in that line of production and did not want a new unit
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 to put it differcntly, an effective fate of exchange) would be specified. Second, even wh@re indigenous production capacity exists-and thi; is alt tlhe more relevant in case of components 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 to him in a manner which is most 4dvantageous to him in term$ of maximising the quantum, impnoving the quality, on neduc ing the price of his product. Kdeping in mind the rigidities and 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 that such illegal transactions can be dhecked the problem does not arise, but it can be argued that even if such transactions did, in fact, take place it would not be a sufficient reason to limit or discard the flexibility with regard to items which an actual user could import, provided thoy were already endorsed on his import licence on the basis of essentiality. ' An addecl factor making fon high cost industry is the
to be set up).

'

Regulation and Devetopment 778

relatively high input costs of basic materials, such as f.emous/ non-l'errous metals, basic chemicals, either because the domestic production costs are high or because the domestic tax structure is such that the prices to the final consumer are raised through imposition of duties like exlise and sales-tax or as a result of heavy impositions by way of customs duties and,/or restrictions on imports. This is the marked fbature of several lines of. manufacturing. Fdr instance, the cost aluminium metai needed for an enginonlo"t' in a of twG wheeler in India inay be higher than t-he completed compG nent produced abroad or in several chemical industries, the cost of domestically produced inputs accounts for most of the differences between domestic production cost and inter_ national price. Several exercises done on the basis of sutr stituting international prices for domestic prices of inputs indicate that in terms of conversion costs or value added bv manufacture, Indian manufacturing activity is not as widely uncompetitive as is commonly believed. The disadvantage arisirig from a smaller scale or less sophisticated technolog,-is often offset, to a considerable exteni, by lower initial costs and because the present depreciated vaiue of capital equip ment reduces the interest and depreciation element in capital
also some of the overheads are lower in India. It,is common experience that costs and prices of industrial

of skilled labour, cost of some utilities liki water and

intensive industries. Further the effective wage costs especially

products tend to be lower (or rise in prices over period a of time tends to be less) where the demand, regionally or nationally, large enough to permit conditions of free -entry for a .is number of entrepreneurs each setting up production facilities on an economically viable scale. In such a situation both large-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 a wider choice in terms of a product range and slecifications to the ultimate consumer. This is the cas6 with -u.ry u"ti"l"i of common consumption such as soap, detergenis, cooking appliances, and household wares. On the .othJr hancl, wlreri the size of the domestic market is limited, fragmentations of this limited demand by setting up several units to produce the

776

IMPORT SUBSTITUTION

SOMtr

competition and, if anY'thing, item does nol effectivelY in *o the sub-optimal scale of produc{ion of new entrants t:"9: raise the average as well as the marginal cost of-production' scales of Given the size of the country and the fact that viable smaller than are usually production under Indian condi countries, it is not very often those in the advanced ind

that the market is too smatl to permit effective competition between producers operating

ed ated demand, or Permittin PerrnrrunF capacities in the hoPe that fnagmented and uneconomic lies at the root of the they will Senerate competition ns on growth or diversificahigh cost structi.rre. The unit in a particular tion of a more efficient or more line of manufacturing is anothdr factor which contributes to the high cost struct ure. No cloubt, the more recent trbnd towards easing of importprocess of' controls is a step in the rigtlt direction' Th-e graduatty exposirig ihe I.tdian industry to ffective inteF' national competition needs to de continued' If such exposure' to international comPetition is to achieve the desired objecefficienry and reducing costs tive of improving the in Indian industry, imPort li ralisation should be accompanied by a more Iiberal approlch towards induction of new lechnologlz from abroad. Despitb an impressive infrastructure of sciencl and technology, the pace of technological progress in Indian industry and associated increases ln in part due to the relatively have been extremely slow. This is weak links between the agen(ies involved in research and development and the users of technology Despite considerable 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 our national institutions. There is {lso a feellng that 'the craze fot

limiting licensing to meet

Regulation and Development 7Zz

foreign' applies as much to technical know-how as it does to consumer articles for elitist consumption. On the other hand, those connected with industry claim that scientists and technologists in the country sometimes tend to become a powerful vested interest seeking to prevent the induction of technologr from abroad in the hope that in this way their work wiil receive due recognition. In practice, however, this has only tended to increase the obsolescence of technology in Indian industry. This is because, with some notable excel> tions, the claims made on behalf of scientific establishments, including national and regional laboratories, of technological breakthroughs are either premature or exaggerated. A wide gap exists between a laboratory scale experiment and its scaled up version which can have application on the shop floor. The various links in the chain which enable a potentially interesting idea to be converted into a commercially profitable process are either too weak or are sometimes non-existent. Many segments of the Indian industry and in parti cular, the capital goods industry are threatened with technological obsolescence. This is particularly true in the context of the impressive technological innovations which the rest of the world has adopted in the wake of the energy crisis of the early seventies. It would be wrong however, to attribute the widening gap betrn'een India and the rest of the world in the field of technologz solely to the factors outlined here. Dr. Manmohan Singh, Governor, Reserve Bank of India, pointed out in his Silver Jubilee Foundation Day Lecture at the National Productivity Council:

If this

technological gap is to be closed early, there is clearly no alternative to a liberal import of technology for industries cusiderd vital for our future growth.... As rugards choice of technologies I am convinced that gfeater weight ought to be given to the views of users of technologies than the views of the generalist administrators or superannuated technicians who sit on official bodies regulating inflow 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 possible to formuiate public policies with a strong bias in favour of locally developed technologies so thal adequate emphasis is laid 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 of

imported technologies. The question of reducing the gap in technology, however, is closely linked with certain otlher major policy issues. For instance, policy orientation which, on the one hand, restricts the freedom to expand on grounds of monopoly and at the same time, lays emphasis on maintenance of existing employment on the other, acts as a maior inhibiting factor for the adoption of new and cost effective technologies. It is understandable that in a country with masses of unden employed and unemployed, thetre would be a strong bias against displacernent of laboi:r. It must be borne in mind that most technological improvements involve some decrease in the requirement of labour per qnit of output. Therefore, if labour displacement is to be avoided, this can only be ensured by permitting expansion of productive capacity in the same unit. In general, greater freedom in expansion is a pre condition. for a unit to be able to adopt new technologtrr without getting involved in an industrial relations problem. Ttrere is yet another point. Whild i{ is the legitimate concern of public policy to prevent concdntration of economic power or curb monopolistic praclices, it is necessary to ensure that in the administration of the applibation it does not create conditions advensely affecting constant technological upgradation. As Dr. Manmohan Singh pointed out

in administering anti-monopoly legislation it is necessary to recognize, as was emphasised by Schumpeter, that a ceF tain degree of market power rday be an essential condition for a firm to undertake major rrew investments or techno logical upgradition ventures. Without a certain amount of
...

contrul over its market envirohment, a firrn may place an excessive premium on playi4g it safe and discount its future verv heavilv.... It must a[so be recognized that faced

negulation and Development l7g

with market uncertainties, a multiproduct firm will

have

gteater incentive to introduce new technologr or new prt> ducts than a single product firm for in the case of the fon mer, a failure of the new venture does not imply total bankruptcy as may be the case with the latter type of firm.... Thus, economies of agglomeration as distinct from the economies of scale; can also exercise an important influence both on investment decisions and technological
choices.2

In future if viable import substitution is to be encouraged and the concept of import at any cost is to be discarded a new policy mix will have to be evolved. The main elements in this policy mb(, as pointed out earlier, should be a gradual relaxation of import controls; a reduction, over time, of .the effective degree of protection; a concerted effort to bridge the technological gap, especially in the fields of capital goods and intermediate goods industries; a more positive attitude including simplification of procedures for import of required technology and a review of some of the elements in the anti-monopoly legislation which have tended to inhibit the adoption of upgraded technologies, whether domestic or imported.

NOTES AND REFENENCES

1,

Economic Inrclligence servic. Bombay : Centr for Monitoring lndia$ Eco

nomy, April 19a3, p. 11.

z. Ibid.

-,,.J

a-

Public Sector as an Instrument of Grorr{h

As will be seen fitom the earlier discussions in Chapters 1 and 2 an active and interventionist nole for the State and a sut> stantial glowing public sector were integral elements of national thinking on industrial policies even before independence. This long tradition of the State playing a crucial role in industrialisation was first formalised in the Policy Statement of 7945, reiterated in the Industrial Policy Resolution, 1948, and took its'final shape in the Industrial Policy Resolution 6f 1956 which has remained the cbrnenstone of the indusFial policy framework ever since. There were certain common elements in all the successive policy statements. First, there was the premise, sometimes unBtated but often openly sup pofie4 that in the absence ofa cbnsiderable degree of regulation and control the pace and pattern of industrial development would be inadequ4te and undesirable from the national point of view. Second, although industry was a State subiect the Central Government had to play an active and dominant role both in the mattler of establishing the infrastructure for industrial growth including developmental finance and in the development of a wide range of industries of national importance. Finally, the State and, principally, the

negulatiatr and Development IB7

Central Govennmenl had to assume direct responsibility for future development of industries over a wide area. This basic approach assumed a more. concrete form ',vith the Second Five-Year- Plan which aimed to bring about a struG tural change in the economy as a result of the Second and subsequent FiveYear Plans. The modern mining and manufacl turing sectors were to account for a larger proportion of the Gross Domestic Product, and within the modern manufacturing industrl' there was to be a shift away from the creation of capacity for the production of consumer goods which were to be primarily within the ambit of small-scale, decentralised or traditional manufacturing. A major point of departure in the Second Five-Year Plan was that thene was not only to be an absolute increase in the proportion of public investment in industry and mining but its share in relation to private investment n/as to be significantly higher. Thus, there was to be a clear shift in emphbsis in the strategy of development so that over a period, the puhlic sector would occupy a dominant position and acquirc 'the commanding heights of the econorny' This is reflected in the numben of units as well as in the amount of investment in eentral Government undertakings. The Central public sector excluding departmental activities like railway+ posts and telegraph, telephones or activities r,rnder the aegis of the Ministry of Defence was minie cule in 1950-51-a total of five undert:rkings ,with an investmerrt of Rs. 29 crores. By 1960-61, ie., by the end of the $econd Five Year Plan period the number had increased to forty-eight a-;rd the total investment amounted to Rs. 953 crores.l Following this the glowth of the public sector has been rapid or phenomenal. By 1.972-73 the number of enterprises had increase<l to 101 and total capital invested was Rs. 4,752 c'.ores with a total employment of 9.32 lakhs. By 7977-ZS the number of enterprises had further increased to 1sS, capital employed Rs. 12,065 crores and number employed to 1.64 million. The position at the end of 1981-82 was a total of 1EZ enterprises with a capital of Rs. 21,865 crores and an employment of 1.9 million.2 These trgures from the annual review by the Bureau of Fublic Enterprises however, coven only a part-though an important 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 of Public Enterprises exclude departmental enterprises of the Central Government as also of the State Governments,
nationalised banks, insurance companies, State road transport corporations, State Electricity Boards, irrigation works, forests and other State Government owned non-departmental economic enterprises, departmental and non-departmental enterprises of the local bodies, Etc. Unfortunately, the complete picture of the entire public Bector, i.e., Central, State and local including depaftmental urtrdertakings, is not available but all indications suggest that the part of the public sector excluded from the Bureau of Public Enterprises survey is considerably larger than the part of the Central public sector included in the Bureau of Public Entenprises survey. A recent estimate made by the Centre for Monitoring Indian Economy in the dcono mic Intelligence Sqrvice issue of March 1983 pLaces the total investments in enterprises covered by the Bureau of Public Enterprises retiew at about 40 per cent of the total; and in terms of employment the BPE units account for less than a quarter of the total employment in all public sector enterprises. Even more important, however, is the fact that the financial performance of the publtc sector as brought out in the annual review of Centlal Government enterprises is overshadowed by the financial performance of other major segments of the public sector. Thus, in 1981-82 the net profits of the railways and posts and telegraph amounted to less than Rs. 100 crores, but the departmental commercial enterprises of the State Governments, mainlyr forests, mines and minerals made a profit of Rs. 335 crores. on the other hand, major activities like irrigation prolects incurred a deficit of Rs. 356 crores, State Electricity Boards Rs. 590 crores, and State Transport Corporations Rs.200 cfores.3 The important conclusion, therefore, is that while disoussing the role of the public sector as an instrument of growfh or while assessing its performance as an instrument for rnobilising investible nesources, note must be made of what is happening in Central as well as State departmental undertakings and also in nondepartmental activities in the production of goods and
serwices.

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 ammunition and allied items of defence production

and and

activities in the field of atomic energy, the public secton also has almost the sole responsibility in respect of much of the infrastructure, 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 to agriculture or to other industries, such as iron and steel, machine tools, aluminium and fertilisers are also wholly or largely in the public sector. Many other areas like healy elec trical plants, telegraph and wireless apparatus including telephone cables and shipbuilding were also resen'ed for the pubiic sector. The original logic in emphasising the public secior was partly ideological-a rapid growth cf the public sector which would occupy the commanding heights of the economy was aeen as an element in the structural transformation of the economy needed in order to move towards a socialistic pattern of society. But there were other considerations as well. It was felt, for instance, that left to the private sector' the growth of many r-rf the basic industries would not be adequate to meet the requirements of accelerated industrial development. This was in part because of lhe resource constraints of the private sector, though it was also implicitly assumed that the attractiveness of such investments in terms of profitability, particularly keeping in view the relatively long gestation periods, would deter the private sector from entering these fields. The original logic of the public sector/ however, was modified over the years. The public sector both at the Centre and in the States began to be involved with 'an incredible variety of indristrial and commeF cial enteiprises such as scooters, rubber goods, 8lass, bread, footwear, tea, textiles, hotels and beverages, both alcoholic and others.'+ In part, of course, extension into some of these areas was due to the phenomenon of 'taken over enterprises faced with managerial failures in the private sector. But it is 'also true as B.K. Nehru pointedly emphasised in his short but interesting paper presented at the'Workshop on Perspectives on 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 nor their desire to enhance revenues of the State. It is simply that it has become common practice for public sector ,enterprises, particularly in the States, to be made into mechanisms to provide powerfr.rl politicians, who cannot be accommodated as Ministers, with salaries, peryuisites, patronage and opportunities to make money through
corruption.s

Apart trom the diversity of the public sector, whatever the it is important to take note of the fact that the public sector contribution in the total industrial production in vital sectors has grown enormously over the years. And, indeed, if the public sector share in total lndustrial capacity is taken into accoun! its dominance is eyen gleater in many fields where the average public sectof utilisation of capacity is lower than in the private sector. The public sectof has a monG poly in petroleum, oil, coal, telephones and teleprinters and communications equipment. Apart from coal and petroleum where the public sector has virtual monopoly, the public sector share was 31 per cent in phosphatic fertilisers; 51 per cent in nitrogenorrs fertilisers; 62 per Cent in steel ingots; zz per cent in saleable steel; and 81 per cetrlt in zinc during 1981-82.6 In aluminium while the public sector production was about one. sixth of the total national productilory the productive capacity in the public sector accounted fof nearly 40 per cent of the total. Over a period of more than two and a half decades since the Industrial Poiicy Resolution, 1956, therefore, a structural change was seen in the country's ilndustrial profile and in the relative importance'of the public and private sectors. These changes have certain irnlportant implications. First, the linkages between public secton performance and develop ments in the rest of the economy including agriculture are such that operational inefficiencies or technological inadequacies in the public sector can retard the Arowth of the economy. As B.K. Nehru pointed out in his paper:?... As the ,,commanding heights' of llre economy, coal, steel, oil, electric powerl railway transport, telecommunicationg banking and irrsurance, are all in the public sector and as they are all ineflicient
reasons/

negulatton and l)evelapmenr 78!,

the rest of the economy, which must rely on the inputs

they provide, is necessarily hampered.'7 The shortage of coal, inadequacies of railway transport, short or intermittent sup ply of electricity all of which depend upon the public sector lerformance is, on the one hand, self-rcinforcing and, on the other, affects the pace and pattern of growth of lhe economy as a whole. For instance, it is not uncommon to fincl steel mills in the public sector blaming the national collieries for inadequate or low quality supply of coal, or the electricity authorities for erratic power supply which is responsible for the poor perfoirnance of these mills. The collieries, in turn, blame the electricity authorities. for an inadequate or inteF mittent supply of power which results in loss of production and the railways for not being able to lift the coai available at the pitheads thus aggravating the effect of lhe shortfall in pro duction. 'fhe State Electricity tsoards, in turn, acr;use the collieries and railways and hold ttrem responsible for their unsatisfactory performance. The circle is, thus, complete and it is poor. consolation for the millions, whether engaged in agriculture, small- or large-scale industry, or as consumers rvho are aff'ected ltv the rron pcrtbrnrance it-r thesc vital
sectors.

The degree of efficiency of public sector operations has a further consequence. Since a very large volume of resources has been invested in the public sector-not only the Central public sector but in the public sector in the wider sense- ihe generation of surplus from past investments becomes an important source of financing future investments. If inefficient management of past investments erodes these sur pluses, as is the case today, it inevitablv has an aclverse rrnpacr on future Srowth. In part this takes the form of a furlher stlain on investible fesources to correct which an excessive, or, for political reasons, a sub-optimal reliance has to be placed on taxation both direct and indirect. In the late 1950s and the early 19[i0s an atternpl rvas utattc to inttncluce a stl'ucture oI direct ta.tation which was to bc both an instrunlent for generating more resources and for reducing inequalities in inconre and wealth. High ancl steeply rising marginal ratcs of income tax, a capital gains tax, an estate duty and for a 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 excess of certain limits would have to pay by way of direct taxes more thi.n their total cument income. The dissaving by way

of disposition of assets lvas perceived as a modality for reducing inequalities in wealth and for a virtual ceiling on nonagricultural income. In practice, however, the consequences were disastrous. To the extent that the tax system totally ignored changes irr the real value of money-the purchasing power of the rupee declined by hearly half in the sixties*the progressive element in direct taxation was much higher than was initially intended. This was deleterious to the newly emerging salaried class because they were least able, unlike certain other sections, to avoid Or minimise the tax burden. The deliberate-and to a considerable extent hypocriticalpolicy of maintaining a curb oh salaries including, where possible, private sector salaries contributed in no small measure to the emergence of an expense account culture. Right from the ministers and legislators downwards there was an attempt to maximise tax-free perquisites or misust: ftlnctional facilities such as official vehicles, low renr accommcr dation, or availability of services. Thrs kind of real income was relatively inflation-pncof and, thelefore, meant much more in real terms. The transition from ah expense account culture to a culture based on outright cbrruption was not slow in coming. The complex regulatory system with its discretionary controls ensured that all levels df Government functionaries, high and low, whether elected representatives or permanent officials were in a position to dernand and obtain a price for even discharging their normal functions. It was not longl before the rate-schedule was fixeil, initially at the lower levels in the system, particularly in the States and later at the CentrE. By the mid-1970s the cancer of cormption had spread throughout the system and harl assumed such pernicious forms that unless those in power and authority were given what they dernanded they could certainly delay and often even deny rightful claims of the average citizen. There was such a wide gap between what lhe law required in terms of tax liability at different levels of income and wealth and what the prevailing socio-cultural mores deemed to be fair or acceptable that evasion of taxes on income and wealth

Regulation and Development

1.B?

passed through four distinct phases. First, there was a reliance on taxation of relatively few products chiefly in the nature of finished consumer goods. This was followed by an extension of the tax net to inputs in preference to finished products. The next stage was taxation of a widening range of consumer products on a selective basis. Finally, there was an extension of the tax base to cover all industrial products except those deliberately excluded. The Committee concluded
Some of the weaknesses of the excise tax srructure ... arise from the fact that in rcality there was no ctear shift in the policy regarding the pattern of taxation from one phase to another but a superimposition of the new phase on the old one without any attempt to make appropriate adjustments in taxes imposed earlier. The high taxation of a select range of products including inputs has persisted even when the

became commonplace. There was no longer any apparenr stigtna attached to evasion of taxes or even total suppression of income from lhe tax net. This contbination of pervasive tax evasion and universal corruption reduced to a mockery the egalitarian claims of the tax policy and of rhe original logic of keeping a strict control over relatively higher ranges of salary income. The continuing failure of the system to generate ade. quate surpluses finm investments in the public sector was, in a substantial measure, responsible for this chain ofevents. The inability to generate mone revenues from direct taxation meant that there had to be an increasing dependence on indirect taxation through excise and customs at the Centre and sales-tax in the States. As the Report of the Ind.irect Taxation Enquiry Commlttee (Part I, October l9Z7)8 pointed out the system of indirect taxation, particularly of Central excise duties

tax base has been widened.e The resulting distortion in the rate structure of indirect taxes was further' dggravdted by the cascading effects of such taxa-

tion. When taxes were levied both on inputs and on the final product such of these taxes as were levied on an ad valorem basis fell not only on the value of the pnrducts but at each stage they 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 Taxation Enquiry Comfitillee, Part l, Octolfer 1977 ) Some of the distortions.in the indirect taxation system are attributable to the volume and urgency of generating additional resources year after year through taxation rathdr than through mobilisation of surpluses accruing from past ihvestments. The question is : How serious is the problem resulting from the public secto/s inability to gsnerate surpluses on an ade quate scale? It is difficult to quantify the total impact of the inefficient use of resources. The linkage effects of the inadequacies in the performance of the public sector are so peF vasive and assume so many different forms that it is difficult to quantifu the losses. Power cutF or worse still, unscheduled interruptions and trippings or Wide voltage fluctuations not only curtail production and resrllt in financial losses to hundreds of thousands of units, large and small, but also damage expensive equipment. Non-availability of wagons for the sup ply 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 tying up managerial fesources and adds to the costs, but even more significantly discourages a widQr dispersal of industry' The cumulative losses to the nation arising from these factors are incalcr.llable. Apart fi:om this there are direct consequences such as the huge losses incutlred by the State Electricity Boarris, State.road transport organisations and others which run into hundreds of crores of rupees annually, requiring additional 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 for one vear, namely, 1,976-77, grogs profit, i.e., gross surplus minus depreciation varied between 5 per cent and 8 per cent. Pretax profits of these enterpflises, i.e., after providing for interest, was as little as Rs. 18.7.qrores on a total investment of several thousands of crores'of rupees in 1980'81 and the figure ir,7976-77 was Rs. 421 crores, i.e;, a pretax return of less than 4 per cent on capital employed i1n that year. The performance in 1981-82 was significaltly bettr-a pre-tax p|ofit of Rs' 1,074

Regulation and Development t8g

basis of the monopoly power conferred on them as a re sult of the import policies. Oil India Ltd and Indian Oil Con poration Ltd accounted for another Rs.300 crnres, i.e., a little less than a quarter of the total. Oil and Natural Gas Commis" sio4 provided Rs. 574 crores, i.e., nearly 44 per cent of the total profits of the ten largest enterprises or 30 per cent of all the profit making entenprises. This high profiiability was a consquence of the pricing policy for crude oil. The crude prices were raised fipm Rs. 380 per metric tonne to approximately Ils. 1,182 per metric tonne with effect ftom 11 July 1981 and this alone accounted for an increase of over Rs. 200 crprs in the total prcfitability of public enterprisies.rr Another indicator of the lact-lustre financial performance even of the top pmfit making enterprises is the rend in the accumulated surpluses and neserues. On a total paid-up cap! tal of Rs. 1,450 crores the- accumulated_ free reserves on Jl March 1982 amounted to Rs. 1,786 crols. In view of the fact that modt of these enterprises have been in existence for more than two decades this is not an impressive performance. A closer analysis reveals that of these accumulated free neserves as much as Rs. 1,138 cnores wene accounted for Oy the Oil and Natural Gas Commission and Oil India Ltd, and Indian Oil Con poration Lt4 and between them they had a paid-up capital of Rs. 493 crores. The other seven enterprises with a paid-up capi tal of approximately Rs. 950 crors had only Rs. 64{t crores in the accumulated foee reserves. Of this nearly a third, i.e., Rs. ZZB crcres were accounted for by the State Trading Corporation oI India Ltd, and the Minerals and Metals Trading Corporation oi

crores giving a neturn of a little less than 5 pen cent.10 l'here is another way of looking at the profitabiliry- picture. Of the total of 187 enterprises covenecl in the BpE survey 102 enterprises reported a total prstax profit of Rs. 1,886 crores. Of this Rs. 1,332 crones was accounted for by ten large pnofit mak_ ing. enterT)rises, i.e., 71 per cent of the total pretax profit earned by profit making enterprises in the Cerrtnal public sector. This figure looks impressive but a closer analysis reveals that out of Rs. 1,332 crores Rs. 132 crors or apprDximately 10 pen cent was accounted for by the State Trading Corporation of India Ltd" and Minerals and Mrltals Trading Corporation of India Ltd, both these organisations rtrake their profits largely on the

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$, even in lS81-82' which the Bureau of pubtic Enterprises clai{ns as a 'land-mark in the his' tory of public enterprises in Indla which have made highest ever post-tax pnofits'13 the total number of manufacluring enterprises incurring losses had gone up from fifty-six to sixtyfive and the total losses incurred had risen from Rs' 614 crores to Rs. 710 crores' If enterprises engaged in non-manufacturing activities were also included a total of seventy-eight enten prises had incurred losses during 1981-82' Of this twenty-two enterprises had reduced their losses in relation.to the previous year but thirty-three units had incurred higher losses as compared to 19s0-8i' Even more worrying wer the projections for 1983-84 and 1984-85 which wdre prepared by the Bureau oI Public Enterprises in March 198$ 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 of hs. z5 crores; and Hindustan Copper Ltd to the tune of Rs' 32 crores. The same was true of Hirrdustan Steelworks Construction 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 It is clear, therefore, that in the pprception of the management of some of these public sector e4rterprises there was little pro spect 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 efficient (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

improve the performance of the public sgctor. On the question of policy reorientation certain lessons should be learnt from our past experience. In the early phases of industrial development domestic base was narrot, not onlv in terms of production capability but also in terms of enrcrprises and skills, and there was a case for a fairly wide range of industries or activities which were reserved for the public sector or those in which the State, to quote from the Indusfial policy Resolution, 1956, 'will increasingly establish new undertakings.'rs Since the mid-1950s, however, two major changes
have occurred. First, there has been a considerable deepening

cumstances and for adopting corrective measures in order to

determining the policy orientation appropriate to our

cir_

bemendous increase in lechnical and managerial skills. Entrepreneurship which was earlier limited to a few areas in the country or traditionally restricted to a few communities has become much more broad-based. During the same period the public sector in terms of size, diversity and organisation has come of age. Unlike the fifties o" fhe ea"rl1, sixties when a verv significant proportion of "rru., managerial cadres in the public sector were persons seconded fr.om the railwavs, posts and. telegraph, ordnance factonies, Audit and Accounts Service or administrative services, the public sector in India todav has its own managerial cadre. In all fairness, quite a few of the management personnel working in the public sec_ tor at different levels are as. good as any in terms of qualifications, experience and dedication. Indeed, the experience of handling really large or complex proiects is, today, more present in the public sector. In the context of these changes which have taken place over the last twenty-five years there is a need to take a fresh look at the concept of certain activities being reserved fbr the public sector and the rationale underlying it. Of c.,r.se, cen tain activities would continue to be reserved for the public sector, e.9., arlns and ammunition and allied items of defen<;e equiprnent, atomic energv, and railwav tt.ansport. tsut the important point is that at present and in vears to come a greater degree of complementarity. between public sector units and the existing or potential manufacturing capaiity in

and widening of the industrial structure in the country and a

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 public ownership inherent in certain t)fpes of public utilities which
preclude 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 working 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 would appear 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 by public sector managerc, no less than politicians to cover up inadequate performances-is thet there is a basic contradic tion between profits or generatlon of sulpluses and achievement of socieeconomic goals. Experience in India and elsewhere has shown that well-meant and well-intentioned desires of policy-makers to use public sector enterprises for achieving broader social objectives were more likely to succeed if a public enterprise was making adequate profits and generating healthy surpluses Only these enterprises were in the attainment of able to follow forward-looking
social objectives. TheY were sive for protecting the en technological self-reliance. surpluses to further national tributing to public good bY employers, more responand were able to build uP

from contributing lhrough nt they were conavailable quality products

negulation and Develoqment 793

nlodel cmplo!'ers or lbr erpenditure otl R& D; and thev rcmained 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 is there 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 do not necessitate liquidation or bankruptcy because even large and continuing losses can be borne by the public exchequer and ultimately by the tax-payer, management of private enteF prises cannot possibly survive unless they can make a profit or at least break even. But, again, it is not uncommon for the management in the private sector to thrive when the private sector units are becoming sicb and not only amongst the developing countries but even in the citadel of USA weak or tottering enterprises have, often, been bailed out by Government or financial institutions at the behest of the Government. The apparently inefficient working of the public sector in many developing countries including India is, at least in part, the consequence of the fact that for various considerations of public policy including responsibility lowards workers' employment and the production needs of the country, governments have had to takeover in the public sector sick or closed units which were initially in the private sector. The fact, however, remains that there is, regrettably, considerable fuzziness about the yardstick by which the perfor mance of public sector units should be judged; and the manner in which the accountability of public sector managements should be ensured. It would, clearly, be simplistic to use profitability as the only yardstick to iudge a publie sector-or for that matter a private sector- enterprise. For instance, there are any number of cases in the private sector where companies continue to enjoy high levels of profits even when the operations arc inefficierit, on the basis of consumption norms, aird there is underutilisation of capacity. This is possible because import regulations prvent cornpetition from abroad, and the internal regulatory framework prevents competition from new entrants. On the other hand, even efficient operations can, on occasions, suffer losseseven staggering losses-because of factors beyond their

r9.

PUBLIC SECTOft AS AN INSTRUMENT OF GROWTH

control such as a sharp downvizard swing in intennational demands or unreasonable price controls. The real issue involved in determining the role of proffts in public sd-ctor enterprises is not whether or not they should make profits, but the manner in which profits are inade. There is no merit in public enterprises claiming qredit for pnofits which are either the consequence of monopoly position or a result of shortages, or are incidental to the governmental decision with regand to pricing {e.9., domestically produced crude oil prices). The essential point is that pubiic sector enterprises, like Janus, should have two faces;a public dimension and an enterprise dimension. The publilc dimension is reflected in public ownership, professional tnanagement, public control and accountability, and commitment to the furtherance of public interest. The enterprise ditnension, on the other hand,
implies production of goods and services on the most efficient basis, i.e., with rnost economical l,rse of manpower, machines and materials; and marketing them at a price which, hr terms of commercial accounting principles, would provide adequate return on the public capital employed in the activity. The enterprise dimension of public sector functioning has, with some exceptrons, been generally unsatisfactory. The factors contributing to the ungatisfactory performance of the public sector have been mdny and varied; but in the main they can be traced back to two or tlrree principal areasmanagerial, financial, and, in certhin specific cases, personnel and marketing. In some cases the continued poor performance of a public sector enterpnibe can be traced back to the initial stage when the investme4lt decision was taken. The prparation of project reports and feasibility studies were done haphazardly and the technical, financial and marketing aspcts were not given careful consideration. In a few cases thene was a desire to set up a pnestige proiect or a totally unsuitable location was chosen for non-economic reasons. Another common feature which has adversely affected the pfofitabilit), of the public secto[' is slippages in terms of constructionL/completion schedules and very substantial cost over runs. These, usually, reflect inadequate proiect preparation or unrealistic assumption of oupply lags and were further compounded by inadequate inteinal systems of management

Hegulation and Development tgs

monitoring. The delays in project completion, particularly towalds the later plrases of the proiect, otrvrously implied sub stantial additional costs often nunnrng into millions'of mpees
per month. 'Io somq extent the initial problems of cost escalation and delays in the completion of projects arose because the cost and execution of several important projects depended either on adequate performance or the cneation of necessary infrastructure in some other part of the public sector. In the context of acute shortage of foneign exchange and a desire to accelerate the progress towards self-reliance, the napidly growing public sector necessarily meant a very extensive

interlinking of public sector proiects. The progress of steel plants was dependent upon the creation of healy engineering capacity in the public sector and the perfon
mance of the Heavy Engineering Corporation at Ranchi. Electricity generation and transmission depended on the quality standards and delivery schedules of public secton producers

of electrical equipments and on the efficiency of the railways in making available adequate quantities of coal. These instances can be multiplied. Of counse, such interlinking is neither uncommon nor undesrrable; anrl. indeed, it has ro be seen as an rntegral part or the planning process. Though in the absence of an effective network of :Ipproach the close interlinkages between public sector units resulted in transmitting the delays and the cost escalations from one unit to another. These deficiencies are in the nature of internal shortcomings which can be corrected by actions internal to the unit. But equally important-or of even more fundamental importanceare the external factors affecting the operations of public sector enterprises. One of the major problems facing public sector enter prises has been that of management. Given the fact that public sector units in India are panly or fully owned bv Government, there would necessarily be a need for accountabrlity to the Government. Government being the shareholder, the executive branch has the sole night to select, appoint and dispense with the services of the chief executives and senior managers of the public enterprises. Similarly, substantial funds for the public sector are voted fcir by Parliament; and there can be ml dispute about the need for public accountability through the

ment to control and regulate enterprises are conducive to their efficient management. In princrple, the desiderata for efficient management of a public enterprise is that in its related operations il should be able to decide ly and act quickly. In order to achieve this, both the prnximate and long-term objectives should be clear to the management, and should be within the competence of the micro system to achieve. These objectives would, of course, be part of the macro objectives which the Government would have in view. As in all systems, there should be a clearly defined procedure or machinery for reconciliation of the micro obiective with the macro obiective. This implies that the initiatives and structures for making business decisions within the pattern of ofoiectives should vest with the managembnt of the enterprise. lA{hereas the decisions relating to the broad policy parameters affecting the enterprise should vest with the Government. Once the organisational structures and conventions suitable for such a division of responsibilities have been established, it would be legitimate to expect the management of a public enterprise to perform efficiently. However, if it failed to do so, it Would be the function of the Government to take decisions dn a new management or a new set of relationships. Unfortunately, procedural systems and conv.entions of this kind have not been developed. There was, originally, widespread agreement that public enterprises which had to absorb sophisticated technologies, or te in large or sensitive markets, should develop a ng cadre of professional managers. It was also generally that the effective ness of a chief executive in any enterprise depended largely on his having an explicit to take certain kinds of decisions, and, save in exceptional cifi,-umstances, his parent department or Ministry fi'om interfering with these decisions. These considerations led to the establishment of a special cadre, the Indian Management Pool, to cater to the needs of manufacturing and tr6ding establishments in the public sector.

Regulation and

DeveloDment

797

Progresslvel, however, these elements were overlaid with practices which greatly reduced the authoritv and effective ness of the chief executives. The l\{anagement pool virtually disappeared. Many appointments to these positions were on criteria other than professional competence or suitabinty; and their continuance was often unconnected with efficient management. On the financial side, it became the common lot of public enterprises to operate continuously on inadequate access to long-term or working capital. Because of delays in governmental decisions on prices, funds allocation or licences of various kinds, the management is unable to take promptly even those steps which the objective situation requires them to take. Last, but not the least important, with the rapid organisation of labour in these enterprises, and the access of tradg unions to political or extra-political means, personnel management has become a major concern. Dr. K.S. Krishnaswamy in the Ajit Bhagat Memorial Lectures, 1980, 16 pointed out
The reduced effectiveness of chief executives together with rlative security of tenure for the lower cadres has resulted rn an attitude to work in public enterprises, which is hardly

conducive to the realization of the multiple objectives set for them. \ /hether it is banks or railways or ration shops or large manufacturing units, the deterioration in productivity level is palpable. Customer service is not assigned the hjgh value it should have in a welfare or socialistic society.... Lack of modernization in our banking system is beginning to hamper its effbctiveness as a means. of social or economic change.... Impediments to arloption of newer technology are adversely,,affecting coal production, railway transport, turn around of ships at ports and so on.... While lt is legitimate to avoid needless dislocation of labour and additional unemployment, it is equally legitimate to ensure that in public anterprises, which dominate infrastructure and basic industries, productivity standards do not suffer from obsolete or archaic equipment and practices.... However, as far as I am aware, most managements of public enterprises are unable to satis$/ this requirement, for reasons other than their competence or willingness to
accept chanae.17

'196

PUBLIC SECTON AS AN INSTRUMEIiIT OF GROWTH

Dr. Krishnaswamy concluded that iust as we seek to avoid wastage of capital, we should also seek to avoid ,the deliberate creation of disguised unemployment.,ls If the shortcornings of public enterprlses arise from a vaniety of internal and external factors, they have to be remedied by initiating changes in policies, praptices as well as attitudeE. Experience has shown that in a number of cases, the poor economic performance of an etrterprise continued because even when the corrective action was specified, there was a reluctance to take the responsitiility for rectifing the situa_ tion. In most cases, this was seen because ,r""u"a""y .o"""o tive action would imply that ellher the earlier investment decision was wrong for one neason or anotheq or in theimplementation of the proiect at some stage there were failures or shortcomings. For in$tance, a ropeway origirially envisaged had been delaye{ consequently unless adflitional expenditure 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 the optimal mode of investment; but long delays in its completion may have such large adverse effeets on profitability that shorttarm measures even at an extl'a cost would be justified. However, if the decision-making process is so tardy, or the response lags in the system are such that the decision regard_ ing corrective action is not taken expeditiously, the remedial

the 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 Government to accept errors or failures can cause great harm to the public
sector.

action itself becomes inftrrctuous. It is in this kind of situation that

There has been a great deal of debate on control systems and accountability in public entepprises. As one professional manager with wide experience in both putrlic and private sec_ tor recentlv obsenved
:

Trust on the one hand and the responsibility to report on the other, are the two ends pf the relationship, whose importance is the greater in a public enterprise than it is in

negulation and DeveloPrnent 7gg

private enterprise, because the former belongs to the people and the State while the latter belongs to one of some' who can more closely control or supervise their enterprise.lt'
a

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' It follows, therefore, that if the combination of trust and responsibility is to work out satisfactorily, the system as a whole-the internal control system in public enterprises, bureaucratic apparatus in the Government, the political, executive and ultimately Parliament and public opinion, would have to accept a culture in which there is an unambiguous acceP tance of lhe link between nroductivity and reward; and in which innovation and efficiency are recognised as being goals which have to be achieved. Public sector managements would have to be allowed-indeed, encouraged-to experiment and to innovate, with minimum interference from the Ministries, or the legislative organs. This, however, would not be pose ible unless the system is willing to accept and condone bonafide errors, provided they are not too frequent. In this context, one could work out an overall system using modern techniques of planning budgeting and appraisal and, :rudit. Ideally such a system, as Mr. Tandon points out,20 would
have 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.

The system of accountability for public

enterprises,

the' curent year and performance budget for the foL lowing Year. If public enterprises are to develop such a combined sys vis-a-vis the tem a.rd operate in a much more open manrler owners, i.e., public, it is essential that there is a corresponding

3. Monthly and quarterly review and accounts' 4. Mid-year review 5. Before the year ends, announce provisional results

for

A)O

PUBLIC SECTON AS AN TNSTRUME IT OF GROWTH

change in current attitudes arpd procedures. The public sector should be treated with a klegree of permissiveness to make its own mistakes; and as lqng as the enterprise is able and willing to learn from the .mistakes or respond quickly and effeclively to changing situations, i public sector managemenrs should be fie 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 State enterprise system. In fact, where fublic enterprises operate in a non-competitive situation, the consumer including other public (or private) enterprises, may often be worse off because there is no choice; and yet the consumer has no voice or efl.ec_ tive redress. Therefore, the task in the eighties would be to enable public enterprises to make a trinsition from the Government or State enterprise system to a truly ,public, enterprise system. The latter wOuld imply a much greater degree ol openness and accountatlility wnicn is to be based on trust and responsibility. There *ould have to be a greater clarity of objectives and where a multiplicity of objectives rs inevitable, a certain order of their relative priorities. Efficiency in the sense of cost effectiveness ghould be the test of perfon mance. Such a transition, however, would require a sense of responsibility and discipline on thp part of those who are con_ nected with or work for public edterprises and also maturity of judgement and a better understhnding of the real issues on the part of politicians, legislators, bureaucrats, and others involved in moulding public oflinion or determining the environment in which public entelrprises function. Hele, as in inany other basic bhanges in the sysrem, thc possibilities of effective and truitful changes depend upon the sociopolitical environment. It hfls been argued and with some persuasiveness that notwithstanding what the country has achieved so tar there rs incrFasrng evidence ro suggesr that the economic as well as the administrative infrasrructure of the country is becoming less and less equipped to meet the challenges of modernisation. The various minifestations of the inadequacies of the system-whether it is in the field of power, transport, communicationF, banking, law and order and the dispensation of iustice-arb essentiallv a result of the failure 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 pre occupations of the politician are diverging steadil)' from the compulsions of the economic evolution.'zl The demands on the infrastructure, the bureaucracy, the police, the judiciary and most importantly our defence forces will continue to grow in volume and complexity and will need a more sophisticated techncmanagerial elite. On the other hand, recent trends have been ton ards the emergence of a political system which needs'pliable bureaucrats, corrupt managers and musclemen, arid not policemen.'z2 Unless this trend is reversed and the root causes of the decline of the system tackled the country will be unable to rise to the challenges that, in the modern world, periodically test the mettle of the nation. The performance and effectiveness of the public sector as an insfument of growth will depend, in the same way as the effectiveness of the industrial and economic system, on how rapidly and how well a country is able to bring about certain basic changes in the socio-political milieu.

NOTES AND REFERENCES

t. Tata Services Lid., Department of Economic$ and Statistics, 'sratistical outline 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 Bombay : 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
Industry of India, on 12 January 19E3, telhi, 6. Ibid., pp. 7-E.
6. See rrote 2 above, P. 2, Iable 1
2.

and Longrl'erm organised by tire Associated Chamber of Commrce ti'

Paper Dresented at the Wor*shop on Perspectives on Indian F'conomy, short

N2
E.

PUBLIC SECTOR AS AN INSTRUMEI.IT OF GROWTH

7. See note 4 above.

India, Ministry of l-inanc, Department of Revenue, neport of the lndircct Taxation Enqutry Committee. Part t. X-.K. Jha, Chairman, Delhi, October
1977.

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 for
Monitoring Indian Economy, April 19a3i

15.

lndusrial

16.

Dr. K.S. Kfishnaswamy, What Ails thd public Secron Ahmedabad: Ajit Bhagat Nlemorial 'lrust, 1980. Fourth Lecture delivered on 21 Decemlle|
1960.

Polic-y Resolution, 1956. No. 51/CFi48, 30 April 1956. In GuideIines for lndustries. New Delhi: Indian InvestmeDt Centre, 1982, part t, Section ll, pp. &10, para 9.

Ibid., p. 21. 1t . Ibid., p. 22.

17.

19.

Prakash landon, Chairman, National Council of Applied Economic Researclr, Central System$ and Accounlability in Public Enterpriaes. Paper presented al the lnternational Workshop, International Center for Public Enlerpriscs in Developing Counbies At Ljubljana, lugoslavia, 1-5 June
1981. (U npublished.l

20.

rbid.

21. Prem shankar Jha" Why Nothing worka. A series ofthrEe articies. ?he Times lndia, 1O,14 and 21 May 19E4. 22. tbid.

of

Dispersat of Indust4r- Gronth and Kemoval of Regional

Disparities

of the accepted objectrves of tndustrial policy over the last forty. years has been wider geographical dispersal of manufacturing industry. Prior to independence, industrial activity was confined to three or four maior industries and
One
these, in turn, were concentrated in particular aleas. 'l'hus, out

ot the twenty-nrne jute mills twenty-six were located in

Calcutta and oul of 144 cottol) mills 100 wet'e located itr tlte
afeas was not necessarill, based on tl)e availability ol local labour. For instance, the mills in Borlrbar.' recluited labout'ers fi'orn the coastal srip ol Konkan and a Ie$, districts of Weri tern Mahaiashtra. 'I'he landless lalloulet's fronr these districts migrated to Bombav in sealch of emplovment. On the othel hand, labour in Ahmedabad was dlawn, by and large, l'mm the adjoining areas. So was the case in Calcutta till the turn of the ninteenth century, but in later years, with the expansion of industry, labour was increasingly provided bv particular aI'eas ofeasteln UP, Bihar and Orissa. The pattern of industrial location atter independence, and

Bombav Pfesidency. 'Ihe concentratiou of industries"in certain

?N4

DISPENSAL OF INDUS1

flV

particularly from the Second Five-Year Plan period onwards, was increasittglv irrfluenced bv a consciotts polit:v lo lllove industry to new areas. Administfative action in the form of licensing Jr other approvals sought to substitute market for'ces and counter the usual tendqncy for industry to concentrate in particular areas. This tendency to congregate at cefiain centres is due to sevenal teasons. First, industry requires infrastructural facilitied which are often concentrated at particular centres. This was particularly true in the earlier stages of development when, on account of the limited availability of nesources, even the minimum necessary infrashucture required by industry could not be provided in all parts of the country. There r,vere other reasons such as linkages between industlies iIr the sense that the output of one industry was often the input of another. Sirnilarly, the pre sence of many units located at one place stimulated the $nwth of repair and maintenance services and trading networks, or creatd a larger pulf on floating labour which enabled a unit to cope with absenteeism-a fairly common phenomenon till a mature indu$trial cuiture is established' Thus, the economies, both internal and external, worked towards 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 in terms of social overheads needed for large urban centres ln fact, the external economies whlch prompt industry to concentrate 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 significant divergence between private rnarginal costs and social marginal costs when industry tends to be concentrated in or around major urban centres. One of the obiectives' of the policy of dispersal of industries, therefore, is to ensure that the geographical pattern of grdwth of industry takes into account 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 relative importance of industry in different parts of the country is not an uncommon phenomenon, particularly in a large subcontinental economy. Even highly industrialised countries like the 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 sutr stantial variations in different regions of the Soviet Union in terms of direct industrial employment. This is unavoidable because certain activities such as mining or industries which are mineral based., iron and steel, and non-ferrous metals like zinc and copper, or cement are location specific; and the same is the case with forest based industries. Increasingly, howeven, as a consequence of technological development even these industries are becoming less location specific and a whole new range of industries including manufacture of a wide variety of chemical products, plastic products and high value metal fabrication are becoming more and more free from these constraints. As a result, the scope for a wider and more even distribution of indusfies and for opportunities for non-agricultural employment is, therefore, much greater now than in the past. Apart from economic or technological Considerations, a variety of factors have influenced the actual pauern of location in India as in many other countries. In principle, fresh industrial investment should be located at the least cost location. In practice, however, the actual pattern of location departs from this optimal .choice for various neasons. In a country like India where geographigal mobility of the population is rather limited, unlike in the United States, because of differences in language and other social factors, the spatial distribution of entrepreneurship tends to be un6qual. As a result, sutroptimal locations are often chosen on grounds of personal conveniences or regional or linguistic loyalties. In addition there are institutional factors which militate against optimal location, e.9., freight equalisation or uneven spread of banking. Political pressures sometimes play an important role especially in the location of public sector units or departmentally managed manufacturing activities including defence; and it is not uncommon tbr the licensing svstem

206

I)tSt)t.R5.\t.

()t t\DI SIR\

eslablisbcrl in irrrlustt'iallv bat:kwalrl ilr'oils; concessions arr<l subsidies irrclrrcling e.rt:rnptions li'orrr the application of spcr;ific rogulations 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 reduction in the share of States like Guianat, Nlaharashtra, Tamil Nadu and West Bengal in the total net industrial output. But there have been changes in the relativb position of States and er/en more, by way of emergence of new industrial centres such as Pune-Pimpri or Indore-Dewas belt, Bhopal, Ludhiana, Jullundur, and of course, the new steel to\ ,'ns. Manufacturing employment irl India covers a whole range of activities and particularly household industries including traditional activities like handloorhs, modern small-scale indus" try and very large factories. Certain important conclusions emerge from the analysis of available data of Statewise distribution of ernployment in household and non-household manufac-

to lle used to canvass ol supporFt srrboptirnal localrons. Ihe need to devote greater attentiol! to the question of a more fational Iocational dist|ibution olf industries and in particular, (lo\'c lol)rtrc n t ol in(lustr| irr rrrlurst r.ia ll\, llat:krva|d St:ttos \\'as arl\\'il|s r'()cogniserl. llre StaIonlollt 0l (irlver.n nre nt's lltdr.rstr.ial I)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 lleerr atlolrlcd lo.lc(jclol'illc irrdtrslritrl glrrrvtlr in Slales rr,lticlr lracl littlc ol no rnanulirctuling ar:tivih. 'l hese rne asunts irrcludccl krcaliorr 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)(l
r

tUring activities and of employment in different

size

categories of manufacturing eslablishments (See Table 11.* First. there is little difference between the industrially more developed and less developed Staies in respect of the number * The National Commitlee on the
19E0, has categorised as States

Development of Backward" Areas October industrially more developed if their per capita value added in manufacturing is above the national averaae in 1975-76, rhe latest 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 other
States and Union Territories (except

Delh

ar considefd 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 of manufacturing establishments. Second, this difference is pro gressively more significant according to the size of the manufacturing establishment.
TABLE
1

\umber of Persons Employed per

rOoO

population Other

-_-.
1 2
Household industfies MaDulactudngestabiishmeDts {al Less thaD t0 workeru (bJ 10-50 tvorkers
{el 5[J-500

Industriallv
Jtales
11.3 6.9
.1.3

More Developea States

11.8 11.6

worketr
(i.9

1.5 2.4

{d, Ntore than 500 workers SOUnCE: neport on

Industrial Dispersal, p.1.)

Third, while the number of persons per 1000 population ernployed in manufacturing establishments with 500 or more employees was 2.5 in respect of industrially less developed
more than four times this number employed in the larger fac_ tories and the average for all industrially more developed
States was nearly thrice.s

States, two States, namely, Maharashtra and West Bengal had

The significant differences in the extent of industrial activity in different States, however, have to be viewed in their proper perspective. First, it has to be noted that his_ tolically, fbl valious reasons llrere has been a failly large dif'lenential in lelnrs of developrnent of modern industrv. Conscious measure$ to reduce these ditterentials have had some impact. For instance, of the tolal factory employment in 1971 Maharashtra and Bengal together accounted for 3z.Z per cent-a0.7 per cent in the case of Maharashtra and 16.5 per cent in the case of Bengal.6 By Tg7z_z I this percentage had decf ined to 30.7-72.s in the case of Maharashtra and 1g.Z in the case of Bengal.; A similar indication of a widcr dispersai , of industrial activity is provided by the data on the growth of small-scare industrial ulrtts 'I'hus, the total numDet,of srrrall-

2OA

DISPERSAL OF INDUSTRY

scale unlts registered with the rdspective States' Directors of Industries was 2,14,000 in 19746 and this bad risen to 3,ti4,000 by 1979.e Durirlg the same period the share of four States-West tsengal, '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 industrially mofe advanced States in terms of the number of small establishments or employment in the factot y sector, ltorvever, did not result in any marked irnp[rovetnent in the share of tlre industliall!' 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-raaccounting tbr nearly onefourth of tlre total value-added iti manufacturing in tlte entire couirtly-the industlv is concentrated in Bombay, Thane-Belapur area near Bombay, the PunePimpri 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 policies fbr 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 industrially advanced 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 the country. All indices of economic advancement for these areas will be very similar- to the back4'ard areas in the indusfially less advanced States. 'Ihe point lo be emphasised is that the States (or even districts) a|e politlcal or administlative entities and do not necessarily present a unilbrm picture and manif'est tl)e same pattent of developme{rt in diff'erent parts of their julisdiction. By and large, during the first [wenty years of planning the emphasis in the policy of achf eving a wider dispersal of industries was on the use of public investments. Thus, during the course of two decades ending 1970-71 tljle total public investment in industry and rniherals including village and small-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-which are amongst the most backward accounted for over 60 per cent of the total investment. However, it would not be correct to assume that this trend of channelling public investments in industry located in industrially backward regions was in all
cases a deliberate or conscious policy. The major contributory factor was that very large raw material intensive projects like steel had to be situated near the sources of raw material and a substantial part of the investment in these three States was of this nature. The consequence was that the spin-off effects ol sucb in\ estnleltt r,r,ele sonter,vhut limited and, indeed, itr letrospect, the direct benefits accfuing to the surrounding areas in terms of the multiplier effect of such investment remained small. On the other hand, industries based on first stage prc cessing of agricultural raw materials, though much smaller in scale, which also have to be located near the raw material sources have alwavs had a more integral relationship with the gnowth of the region. For instance, th growth of the sugar industry in the South, and particulanly the growth of cooperative sugar units in Maharashtra and to a lesser extent in Gujarat and Karnataka, had a far greater impact on local nonagricultural emplovment than the corresponding volumes of investment in very large raw material intensive projects. In the case of industries other than raw material based industries, during the first two decades of planning location of industries including public sector units, tended to encourage concentration near a few unban areas. The existence.of infrastructure, not merely in terms of water, eilectricity, roads, and communications but also in terms of an attractive or at least an acceptable environment for superwisory and managerial personnel was an important consideration. In the fifties and the sixties, lbr instance, public sector industry in the South tended to be concentrated in and around a city like Bangalore which olTered many attractions such as congenial and attractive living conditions. public sector indusby in and around Bangalore was chiefly sophisticated engineering activity; and the private sector activity was such as reinforced the effects of public sector investment and tended to stnengthen the effects of external economies. Other factors strch as the availability of skilled labour., widespread

210

DISPERSAL O!' INDUS'I'RY

entrepreneurship and traditionaf buyers in favour of certain areas in the lendirrg policies of corhmercial banks and, to a lesser extent, of the newly created tepm. lending institutions, also tended to limit the impact of dispersal policies. It is essentially in the seventies that a deliberate attempt through Central arrd, later, through the State Government sutx sidy schemes and concessional flnance schemes was made to give special attention to the industrially backward areas. The question was first discussed at a meeting of the Comrnittee of the National Development Counpil in September 1968 and it was decided to set up two worklng groups-one dealing with the incentives for establishing industries in backward areas and the other to lay down criteria to identiff the backward areas. The main criteria fof the identification of industrially backward States and Union Terriltories laid down by the Working Gioup under the chairmanshfp of B.D.Pande were :ro

per capita income; (bi per cit[)ila income f|orn irtclustty and 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 relation to the population and the area ol the State.
raJ

The Group also suggested certain other criteria or indicators of backwardness for identificatfon of backward districts in backward Statevunion Territorles. These were: the districts should be outside a radius of abqut 5o miles from larger cities and large industrial projects; pen capita income should be at Ieast 25 per cent below the State average; the population density should be relatively high; ahd the infrastructure such as elecllicity, power/ tl'ansport and comrnunications, should either be available or its availability should be ensured witbin tl)e rt(')\l one o| lw() ) e |.s. N.N. Wanchoo recommendbd inter alia the following set of fiscal incenlives
:

1. Grant of higher developmedt rebate to industries located in backward areas. 2. Grant of exemption fi'om income tax including corporale

Begulation and

Developnent

277

tax for five years after providing fbn the development

rebate.

3. Exemption from import duties on plant and machinery, components, etc., imported by units set up in backward
aneas.

4. Exemption from excise duties for a period of five years 5. Exemption from sales ta& both on raw materials and finished products to units set up in specified backward areas for a period of five years from the date of their going into production. 6. Transport subsidy for identified backward areas in Assam, the Hill States and J and K.

An important recommendation made by the Working Group under Shri;Pdhde was that about twenty to thifiy dis. tricts in all may be selected for grant of special incentives dun ing the Fourth Plan period. This was, however, not accepted and at the meeting of the National Development Council in September 1969 it was decided that the concessions to be offered by financial and credit institutions for financing industries in backward areas should be available to selected backward areas/districts in all 15he States and Union Territories. The Stafe Governments ere asked to select districts/areaS fmrh each State, the number of such districts/areas being larger in the case of the industrially backward States. Later many States set up their own schemes to attract industries to their States and particulanly in the relatively backward parts qf the States. This was done chiefly by offering cash i4centives related to capital investment but with an upper limiU and more impon tantly by the sales tax exemptions recommended by the Wanchoo Committee Report. The recommendation regarding transport subsidy was partially implemented but the other recommendations were either not acceptable or workable. The various concessions available in respect of investment in industrially backward aleas should be seen as a whole because the investment concessions complement one anothr. For inslance, capital subsidy is available duning the construction stage; interest concessior] helps in the earlier years of production; and tax concession is attractive to a unit mainly in the 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. Of course, 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 irl capital subsicly and amounts givetl on concessional terms arc limited to Rs,2 crores. Only itl the case of tax concession under Secliolt 60 HH \vhich is lo lhe extellt ol 20 pe t' cr:rtt of the t'axable profits allowable for calculation of tax as rebate of tax that tbere is no ceiling. It ili difficult to generalise about the 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 Comnittec on 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 lt sbowecl 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 little as 1 per cent for a project cosl of Rs. 25 crores'll Oi the industrial undeflakings which received a subsidy till lg7 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 for units Rs. 62.4 crores. A little ldss than a quarter of this was and 30 per with a capital investment of less than Rs' 10 lakhs' 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 the level of Rs. fo lakhs but less than a crore On an average
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 industrially less advatrced States is seen in tbe disl:ursements made so far under the Central capital subsidy scheme ln llre earlier
project'1z in!'estment in this category was Rs 35 lakhs for each

negulation and Development 213

years and belbre the schetne was implemented, the industrially advanced States and particularll, those r,r.'ith a relativell, rvell organised administlation like i\laharashtra, Gujarat and Karnataka accounted fbr a substantial portion of the disbursements from the Central investment subsidy sclteme l'hus, betrveen 197 2-73 and'f.975-76 the total disbursements amounted to slightly over Rs. 100 crores. Of this more than Rs.36 crores was accounted for by these three States. By 1.97a-79 the total disbursements were to the tune of Rs. 57 crores and the share of these three States had declined to less than Rs. 15 crores, that is, their percentage had in the total declined from 36 per cent to 26 per cent.13. 'I'he share of the backward districts in the florv of finance lrom the:rlflndia institutions increased as a resull of the conscious policy to taive prelerence to investments in the backward districts . litt 197 8-79 the share of the backward districts Irad increased to appi"oximately 44 per cent as compared to about one-third in the early seventies. This improvement should be seen in the context of the lact that these districts covered 70 per cent of the area of the country and account lb| nearly 60 per cent of the population. It should also be noted lhat in subsequent years the share of the backward areas in tlre total flow of assistance from the all-India institutions has stabilised around 40 per cent. According to the Industrial IJevelopment tsank of India Report on 'Development Banking in India' by the end of April 1981 backward areas accounled for a cumulative total of Fs. 2,872 crores out-of a total disburse ment of Rs.7,506 crores by these institutions since incep tion.ra . 'l'his works out to 38 per cent, which is approximately the share of the backward areas in the disbursement in 198081. This would imply that the total assistance to the backward a|eas is reaching a plateau, but as the Report of the Industrial Iievelopment Bank of India points out the share of assistance to the backward areas of the States identified as backward by the lVorking Group uncle,r Shri Pande increased sharply from Rs.279 crores in 1979-80 to Rs.4,10 crores in 1980-81 and constituted 46.3 per cent of the total assistance to backward areas as against 36.4 per cent in the previous year. It would appear, therefore, that the benefits of concessional finance are tending to be increasingly used by the identified backward districts in the industrially less advanced Stares.

ZI4

DISPERSAL OF INDUSTRY

an analvsis of the subsidy and finance schemes. First, the

'l hert; are, however, two othe[ l'ealures which emerge f|om

ol

benelits of the subsidy schenre have accrued nrore in the case States which attracted ltrore lalge.scale units; and tlrese units, by and lalge, were locutecl in the inrlustriall_v advanced States like'I'amil Nadti, lVlalrara6ltra, Guiarat and Karnataka. Second, an analysis of lhe disbursements made by the term It;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_v on*thild of the lotal clisbursals macle in all the 247 llackward distlicts. tsenelhs ol' the Centrirl subsidv applicalllt: to tot districts areas as well as concessional linance have ncerr gcnerally limiled to a snrall dumber of districls rtranv ol wlric[ anr in the lelativel_v industriallv advarrced States. Mrrleovt:r', rnan.y ol thr:st{ rlistlir:ts are irr close proxirrrit_v lo relatively developed industrial Centres (e.9., Medak, Alleppy, Madurai) on lie on the trunlt noute between developed centnes (e.8., North Arcot, Dharimapuri, Bharuch).'s Many of the distlicts that have lrcnel'itr:d lrave lalge industrial estates or aftias plomrrlerl aggressivelv bv State level agencies while the availability ol indusllial infrastrur:ture and proximity to ilrt: nralket in developed centres al)l)ears to have influerrced tlre locatiorr ol' mediurn and large units. 'I'he concessional linance arrd subsitly schenres haVe significantly inlluencecl the paltern ot rllvelotinrent ol sntall units l)ased on local raw malerials, llut have n()1 nrateriallv helped the development ol' ancillary inrltrstries in thcse artias. 'l he incentive scheme lbr tlre developmerrl ol backwaldr distlicts has tended to bt: skewed in lavour ot rhe industrihlly more advanced Start:s and also in lavour of distlicts near establisht:<l industrial centres. 'I'he location ol public er)terprises in the backward aft)as has, in statislical ternls, shown a marked bias in lhvorrl ol' inclustriallv backward Stales. A(rcor(ling 1o an analysis tlone l)v the National Comnlittee on tlre Developnrent of Backwarcl Areas, at the end ol Malch lS)79 the strare of industrially backward States in the investment in Central pulllic enterplises was 6l per cent and in emploj,ment 53 per cent. No tlorrlrt these are inrpressive figures but they need to be qualified irr certain respects. As mentioned earlier, a large proportion ol'

negulation and Devel.rpment 215

the invcstment iir the less developed States is accounted for by Bokaro, Bhilai and Rourkela Steel plants.16 Cential publiq sector investment in other industdally backward States, thelefbre, is relatively small. Similarll,, a signilicant propoF tion oi the total employment in public sector undertakings is on account of the labour employed in the coal mines which is mainly in the Bengal,Bihar belt. Nevertheless, it should be noted that a bias in favour of industrially less developed States has been an acceptecl element in public policy; and severai Central seclor engineerin6{ enterprises which could lral'e beerr iocatetl, perhaps rvith sorne advantage, near developed inclu$trial centres have been deliberately established in undevelopetl areas. F-or instance, Bharat Healy Electricals Ltd (BHEL) plants at tshopat, Hardwa| anrl Jhansi; Hirtdustan Aeronautics Ltd (HAL) plants at Koraput and Lucknow; Indian Telephone Industries {ITI) plants at Naini, Rae Bareli and Gonda; or Indian Drugs and Pharmaceuticals Ltd (IDPL) plant at Rishikesh. Moneover, many of the public sector plants located in the relatively more developed States have also chosen new centres like Hyderabad, Nasik, Trichv or Durgapur rather than being close to the establishecl industrial conglotnerations. lT While public sector investment has always had a bias in favour of indubtrially backward areas, special financial incentives were introducecl to encourage new industrial units in more industrially backward areas towards the end of the sixties. The use of,industrial licensing as an instniment for determining the location was somewhat restricted till the seventies. No doubt the First FiveYear Plan had recognised that 'increasingly, greater artention will have to be paid to the States and areas which have so far remained backward.'rS Under the Industries (Development and Regulation) Act, 19S1, the Government has power to regulate location.l!, The Second ancl Third Plan Documents also stressed the importance of location decisions in the public sector and particularly the concept of large projects as the nuclei for regional growth. The Second Plan, for instance, pointed out

in regard to the location of which, on economic considerationq there is a field of choice. Often
T'here are industries

2T6

DISPERSAL OF INDUSTRY

the disadvantages of comparatfive costs are only a rel]ection of [the] lack of a basic development. Once this is started the financial handicaps progressiively disappear. Wider ditlusion of development nuclei is essential lrom this point of
view.2(l

However, it was only in the early seventies that in addition to the introduction ol capital subsidy, concessional finance and other incentives indusrial licensing began to lte ust:d as an important instrument lbr deternrining location decisions. In some ways (he use ol the licensiirg rner:hanism lbr encouraging investmenl in thr: industrially backward ar.eas could be more attractive. Although no specific provision in the Industries (Development and Rcgr-rlationl Act seoks to give an incentive to the estalrlishrnenI ol irrtluslries in the bat;kwald areas, the aspecl of indtrslrial lttr:atiolr in backwaltl ar.eas is given wcightage llv the (iovrirrrnrt:nt wlriltl t:onsirkr|itrg applications Ibr inrluslr'ial Iir;crrct;s. In adclition, especiallv since the later l)art ol tlre severrties.l tregalivo clitcrion lras been applied whi<;h ext:ludos t[re s(]tting up rrl lir;ensallle industries in nretlopolitan area1; and s1;t:t:ilir:tl ul.l)an conglomerations. As a result of tlrese policir:s tlrt-' shal'e ol tlre kttters 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 intent were fbr locations in backward a|eas. 'l his change should ltr: viewed in the context ol anothilr leature of our. irrdustrial gnowth. l'or instance, in 1975 ncl 1976 the total lit;ences is$ued were 1,689 and lhe lotal rrunrber ol''leltels ()l inlent issued were 1,509. * The four relatively more industrialised States, viz., Maharashtra, West ts(rngal, Gujalat and 'l'amil Nadu accounted for 54 per cent ol'lhe industrial licences and 48 pei cent of the new letters of intent.rr Despite the changes in licensing policies and the more recent emphasis on (liverting industrial growth to 'NGindustry-district' the proportion of letters of intent and inclustrial Ucences issrred lo these lbur industnially more advanced Statt:s has lemainr:rl . apprcximately the same.
*
This inoluded some cases fi'om past yeads wbich wo.c clearod afl(x' lh(: e$talr" lishment ofthe Scretariat for lDdust|.ial Approvals.

Regulation and Development Z7Z

While the licensing policv succeeded, to some extent, in encouraging industrial activity in the specified backward areas, thenewas no corresponding success in morring industr-1, to the backward States as a r,vhole. f'his is not unexpected because the licensing policy is a negative instrunent and cannot by itself promote industrial development in the industrially backward States. It can, at the most, irnpose certain restrictions on the pace of expansions in the developed areas including a ban on expansions in metropolitan centres or urban conglomerations; but the effect of such restrictions can only be indirect by making it somewhat easier to attract entrepreneurs to industrially backward States or :rreas. Ulti mately, the effectiveness of a policy of industrial dispersal would depend upon the success or otherwise in establishing centnes where thb infrastructural and other facilities are such as to attract intending entrepreneurs. This together with a ban cr fairly severe restrictions on expansions of new undertakings in specified urban conglomerations is more likely to result in a wider dispersal of industry. It is against this background that the more recent shift in policy towards moving industries to the backward areas needs to be viewed. In a Statement made in April 1983,22 the Minister for Indus try divided the backward areas of the country into three catcgories. 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 for Central subsidy (excluding ttrose included in category A). Category 'C' cornprised the existing 246 districts which are eligible for concessional finance (excluding those in categories A and B). Apart from this categorisation of the socalled backward districts, the announcement in parliament also enhanced a4d, in some caseg amended the benefits in the form of capital subsidies, etc. The existing ceiling of investment subsidy of 15 per cent or a maximuh of Rs. 15 lakhs was enhanced in the case of category 'A districts to 25 per cent with a maxi mum of Rs. 25 lakhs. At the other end, districts which were formerly not eligible for Central subsidy, although being back ward they were eligible for concessional finance, were also allou 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 investment subsidy or concessional finance if such investrnents attracting subsiciy had exceeded Rs.30 crores. In any case MRTP anrl FERA houses were nol eligible fbr Cer-rtral subsidies in category

'C'disficts.
'fhere were two other elements of the Policl, announced in April 1983. In order to induce the State Governments to provide adequate infrastructural laoilities, the Central Government agreed to assist the State Governments in respect of infi'astructura I developments in otrT e or more identified growth centres in'ncindustry-districts'. Such assistance, however, was to be limited to one-third of the total cost of infrastructural development, subject to a malimum o{ Rs. 2 crores pet' district. Ihe second element of the Policy rvas that in order to provide an impetus for the establishment of such industries
as could promote the developmertr of ancillary industnies, cen t;rin indusirial units were to be declared as nucleus plants. '{'he definition of a nucleus plant was that it should not have less than 50 per cent ancillarisation and the employment level in the ancillaries should be at least tlrree times the level of direct employment. In such a case the nucleus unit would be entitled to Central investme t subsidy; but MRTP and FERA companies would nol qualifl, for such subsidy.zr 'fhc Policy anuounced in April I9832a and its implementation raise certain important issues. There is clearly a need to neview from time to time the extent of fiscal and other incentives to be provided in order to facilitate better regional dispersal; and to the extent that the April 1933 Policy seeks to induce greater orderliness in the Structure of incentives in the line of development since the scheme was introduced, this is a welcome step. Apart from restructuring the incentive scheme the implementation of the April 1983 Policy has, in practice, meant a gFeat deal of arbitrariness in forcing location decisions on entrepreneurs with regard to specific projects. In princi ple, l-raving announced a calibrated structure of incentives and also a list of locations which are not eligible for the establishment of industrial unit$, the exact choice of location ought to be left to the entrepreneur. It should be his/her choice as to whether, taking intO account the differences in

negulation and Develo-pment Ztg

the extent offiscal and other incentives, he,rshe should choose location A rather than B, C or D. It coulcl be argued that left to themselves entnepreneurs

would probably opt for locations closer to the already deve loperl industrial concentrations and that in the process the industrially less advanced States rvould continue to be neglected; and for this reason il \vas necessalv to use the licensing policy as an instrurnent tbr pressurising people to establish units in particular locations le.g., no-industry districts). It
must be noted, however, that such an apprcach though a mafor departure from past practice, introduced a dubious element in the location policies. The licensing s1'stem is rro longer used for preventing an industry frcm being set up in nonpermissible locations or even in preferred areas, i.e., backward areas. The system is now used to increasingly pressrtrise

individual units to locate part or whole of their activity in locatiorylocations which are politically acceptable to the Minister concerned or to the Government in power. ' This is an unclesirable development from sevenal points of view. The principle of limiting new capacity to nGindustrydistricts and to special regions like Assam, J and lri Himachal Pradesh, etc., in effect means that 118 districts in category A constituted the only areas where new size and type of units would be granted.25 In practice, of course, a few of these nG industry-districts are particularly pneferred for non-economic considerations. Basically, this particular approach in which
certain aneas are specified as eligible or preferred locations is not economically sound and in actual working has caused considerable hardships to intending entrepreneurs. A no-industry-district is one in which there are no licensed or registered industrial units. This would imply that prima facie there must have been certain adverse factors rvhich, histonically, inhibited industry from being set up in these districts. For instance, several of the 118 distnicts designated as no-industru-districts are such that because of the telrain, lack of resources including manpower or adverse factors such as lack of adequate lail, road transport and conrmunications, it is hot feasible to establish medium- or large scale irrdustlies. On the other hand, the present definition of a noindustrydistlict rvould disqualifv a number of distlicts includin6l sorne.

22O

DISPERSAL OF INDUSTRY

in the industrially backward States simply bgcause there may be one or two resource based units such ad cement or sugar in that districl. The mere fact that there is a cement factoryr or
a mechanised saw-mill or a sugaf and distillery unil would disqualifu the whole district from being inbluded in the list. Further it should be emphasised trhat a district is essentially an administrative unit and does not have to be-atrd indeed is not-an economically homogeneous tract. f'he result is that the presence of just one or two units in a district would tend to denv a large tract of the district opportunities for attracting inclustries. It should be noted that this definition of a noindustlv-district results in a situatFon where there afe States like Nlaharashtra which do not have a single noindustry-district or Gutaral which has onl)' one. ,At the other end, there are States like Uttar Pradesh, Rajasthan, Bihar and Madhya Pradesh where a large number of districts qualify as noindustryd isl

ricts.

A system in which the licensing mechanisrn is used fbr

determining the location on a disqretionary basis rather than on the basis of choice at the mar$in of the entrepreneur taking into accolrnt the relevant factors including incentives offered or statutoly restrictions in force tends to become ,costly and counterproductive. The general. rule since the April 1983 Polic), was anncunced was that in the first insrance most applicants with large investment proposals would be asked to go to nGindustry-districts, particularly if the applicant haP pened to be either a large house or a FERA company. This has, usually, rneant considerable delay in project finalisation and implementation. While it is not possible to quantifu the extent of such delays, it is common knowledge that the original stipulation regalding location of the unit in a noindustrrvdislrict can often be rescinded; btxt the process takes several months resulting in not only loss of managerial time and effort but also certain other costs and very significant escalation in the total proiect cost. It is not uncommon to find cases where the original preferences of the entrepreneurs lo locate a particular project in a noindustry- dilstrict is questioned or permision is delayed for one reason or another unless the entreprneur expnesses his willingngss to move to a noindustrydistfict in a particular State or sometimes tcr a particular area

Regulation and Development 221

within that State which is acceptable to the Government in power. 'l'here are inslances whele the original nGindustrydistrict location was permitted only afler protracted discussion and long delays because lhe entrepreneur made it clear that he would rather abandon the proiect than move to lhe
suggested area.

This criticism of the recent policy regarding location does

not, however, mean that there is no need for further strengthen-

ing of the policy fbr a nider dispersal of industry. The main justification for encouraging a wider disp.ersal of industry is that it enables diversification of employment structure and the creation of centres of high productivitl, and high wages which rhen provide the base for development and diversification of economic activity. Economieally backward areas in India, as elsewhere in the world, are characterised by subsistence economy, stagnation of technology, low productivity and low incomes. The consequence is that the growth impulses from the centres which are the concentrations of modern prc' ductive processes do not percolate down. The high proportiorr of working population which has to be absorbed in low pro ductivity agriculture and,/or traditional sectors such as handi crafts leads to the perpetuation of low incomes and consequent lack of purchasing power which, in turry inhibits industrial development. One of the important rasons for supporting and encouraging wider dispersal of niodern irrdustry is to utilise the newly created industrial capacity for strengthening the for ces for modernisation and for generating growth impulses within the backward areas. While the need for dispersal of industries is clear and pres' sing, it does not mean that industrial growth should be restricted to the least ccngenial location with consequent effects on protect costs and production costs and the policy ofdispen sal of industries should be distorted into forcing the intending entrepreneurs to move into a particular State or areas of that State for political reasons. It is true that the earlier system of specifuing a certain numben of districts in each State as backward districts eligible for several specified concessions and which, in addition, lvere treated as preferred locations in terms of licensing policy did have some limitations and resulted in distortions. For instance, the choice of the district

222

I)ISPT]R SAI, OF INDI]STRY

did not in all cases lbllow the critria laitl down by the Planning Comnrission for determining backwardness, but the selectiorr was, at least in some cases, on the basis of political r:onsicleralions. [f urther, in almost every State, the natural tendenc1, of thc applicants was to seek a location which was

close to an existing inclustrial centrc or was at least nearly' urban in terms of facilities such as schools, cinemas, raiVroad connection ar-rd other means of communication. "I'hus, locations like Hosur in 'I'amil Nadu, Alu,ar in Rajasthan, or Aurangabad in Maharashtra attracted much more attention and investment than other centreg specified as backward in these States.2(; In short, the gror.r,th process corltiirued to have as its epicentre an industrial or ecdnomically adr.'anced urban conglomeration; but to the extent that sucb grorvtll brought large areas or seg[rents of p<rpulation n ithin the ambit of influence of modern irrdustry, the etTecl was salutory. However, this lype of developmenl continued to leave verv large areas of the country untoucired by the process of industrial development. 'Ihe answer to this problem, however, cannot be sought by a strategy rvl-ticlir concentrates on districts which have the least comparalive advantages, at least as seen by the entrepreneursi and which ilr numbers and area are so large as to call for a massive investment if the necessary inlrastructure in all its aspects is to lre built up. It is in this context that the National Committee on Development of Backrvard Areas, appointed by the Planning Commission and headed by B. Sivararnan, analysed the problems and made its recommenddtions. The main point of departure in the strategy suggested by the Sivaraman Committee was that, unlike in the past, the selection of concentration of backward areas r /as to follow nrot 'an area approach' but a growth centre approach'. The essential difl'el'ence was tllat in thc':rrea approach' the developmental elfolt had to lre widesplearl, l hat r'vould entail eitherr resources r)n a scale r.t,hich vyas nruclr tt-ro large in t(:r'nrs of competin5l claims on resourr;es; or lack of resources vvould result in inadequate investrnent which would continue to make the errea suboptimal itr ternr.s of quantunr and qualitl, ol the inll'asfucturc, making it distincth,a less preli:r'red or higlt iost location lbl tlie intendirrg 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 the centres or nuclei with growth potential so that there would be, ol,er a period of time; a large number of such centres throughout the country which would be capable of providing the impulse for modernisation and growth. In the identification of such growth centres, the Committee recognised that due consideration can, and indeed should, be given to creating more such centres in the States which, at present, are economically backward. Subject to this the Sivaraman Committee,s approach involves minimising costs, providing infrastructure by selecting growth centres which have a degree of urbanisation. The other criteria suggested by the Committee for the identification of growth centres were
:

1. Theli should have a

2.

They should have less than 10,000 workers in nonhousehold manulact uring.

population of 50,000 or more.

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 10,000 as per the 1971 Census.

manufacturing was lower than 10,000 although their popula_ tion size was 50,000 or more. On the basis of the three criteria mentioned earlier approximately 126 centres qualified to be considered as potential growth centres.rs An intenesting point that emerges is.that if on the basis of value-added per capita in manufacturing, States are categorised 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

In order to ensure that there is adequate time for results of the growth centre strates/ to manifest themselves, the growth centres selected for development should remain eligible for special assistance for a decade. On this basis the Committee identified eighty-four centres with a level of employment in non-household manufacturing of over 10,000, but there were also as many as 242 other centres where the level of employment in non-household

224

DISPERSAL OF INDUSTRY

classified as industrially backward, a little over 40 per cent (i.e., tlfiv-tlr'o) of thd gnowth cenres would fall in the industrially developed areas. If for reasons of national policy or accepted priorities it is proposed that special weightage be given to the industrially backward States, then it would be necessary to include proportionately more centres from areas in the selected Srorvth centres. 'I'he essential point is that unlike in the past, the concentration of effort should be on the rapid development of selected centres. The provision of infrastructure and the pt'omotional eflb|ts of the State Governments and the Central Government

should be focused on the selected centres with a view to avoiding difTusion of limited resources including administrative inputs. 'fhe Committee made a number of specific suggestions with regard to the manner in which this could be organised. Past experience has shown that otten, policy measures taken r'r'ith a view to encouraging industrial development in industrially backward areas-and at locations which are particularly backwardrthe benefits received by the local population in terms of industrial employment or as a stimulus for further development have been much less than one would expect. l'his r.vas due lo several reasons. The most important was that if the industt'y t)eing set up was of a kind which had limited or nort-existent linkages with local resouF ces, including manpower, the attempts to induce develop ment in backward areas could prove to be counter productive. In some cases, the local impact was negligible. It is not uncommon to see instances where the new industry is brought to the area by ;in outside entrepreneur with capital from outside. 'l'he stafT and often most categories of labour are from outside; to the exteni that a large proportion of inputs needed bv the manufactlring unit are also from outside, other spin-off efTects occur outside the area. This would imply that in the programme to stimulate industrial develop ment in new centres there must, on.the one hand, be selection by way of speciallv encoufaging those lines of activitv rvhich have strong local linkages in terms of raw materials. Horvcver, this nrav Irot a.lrvavs lic ltossible, particularl)' if the irrlentirrn is to disperse ilrdusttv trrot r; rvitlelv than has l;ecn in
the
I)a st.

Begulation and Development ZZs

source of tension.

which use as raw material the commodities which are traded on a national scale, e.9., metals - ferrous and non-ferrous, chemicals other than those which pose special problems of transpontation, new technologies such as electronics. In such cases the emphasis should be to ensure systematic measures to identif the skills that are ndcessary for new industry; and to the extent they are not available locally, provide special facilities so as to enable the local people to be trained to fill the vacancies. This, of course, would require considerable advance planning, but unless it is undertaken, the dependence on workers and suppliers from outside can create ten_ sion between the local people and the outsiders. What is more dangerous is that even at a later stage the local people may not benefit sufficiently because opportunities created by the location of new industries wotild have been pr.+enptei bv people coming from outside in the first instance. Recently several studies have been undertaken in different parts of the country to analyse the impact of new industrial rlevelopment on opportunities for local employment. In almost all cases the conclusion was that the local people tend to be engaged in unskilled jobs, whereas many, if not most, of the 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 advanced Slates outsiders were often from districts in the same State, in some of the industrially bdckward States the outside employ_ ment in the newly developed industrial centres was not f.rom other districts of the same State but from other adjoining States. Therc is, of course, nothing inherently undesirable in cross movement of persons from different parts of the coun_ try. Indeed, such movement may be a positive factor making for national integration. But in a society with a pei -gleater irasive scarcity of resources and opportunities, the intrusion of outsiders, particularly if they seem to monopolise more lucrative employment or income opportunities, can be a maior

for inoustrial devetopment provided by footloose industries which mone recent development in technologv has made possible. Such footloose industries, by and large, are those

In that event, it would be necessary to utilise opportunities

226

DISPERSAL OF INDUSTRY

At the same time it should.be recognised that an essential condition for the development df viable new industrial centres is that special efforts are needed for equipping the local population for transformation i ito an industrial workforce. An equally important requirement is to identifv potential entrepreneurial talent and to provide opportunities of meaningful training which can end the initial rraining period of the selected applicants who are given a blueprint of the industry they want to establish. By and large, entreP reneurs would either be people who already have an industrial background having worked at some level in a manufacturing industry or having managed an industry which is not very dissimilar to the one proposed to be set up. The main source of entrepreneurship is traditional trading families who have an awareness of marketing possibilities and have, or can have, contact$ with other families which may be in a position to provide flinance. The third category of potential entrepreneurs-and one which is a favourite with politicians of all hues-is the technician and the professional. This last category has an advantnge of knowtedge of techno logr; but experience shows that unless there is an. adequate and continuing support to this category of potential entrcP rtrfeurs, especially in the initial stages and in the form of expentise in other disciplines $iuch as finance, marketing and industrial relations, the technocrat-entrepreneur often enCls up as a losen. Entreprenetrship is a separate and distinct quality and an attitude of mind lt can be refined and developed;. and over a period of time through a suitable neorientation of education and social values, a larger pool of entrepreneurship can be created. It should be rdcognised, however, that except to a limited extent entrepreneurs cannot be created by making thern undergo training. llhis, in turn, means that the supply of entrepreneurial talent and initiative will be somewhat uneven and varying from one part of the country to another and sornetimes may be concentrated in 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 local entrepreneurship in the backwand aneas, a certain amount of development of srnall industries, mainly based on local rart'

negulation and Development ZZ7

material, may be possible. F'or this purpose a certarn level of infrastructural development such as the availabilitv of port er, water or essential inputs, developed land and industrial estates or sheds fbr small industries would be necessar,-. Second, in order to attract large and medium-scale industries growth centles which are lo be the.focal points for the backward areas, local entrepreneurship cannot be counted upon. In consequence, for large and medium-scale industries, either these will have to be public sector plants or expansion and diversification of large units presently located elsewhere both in 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 be an integrated grid, the capacity of the transmission system and the design, and the. distribution system at different centres varies with demand; and because of the svstem,s configulation and low despatch principles are such that backward regions often bear a disproportionate share ol fluctuations and shortages including greater frequenc,v of unscheduled powercuts. 'I'he link \,vith the existing regional or national network of roads and railways may be missing and would need sonre initial investment. Even more impor tant for large and medium-scale industries is the need for quick and dependable communication link with other parts of the country and in particular metropolitan areas and also in some cases link with the oulside world. A good telecommunication netn'ork is often a precondition for attracting industry t o backr,r,ard regions some distance away from the established inclustri:rl or rltetropolitan centres. l'he prlrble m, lrowever, arises because in most cases investment in inlrastructure of this kincl-link with national netn ork ol roads or railwavs, telecomrnunications, upgradation ol pon'er availabilit,v, development ol other lacilities such as developed land, and water supply, neerled by industry-tends to folk.rvv dentand rather than lea<i it. While this is Io some extent unavoiclable, especiallv in the coritext of general shortage ot resoufces/ it is to [:e recognised that adequate al]d ;timeh, investrnent in building up such infrastructure can be rnuch 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'rnative incentives by way of either subsidies or tax concessions' One of the purposes of initiating development in backward areas is to reduce, at least to some extent the concentration of industries in the traditional, large unban or metropolitan centres. 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 in terms of raw material and market will not be evenly distributed throughout the counhy, there is the important consideration of the existence of external economies associated with agglomeration of industriQs. In the absence of special industry would tend -uu"rl""" or policy initiatives, therefore,established industrial to go to urban areas which are plready 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 with large 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 of viable 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. '"o.,."", the correlation between industrialisation and 6f urbanisation is high not merely because manufacturing industry and consequently employment tend to be in large towns lt cin 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

negulation and Development 229

same lesson. Apart from this type of unbanisatron associated with the steel towns, industrial growth can take the form of either new industrial areas near metropolitan towns growing at a very fast rate or new areas transforming themselves into

large towns within a short period. Examples of the former type are to be seen in the growth of Avadi, near Madras, which between 1961 and 1971 grew from a populartion of about 13,000 to a population of 77,OOO; or Thane w\ich had an increase in population of 7o per cent in the same decade or Dombivali, near Thane which tripled its population between 1960 ancl 1970. Examples of the latter type are to be seen in the case of Kerkend near Dhanbad in Bihar, which in the sixties grew into a town of 51,000 population although at the 1961 Census it had a total population of 6,000. Similarly, industrial concentration at Pimpri-Chinchwad near Pune resulted in tripling <,rf the original population of 28,000 in a decade. All these instances underline the fact that even a successful policy of wider disprsal of industry would not eliminate the need for a conscious urbanlsation policy. What dispersal by itself would help to do is only to minimise the pressure on some of the existing urban based industrial centres and tend to make more manageable the prqblems of major urban centres many of which are bursting at the seams. Unless a conscious effort is made to ensure that the plan for industrialisation and urbanisation proceeds simultaneously some of the distressing features of unplanned urbanisation will soon emerge-and indeed, are already emerging in many of the new industrial
centres.

NOTES AND REFERENCES

l.

lfrdra, Pl.urrrirrg alrd Development Depat'tment, Statentent ofGovernnTent's

Poltcv, 1945.llncluded in Appendix Ll

23O
2.

DISPERSAL OF INDUSTRY

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 by the Natiorral Committee on the l)evelopment of Backward '\reas, B.Sivaraman, 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, Slatisfical outline oJ India. Bomba!', 1982, p. 75, 'I'able 7I.

lndustrial Policy Resolution, 1956. No.

s.
9.
10.

lbid.,

l9lJ0 edn., p. 76, I able 72.

,bid., 1982 edn., p. 81, I able 78. tndiir, Planning Commission, lleport Qn Industrial lli.spersal. Prepared b) llle National Committee on the Development of Backward Areas, B.Sivara man, Chairman. Delhi: Contrcller of pub'licatiorrs, l9sl (iltapter4, pp. l1 lbrd., p. 20, Table 4.r. Ibid., p. 22, fable 4.3. Capital Inveslnrent Subsidy Scheme as an Instrument for Industrialization of Backward Areas-An Expository View by Ajay Dua. Paper read at seminai' ou tDduslrial Developmettt of Backward Areas, organised by the Industfial Development Rank of India, 16-17 May
1960.

11. 12.

13. See note 10 above, p. 21, I'able 4.2.

74.

neport on Development sanking in India Developmenl Bank of India, t982, p. ;.

1gE0-81,Bornbay :

Industrial

15. Ibrd., pp. 14-15. 16. Ibid., p. 1s. 17. Ibid-, p. 76. 18. Ibid., p. 8. 19. The Industries (Development

and Regulationl Act, 1951, 65 0f 1951. In

1982,

Guidelines
Part

Section III, pp. 1-38, Section 11. 20. See note 10 above, pp. 6-9.
21. Reply by the

for Industries. New Delhi: lndian Investment Centre,

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.

Minister of Industry to unstared question No a747 ' daled' 25 April 1984 during the question Hour, in tarliament.The reply contains a

a.rbkl.
2s. rbid. 26. Se note 10 above. 27. Ibid., p,ta7.6, p.35. 2a- Ibid.,'paras 7.9 ro7.72. p.35,

Pricing Policy for Industry

Therc has beer4 over the years, a considerable amount of fitzziness and confusion about an appropriate pricrng policy in the

Indian context. This is true not only of the pricing policy for the public sector but also pricing of important commodities produced solely or largely in the private sector. T'he former is related to the lack of clarity with regard to the operative guidelines for the public sector industry; and in particular, the role of surpluses in the context of development. The latter, by and large, has arisen mainly out of the concern with 'fair pricingi; and until about a decade ago the main thrust of policy in this regard was to keep, through administrative controls, prices of important industrial products at a level lower than they would otherwise be. Price controls in one form or another have been fairly extensive and the methodolo6y used for determining the prices to be paid to the producer has often been strongly biased in favour of protecting the interest ()l tl)c c()nsullref in the short run l)ut lras generallf igno|ed llis
long-term interest.

Following independence the discussiqn about the price policy and the role of controls has been in the context of the stresses and strains. which were inherent in the process of

232

PRICING FOLICY FOR INDUSTRY

planned development and were, on occasions, aggravated by special factors such as droughtg, wars, or inflationary prersures arising from internal ahd,/or external factors. For instance, at the time of the First Plan, the justification of contrnls was that 'the conditions for a smooth functioning of an unregulated economy do not exibt at present and the social responsibilities which faII upon a modern State iust cannot be discharged without the aid of cgrntrols.'1 The main emphasis, of course, at that point of time was on the regulation of foodgrains prices, but the approach ttr the pricing policy and the role of controls was based upon the need to control inflationary tendencies and for this purpose 'great caution...\ias necessary in conceding demands for price increases.,2 By the Second Plan period, the argument no longer was that the prevailing circumstances made price controls necessary. The justificalion was that in a developing economy

The basic trend of governmerttal operations in the fiscal and monetary field is inevitablll expansionist. Generation of new demand somewhat ahead of supplies is a part of the strategy of development.... There is always a certain lag between creation of new incomes and the increase in available supplies on which they can be spent.... A measure of risk has to be taken. This means that there must be corresponding preparedness to adopt physical conlrols and allocations as necessary.... If controls are administratively cumbrous and may act as disincentives, lack of them it has to be remembered, may create inequalities and hardships to the prejudice, especially/ of classes that need protection
mos[. r

This, in essence, was the logic arird the rationale of controls during the sixties and the seventles. The Second Plan Document further emphasised that whitle controls on essential consumption could not be ruled out in particular situations, 'these controls should not be regarded as sufficient by themselves, and their imposition should be accompanied by measures simultaneously to increase supplies.'1 By the early sixties persistent dnd occasional high rates ol inflation had come to be accepted as a fact of life. The Third

negulation and Development 233

Plan Document, for instance, admits that 'the possibilities of

significant-and even disturbing-price rises cannot

be

entirely eliminated.'5 'I'here were several reasons fbr this such as unceftainty witlr regard to nronsoons and imbalances in the Plan implementation ol rates of growth in various sectons which are almosl certain to appear from time to time. The Plan Document also concedes that'the various restraints on consumption implicit in the Plan mav not always operate to the lull extent,'6 and, therefore, certain upward pressures on prices are implicit in development . and these have to be accepted as the basis for formulating policies and evolving mechanisms for restrairring price rises. It is in this context that official Statements of Policy over the last tr,t'entlr-five years-the Plan Documents, the annual Economic Surveys or statements of Government spokesmenhave consistently referred to the impofiance of fiscal and monetary disciplines. In practice, however, these disciplines particularly the necessary fiscal discipline was lacking or could not be enforced. This, in turn, meant that the burden on

other instruments of policy was greater. The logic of price controls and fiscal allocalions was spelt out in the Third Plan Document in the following terms
:

Without adequate fiscal and monetar.v disctplines other

regulatory measures cannot have the desired effect. But fiscal and monetary policies bv themselves may not also suffice lo secure the right relationship between various prices or to prevent undue hardship to low ano fixed rncome groups. It may be necessary then to have physical allocations and direct conlrols in certain seclors.;

'In otner words, the rore of price contr-ols and

other regulations was not merely to reduce the distortions which lvould arise in a period of excess demand, but to supplement fiscal and monetary disciplincs with a view to 'secure [thel right relationship between various prices, and to prevent undue hardship to low and fixed income groups.' It is in this context 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 print ing paper. By the time the Fourth Plan was under preparation the pressure on prices had become a $ource of concern; and policy-

makers, therefore, placed renewed emphasis on adequate mobilisation of internal resource$ and on the need to exercise discipline in incurring expenditure as a means for avoiding {leneral pressure on prices. At the same time there was a growing awareness

A distinction...should be ma{e between price

increases

which are likely to have a curnulative and wide impact on the economy and those which are of a peripheral nature .... The main emphasis in price policy should be to ensure that spiralling of costs, prices and money incomes through mutual interaction is avoided.E Apart fiom maintaining prices of essential consumer goods like foodgrains and edible oils, it was necessary to rlesign specific measures for regulating the prices of industrial raw materials which had a significant bearing on the general cost structure and the econorny. For the prices and distribution of these materials, regulations have to be operated with a twofbld purpose. First, with a view to ensuring economy in their use and second, preventing an undue increase in the prices of commodities produced from these raw materials. It r.vas also recognised that past experience of price controls and allocations had not been satisfactori; and in the light of this experience 'the entire structui'e of controls has to be reorganized so that the obiectives to be serwed by it are clear and the administration purposive.'s It was not until the late seventies" rhat the concern with price controls and physical allochtions as methods for countering 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 Commission was wound up. Accordinily, 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, unlike the earlier Plan Documents, had little to say about the role of price controls and allocations of raw rnaterials; instead the emphasis was on earning a higher rate of return from public investment, higher rates of dilect taxes alrd a differential system of 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 emphasised more the macrorequiremnts of a reasonable balance between ag$gate demand and supply through a combination of monetary policies and also a steady increase in the supply of goods of essential mass consumption. On the question of price of manufactured goods the Plan l)ocument very specifically mentions that price fixation 'should be limited to a few commodities where this is clearly required for maintaining or,'erall price stability.'l0 A fair return on investment was also mentioned-for the firist time-as an important determinant in administered priceg whether for industrial goods or for ser' vices. This approach was clearly reflected in the Statement on Industrial Policy of the Government issued in December 1977. The Statement begins with the proposition : There has been a tendency to regulate prices of industrial products rvhich were vital to the needs of development in a manner 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 adequate 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 products is possible only in the context of an effective policy fbr ensuring adequate supplies, al reasonable prices, trf fbod6pains

236

PRICING POLICY FOR INDUSTRY

and otl)er esscntial fbod ar.ticles like vegetabe oils. In letrc spect, it n,ould appear.tblt the inability ro t.cslrilitr prices of lbodgrarns and other agricultulal products including raw materials for major industries like cotton and jute textiles, sugar and vanaspati tended to make Government more keen on controlling prices of industrial products, often through arbitrary price fixation. Apart from the impacl of such price fixation on the profitability and gfowth of output in respect of items 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 the absence of such controls the level of prices in the market will tend to be higher than what is thought to be ,reasonable,. Controlled prices, therefore, have to he lower than the prevailing market prices. This, in turn, wopld imply that unless price elasticity of demand for that item was negligible, lower levels of controlled prices would aggra\iate the imbalance between demand atrd supply. An excess of demand in relation lo the available supply at a given controUed price can only be taken care of by a system of rationing which deternines the quan_ tity available to each user. A systpm of rationing is relatively easier to operate when all users qT that item require the oroduct in tnore or less predetermined quantities which do'not vary greatly from one user to another, e.g., foodgrains. For rationing to be administrarively feasible the product should have certain economic characteristics, namely, the product should be homogenous; there shoiuld be few, if any, differences in quality or specifications; the requirement of that item should be delerminable and not widely variable between consuming units or in respect of the same consuming unit from time to time. Only when these product characteristics are satisfied is it possible to evolve a workable system of price controi and rationing. Even in such cases, however, unless the controlled price reflecls true economic cost that provides for not only input costs but also leaves adequate ritargin of profit to attract additional investment leading to increased production either frorn existing manufacturers or new entrants, over a period, the imbalance betr,veen effective flemand and available sup ply r.vill tend to rviden. 'lhe widetr the gap, the higher the

Regulation anrt

Development

237

likelihood that price controls would lead to blackmarketing and the administrative allocations system would be under
increasing pressure. India's experience of price contrnls over the last twenty-five years contains many lessons, some of which have already been learnt, though at considerable cost to the economy. For instance, the earlier approach to price controls waE based or the assulrnption that it is economically necessary and adminis batively f'easible to operate an extensive and integrated sys

tem of controls consisting of price controls, quantitative

allocations, 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 temporary devices of a transitional character until the demand and sup ply were in better balance. In fact, as pointed out earlier, the realisation (during the mid-sixties) that fiscal discipline could not be observed or enforced put a premium on the use of price controls and physical allocations. As experience has shown, the attempt to sul)stitute (or even supplement except to a marginal extent) fiscal and monetary disciplines by physi cal controls and allocations only led to considerable distortior in the forn of arbit|ary allocations, erosion of political o administrative will to reduce the area over which controls are exercised and an enormous increase in blackmarketing, black money and money power. No doubt, as compared to the sixties the extent and rigour of controls over itrdustrial prices have beeu gneatly reduced. But even now, it is not clear whether all the important lessons of the past have been taken into account. A classic example of this is the history of working ol price controls in the drugs and pharmaceuticals induslry. 'l'he Drugs (Control of Prices) Order of 1963 as amended liom time to time, virtually requires the administrative ministry to announce and enforce prices of the entire range of basic dnugs and formulations. The extent of the task is best seen in terms of the number of formulations-around 25,000 at the last count-and seventy'

five basic drugs (excluding imported drugs) which

are

manufactured by over 5,000 units, of these 130 units are in the organised sector which account for the bulk of production. To complicate lrlatters further unlike other industrial products

234

PRICING POLICY FOR INDUSTRY

which are purchased directly by the consumer, induslrial or individual (though he may be influenced by the publicity and advertising), the formulations arg, in the main, sold through the intermediary of the prescribiyrg doctors or are bought in bulk by institutions such as hoopitals, nursing homes and more recently by large organisations like the Employees State Insurance Corporation or the Central Government Health Scheme. It should also be noted. ttrat production costs of a formulation will vany depending ,lp.,n u change in the formula and the price of any of the qrumerous inputs including sweeteners, syrups or solvents which are of a nonpharmaceutical character. In shoft, what the Drug Price Control Order seeks to do is to co4trol the retail prices to be charged uniformly in all parts of thp counlrv, for prodr.icts whose consumplion, to a substarttial extent, depends not on prices, but on the medical practitionels preferences, and the input costs of which are, in.varyilng degrees, uncontrolled. A large number of formulations which are price controlled use mole than one basic drug or active ingredient; and the change in the price of one on more basic drugs involves a conselluential change in prices, in varying degrees, of literally hundreds of formulations. The consequence, of course, is that there is an inevitable lag between cost escalations and price adjustments, the former remaining always a sqep or two ahead particularly in an inflationary period. It is not that the ir-rherent problems of price controls of this nature have not been recognised. From time to time, Committees, Working Groups and more recently the National Council of Applied Economic Researchl2 have addressed themselves to these pnoblems and have come up with suggestions ol solutions. But there has been insufficient willingness to address oneself to tlie more fundamental issue, namely, what is it that one wants to achieve as a result of
control
?

In an industry like drugs and pharmaceuticals there

several issues, some of them emolive, which agifate people,s minds and which influence public policies. There is, for instance, the question of 'Multinationals, and their dominance in the pharmaceuticals industry. The underlying assumption is that the hold of multinatlbnals would be reduced if they,

are

negulation and Development Z3g

find that their operations in India are not as plofitable as they would wish them to be. There is also the related question of distrust and scepticism about the pharmaceutical effectiveness of specific formulations. It is argued and with some iustification- that the high pressure salesmanship resorted to by drug companies thlough their medical representatives is intended to induce doctors to prescribe lheir brand-name formulations, although there is no scientific evidence of their being superior to other formulations available at much lower prices. There is no doubt that there is a great deal lvhich needs to be rectified in terms of the drugs ancl pharmaceuticals inrlustrys commitment to its social responsibilities, particularly in a poor country wlrere modern allopathic meclicine is still the preserve of a l'ew. It is also rrndoubtedly true that despite the seemingly rigorotrs price controls, the level of protilability of the drugs industrv has until recently been significantly highel than thal of many other industries meeting the essential needs of the population. The question, however, is not whether it is necessary to enforce some orderliness in the production pattern and therapeutic. effectiveness of the products of the dn-rgs industry; but whether, and if so to what extent, a system of price controls is likely to achieve this goal. It would appear that, for various reasons, an excessive degree of importance has been attached to the role of price controls in the drugs and pharmaceuticals industry and tl-reir likely contribulion in terms of public welfare. If it is accepted that there is a direct proportionality between the availability of medicines and public welfare it is clear that any arrangertent which reduces, over time, the availability of medicines is counter-productive in terms of public interest. An elaborate ancl cumbrous systerr, of price controls tends to put a premium on the prices at which a medicine is available as distinct from the ready availability of the medicines when needed. Thus, the emphasis on the price aspect becomes even more irrelevant when it is recognised that unlike other industrial products the end price of a medicine (or an injection) constitutes only a small part of the total cost to the patient. This is obviously true in case of private patients buying medicines on the basis of their doctors' prescriptrons; bllt it is also tt'ue in r:ase ol pultlic

Z4O

PNICING POLICY FOR INDUSTRY

well-todo fbe cost of medicines, etc., is necessarilli only a fraction of the total cost of the facility' plovided in health services organised as pdrt of the social securitv svstem" 'l'he major elements of costs consist of land and buildings, doctors' salaries and medical equipmenl. Against this background, one of the app|oaches used front time to time is to be more meticulous in the fixation of prices of what ale called 'life-saving drtrgs' and to keep these prir.:es as low as possible; and to permit somewhat mol generous mark-ups on dinect costs in the case of non-prescription drugs and formulations. The logic underlyinf{ this is that, by defini tron, the latter are consumed by l)etter off sections of the commulrity who can, therefore, all'ord to pa1,. The limitation of this approach, however, is that the profitability of a company will thus depend upon horv mutch it procluces and sells (or can produce and sell) of the sorcalled 'less essential drugs, such as commonl_v used household remedies for aches and pains or vitamin preparations. In other words, a pharmaceutical manul'acturer who produces an anti-leprosy drug or a dr-ug for treatment in cardiac cases would have to be content with a lower level of prol)tability than sorneone engaged in the 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 as possible. By definition, in terns of the number of times an individual uses them or the cost gf the drug as a propbrtion ol the total cost ot treatment offered, excessive concern with the price of life-saving drugs appears to be ill-founded..If anything, the crucial consideration in respect of such drugs should be their availabilily and their therapeutic effectiveness rather than their price. On the other hand, the household remedies, vitamins, and tonics which are very widely prescribed or used extensively have probably, a greater impact in terms of the consumer budget. One could argue that if benefit to the consrimer is to be the criteiion, it is these drugs rather tHan thr lifesaving drugs which need to be controlled. The trutn, however, is that the approach to pricing policy in respect of the drugs and pharmaceuticals industry has been coloured b1, the mistaken nbtion that the ills and shorthospitals catering to the needs ol the less

Eegulation and Development Z4l

comings-and there are many-of this industry can, and should be, tackled through a rigorous system of price controls. Only recently there has been an increasing awareness of the importance of epsuling adherence to the national pharmacopoeia, avoidance of unnecessary drugs, or excess dosages of vitamins, etc., which have no therapeutic l,alue and are wasteful in terms of resources. Similarly, a shill in emphasis away from controls over prices, the insistence on siandards, therapeutic effectiveness and ready availabiliry is slill not common. Finallv, if the concern is about 'excessive profitability'-and that too in an industry' r,vhich appears to thrive on people,s illnessess the answer could well be in terms of a post-fac'to examination of pnofitability of individual units; and an arrangement by which they are required to readiust their prices so as to bring their operations within the prolitability norms worked out for the industry as a whole. The experience of the working of the drug price controls over the last two decades illustrates how a lack of clarity regarding the objectives to be achieved and also an inadequate recognition of the special characteristics of the product can resu.lt in a cumbrous control system which fails to senve the purpose for which the conlrol was first introduced. Another industry where a system of rigonous price controls has been in existence for a long time is cement. More than lorty years ago, in 7542 when cement was brought under price control, the Government of India fixecl the prices admissible to cenent manufacturers on a cosl-plus basis. In 1946 the price of cement was again fixed on the basis of cost of production of the Associated Cement Company units as it was the single largest group producing cement in the country. The fixing of prices by executive orders continued till 1952, when the Tariff Commission was requested to suggest a fair ex-works price stfucture to cement proclucing units for the first time in 19s3. Following this, the Tar.iff Commission carried out cost studies in 1958, 1961 and 1964; and in all these enquiries because of the varialions in working conditions and homogeneity in prr> cessing technolo5y, the _number of labourers employed, the age of the plants, the availability and transportation costs of raw matefials, etc., nratrulbcturing costs of the units. differed

.A2

PRTCING FOLICY FOR INDUSTRY

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 Government

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 a system of uniform prices for the industry as a whole would have the effect of compelling the high cost units to seek economies and provide a measure of reward to those units who were able to achieve therrl, Government continued to follow 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 een Rs. 69.50 to Rs.75 exunits,. the price range varied ent in 1961 and between works per tonne of naked 1969 the llrice was fixed at Rs.90.50 to Rs.96 in 1968. In raised the price to Rs. 100, and successive Price the point of view of the conRs. 161.12 by october 1977 the retenlion price but the sumer, however, it is not so mu FOR destination price and for the smaller consumer, the retail price 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 of lcement 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 price ivaries depending upon the ratds of sales-tax' octroi' etc For 'example, during 1983 the retention price payable to cement per tonne and the FoR destination -urrrrfu"t,l"r"" was Rs. 335 the range of Rs 653 to Rs' 787 per price of levy cement rt'as in
tonne.

of India.

price has been under control in the case of cement First, cement price control because it is an essential commodity and since
Sevenal issues are relevant

in an examination of the

ih" fifti"" with the increasing

emphasis on planned investment, the Goverqment and pullllic sector entilies al a sul)stan,l'lte |)l.ice ()Ollll.()l ()|1 (j(]l.l.l(]llt, tial t:tlttstttttt:t. 01' cenrtjlll.

Regulation and

[hvelopment

2qz

and the Centre, large and small-scale industries, public sector undertakings and institutional bu-vers constituted the major consumers of cement. The other category of cement user is the general public whose requirements are mainly for reparrs or new coostr.uclion of houses arrd although these may add up to a large number they are individually small. Based on the antir;ipated t.equirements ol the Government departments in the States and the Cenlre atrd the other consumers in the reserved category, the Cement Controller determines the allocations and directs the allocation of cement to the priority categories. Since 1981 when partial decontrol of the price of cement was introduced, the categories eligible for ailocations of levy cement, i.e., approximately twGthirds of the prcduc_ tion of each unit which is price controlled, were nedefined and limited to the requirements of irrigation and power, other public sector uses includin6; clefence, small-scale lnd ustry and mass housing conlblnring to certain stanclards of austeriiv. Fol the I'esl, cenlent vvas to be available in the li,ee market at prices r.vhich r.vould be tleterntinerl on the basis of market forces of dernand and suppl-v. An important feature of the price control in the case of cement is the concept of uniform FOR price based on freight equalisation. 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 actual average freight costs in respect of ler.y cement sold under the Cement Controllels directions are less than this notional ele ment'hakes payment into the.freight-pool, whilst the freightpool pays out to the manufacturer whose actual freight costs are higher. Since the freight equalisation scheme offers uniform prices to consumers located in different parts of the country, it would normally result in increasing the dverage haulage. This tendency is further. strengthened, when as in the case of ceinent thg reserves of the essential raw material, namely, Iimestone are not evenly distributed throughout the country. One of the consequences of freight equalisation is to put a premium on locations which are closer to raw material sources rather than to the markets. In practice, this has meant

tberufbre, was also accompanied by a distr.ibution svstem based on allocati<rns. The various (;overnnrent departnrents in the States

44

PRICING POLICY FOR INDUSTRY

that sites in South and West India have been .preferred

although 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 tonnes. During the same period the surplus production ovef consumption 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 (51 per cent)' the cent) and the western and southern regions northern a.td eastern regions together produced only 31 per cent, that is, only a little over 60 per cent of their requilments' Another indicator of the impac[ of freight equalisation with was regard to cement is that the avenage,lead distance rvhich 1966-67 and 377 kilometres in 1960-61 rose to 468 kilometres by 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 quite e*"Jpt f- very long leads, its effect on profitability is ir-t it-t" c."" of units located in the cement surplus "ig.rifi"u.r, South and West Arl official investigation into the aias of the in consequences of freight policy showed that -the -reduction waE only slight for leads of 1'000 kilometres' construction costs 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 be kilometres, the cbst of construction (at 1974 prices) would 6 per cent' As against this' the affected to the extent of only may disincentive to the producer in choosing a location which delivered costs of inputs includbe slightly inferior in terms of ing lilestone and grpsum, etc , was quite significant' when the he could not compensate this disadvantage by exploiting to the mafket Anolher consecost advantage ofihe nearness quence of freight-pooling has ben to discourage.the exploitation 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 the earlier years of the operation of price control on cement, new entrants were able to overcome or, at least, to reduce substantially the disadvantages of higher capital costs by improvements in technology and economies of scale. But by the seventies, the substantial increases in capital cosls per ton of oulpul as a result of the increase in prices of equipment, civil construction, etc., placed the new unit at a considerable disadvantage, and this could only be partially compensated by economies in variable costs. In an industry in which more than 50 per cent of the capacity as on 1 January lgZZ was more than twenty years old and nearly three-fourths of the capacity was more than ten years olci, the weighted average costs in respect of servicing of capital at charge tended to be much lower than what was needed for a new unit. It was against this background that the Government considered the question of a higher retention price for new units. In its Report on Cement Prices in 't974, the Tariff Commission had emphasised the need for 'differential treatment in the matter of returns, for new units, but had ended up with the recommendation which, in effect, meant an additional price of Rs. 10 per tonne to units going into production after September 1923; and in re pect of expansion, the extra production was to receive an addition ofRs. 5 per tonne only. For new uniis going into pre duction during the pricing period, that is, up to 1929, the additional price was to be Rs. ZS per tonne. In 1976 Government evolved a formula for fixing prices in case of new units which constituted a major departure from past practice. First, instead of a rate of return on capital employed, the basis of price fixation was to be a ,net post-tax return on equity, that is, on the shareholders, funds including reserves. For purposes of calculating post_tax returns, the standard rate of tax was to be taken into account so that any reduction in effective tax rates accruing to a unit as a result of specific tax incentives such as investment allowance, etc., would be to the advantage of the investor. Second, in case of additional capacity it was decided that the capital cost per tonne of output was to be calculated uniformly on the basii of Rs. 650 per annual tonne of capacity irrespective of whether it was expansion of an existing facility or a new production

46

PRICING POLICY FOR INDUSTRY

facility. This had two consequences. Thene was a built-in incentive lbl opting lbr expansion of capat:itv w'ltetr:ver fi:asi ible, because ordinarily, capital costs per annual tonne of capacity in respect of expansio4 would be lower than for'a new unit. Further, a fixation of a specific figure meant that anyone 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 profits built into the cost formula The new scheme was announced in 1977, and the test of its attractiveness was that with thi$ announcement the irlvestor interest in the additional cement capacity was very high Between 1977-80 the additional capacity new units and expansions-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 restrictions, but continued to remain under the pricing formula of
the TarifT Commission. The condlusion is inescapable Even if for reasons of public policy it is ponsirlered necessary to keep

The mechanisms for ensuripg thls would vary ftom one indus'

an industry untler price control, mechanisms need to be devrsed to ensure that new inrlrestment is not discouraged

tr-ri to another, but for the success of any price control measure it is of the utmost importance that there is a built-in incentive 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 of prices) 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 enforcing price discipline may not be eittier leasible or the most effeciive. A case in point is the policy adopted by Government in

Regulation and. Development z4z

with regard to the pricing of commercial vehlcles. There was considerable concern about the fairly steep increase in the prices of commercial vehicles. This, according to the manufacturers, was tEe direct consequence of an increase in input costs of materials, bought out components and other inputs including power. Any proposal to fix prices for dif: ferent models and makes of commelcial vehicles would have entailed enfbrcement of price controls in respect of a very large number of components which were produced in small,
1975

medium and large.scale sectors, and many of these rt/ere prG duced by hundreds of manufactureps with varidtions in quality and specifications. This, in turn, would have either required fixation of maior input prices such as fen-ous and non-ferrous metals and special steels, or an escalation fom)ula to take into consideration variations in these input prices. In short, if the system of price fixation was not to be arbitrary, it would have to be so comprehensive as to be administratively burdensome, 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 pricing policies of the units rather than flxation of prices per se. In other words, public interest would be protected even if the producirig units were given freedom to alter their priceswithout prior approval of the Government provided they could satis'$, tl-re authorities post facto that the changes made were in conformity with the agreed paranreters fqr determining the list prices. After a great deal of detailed investigation and discussion with the manufacturers, the Government suggested alternative criteria such as post-tax rate of return on, capital employed and the manufacturers were given the choice to opt for one of the alternative formulae- The manufacturers were required to substantiate their reasons for enhancing their prices, and provided these were in conformity with the broad parameters agreed upon, the manufacturels retained the freedom to alter their prices. It was paft of the arrangement that in calculating the rates of return on equity or capi. tal employed, these would be related to certain minimum degree of utilisation of capacity which was close to the optimal utilisation; and that it would not be permissible for

AE

PRICING POLICY FOR INDUSTRY

manufacturers to increase prices, using their monopoly power to protect profits, even in the event of significantly lower rate of utilisation of capacity. There was, thus, a built-in safeguard that price increases wefe not regorted to in exercise of the monopoly power enjoyed by particular manufacturing units. Another interesting and important lesson with regard to

price regulation and control is provided by the experier-rce of pooled prices, that is, separate retention prices for individual units or categories of units comprising an industry and a uniform pooled price to the consiumer which is made possible by individual manufacturers making palmenls into or receiving amounts lrnm a price equalisation account depending upon whether their netention price is lower (or higher) than the pooled 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 of pooling lecomes administratively easier if there is a relatively small number of large units whose retention prices can be detefmined on the basis of detailed cost investigation and easily 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 out reasonably well, and more importantly has acted as an assurance to any new producer that he can hope to receit'e a reasonable price which takes &ccouht of his higher capital costs. An even moPe interesting example of the system of pooled prices is that of fertilisers. Unlike aluminium which is an industrial raw material, fertilisers are an essential input for the coirntry's largest activiiy, namely, agriculture Second, unlike in the case of many other products, it is part of the public policy to ensure a rapid increase in the per hectare application of fertilisers. Third, the price to be paid by the agriculturist for the fertiliser he uses has to be low enough to make it attractive for him to increase the usage of fertilisers to the aglonomically. optimal level. On the other hand, apart from being a capital intensive lndustry, the fertiliser industry, especLlly in tndia, faces another special problem. The feedstocks for the fertiliser industry in this country include coal 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 of technologr. 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 develop ment 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, and the price to be paid by the farmer taking into account the end price for his product and also the need to maximise fertiliser usage. The two cannot be identical. Therefore, pricing and distribution arrangements for fertilisers, apart from involving a pooling of prices at the manufacturers' level, require a conscious 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, technof ogy, etc.) can, of course, easily degenefate into a system of feather-bedding even the most inefficient producer by ensuring fol him h price which covers all his costs even if they are inordinately high and, in addition provide him with a margin of profit. In fact, in any system of retention prices or differential prices to units this is a real danger. This problem is tackled in the case of the fertiliser industry by defining an adequate rate of return which would be available to any producer provided he is working at a level of capacity utilisation which is technologically feasible; and provided that the consumption norms envisaged in the project report or forming part of the performance guarantees are being achieved. The rate of return is defined as 'post-tax net return' to the investor on his own funds, i.e., share capital plus free reserves. In practice, if allowance is made for all the tax incentives, this rate of return, in most cases, works out to be a fairly attractive figure; but this is available to a manufacturer onJy if he is working at or near utilisable capacity and is not exceeding the

250

PRICING POLICY FOR INDUSTRY

consumption norms in respect of lnputs including water, elec_ tdcity, et.' The arrangement, thus, that fo'r an elTicien_ tly, functioning unil, irrespective "n..,."" feedstock used of the or other variations arising fronr the age of the plant, the techne log, used, or the scale of output, etc., there is a fairly attractive rate of return. The problems, in pfactice, have arisen because in sonre cases or on occasions, the profitabilil-v of the unit was seriously eroded as a result of faciors beyond its control such as infrastructural deficiencies resulting in shor-tage of power, or nonavailability of coal. The systerrr of pooled pr.ices of the kind evolved tbr the fertiliser indu6try along rvith ihe adminis_ trative mechanism evolved for continuous monitoring of input costs 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 iarmers and the community as a lvhole. Anothel varianr of price conttol is the system of dual price -a lower price fixed fol quantities made available through a svstem of priority distribution as in the case of cement or for certain.rationed qrrairtities as in the case of sugar. The logic underlying dual pricipg as a policy instrument is that centain specified end-users or limited quantities in respect of all users should be made avallable at prices which are related to the cost'of production bqt are not adequate to maintain a satisfactory level of profitability for fhe industry. The non controlled supplies which are sold in the market at prices determined by demand and supply are expected to provide the extra element of profitability. thus, the ler,y prices in the case of cement was lixed at Rs. il,lO till June 1983, and Rs. 492 fiom July to December 198it excludfing l]eight, salesrax, excise duty, etc., whereas ihe price received by the manufacturer in respect of free sale quantities during 1983 varied around Rs. 1,200 per tonne. Similarly, the ler.y price of sugar was Rs. 300 per quintal while the open market Wholesale price varied between Rs. 380 to Rs. 510 per quintal. DuaI pnicing is, under certain clncumstances, an attractive alternative; but it is importaltt to recognise that the economic logic of dual pricing or its social utirlity is dependenr upon certain 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 in

iiuality. and specifications. If the product is not homogeneous, ,that is, if there are a large number of varieties with variations in production costs and/or market prices on accouut of consumer preferences, the operation of dual pricing can be dif-

ficult or distorted. Further, two different prices for the same product-{nd this is what dual pricing essentially means*can be iustified only on the basis of differentiation between end-

users atld also on the assulnption that cross-transfers between them would be relatively small. The differentiation becomes relatively 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 to all of them at a lower price. Consumet's who desire to supplement 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 product on a continuous basis, the system of dual pricing would lrave to make a distinction between lhe needs of the end-use|s by speci$ring certain end-users as deserving of special trealn)ent. Thus, the allocation of levy cement at lower prices is lirtrited to specified end-users such as Public lVorks Depaftment, it'figation proiects, power proiects and railways, to lt,horn pe|iotlic allocations are made on the basis of their estimated t't:quit'ements calibrated for the evailability of lew cement. In tlleoly, therefore, these end-users could be allocated palt ol wholt'ol their requirements at lower prices; and they could lle left li'ee to supplement these allocations by purchase in tlte opcn Irtat'ket. Those who..are not eligible for lery ce rnent would pulclrase their requirements in the open market only. In practice, however, the allocation system based on the concept of priority users suffers from a basic limitation. jlhe underlying assumption is that all requirements of the eligible allattee Ar of' equal importance. To illustrate, allocati,on of 'oement, lbn $a)1, qtgilways or the lrrigation Department can be used for darir work or construction of a boundary wall (which can well be constructed without the use of cement) or other less 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 undertaken by the non-eligible category of cohsumers. If the difference in the prices between preferential allocation and the open market

sales

is significant the tendencv inevitablv would be

to

to ensur that the open market prices of sugar remain at a level which is deemed to tre acceptable or desirable in a given situation. Thus,.larger releases by way of lely sugar increasing the availabilitv for each consuming unit as at the time of festivals, etc., is used to ensure that the open market prices do not rise unduly because of the seasonal increase in demand. On the other hancl, it is well-knowm that releases are limited if it is found that the open market prices are tending to fall well below the level deemed to be acceptable from the point of view. of .the profitability of the industry. In this situation, decision-making with regard to the quantum of release isrot only a very tricky operation but can become a source of political patronage or other undesirablq practices. In the case of cement, on the other han4 the ler,y cemenr quantity is fixed as a proportion ef the industqy's productive capacity and not the production lbvel during the period. The ionsequence is that if, for whateyer reasons such as power shortage, and lack of coal, the oulput of the industry is lower, the proportion of its total output which has to be earmarked for distribution under lev_v goes !rp. The situation is further complicated by the fact that under an inforrnal arrangemenr the Cement Manufacturers' Association with the tacit a[proval of the Government has fixed what it calls a fair open market price. With a wide variation in the availability of supplies to the open market, what happens, irt practice, is that whenever capacity utilisation in the industry is adverselv affected as a

overstate the requirements b)' eltgible allottees, and this, in turn, could leacl to substantial leakages into the open market. It is well-known, for example, that black maiket in cement has been a thriving source ol black money and that substantial quantities of cement allocated to Governmer.lt departments do, in fact, find their way into open market sales. There is yet another aspect of dual pricing which deserves mention. In the case of sugar, fon instance, the dual pricing mechanisrn is further controlled thrcugh a system of releases from the factories; and the quantum of these releases is used

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 in the availability of cement in the market; and the ordinary consumer has to pay a price which is significantly higher than the price iit which factories are supposed to supply their cement to lhe distributors. Exlra margin is eilher apprG priated by. the,distributors, or more likely, is shared between them and the producers. The consequence is that the dual price 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 well require a lower rather than a higher level i:f output. The reason being that the lower the quantities entering the open market the higher is the price; and considering that the profit margin in free sales is much higher, the extra costs of lower utilisation of capacity can be easily offset by higher realisation to the manufacturers, dire ctly or indirectly, from the free
market sales.

The point, therefore, is that dual pricing as an instrument of policy can be successfully used only in special circumstances; any attempt to generalise the application of dual pricinp would lead to significant distortion and adventitious income, often untaxed, for those who are in a position to manipulate the dual price arrangement. On the other hand, dual pricing can be viewed as a transitional phase between comprehensive price and distribution controls and the operation of rnarket forces. For this, it is necessary to ensure that as a result ofthe profits 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, it is essential that the concessional or preferential price is nol kept at too low a level and is adiusted over time to take into account 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 adven sely affected. This would tend to discourage new entrants and defeat the purpose, namely, moving towards a better balance between demand and supply. Sirnilarly, there has to be a conscious effort to reduce the gap between preferential or concessional prices and the open nrarket prices The free market

N4

PRICING POLICY FOR INDUSTRV

prices would, no doubt, go down with increased availability in the open market; but the pi'ocess of reducing the gap would be facilitated by periodic upward adjustments in the preferential prices. If dual pricin$ is to be used as an effective instrument of policy, it is essential to keep in view these considerations.

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, cations, 1961, P. 125.
6. rbid 7. Ibid., p. rzE.

Third Fitt-yeer PIan Delhi: Manager of Publi

8. India, Planning Commissiory Foufth Fivayear Delhi: Manager of Publications, 1969, p 1E.
9.

PIan

1969-74t

A Drzfi Outline'

Ibrd., p. 19.

10.
11.

Indi4 Planning commissiorL Draft Sixth Fiveyear Plan

Delhi : Controller of Publications, 1979, pl 9.

7978-83'

neised'

Indi4 Statement of Indusn'ial Policy 23 December 1977 In Guidelines for Induslrie.s New Delhi: Indian Investment Centrc, 1979, Part I, Section Il,

10
Conclusions

The discussion so far has been primarily limired to how the policies and pnocedures relating to the dwelopment and regulation of industry have evolved over the last thirty years and how, in practice, there has been a continuing and often gruwing chasm between objectives and results and between prnmise and performance. Since the work on this monograph
began, many changes have occurred; and over the last ferw years there has been a growing awarness both in Govemment and in public debate that a radical change is needed in our perspectives

and policies if the country is to march into the twenty-first century as a viable and vibrant nation. The change in the political climate and the emergence of a new and younger leadership provides an opportunity to critically review past policies and to fashion them to meet the needs of the future. Such a review does not, by any means, imply that past policies were necessarily wrong or ineffective.
prcpositions. First, although a glBat deal hag been achieved in terrns of widening and deepening of the industrial structure and some steps have been taken towards making industry cost to be done if the countqr is to make maximum use of the potential that has been built
conscious, much more remains

But the urgency of such a review is predicated on two

?36

coNclustoNs

up as a result of development in all sectors of the economy over the last thirty years. Funthef, the policy parameters for the future will necessarily have to be different What was right or relevant in terms of policies in the sixties or even in the seventies will not-and indeed cannot-be the correct prescription for the future. It is necessary to design policies which lake into account the changing environment and seek to build upon the achievemenls of the past. The second proposition is also important. It would be srmplistic, 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 or in the sectoral allocation of resoulces. Apart fnom being contrary to the long tradition of thinking which has always emphasised the need for active Government intervention in order to accelerate industrial development, there can be no doqbt that the social and cultural ethos of the country will not permit a democratically elected government to largely abdicate its responsibilities in thd e,conomic field. Indeed, in yearc to come, there will be an ingreasing trend to hold a duly
elected 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 assume the form of comprehensive and detailed regulation .and control. In fact, experience has shown that whatever the origins of such controls, they tend to acqqire a life and momentum of their own and outlive their utility. For instance, many of the controls-control on textiles; rent control; pnoduction control on indtrstry; aUocation of scarce raw materials, both indigenous and imported; and foreign exchange and import controls-were introduced during the Second World War. Their primary objective was to conserve nesources for the war effort' and to overcome the special problems created as a result of wartirne shortages. They continlued in the post-lvar years because in the earlier years of planning an era of shortageg including food shortages, formed, the backdrop for economic policy-making. Many of these cotrrtrols, therefore, wene continued with relatively minor modifications. The savings rate in the economy was low, foreigir exchange was scarce and conserwing resouipes w4s cruciall The consequence was that

negulation and Development 257

the main thrust of poliry-making and of the administrative

mechanism was centred on managing an economy of shortages.

Over the last quarter of a century and more, radical

changes have taken place in the economic and political environment. The current savings rate is 23/24 per cent of the gross national product instead of10 or 11 per cent as in the fifties. The foreign exchange neservs are much more comfortable than was the case in the late sixties or the early seventies, and.although when the rcpayment of the IMF loans begins some strain on the balance-of-pa5rments is only to be expected, it has also to be necdgnised that our base for export earnings has widened and remittances from abrrad are likely to continue as a sizeable element in our balance-of-pa3,ments. The domestic content in

the development process-whether it is agriculture, transport, power or industry-has increased suffciently to make much of the development including industrial development internal to the system rather than being dependent upon imports of technolos/, capital goods and raw materials ftom abrnad.

It is true that over a period of three decades till the beginning of the 1980s, the average annual rate of growth has been no mone than 3.7 per cent-a glowth rate which hofussor Rai Krishna of the Delhi School of Economics described as the Hindu rate of gmwth. On an annual per capita basis, the gDwth
mte has been around 1.4 per cent, i.e., apprnximately 50 per cent over the period. This has to be viewed in the context of gmwth prolections made in the Finst Plan which envisaged a doubling of per capita income in twenty-seven years. It has to be noted that in the last decade there has been a significant improvement in the gtowth rate. The Sixth and Seventh plan periods showed a

rate of growth of approdmately S per cent. The grcwth rates conceal the significant development in the agricultural sector whene the tnend rate of gmwth in rEcent years has showm a rising trEnd. Further, the amplitude of upward fluctuations in a good year is becoming sharper; and though there are downward fluctuations in a bad year, they are becoming less sharp.

On the othen side, however, while we have a well diversified industrial structure as compared to the fifties and the

25E

CONCLUSIONS

sixties there has been solne dec4leralion of industrial growth since the mid-sixties. T'he movemetrts in industrial output have become mofe enatic. Sur;prisingl.v, the per-iod ivhich commenced with agricultune Ehowing a marked growth trend has seen industry slipping badlv. One rvould have expected the reverse because dgriculture in India plovides not only the inputs for agro-based industnial activity, but also provides a large nalket for the products of industry. As pointecl out in Ohapter'-l sevetal hvpotlrescs have been suggesttltl which attempt to explain the slowing down of the rate ol growth of industrial production but a much more detailed investigation is required to test them. The fact, however, temains that there was a slowing down of industrial growth which has been reversed only in the last three on four ye:rrs. While there is some evidence of the be$nning of agficultural modernisation and a decline in its share in the overall income generation, and there has been considerable diversification of the industrial economy, the occupational structurc bf the population has not shown much change' In short, we have not made much ppgss towards the structural transforrnation of the economy which is the test of rapid growth' While we have made a be$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 ol eipanding employment opporturtities,. unfortunately in terms of the physical quality of life India does not compare hvourably with 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 relaiively 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 incremental capital-output ratios' lICORsl, arld to some extent, the capitaloutput ratio will clepend upon the stage of development Despite these qualifications, the capital-output ratio still provides ol i useful, though somervhat crudle, measure of the efficiency of and at the the use of capital stocks, botlt on the avefage nrarsin. 'lhe availatrle statistiCal itllot'Ination cotlfirnrs the ntarglrl.

negulation arrd Development ZSg

cal factors which have tended to reduce the marginal efficiency of capital there is; in a sense, a more fundamental factor which needs to be recognised in order to evoive the policy for the future. Following inclependence when the country launched its movement towards planned development the objective was clear; and what is more, there was a national consensus about its desirability. At the time of the forrnulation of the First Plan in 1950 the objective of planning in the country was defined very succinctly and pentinently as being three fold. The purpose of planning was to move towards a technG logically mature society which would ensure self-sustaining gfowth and avoid concentration of income and wealth in the hands of a few individuals. There were three elements which undenlined our approach to the development process_a lectrnological transformation withoUt which it was not possible to impart dynamism to the stagnant society; an emphasis on selfreliance so that economic development would be largely based on domestic efforr and over time, would become self_ sustaining; and finally, achieving this transformation in an environment which was socially acceptable by avoiding excessive 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 the value commitments' of the ideology underlying the evolution of economic policy-making in India.2 .Can we claim that over the last three decades we have taken significant strides in. eabh of these imporrant con_ stituents of economic policy envisaged for the country by common consensus ? The answer7 unfortunately, is, at best, a mixed one. It is clear that the confidence ani elan seen in the first ten or fifteen years after independence has gradually given \ /ay to doubts as to whether we are on the right path;

conclusion that over the last three decades incremental relurns from additions to capital stocks in the Indian economy have been declining. It is important to note that this is not restricted to industry but is also seen in ancillaries like power and transport, and in the economv as a whole. Recently, a great deal of intensive work has been undertaken in order to identify the reasons for lowering of the marginal output ratios. r Apart from the economic or techni-

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 lruslration 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
'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'
veat's rvith tlre emphasis on acquirin54 tlte 'coulurandinf{ heights

ing activity are now owned and rnanaged by the State' Virtually, 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 money- power' 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 growing 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 the public 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 sys tem 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 to emerge in a democracy based on adult suffrage. It . was implicitly assumed by Pandit Nehru that even in a country with mass poverty and mass illiteracy the democratic process would eqsure governments which would be committed to and effective in the eradication of poverty. It was further assumed that the system of public administration inherited from the British which was essentially based on avoidance of mistakes rather than achievements of particular socioeconomic goals would be an effective instrument for establishing and running a clemocratic sottialist fegime ollce it tl'as Inacle ac(loutllitl)le to the elected leadership. As in the case of public admillistration, the newly created public sector was expected to be the instrument for achieving certain goals, e'9., prevention of concentration of incomes and wealth in private hands, generation of surpluses for financing further investment, prc viding goods and. services for mass consumption and for developmental activities at a low cost by operating at a high level of efficiency', and being a model employer by setting standards not only in respect of emoluments but with regard to the place of labour in society. It is clear that the results anticipated in the Fabian ideology or more specifically, the expectations with regard to its application in the Indian context have not materialised. Where has the Fabian approach failed ? A fundamental weakness of the Fabian approach in the Indian context has been the mistaken belief that adult franchise in a country like India would produce in a poor society an effective prGpoor government. Further, it was assumed that the nature and structure of public administration would be such as would be effective in implementing pro-poor policies. Both these expectations have remained largely unfulfilled. Similarly, the efficacv of

262

CONCLUSTONS

State ownership and managemeirt of productive assets

utility of governmental controlsi in ensuring the pursuit of

r.lenrocratic socialist objectives has been increasingly open to doubt. The theoletical basis tor State monopolies in public utilities

or the

as a whole and in certain types of manufacturing aclivities and selvices is that because of the exlelnal economies associated with such monopolies and the consequent lowering of costs, such State monopolies subselwe public interest. on prlvate sector activity is that such contnols a,I'e des:igned to improve the allocation of economic resourlces or- distlibution of income by nraking the scarce resources 4vailable to the more cleserving weaker sections. In pna however, the theoretical possibilities of a reduction in co$ts as a lesult of State monG ltolv hin,e, in rtranv cases, lteen nrole than olllet llv the: operational inefficiency of the phblic sector. The experience of controls, by and large, has been that ttrough intended to help the small man, they have lleen effectively manipulated by the et:onomically strong. 'flre important conclusion, therefore, is thrt while the basic structure of socialistic dernocratic values which colstitute '.. what Professor Raj Krishna calllecl the value component of

range of economic activity. 'Ihere is enough evidence to suggest that a conscious policy of: progressively reducing the degree of monopoly for public sector enterprises or. even some of the public utilities may contribute more to the social good. Of course, the principle of Stulc nronopoll mav r.enrairr valid in certain limitecl fields, e,g., atomic errergv, but eaclr such case of monopoly would harle to be lustified on rner.it. This would be a departure from the traditional erpproach

Pandit Nehru's ideology continues to remain valid, the institutional fornrs or the operating mechanisms have failed to achieve the results expected from them. Indeed, lhe time has come rvhen in order to effectively pursue our commitment to the values of democratic socialism, i.e., 6powth, liberty and equality, it is urgently necessary to critically review and reconsider our traditional emphasis on State ownership or monopoly of productive assets, and also the detailed administrative regulatiqn and control over a wide

Regulation and Development 263

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 sector unit could enter these activities or even expand the capacity of an existing unit unless the public sector unit andl'or

activity did not encroach upon fields that were either reserved tbr the public sector or where, according to the Industrial I'oiicy Resolution, 1956, future growth was to be mainly in the public sector. This together with what may be termed as 'unplanned' expansion of the public sector through nationalisalion of sick units resulted in a diversification of the public sector 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 new private sector activity could be permitted without delriment to the basic obiectives of established policy because the public sector has already acquired the 'commanding heights'. In such cases competition frbm the private sector can crnly be on the basis of superior technolory, quality or services, and would, therefore, be in public interest. Finall,v, a close review of the present policy would Lre necessary in respect of public sector units which have consistently faced losses. In cases where there have been large and persistent losses and where on any commercial reckoning future prospects are bleak it would be necessary to work out schemes including amalgamation, or in some cases even outright sale to other public sector or private sector units. In slrort, unlike in the past when the growth of the public sector was limited only by the availability of financial resources, in future such growth should be determined by the extent to which il could achieve an accepted socioeconolrric obicctivt:. It would also be r:ssential

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

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 tlre plivate 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 ill cooperation rvith a suitable partner in the private sctor' 'lhe country can no longer alTord to plan allocation of resoutces on 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-Year Plan, stresaed Plan allocations and investments rather than' returns. No doubt, substantial and growing levels of investment are a precondition for the structural transformation of the econom-y. Without investmenl it would not be possible to sustain grolvth. Though it should be rerhembered that there is more to growth than investment; and investrnent is not an encl in itself. As L.K. Jha and otkrer discenning critics have, obser\'erl:- rre have, over the years, .tended to emphasise outlays rather (han output. I'he efficiency of investment is important in anv context. In a poor countr,v tvhere savings involve real sacrifices ;rnd capital is the scarcest resource, one cannot afford not to get the most out of the capital there is and ls being added to. Productivity is as important as investrnent as an instrument of growth; and yet productivity growth in our economy has not been a significant factor contributing to the acceleration of growth. Since the beginning ot'planning in the 1950s, plan exercises have made a distinction betweerr plan and non-plan outlays. The Plan outlays largely consisted of expendilures on new investments although there was an element of current outlays of a developmental character whlch was also included in the Plan expenditures. The priority given to Plan (as against nonPlan) expenditures has continued in successive Plans; but with the passage of time this distinction has often tended to distort prionities in the context of development needs at a particular point of time. For instancd, non-Plan expenditures are not, as is commonly assumed, necessarily or always nondevelopment expenditures. High Priority development expenditule like docial servrces of sums spent on belter maintenance

negulation and Development 265

and upkeep of past investments including burldings and other civil works, or even provision of balancing equipment not prG

vided for in lhe o'riginal project constilute significant

elements of non-Plan expendilure.3 The scarcity ol resources together with the political and,to some extent, economic compulsions of a larger size of the Plan have implied that out of the limited nesources available, the Plan pr-,ovisions used the bulk of resources and the arnounts available for non-Plan expenditure, however essential, tended to be inadequate. The result has been that although higher capacity utilisation and better maintenance are being accepted as essential elements

in improving the return on capital, the emphasis still continues to be ou Plan outlays. It is, perhaps, time to reconsider the methodolo$/ of the planaing process and, in particular, the present emphasis on Plan expenditures in preference to some elements of the non-Plan expenditure which could have cont|ibuted lar more to the growth of output. rn other words, the present bias in favour of outlays rather than output needs to be corrected. The current distinction between Plan and non-Plan outlays under certain circumstances, gives wrong signals in respect of priorities and serves a rather limited purpose in terms of pro viding guidelines for the allocation of resources. Instead, it would be more fruitful in the present context to think in terms of allocating resources for the development of a particular sector. In other words, the so-called Plan resources instead of being utilised only for new investments can be used for other typps of related and complementary expenditure whose objective would be to improve capacitl, utilisation thereby lowering the capital-output rhtios. Many examples can be cited in fhis context. For instance, the Plant Load Factor (PLF) in thermal stations which was approximately 55 in the second half of the seventies has now declined to less than 50 per cent. Part of the reason for the decline in PLF is the lack of adequate maintenance and balancing equipment in power plants. Almost invariably, the funds required for this purpose are much less than what would have been required if new investment had been incurn ed for the same amount of additional power. To put it differently, even l per cent increase in PLF would meall an

266

CONCLUSIONS

iidclitional polver generation of ds much as 400 mw, which r,r'ould irnply an investment of over of Rs. 400 .crores in case conresporrding addition to capapity was to be attempted. Apart from reducing the strain on limited resources such an inrlrrovement would also take ntqch less lime tha.n vr,;ould be required to complete a 400 mlv power project. It is evident

that whatever can

Lre done

to iprprove the PLF, even if it

involves some additional investment, would have a better cost berrefit t'atio thair additional invesiment in porver generation per 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 and distritrution -uvhich reduces power loss rvould cost much less than the investment cost of appft;xirnatelv rupees one crore

ll{r'nrr}gaiYatl and rvoulcl help rccluce the average c()st pef unil oulprll.r A greater concern about output rather than outlays essentially implies a grcaler emphasis on increasing productivity. Many of the policies and attitudes which were crystallised in the 1960s and 1970s require critic4l re-examination in the light of experience. F or instance, mairv pecrple (;rnd rnost politiciansl lrave a filnr cor.rviction that employment can lle increased

primarily bf introducing in a particular area large-scale manufacturing activity. In Parliarnent, and cven more force fully in the various Committees of Parliament, rnembers from different parts of the country wbuld argue in favour of locating large public sector projects in their own States or
their constituencies on the ground that it would help genenate employment and reduce the backWardness of the State or the aroa. T'he implicit assumption is' that modern manufacturing industry constitutes a maior source of employment creation. It is time we recognised that direct shopfloor employment in rnodern industry constitutes a relatively small proportion of total emplolrnent even in the most advanced industrial countries. Indirect employment creation, i. e. employment generated in producing inputs for manufacturing industry and also the ernployment in srbbequent operations like trans-

port and distibution, is much larger. The potential for emplovment 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 population of over 600 million people, the modern rnallufacturing sector cannot be perceived as the ntain provider' <;f direcl. and indirect employment. Of course, this does not mean that in the structural translbrmation of tlre Irrdiarr econornv n'hich slrould be the rnain obiective of ll.re next trt'o decades, or)e can ignore the neecl for creating as large a volume of agricultural employment as possible. Given the demographic compulsiorr arising from the population growth over the last thirtv vcars and the resulting age compositiorr it is cleal that a very large number 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 aliied activities such as forestry, fishery and dairying. T'he process of development whether in the field of agriculture, industry or minin5l also creates rapidly grorving opportunities in the field of transport and other sel'vices including banking, insur' ance, conllnunications, etc. A revitalisation including technologi cal upfradation of tladitionai industlies such as handlcorns, coir pi'oducts, leather products would also help generate much 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 cannot be achieved by trying to protect all existing employment in the organised iridustry or insisting that the modern manufacturing industry continues to employ surplus labour force in the belief that such an insistence enhances opportunities for employment. It does not. A steel plant or a petrochemical complex u,hich is required to employ a work force many times more than what a similar plant in an industlial society would 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 modennisation
using the latest technology.

It is often argued that with the relatively cheap labour in India a greaten degree of labour intensity is possible without adversely affecting the competitiveness of Indian industry. This is not always or necessarily trl-re. First, the relative cheap ness 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 relative cheapness of labour in India is reduced considerably. Second, modern technolog, using high speed production techniques involving larger capital costs also results in a higher quality or fault-free production: The higher degtee of automation and, consequently, low employment cdefficient per unit of capital or output is likely to make industry abroad much more competitive even in fields where, at one stage, it was felt that many industrialised countries would, no longer, remain competitive. Textiles is a case in point, High speed machinery and equipment producing large volumes of output of uniform and superior quality is now a common feature in many segments
of manufacturing activity in the industrialised countries. Comparative advantages for the newly industrialising, countries in the developing world arising from a large reservoir of labour supply will be fast dissipated if organised labour succeeds in

perpetuating surpltrs labour or in preventing the induction of newer technologies in the belief that this would protect the existing employment. An uncompetitive or obsolescent indus. try cannot tre an engine of growth or a provider of expanding emplovment. As a result of the development process over the last three decades the Indian economy and, in particular, the.Indian industry has become much more complex. The pace of change-pafi icularly technologlcal change- has beer-r accelerating the world over. If we ale to keep pace with the rest of the wonld, it is essential lhat the process of decision-making in Government and the administrative infrastructure for this pun pose be reoriented, so as to ensuie a speedier response to the emerging changes. In order to do this there has to be a far more prompt and accurate supply of statistical and other ilrfor mation 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 highest
priorit_v.

Thp thrust of policy in the comlng years, thenetore, has to be toWards removing systematidally the constnaints rvhich

negulation and Development 269

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 constructive pricing policies have had only marginal impact on the overall

thnust of industrial policy, The framework of the industrial policy continues to be restrictive both in its substantive and procedural 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 telecommunications, electronics, attitudes towards computerisation and steps towards liberalisation of licensing policy, etc., mark a departure from the past although there is a reluctance (or a hesitation) to adnit this. The result is that while ad hoc changes in particular fields are announced, these cannot be a substitute for an enunciation of a clear and coherent policv. In the absence of clarity about the directional changes which the new Government proposes to introduce, the process of policy ihanges tends to acquire an ad hoc character; the pace of change is necessarilv slow if not hesitant. It is clear that if the counlry is to move forward on several fronts simultaneously at a pace commensurate with our requirements the practice of gradualism will not work. Much can bb said in favour of opting for a directional change which is clearly understood ancl accepted. Specific policies affecting maior sectors or in res pect of crucial issues can then.be worked out. This appnoach instead of stepby..step adiustments in policies and procedqres would help in overcoming some of the constraints on development which have emerged oven the years. The first step in this direction is to declare unequivocally Governrnent's intention to review and modifu past policies in the light of experience. The basic questions which the Government should ask itself are
:

1. Are the policies right in terms of ensuring speedy achievement of a givep set of obiectives, such as industrial growth, generatlon of employment, promotion of balanced regional development or conservation of foreign 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 the tradeoff between the variotis obiectives, that is, which of the obfectives need to be emphasised in a given siluation. 3. Even if the obiectives dne not inconsistent and the policies are appropriate, arc the procedures or adminis_ trative mechanisms suitahle ?

In the field of industrial licensing and controls, the new

of 'why not controis'. In other words, every control would need to be justified on grounds of clear necessity for the Iarger good before it is imposed or allowed to be continued. Thus, controls should become the exception justified by gooC
Government should be asking at every stage 'why conhols, instead

reason rather than becoming a,rule as has been the case over the years. {)nce. such a statement of intent has been made, il would be both possible and easier in terms of acceptability for

the new administration to take and defend individual

decisions. In short, these decisions [^/ould then be part of a new policy rather than indivrouar battles to be fought each time. What then could be the main arrias of policy changes ? It is neither possible nor is it the intefition in this monograph to spell out the many ingredients of indusfial policy for the future. In fact, such detailed analybis of the policy parameters for the futune and the policy profiles for each of the maior industries such as coal, steel, texliles, electronics and petro chemicals, would be a pnoiect by itselfl What is attempted hene, therefore, is much more limited, viz., on the basis of the analysis of the pnesent situation .and one,s perception of the current needs, what would be the appropriate directions for the future polic_v. The first major step should be lo announce that all indus. trial activit),, i.e., new indusfial underiaking, substantial expansion of existing industry, or production of a new anticle would be exempted from the requilrements of licensing under the Industries (Development and Regulation) Act, with the exceplion 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 the public sector under the existing policy.
The only stipulation should be that all units coming within the ambit of the Industries (Development and Regulation) Act, that is, units with total investment in excess of Rs. 5 crores shall report, for satistical purposes/ all additional investments and additions to capacity within a specified period from the time such capacity comes into existence. Such an exemption from the licensing provisions, however, would not, in any way, dilute or alter such other regulations as may be in fotce regarding the location of industries, i.e., no industrial activity would be permitted in specified metropolitan or urban areas nor would the exemption override other existing legislative provisions in the present or amended form, e.9., Monopolies and Restrictive Trade Practices Act. There would, of course, be a need to closely examine the legislative framework and the procedural arrangements for implementing ttre legislative intent of impoftant statutes such as the MRTP/Foreign Exchange Regulation Act, etc. For instance, having raiped the assets limit for the application ol MRTP legislation it is equally necessary to examine the procedures by which de-registration can be expedited. It is common experience, for instance, that despite the raising of the limit a large number of companies are still waiting to be deregistered. Perhaps, a simpler procedure could be evolvecl. An applicant would file an affidavit supporting his eligibility for exemption from the MRTP Act unless his plea is reicted within a specified period, say sixty days, the unit would stand deregistered. If, on the other hand, it is found that the statements made in the affidavit are false or misleading or facts have been suppressed it is always open for Government to take cornective action, and impose heav.v penalties through the nornral processes of law for a false affidavit. The main purpose of liberalisation should be to ensure that investment decisions regarding modernisation, creation of new or additional capacity, and diversification are taken on the basis of their viability, arld not because thele is little or no competition in a particulal activity and ll'ee entrv is not being permilted. Financing inslitutions r,t,ould then decide on tlrt:

2'.r2

CONCTUSTONS

basis of tneir technical and final'rcial appraisals whether particular proposals deserve to be supported. The locational angle would be taken care of by the proviso that new activitj would not be permitted in ceitain excluded areas. By th( same token it would be for the Government to announce from

time to time specific locations which are out of bounds for new industrial activity or particular types of industrial activity for social or ecological rasorrs. But, it should not be the effort of policy to direct the industry to a particular location. In case, it is desired to attract the industry to particular areas, fol' e.9., backward districts s1 'nqr-industries-drstricts' it should be done by nroviding the infrastrlrcture and by having a graded syslem of incentives. But the final choice of location outside excluded areas should be lefl to be worked out by economic
considerations and entrepreneurral preferences. In order to ensure that rne reservations for the small-scale sector or reserwations for the public sector are not permitted

to come in the way of speedier growth thele should be a mechanism for reviewing periqdically the list of reserved items. Such a review should be based on testing whether, in
practice, the reservation is serving its purpose, namely, to pru. vide for the public oector the lcommanding heights of the economy' with a view to protecting public interest. The list of reservations for the public sectof should be scrutinised to see

whether there is still a case for exclusive resen/ation, or whether in view of thd dominant position attained by the public sector, compe.lition from new entities should be pen
mitted. The object of reservatiorl should not be td protect the public sector against competition, but rather to ensure that public interest in terms of the basic obiectives of policy is being served by such reservationi In the case of reseruation for the small-scale industry, such reservation is iustifiable,only where the scale factor is not deemed to be significant; and the product is one which can be produced in adequate quantily and is of acceptable quality through the efforts of entrepreneurs in the small-scale sector. In cases where a particular industry or product is being reserved fgr the small-scale sector, action programmes should be worked out for enlarging and improving the production capabilities. Further. measures should be taken to introduce

negulation and Development 273

modernisation or diversification. . But, past experience has shown that the system very soon settles down to a normal pattern particularly when the get-rich-quick section of the busi ness community realises that the liberalisation is universal and not likely to give it any kind of edge over others. It would also be essential to make it clear that the import of capital goods or raw materials by existing units or new undertakings which would be a result of de-licensing, would continue to be subject to the import policy in vogue; and that ehanges in the policy would have to be made fuom time to time taking into account the foreign exchange availability, the extent of tariff protection available, availability and quality of indigenous production and other relevant factors. In short, decisions regarding new investmentg expansions or diversifications would not per se involve an entitlement of imported materials. At the same time, subject to import regulations and tariff rates in force,* anyone would be free to import and that subject to the constraints of foreign exchange availability, it would be the Government,s policy to reduce to the maximum extent quantitative restrictions on imports as well as limitations 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 technologz from abroad particularly in order to enable modernisation of Indian industry. For ,this purpose it would be necessary to revieil/ 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 inessential imports and encoura(ing pl ogl'essive indigo!lis tion.

quality control standards such as ISI marking or compulsory test report so as to protect the interest of the consumer. Often in the past, reservation for the small-scale sector meant shortages, and even more frequently products of indifferent quality which mean, in effect, taxing the consumer. A guestion may be asked here: What would be the result of this apparently drastic liberalisation of the system on licensing for imports of capital goods and,/or raw materials ? It is possible that in the first flush of the announcement of liberalisation there would be a scramble for new capacity creation/

274

CONCLUSTONS

current technology policy. However, it is not, merely a rnatter of ,more liberal import of technollory for industries considered It should also be ensured that in vital fon our future t is given to the ter choice of technologies, the the users of the technolbgies than to the views of the views of generalist administrators or technologists turned bureaucrals whose knowledge is not only rqsty and out of date but who still continue to wield power to determine technology choices. This is both necessary and possible in the present context. 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 of competence available in the governmental system for deterpining what are the best available options. The fear that therE would be ;indiscriminate and repetitive imports of technolog,z can be exaggerated. Such a fear would be legitimate if there are resfictions on technology imports which gave to the early entrants or the favoured recipients of new technology a competitive edge in a protecterl market. Once it is known that the degree of protection against other domestic producers and prognepsively, against imports trom abroad is likely to be. reduced, there would be . a more cautious calculation as to whether a particular technological input 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 market dominance 'to ihe detliment pf public interest has been ignored. This has happened beoause the present coverage of

the 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 current

prices, units ot'business gloup$ which were llever intended to be covered. 'I'his has two implications. On the one hand, it has led to avoiclable papet'rvorll atrd unnecessarilv llul'dened the 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 of

economic power or the use ol monopcrlistic strength in the form of rcstrictive 1-)rtctices to the common detriment. The main consideration in the operation of the MR1lp Rct

should be to decide whether the concentration of economic

power or particular trade practices are to the common detriment. The thrust of policies and procedures, however, should be such as to ensur that the operation ofthe MRTP Act does not crEate conditions adversely affecting constant technological upgradations. It has to be recognised that a certain degree of market.

power is often an essential condition for an orgairisation to

undertake a maior new investment or technological upgradation involving substantial expenditure. Even the largest units in Indian industry by and large, are much smaller in terms of investment and output as compared to their counterpants abroad; and to the extent that the scale factor is an impodant deterrninant of the ability to compete in international markets, it would be necessary to keep this aspect in view in the administration of the MRTi legislation. f'he lilreralisation suggested in respect ol the plivate sector is t.'trlrt rno|c u|grtrrtly rrecdecl lilr-.thr: ;tUlrlic sector. A J{r(j.il

nreaninglirl accountabililv of public sector manager.s. There is no doutrt that therc is r:onsiderable scope.fbr improving lhe managerial perfornrance both at the functional level, i.e. pra duction, rnarketing. finanr:e and perconnel; ancl also in teims of leadelship lty the chief e-\ecutives. Havir)t{ .lcccpted the lact tlrirt prrlrlic cntc.l)r'isos rrtxrrl lxrrtcl r)iu)irg.r.s, it l)irs tr) lre r.ccogrrist:tl tlrat rrrr<ir:r. llrt: l)r.osr)t)l at'r'illgcntctlts, prrlrlic t:rrlrtlpr.ise lDanilge|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 enterprises anrl thc (;ovr)l'nment is such that (iovernment. is not merely tlro owi)(!r', lttrt it also plavs arr activo. in nlanv cases, a donti_ nant rrrlc irr llre stlatcgio nl.lnlH(:ntcltf ol ptrrirlic t,trterpriss. Whether it is investment clecisions, Iines of new activities, cor. porate obiectives or personnel policies or p|icing and marketing clecisions, the ptrblit; sectof l)ril t)agcrs ale almost lotallv tlependenl ur) Ao\ er'r)nrrttal rlccisiorrs. lrrtleed, tlrc abilitv of -

ol ernlrh:rsis is-and rightlv-being plar:t:d on lrnprovrng the managclial environmen t lbr. lhe public sector and on
dr,.al

276

coNcLUsloNB

public sector management to take or implement decisions which are in the best interest of the public sector corporation in terms of the objectives are, rnore often than not, dependent on the ability or the stature of the Minister or Secretary concerned rather than on the viability of the proposals themselves. In this contgxt it is not qnough to concntrate only on impnoving the managerial calibre and performance in public sector enterl4ises. It is. even nrori impoltant to closely examine the system itself. Unless we car"l ensure that Government dischalges its own responsibilities in respect of the public sector with a gleatel sense of pufpos@ and realises that all policies and pt'ocedut'es in t'elation to tlre working of the prtblit: sector have to be geared to making the public sector an instrument of growth, mere managerial strengthening catt achieve only limited results.
r\parl from these basic chat){es, there are at least two areas whelc inrrnediate action is llotlir possillle atld ttecessary. 1'he filst one is in relation to the present procedure for the clearance of public secto+' pro,ects bv the Public Investment Board {PIB).s This is lotally itraflequate. Tltet'e are numerous cases of substantial overruns in the proiects which have been cleared 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 evaluation and project management svstenls. As a first step in this direclion it would be desirable to specili that hencelbrth any new il]\,estment proposal coming to the Public lnvestrtrel)t Board would not be cleared unless the Boald is satislied about tbe proper- selection of the project manager and about his retention in the proiect from the stage of clesign to ccrmpletion and stirrt-up. No banker would lend mone1, lvithout being satisfied aboul the competence and track record of the managemerlt and the chief executive; and there is no reason why the Govqrnment should. The other area where something can be done immediately is to enable public sector enterprises to take quick decisions on additional investments, not originally envisaged but which are essential to make the project viable or 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 stage rrave not '' materialised. The connecting road may not have been completed by the concerned agencies, or a high tension motor may be burnt out, or power supply may need to be sup plemented, or a new opportunity for profitable prtduction may have emerged. In all such cases the present procedures which involve budgetary provisions or timeconsuming administrative scrutinies result in funds either not tteing available or being excessively delayed. !t would be useful if as part of the Seventh Plan, some amount could be earmarked for public sec, tol undertakings .and placed at the disposal of financial institutions. The undertakings should be asked to submit their proposals for evaluation by the financial institutions; and depending upon the viability and pay-back period., the institution should be able to clear the applications quickly. Such scrutiny by public financial institutions would also ensure that the proposed investment$ are well conceived. Promotion of a more balanced regional development is another area where some reorientation of poticy is qrgently called for. It needs to be stressed that a more balartced regional development can come about only by a more effective utilisation of local resources, i.e., appropriate investments in agriculture, irrigation, forestry, fisheries, traditional indu+ tries and dlso by locating new industrial uriits which act as triggering off points for further development. It is wrnng to assume that a wider geographical dispersal of modern manu: facturing industry would make a significant contribution to the eradication of regional disparities in the Indian conte-\t. It would only result in sub-optimal locations for substantial public- or private investments thus contributing to the continuation of a high cost structure. The emphasis should be on Plan allocation to the States which would enable them to improve infrastructural facilities in the identified backward areas. From a social point of view, such investment in infrastructure is to be preferred to the plethora of incentives which different State Governments and the Central Government have offered to establish iildustry in the backward areas. A special fund for the promotion of infrastructure in selected centres in the back#ard areas of different States together with a limited scheme for gtaded incen-

274

CONCLUSIONS

lives to overcome the inertia itr nroving 1(-) a l)cw location would pay bettel dividends in lelms of dispersal ol inrlustlv. In such a systeln lhe choice of location woukl llc l lrlarragement decision sublect only to a negative list of lor;ations and taking into accounl the lotality oli cclnsidela t ions. Similarly, as part of the effbrts fbl eur;oullging a widel dispersal of industry, special ellb|to slroukl lle nrado liu' r'olor:ating some of the existing industlial units in t:ongested metropolitan cities. A set ol tax and olhet'incentives need 1o be wonked out to euable industries like textilt's, re-r-olling mills, foundries, etc., to nlove eut ol big cities like }Jonrbav and Calcutta. In this way the land thus leleast:d could be used for other socially appropriate piurposes and theleby teduce the intensity of civic problems in these cities. The tax laws and municipal legulations should be so revised as to enable the units moving out of the cilips to use the appreciation in the value of their land and other assets for reinvesturent in other places or for setting up new industries outside the metropolitan areas. While employnlent is an important obiective of economic policy it has to b emphasised that economic Srowth would be seriously obslructed if thele is insistence on the same percon being employed in the same lob itr the same
location. There are two other points of a more general nature which need to be bornd in mind. First, over the years, for various neasons, there have been so many age4cies exercising controls that the regulatory power$ ltave not only become very

complx but the whole process of obtaining approvals has been tied up in knots. Any attempt to untie each of these knots separately would be time,consuming and until there is adequate movement on several fronts, worthwhile improve ments would not be disce|nible. lt is necessary/ therefore, to take certain calculated risks and make a concerted move lowards simplification of prooedqres and liberalisation of policies on several fronts simultaneotrsly. It is not merely a question of liber alisation of licensing policy. It is equally necessary to initiilte ppr-op|iate consequential changes in other areas such as cotrtt'ol on uronopolies and restriciive trade practices, impo of technology, r'egulations regading inflow of foreign c:ipital, regulation of imports,

Regulaliotr and DevelopInenI 279

fcmoval ol inrPcdirrtt:trts in utilisirtg trrodet'tr itllbt'tnatiott svsterrrs and lucililies of- laster comrnunicatiotrs--tlatiorrall-r' atrd intelnat ional lv. .\ nln'policv orientation would alscl Irecessitate r: r'evieu' ol the flsr;al policy, par'lit:ulallf in so I'itr as it aff'ects tlre 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 fetting slvarrrped bv a setrse ol fl'itstlation al tlle vely slor,v pace of visil)le oharrgc. 'l'he second poilrt is that in acldiliolr lo changes in policies ;rnd procedrrles, a change in the administl'ative ethos and cullure would be essential if these policies are to succeed. Over the vears regulatoly policies and procedures in tlle system have been modified and lefincd in the light of experience.' The aim of these refinemenls was lo ensure compliance with the legulations and to fenlove ahy loopholes. In a sense, the administrative system has built up a degree of expertise in regulation per se. The minutiae in respect of indu-stl'ial licens' ing, impolt controls, foreign exchange and a whole range of specific types of regulations has been rnastered by the adminis. trative apparatus. This expeftise has also mant that the prD cesses of policy-making have relied upon the ability of the regulatory apparatus to prcvent certain events. But the reguLatory system was not in a position to make things happen. lf one is to move away f'rom the system of physical controls, a major change in the administrative culture would be bssential. For'example, in the traditional regulatory system creation of over capacity was, in sevenal cases, prevented through the use of the licensing svstem. If the area of licensing is to be reduced, then clearly it r.vould be necessary to build up mechanisms by which the creation of excess capacity could be avoided. For instance, it should be ensuled by the Goverr-rment that financir.rg institutions, the lrirectol'aie General of Technical Developmenl and other technical l\'ings of administrative ninislries, Development Councils, or better equipp6d hdustrv Associatiol-rs are nlore efTectivelv used to dissernirrate inlofn)atior) t'egitr<ling aleirs \\ hele lurtlrer' capacitl. cleation woulcl be lrazardolrs l() tllc ne\\ elltfepreneurs and also highliglrt rrreas rr'lticlt otlel irlvtlsttnent opportunities.

zao

CoNCLUSIONS

The emphasis woulct have to move away from physical controls to more effective pnojeotions of effective demands and investment opportunities. In such a system the right kind of signals would need to be ransmitted through fihancing institutions who would make it clear that they woulfl be unwilling to finance substantial additional investments rn particular sectors taking into account the present and prospective demands, and the emerging pattern of risks and profitability of new investments. Unless the p s of greater liberalisation is accompanied by a change of this kind in the management of the economy, it could welil happen that at least in the initial stages, considerable of resources could occur with disastrous co particularly for the new
and smaller entrepreneurs.

The recent political changes d the emerging signs of strength and resilience of the dian economy provide a tremendous opportunity for a m and essential overhauling of the system. Such opportunities come only rarely; and it rs hoped that the new leadership woruld be able to recognise the high stakes involved in s implementing the new policies and also recognise that a onalchange in policy cannot be either an instant or a painless process. This is particularly so in the Indian context hecause, over the years, the system has increasingly tended to be one in which social costs wene being incurred for private benefit. Any directional qhange which emphasises that in future social costs will be incurred only when there is a corresponding social benefit, and not private'or sectional gain, would hunt those who have learnt to derive large sectional betrefits by developing special skills in finding their way through the maze of controls. These sections have considerable potentlal to sabotage the introduction and operation of new policies. The next tlr,o or three veals, thereforer can be crucial lbr the future of the h-rdian economv and, indeed, for India's political system.

Regulation and

Development 2El

NOTES AND REFERENCES

1. For details see, Isher Judge Ahluwalia, Industial Stagnation in India cincg the l{td-sixtiee 0956-57 to 7979-ad. New Delhi: Oxford Universiw hss,
t

9E5.

For an incisive analysis of the issues involved see, M. Narasimham, Some Thoughts on Planning. Based on the speech delive|ed at lhe Forum of Financial Writers, New Delhi. Sachin Chaudhari Memorial Lecture on 30 March 1984. State Bank of India Monthly Review, Vol. xxxiii, No. 6, June
1984.

2. For an analysis of the ideological basis of the economic policy in India and the institutional regime which was established, see, The Coromandel Lecture 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 Secrtary 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 fairly low limit have to be screened and clearcd by the pIB before the approval
of 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 had taken over. While there was no offidial resoltrtion or Statement of Policy which spelt out the ne\ / Govemment's policies, there was clear evidence of the direction in which the ner,rz administration wanted to pncceed, Several changbs nelating to taxation, industrial licensing and import policy including import of technologr wene being initiated. The Seventtr Five-Year Plan was placed before Parliament after discussion in the National Development Council, and this document spelt out in some detail the rationale of the nerar policies and what was sought to be achieved in the next five years-and in some cases over a longer period*as a result of the new policies. The basic thrust of the new polidies, which were taking shape

when this monograph was bein$ published, was that Indian industries in future must be competitive internally an4 in due course, extemally; and that Indian research and development should not seek to rediscover what is already a part of the international stock of knor,vledge and which, thereforc, generally can be obtained at a price, but rather ooncentrate on a few selected
areas 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 PrDduction 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 of industry. 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 prsent danger of expectations running ahead of what could be delivered'

Another danger was that if the new policy initiatives run into rough weather for internal or extemal reasona, the forces which have vested interests in the old system of regulation and detailed controls would undoubtedly want to prrt things in reverse gear' These vested intersts, it was pointed out, which had consolidated 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 two decades between politicians, bureaucrats and powerfrrl sections of Indian industrialists had a major stake in perpetuating a complex rgulatory system. The conclusion, therefbre, was that unless reform of the political and administrative machinery which was sought to be intrDduced percoLates to the bottom rung or in cefiain fields begins ftom below as a result of local initiatives, the results would not be in conformiqr with the avowed

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, railways, corrununications and ports. ln addirion, very substantial rsounces wer likely to be needed for achiwing imponant obiec-

obiectives.

2U

EPILOGUE

resources unless there werE concetted efforts to mobilise and conserve domestic nggournes and them with maximum
cost effectiveness, arrd on a selective basis. The seriousness of the resounce on the extemal account was also stressed. It was out that the relativelv rapid rate of growth of the economy in the last few years and the lagged effects of import were likely to result in a

rising trend of imports. Even if cement and fertilisers could be possible-there could be no doubt imports on a broad front would

was equally clear that the new stra would not be consistent with the strict and elaborate arrangements of import contmls. In view cif this situation, there was an urgent need for increasing exports. But even with a fairly rapid growth of exportg there would still i'emain a sizeable balance of payment gap on current account whlch would havg to be met by foreign exchange inflow in other fdrms, e.g., remittances ftDm abrcad, particularly ftom non-resideht Indians, inciease in bilateral or multilateral aid on concessidnal terms, and raising nonconcessional extemal resourceg i.e., bommercial bonowin$s and private forEign investments. It was cqncluded that $ven the con_ straints on sizeable increases in cofcessional flows, there was perhaps no escape finm a larger flow of non-concessional external resources.

imports like edible oils, -and this should be additional demands for in the coming yeals. It for less detailed contml

nineties are likely to be totally different from those oi the fifties and sixties, it had been pointed out ihat while there would be a need fpr a degree of governmental qontrol, the role of Govern_ ment and of governmental or public ihstitutions would have to be significantly differerit tom what haH evolved in the thirtv-five years after Independence. In the futule, Govemment wouljhave

ing in viov the fact that the conditions in the eighties a;d

In the context of the difficult resoun:e .position and also keep-

Rerlt ation and

Development

zAs

to be the agency for monitoring development and.-s a catalyst of change. The main and indeed the cmcial-function of the State apparatus and authority would be to take a mor comprhensive

view than is possible for individual participants in economic activities; and having taken such a view to devise systems through the use of State powers which provide the necessary framework of incentives and disincentives and deterrents which would lead to the desired results. The Epilogue vwitten as it was in the early days of the Rajiv Government's administration ended on a hopeful note. To quote from the text
There is a breath offresh air in the corridors of power, and for the first tiine in many years there is a willingness to accept that a change in policies to deal with situations is not sJmonJmous with repudiation of the past. All responsible sections of the population wish the policy-makers good luck; but for policies to succeed there has to be a political restmcturing in terms of

political system and would not be possible.

isolating and neutralising the lumpen elements which have tended to dominate the political scene. This would be a maior task for the political leader'ship because without this a credible

reasonably honest adminisbation

Looking back over the last three or four yeans, to tvhat extent have the hopes been realised or the dangem materialised? Even morE pertinently, what is the prEginosls for the future? What kind of strateSr and conesponding policy tamework would enable us to move mone purposefully towards the basic goals' to wtrich the economic policy has been geared since Independence?

It is a matter of satisfaction that since the first edition was published several s,rggestions/conclusions in the mono6raph have been acted upon. The definition of MRI? compa.nies has been altered so as to become applicable to corr.pa.nies with assete of Rs. 100 crore instead of the earlier limit of Rs. 20 crpre. t MRTP/FERA companies were also exempted tom licensipg in as
'Itrese goale are: 'Mo,e tolv8rds a technologlcally rrlaturt EeiotJ, wtdch would ensuE slf-suEtaining golivtb and avold concentration of inco[re and r Eilth in the 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 up units in centrally declared baclavard areas. A number of policy initiatives have also been taken with a view to limiting the role of licensing; and to some extent rEverling to the original concept'of the Industries (Development and Regulation) Aci, 1951, by broadbanding certain industries with a view to providing flexibility in the range of manufacturing. The system of broadbanding now extends to a wide range of indu$tries including metallurgical machinery, earth'moving machinery, auto-ancillaries, textile machinery, synthetic fibres, sl,nthqtic filament yams and a wide range of chemical industries. Even ln the case of consumer durables, the new policy permits diversiification into a range of 'white' goods, such as refi:igerators, washing machines and vacuum cleaners. In short, the rigidity and overprotection rarhich were a consequence of the elaborate and complex system of licensing
ane sought to be greatly reduced. Ah equally

important change is

the introduction of the concept of minimum economic scale of pmduction-again a reversion to the original concept of Industries (Development and Regulation)Act+ - so that not only would the new units be of economic sizie but the existing units also would be fieely pernitted to expand until they reach the mini-

mum economic scale of produition. Government allowed exporting units to meet firm exp0rt orders without acquiring
licences to do so; and it was also decided that provided a unit pruposed to export all pmduction over and above the permissible capacity, it may do so without the need for a licence. There has been considerable relaxation with regard to re-endonsernent of capacity on the maximum production achieved by a unit. Important indqstries like cement** and allrminium have been removed fi'om the ambit of price control$ ahd generally a more rational policy has been followed in res6iect to administered prices. Attempts are being made to incrdse the autonomy++ of public sector units by intnrducing a system of Memomnda of Understanding between public sector units and govemment departments. In this way, public sector enterprises would be answerable to Govemmer)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 interfernce of govemment departments in normal managerial decision-making will be avoided. The last thrce or four years have seen a directional change in policies and procedures, but in this NetIIu centenary year there are'miles to go'. Even though the liberalisation process has not been as drastic as some would have liked or its benefits as pervasive as one could have hoped for, there have been maior-and even radical-

ploduction, such as fertilisers, cement, passenger cars, consumer, communication and electronic goods, sl.rrthetic fibre and trvo-wheelers there have been very large quantitative increases in capacity and production in the last few years. But equal$ important has been the qualitative improvement in a wide range of products including capital goods and durable consumer goods, on a scale unparalleled in the last thirty-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 there has been a significant relaxation ofthe infrastructural constraints to rapid industrial expansion. Industrial investrnent has been
buoyant. The increased competition is imposing on Indian industry a new dibcipline and culture, and the focus of managerial effort is shifting away firom manoeuwing controls and procedures and moving towards establishing market shares. Technology is becoming an increasingly important determinant of competitive strength. A new class of entreprneurs is emerging and the relative ranking ofbusiness houses is undergoing a rapid change. Domestic liberalisation coupled with relaxation of import controls, limited though they might be, has initiated the process of making the Indian industry cost, quality and productivity
conscious.

changes in the industrial scene. In several areas of industrial

Another encouraging feature of the industrial scene has been that the expansion of industry in the last few years has been quite broad-based. For instance, according to the Seyenth Five-Year Plan 1985-9O, Mid+errn Appraisa.l,' about 40 per cent of all industry showed rates of growth exceeding 8 per cent. .These include basic metals, chemicals, paper and paper prociucts, electrical machinery and appliances. In keeping with the buoyancy in the growth of industrial output, the pace of investment in the industrial sector has also been fairV rapid. The public sector outlay for

2.88

EPILOGUE

large and medium industries in tlre central sector was envisaged to be Rs. 17,268 crorEs at 1984-85 prices., According to the latest estimates, nearly two-thirds of t$e planned outlay had already been undertaken in the first three ['ears of the Plan. Private corporate investment is estimated to h4lve risen by about 26 per cent at constant 1984-85 prices,: as compriared to the trienniums centred on 1981-82. The buoyancy of industrial investment is also conlborated by other indicators, such asl industrial approvals, consents given by the Controller of Capital Issues, and assistance sancti-

oned by all-India financial institqtions. For instance, the assistance by the three all-India financial institutions and the State Finance Corporations and the State Industrial Development Con porations increased from Rs. 3,605 crores in 1983-84 to Rs. 5,3(X crores in 1985-86, to Rs.6,848 crcrs in 1986-87 and to Rs.7,625 . crores in 1987-88.4 Disbursals also increased t'om Rs. 2,529 cmres in 19E3-84 to Rs.5,482 crores in 1S87-88. This increase in disbursals has to be viewed in the context ofthe very large increases in nesources raised tom the capital market by the private sectorRs. 2,339 crores in 1986-87 as agalnst Rs. 1,157 cmrcs in the prvious year.s Thu$, the overall invQstment climate in the countsy plovides sufficient gmund for an{icipating impmved investment and output in the indusdal sectoh in the coming years. Available data also indicate ttmt there has been a distinct improvement in the capital-outpurt ratio in manufacturing industries in the last five or six years. Ifirproved capacity utilisation as well as the completion of long Eestation projects where large investments were made in the preceding years would have contributed to this improvement. Thip trend, however, mal not con-

tinue for two reasons. First, modernisation of existing ilants which will help reduce the cost of pmduction in an industry would not necesoarily result in an increase in output commensurate with investment in modertrisation. Similarly, additional investments which would be needed to minimise the environmental impact of industrial activity will also tend to raise the
capital-output ratio. There is a comnon assurnptioh that Indian industry, for the most part, is a high cost producEr. While, no doubt, there are segments of manufacturing activity where local costs of production ar out of line with interna$onal costs, but an analysis of studies 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 formulations, petmleum refining, industrial boilers and passive electlonic 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 aluminium, 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 consequence 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 would seem to suggest that provided apprDpriate cornective measures are taken, there is considerable scope for making the industrial economy intemationally morE competitive. These changes would involve changes in pricing policies, lessening the licensing constraints on the mor efficient units, and also changes in a number of govemmental policies. For instance, while there is need to insist on a phased manufgcturing programme, glater ca.ne needs to be taken to ensurE that substitution of imports is not undertaken at exorbitant real costs. The attempt should be to optimise the perEentage of domestic input rather than maximise it inspective 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 by ensuring that fiscal levies on the inputs needed for production of
*Dudng the period 1962-87 the Burau oflndustrial Costs and Prices undertook studies of2o8 industries covering a numbr 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-Some lcssons from B.I.C.P. studies', which was circrrlated as a discussion papr at a geminar held on 2 MaY 1988.

29O

EPII.OGUE

domestic capital goods are not fi*ed at a level which make the domestically produced capital godds significantly higher priced than similar products abroad. Thene is, however, disturbing news on the resources ftnnt, both intemal and extemal. The preference for soft options, lack of firmness in insisting on performance at all levels which, in a sense, is an essential ingredient Of a competitive environment, and an ambivalent attitude towafds enforcing a link between productivity and eamings, especidlly in the last few years, have brought the economic system under increasing strain. The basic prcblem of over-spending at hofne and not earning enough abroad has, by now, acquinsd menacing proportions. For instance, the total outlay at the Centre and in the States/Union Territories in 1980-81 was Rs. 96,845 cmrcs and constituted nearly 27 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 of the 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 been made. Even mone worrying is the fact that while dwelopmental expenditures during the decade increased by approximately three-and-a-half times, i.e., from Rs. 22,42;6 cr!,res to Rs. 78,107 crors, the non-dwelopmental expenditurc had risen more than founfold.o The gap between current revenues and current expenditures amounted to Rs. 12,282 crDres in 1980-8l which had more toFrs.47,7M crures in than doubled in 1984-85 and had the Budget Estimates of 1988-89.7 This gap had to be filled by increasing rliance on of one kind on another, internal or extemal, and at fairly high rates of interst, or by creating
new money. In consequence,

to Rs. 2,957 crnres in

1980-81

l9E6-87 and further to Rs. 16,109 cr1)res in the Budget Estimates of

198E-89. Despite large borrowingsr

the overall budgetary deficit

which was steadily being brou$trt down since 1980-81 and amounted 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.E The implications of financing thp current deficit with a combination of borrowing and note-printing ar e evident. Borrowing at a high rate of interest entails a sharply increasing interst burden.

This in turn worsens the revenue deficits necessitating even

Regiulation and

Development Nl

higher bonowings and noteprinting. Second, these bonnwings have to be repaid; and when large repa5rments ar to be made, these will have to be increasingly dependent on printing money and thus further fuelling inflation. Thftd, with Government progressively acquiring a laqger share in the savings in the economy, credit resources available even for essential or high priority investments in the organised private sector tend to get crowded
out.

Unfortunately, for many years there has been a degree of complacency about the continuing budgetary deficits. While some look upon these deficits as inevitable, otherr take refuge behind the argument that in a dweloping counuy like ours,'historical experience has shown that budgetary deficits (and consequent increases in money supply) are not necessarily or fully reflected in price rises. This argument, however, is fallacious for two main rasons. Fi6t, the price rise which is relevant for the ayerage citizen, i.e., wage goods such as foodgrains and other food articles, and essential services, has been higher than is reflected in the wtiolesale price index. The consumer price index which has a higher weightage for these items has always risen at a faster rate than the lwel of vr*rolesale prices. Secon4 the impact of budgetary deficits in the last two or three years has tended to be moderated by drawing down on the foreign exchange reserves. The decline in reserves acts as a contractionary influence on money supply. The scope for further drawing down of the resewes is nearly exhausted. Moreover, the cushion built up in terms of large foodgrain neserves which, in a sense, are a forrn of foreign
exchange reserves is also no longer present. In short, ther is no room fon complacency. This is all the more so because with the continuing budgetary deficits, ihe cumula-

tive increase in money supply has already built up a latent inflationary potential. So far monetary authorities have tried to keep in check the adverse consequences of increased primary rnoney supply thmugh restrictive monetary policies, such as successive incteases in CRR (Cash Reserve Requirement) and SLR (Statutory Liquidity Ratio). But ther is a limit beyond which this is not

possible. The socio-political consequences of persisting inflation-and also expectations of continuing inflation-are

extremely serious. A highly,unequal distribution of incomes in a country like India gets further accentuated thmugh persistent

292

EPILoGUE

inflation. Basicallv the tax evadert, organised sections of society including government servants, cirganised labour in public and pri/ate sectom, and those who have 4n opportunify to be corrupt whether in public or private $ectof or in Govemmer-rt thrive at the expense ofthose who are the poofst, unorganised and hglpless. The rich get richer while the poor, particula-rly the poorest, become the victim of rising prices. Govemment's efforts to borrow by offering all sorts oftax exemptions and attractive interEst rates benefit the relatively bettenoff. Vafious schemes like Indit a Vikas Patra, wealth and gift tax exernpt bonds and other similar schemes contribute to launderin$ black money. This is no recipe for social or political stability. There is, of course, recognition of the need for containment of the budget deficits and prudent dranagement of public expenditurc., The Economic Survey for 1988-89 as well as Surveys in earlier years have highlighted the need for fiscal discipline. For instance, the latest Economic Survey'o points out that the 'three maior elements in non-Plan eiperlditure, namely, intercst, subsidies and defence, which had accounted for Rs.25,954 crores in t986-AZ, increased to Rs. 30,906 crors in 1987-88 (RE), and fur'ther to Rs. 35,359 croles in 1988-89 bUdget estimates.' Similarly, the Survey recognises that 'restoration of better balance betr,r'een Sovemment revenues and expenflituns is not only essential for bringing about the desired improvement in public sector savings per{ormance, but also for enhan(ing futur prospects for price stability.'rr On the question of balance of pa3zments, the Economic Survey attributes the prssurc on the balance ofpay'rnents during the Seventh Plan to several factors including
deceleration in the growth of domestic oil production, pmtectionist tendencies abroad, Wlatility of maior intemational currencies, bunching of repayrnent obligations to the IMF and other sourres and an unfavoufable intemational climate for concessional assistance. The prlessures arising ftrcm these factors have aggravated during 198E-Eg by a surge in the import
...

bill.1,

It is true that these factors have enhanced the difrculties in managing the extemal sector. The liberalisation of the system
together 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 compared to 5 per cent in the preceding the years-has also meant

in the import bill; and this was further accelerated by the in agricultural output necessitating import of vegetable oil and foodgrains. But the fact remains that in a mor fundarnental sense, the balance of palments prohlerns leflect imbalances in the domestic fiscal situation. As the Economic Survey points out:
a spurt

adversc tncnd

though it is not often appreciated, it must be recrrgnised that high levels of deficits ter"ld to spill over and contribute to higt! current accounl deficits irr the balance of pay'ments. An irnprovement in thc current account of the balance of payments rrequires a commensurate reduction in the overall savings-investment gap of the economy.l3

to the Finance Minister who had to fi'ame the in the context of the difficult situation and in a prebudget
fairness election year/ one must recognise that he has managed to keep undel control the pressing claims of the spending departments and the political pressures for populist measunes. For instance, he has been abie to keep the defence expenditure pegged to the sarne levei as in the previous year in nominal terms. This represents a reduction in defence expenditune in real terms of the order of nearly 10 per cent. This is certainly creditable when seen in the context of the mounting expenditune on this accounl year aftel year. Defence outlays have increased each year ever since the fifties and the increase during the eighties has been quite sharp. The total defencc expenditure which was Rs. 3,571 crores in 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 of Defence for 1989-90 wer rcported to be to the tune of Rs. 17,000 cmres. Similarly, the various schemes for the welfare of the weaker sections, such as distribution of dhotis and saris, mid-day meals and employment for at least one penson in wery household, which were strongly supported by the All-India Congress Committee at its meeting olrly a few months before the Budget, would have meant a total burden in the neighbourhood ofabout Rs. 2,000 crores. On a rough estimate, the Finance Minister has heen able to contain this demand to arnund Rs. 500 crores. He

In

294

EPIIOGUE

has also made an effort to mise additional nesounces qnd the net

increase 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 another count. As he has pointed out in his Budget speech,15 the Govern-

ment has rcsisted the temptation to cope with the short-term difficulties in our balance of paJ,/rnents by ad hoc import regulations through detailed import licensing. It is also interesting to note that the rEason for not succumbing to this temptation is the changing composition of our im$ort trade. At the beginning of the decadg 65 per cent'of our imports consisted of a few bulk commodities like foodgrains, edible oils, fertilisers, petroleum, and fuirous and non-ferrous metals. In respect of these imports it is relatively easier to regulate the total quantum of such imports thmugh foreign exchange allocations. Of course, the subsequent allocations between the users in cases like ferrous and nonfurrous metals became quite cofnplicated. But when imports coven a wide range of raw materiflIs, capital goods, compone.nts and chemicals, the system of foleign exchange allocation and import control suffers ftpm inordinate delays and inefficiency. As the Finance Minister has pointed out in his Budget speech,r6 by 1987-88 imports of bulk commodities accounted for only onethird of our imports, i.e., only half as much as at the beginning of the decade. The strategl for maintpining a curb on importg there foie, can no longer be detailed forgign exchange and import reglrLations but other rnacftt-economic policies such as exchange rate and tariffpolicies. For the finst time, the Government has spelt out the lo$c behind the policy of reducing the arca of elaborate and detailed controls. It is to be hoped that this policy will continue. While these rccent policy direotions augur well for a greater the task in the comemphasis on fiscal and monetary ing years is likely to be far furmidable than is generally of the fiscal problem and recogtrised. First of all, the has been permitted to the period over rvhich fiscal prevail do not alloru much for gradualism. The need for reducing budgetary deficits is On the other hand as pointed out earlier, the magnitude of resources rcquircd to catch up with the shortfalls caused b5,t inadequate prcvisions in the past in crucial sectors like education, health, housing or special emploJzrnent pmgrammes is itself going to be so large as to put a

Regulation and

Development zss

strain on the available nesounces. In addition, massive investments ar likely to be needed for infrastructural industries, e.9., coal, electricity, railways, transport and communications; and also for capital intensive segments of industry in the public sector, e.g., steel. In short, in the next fewyears a concerted effort will be needed to generate and mobilise domestic investible resources to the maximum possible and to utilise them with maximum
against this background that the decline in the rate of domestic savings becomes a matter of serious concem. The gross domestic savings which hovered around 10 to 11 per cent during the First Plan period had risen to around 15 per cent by 1969-70. There was a sharp increase in the gross domestic savings rate towards the end of the seventies. The average domestic savings between 1976-77 and 1980-81 werc 23.'1.4 per cent which came down to approximately 21 per cent on an average for the thnee years 1985-86 to 1987-88 (both inclusive).l2 The deterioration in the savings rate-as the Economic Survey (para 9.3) points out-can be largely attributed to the deterioration in savings by the public sector and especially to the sharp increase in dissavings on Govemment account. Year after year the Economic Surveys have been drawing attention to the tendency for the growth of currEnt government expenditures to outstrip curent revenues, thus leading to rising rates of dissavings and growing reliance on borrowed funds for financing govemment expenditure. By 1987-88 the gap between grcss capital formation out of the budgetary nesources ofthe Central Government and thegross savings ofthe Central Govemment had risen to over 9 per cent of GDP. Fmm the peak of 5.2 per cent of GDP which public savings had attained in
cost effectiveness.

It is

]p76-77, they had fallen to a merE 1.9 per cent of GDP.

The turrraround in public savings performance is crucial for financing the lwels of public investment necessary for continued strong economic growth in the medium terrn; and this turnaruund must come both from an impmvement in the budgetary balances of the Central and State Govemments as well as increased surplus generation by public sector enterprises. An improvement in the fiscal situation both at the CentrE and in the States will depend not merely on steps to enhance the buoyancy of tax revenues and measures to bruaden the effective base of taxation, but also on Government's abilitv to enforce strong curbs

296

EPILOGUE

The scope for enhancing exists, but the temptation to incrcase tax ngvenues bv enhancing rates on a rclativelv narrow taxable base to be rcsisted. Experience has shown that beyond a point the rates of dircct taxes is counter-productive; and sifnilarly, a steep increase in the rates of excise and customs dutie$ not only distorts the rel,ative structure of output costs and priges, but it also necessitates a cumbrDus and dilatory system of set-offs to assist exports by offsetting the disadvantages suffered by exporters as a result of high and multiple taxation at local, State and Central covemment levels. The thrust in future will, thercfore, need to be on broadening the tax base, maintaining a statlle and relatively more neutral effective incidence of taxation, indinect taxatiort and removing irritants in the fbrm of interpnetations of tax laws in respect of direct and indinect The amount of time and effort, not to speak of the financial which trade and industry incur as a result of ambiguities in the interpretation of law is only a part of the costs. The and wen more worr5ring dimension is the very increase, rvhich apparently has occumed in the last few years, in the extent of corruption in the tax collecting agencies. The thenefore, is not onlv for augmenting tax rEsouK)es but fol' doing so through methods which are perceived to be fair and equitable. The other maior thrust of policy [n the years to come has to be in terms of reducing the gro$th of government expenditures and especially consumption expenditlrres. According to the Economic Classification of the Cerltral Budfret,la consumption expenditure rcse fi\om Rs. 5,f74 ctores in 1981-82 to Rs. 18,743 crores in 1987-88. The need to borrtw in order to finance current financial expenditures, as pointed out earlier, has meant a rapid increase in borrowings. Consequently, the proportion of expendilurs on interst payments has incteased fiom 10 per cent of the total expenditures in 1980-81 to abdut 17 per cent in 1988-89. The result has been that while the propDrtion of consumption expenditur to the total expenditure renhained mor or less the same during the eighties, there has been a decline in the propoltion of expenditures in capital formation ftom ove,r 40 per cent in the eighties to a little over 35 per cerlt in the budget estimates of
the buoyancy of tax rerrenues
1988-89.1e

on the 8lo\Mth of cunEnt

Regulation alrd

DeveloPnent

297

The control over govemment expenditurs, however, wiil involve not merely mar$nal adiustments like curts on travel expenditures or stationery, but far more basic changes in the style of functioning of both Cenral and Stat Governments. What is required is a careful revie,rv of the whole gamut of Spvernment activities in order to establish that they arc still relavant and essential in the cufrBnt context. Equally, it will be necessary to keep a close watch on whether the way of doing things needs to be modified so that more can be achieved with the samr.' expenditure. 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 the community gets a reasonable return by way of public sector surpluses. The nation has invested over Rs. 60,000 crcres at historical costs in enterprises owned and run by the Central Government; and while public enterprises may have made many contribtttions to the development of thb industrial strength of India, fbr the most pa they have failed to Senerate adequate surpluses.' For instance, in 1986-87, profits of public enterprises amounled to Rs. 2,742 crrrre-s, of which Rs. 2,142 cmnes wene generated in the petmleum sector alone. If the petmleum sector is excluded--and there are good reasons why il should be excluded in analysing the working of the public sector as a whole-the ratio of net profits to capital employed in all other profit-making public enterprises is amund 2.5 per cent. The ratio for all public enterprises, i.e., including loss-making ones, is negative with losses amounting to 0.9 per cent of the total capital employed. Further, these losses for the public sector as a whole have been increasing tom Rs. 1,112 crcrs in 1984-85 to Rs. 1,710 crores in 1986{7. There is obviously a need for a concerted effort to improve the profi tability of public enterprises. The efficient operation of the pub[c sector is to be seen in the conlext of the need to raise nesourcea in a non-inflationary rRanner, If thene has to be a stratery for the creation and sustenance of a competitive envirnnmen! the turnaround of public enterprises has to play a very crucial role in that stratery. Indian
'For a detailed discuseion
Grcwth.'
Eee

Chapter 7, 'hrbuc Sector aE an Inshrrment cf

Z9A

EPILOGUE

industry cannot be .made internationally viable unless public enterprises which pmduce the bEsic raw materials and inputs are also intemationally competitive. Much has been written and said on this sublect; but the sfu61;point is, as indicated by Shrh
Abid Hussain, 'the commanding helghts have, at some stage, to be good for people other than the cornmanders themselves.'zo This will require action on several finnts and will be a subiect by itself. But there are some points which deserve special emphasis. The wave of liberalisation over the last few years has really affected the private sector. The public sector cqntinues to be under shackles. The stranglehold of ddministrative departments makes a mockery of the corporate form which was designed to establish an ann's length rlation with Govemment. Irt is time that they cea$e to be undertakings and become enterprilses. Second, future directions ofthe growth of public enterprises need to be charted out. There should be no a priori restrictions on the grcwth of public enten prises. Public enterprises have to gtrow, expand and diversi$r in a competitive environment like any business. They will need to change in response to market condlitions and in keeping with the
emerging needs of the economy. But by the same token there is an urgent need to undeftake a

review of the existing portfolios of public investments in the industrial and rclated secto6. The suggestion by Abid Hussainzr that public enterprises should be encouraged to vacate low technology, smAll-scale and non-strate$c areas of operation so that they can concentrate their resources and focus their capabilities on high priority and technologically demanding areas, deserves carfuI consideration. A consciouE policy of disinvestment might in some cases involve sale ofthe enterprise to the private sector. In some cases, it might rcquile abborption into an existing and efficiently managed public enterprise. There are several other
variations.

Third, a hard look is needed with regard to the future of enten prises which have emerged as chrcnic loss-makers. An analysis of the public investment portfolio will show that around 40 enterprises which have been incurring cash losses continuously for five years account for 75 per cent ofthe total cash losses inculred by all public enterprises in 1986-87. The total losses ofthese units amounted to over Rs. 1,000 crone$ in that year. While to some extent these losses reflected the operations of the units that have

Regulation and

Develoryent

299

been taken over by Govemment, in a large measune they are attributable to deficiencies in the ori$nal investment decisions. In consequence, it is necessa{r that these deficiencies in the forrn of inapprnpriate location, improper technolory covering the know-how and equipment, irrational pncduct-mix and unsuitable marketing arrangement will need to be rectified. Maior technological and finahcial rcstructuring will be needed to make the perenially loss-making enterpri.qes viable. Finally, operational autonomy is a 'must' for all public enterprises. Autonomy and accountabiliqr go together and therE is no conflict between the two {see pp. 198-99). The necent initiatives in the form of the Memorandum of Understanding are still at a pleliminary stage and will need to be refined to ensure both autonomy and accountability. Cunently, the question of the Memorandum of Understanding; their conted and their usefulness for iud$ng the performance of individual enterprises is being examined in depth. The question, howeven, is not merely of drawing up of such MOUs; even more important is the whole attitude towards the role of public enterprises and the need to give them adequate operational autonomy. The real pmblem has been that having created corporate entities in the public sector and thus drawing a corporate veil to reduce theit expostir to administrative and political interference, Parliament no less than Government did everything possible in the sixties dnd seventies to ensur that the autonomy for public sector enterprises waa no
grater than that for subordinate govemment offices!Unless therE

is a change in this attitude of treating the public sector at the GenFe and particularly in the States as a hand-maiden for the politicians, there can be no real imprcvement in the functioning of the public sector. Ttre resourre crunch is the other dimension of an acute strain on the balance of paymeiits. Except foi nvo year, i.e., 1972-73 and L976:77, since 1948 Indian merrhandise imports have cost more than the exports. The annual deficit on the trade account has increased from amund Rs. 100 cmres per annum in the early fifties to figures ranging between Rs. 5,000 and Rs. 9,000 crorE in the eijhties. On prsent indications, the annual trade deficit will continue to be between Rs. 7,000 to Rs. 8,000 crores despite the necent incnease in our exports and the efiorts at import subetitution.

3OO

BPILOCUE

The deficit on fade account, hov{,eran is not by itself a matter for grave concern. Despite the oil cr{sis trndia was able to manage its 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 and also deposits undex the scheme available to non-resident Indians for keeping deposiis, convertible otr non-conveftible, in Indian banlcs al atlractive rates of interest. 'I'he invisible rreceipts whioh had fluctuated bel&en 500-600 million doliars in the sixties and seventies.rose sharply to arnund 7,500 urillion dollars.in 1980-81. In 1sE5-86, these amounted to Z8S5 million dollars. Although ilrdsible fJalrnents have aiso increabed frorn anrund 700 million dollars to 3,700 rniliion doilars in '1986-87, the net surplus on
invisibles has risen shaqply, cnnsequenlly bringing down the currnt account deficit. Nevertheless, the deficit in the balance of paJments has continued to be ntial hovering around 3,000 million dollars thruughoul the except in the J,ga. 1984-at when it decreased sharply to 1,000 nrillion dollars.22

The balance of paJtrnents

can be financed either bv

the Fund or by additional extemal assistance or by dralvings allocations of SDRs. Except for last 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 cost implication. Externai assistance, parl'ticularly borrowings on near commencial terrns, have to be servicdd and repaid. Drawings fi'om the Fund bring along with it conditlonality which involves basic perccptions arrc at varian ce changes in policies even if int with the Fund's prescriptions. It is this background that an adequate level of foreign reserves becomes an

important constituent of Since 1985-86 therc has been a sharp decline in our reserv'es which in nrpee terms have declined ftom Rs. 7,384 crors as on 31 March 1986 to Rs. 5,819 crores by the end of June 1988.13 The rese,rves in rupee terrns, however, understate the extent of erDsion of foreign exchange reserves b4cause ofthc depreciation of the Indian rupee in terms of olher cprrr.ncies drfing that period. ln terms of SDRs, i.e., on the basis of a common denominator which takes care of the deprciatiol'r of the extemal value of the rupee, the neseryes declined ftom 5,f28 million SDR at the end of March 1986 to 3,598 million SDR at the end of June 1988.24 This is

and

'4ulation
a matter of some concefn.

Developme

SAT

Apart tom the curtailment of nur teedom of action as a result of the decline in reserves, there is another worryzing feature. The figure of n:serves at the end of December 1988 is bolstered up by
the accrction to and increase in FCNR (Foreign Currency denominated Non-Resident) deposits.* The dollar designated deposits have gone up tom an equivalent of499* million dollars as on 31 Marth 1985 Io 4,!34 million dollars. by the end of December 1988.rs The net accrtion in the course of the year ending June 1988 was Rs. 1,398 cnrnes, i.e., nearly 20 per cent more than the corresponding period in the pre,vious year.z6 The uptrend in FCNR deposits has continued in the subsequent period as well. These represent investments made by non-residents through the banking system in the form of attractive intenest bearing deposits withdrawable in foreign currency. The fact that these are repatriable means that the inflow as well as the outflow of these deposits will depend upon the investors' confidence in our abilit5z to manage our balance of pa3rments without imposing new restrictions on the repatriation of interest or principal. A continuing strain on the balance of pa;rments can create a psychological atmosphere where the depositors' confidence is adversely affected. Any attempt at rcstructuring the outflow can only mean slowing down of ifrflows. Any large claim by way ofwithdrawals can make the extemal account extremelv vulnerable. This only highlights the uryLncy of dealing with rhe stmcrural protrlems associated with our balance of payments. One elemen! of course, is the need for domestic fiscal discipline because, as pointed out earlier, restoration of better balance between government nevenues and expenditure is not only essential for bringing about the desired improvement in public sector sirvings performance, but also for enhancing future prospects for price stability. This task is not going to tre easy because there are other medium terrn adverse factors which will require adequate and pmmpt 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 effct fiom 196E, ITCIIR deposit8 could be deeignatod in yen and D.M. These ar also

l Augu8t

excluded

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 external assistance. In vierry of this situatiorl, the strategy in the next few years will have to concentmte on ensuring a strong and sustained growth in exports of both goods an{ services. This will need to be supplemented by an economically efficient effort at import substitution. There has been recently a sharp increase in imports. In part, it has been caused by temporhry factors such as unusually high international prices for sorne commodities like metals, chemicals and edible oils, lalge imports of certain bulk commodities 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 industrial enterprises are dispmportionatel).i oriented towards domestic market sales. A sustained programme for ensuring that India's manufacturing sector makes a transition towards an intemationally competitG environment is a preconditidn for a healthier balance of payments. Unless Indian industry domestically operates in a competitive, cost conscious envirdnment with adequate opportuniiies for technological upgradation and economic scales of operation, there cannot be a shapp increase in the export of manufactures. 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 cannot bring the external payments into balance through faster expofi growth, therc will either have to be a rcduction in the import bill ior 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 which could lead to unsustainable debt servicing burdens. The creation of a competitive, cost conscious envirorlment' however, will necessitate radical cfranges in our prsent perceptions 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 segments 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 individual units, or in some cases industry as a rvhole, to nestor bal,ance and recover viabiligi would bc thncugh a drastic n-.structuring. Modifications or upgradations of technologr, changes in pmduct specifications, manpower usage and pricing policies would be necessary; and unless the system as a whole is one which permits or encourages such fledbility, industrial sickness will be even more pervasive. The wide range of basically unviable units will continue to be propped up through artificial respiration in the form of additional funding to meet cash losses. This, however, will only mean postponing doomsday. As experience has shown, the takeorrer of such units by State or Central Government is not a cost effective solution. The wav out is to accept the pnDposition thal changes in the forlunes ofa unit or industry are a fact of lifu and therE is nothing sacrosanct about not permitting the continuance of unviable units. Similarly, units with dishonest and/or inefficient managements should be fteely permitted to change hands or in some cases even shift their
locations.

The latter part of the eighties witnessed the emergence of competitive impulses. Having intnoduced the forces of competition in the late eighties, the nineties must be devoted to managing the consequences of that competition. As Abid Hussain has emphasised, the real issues of the irinbties will not be confined to the economics of liberalisatiory but more fundamentally they will rlate to the politics of liberalisation and the management of its fallout.r? As Abid flussain has pointed out, 'to attempt restructuring in a pnotective environment that still prevails in India would be like mnning in a potato sack race; once the pafiicipants reach a certain speed, they cannot accelerate further unless they drop their
sacks.'28

The process of making Indian industry internationally competitive is likely lo be a long and arduous one. It would be unrealistic to ignore the social context in which the transitioE fi-om protected to cornpetitive industrv will have to take place. The focus of policies will have to be on expanding the contribution of the industrial sector, directly or indirectly, to emploJ,ment generation. While output and the value-added growth nate have been encouraging over the past few years, the rate of new lob cration

304

EPITOGUE

in the organised sector of industry. has been extremely low. In the otganised manufacturing sector as a whole, emplo5nnent elasticity with respect to output has ddclined from around 0.5 in the sevenlies 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 the manufacturing industry. There isp of course, sufficient evidence that certain segments of Indian industry att overmanned and rationalising the labour force is a precondition for intemational competitiveness. At the same time, however, the thmst of policy will need to be on creating productive emplo5zment opportunities in manufacturing industry. There is obviously a need for a special programme for encouraging smaill and village,/rural indusuy in areas like wool sericulture, food processin6 garment-making, and leather-processing. If the experience of countries like China or 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 incluorng sales tax and octroi will need to be calefully reviewed. The scope for knowledge-based industries in which we have a decidedly comparative advantaie, e.g', co{nputers, informatics and software, needs to be exploited; pace of winds of change which are societies that have

The process of economic change is inordinate$ slow sweepihg acrnss the world and been more closed aqd insular same old sterile nhetoric, the in administration and in cess of reform. The elan, the

ours seem to pass us bY. The old vested interests in politics, continue to hamPer the Proof 1985, seems to have In the absence of hn integrating force such as an disappeared. effective part5l organisation with sensitive antennas, local level tustrations are mounting. In scime cases economic impulses have been generated, but these oannot be accommodated in the existing social or political systern. The traditional power relationships are inevitably bleaking downr, but substitute structures have not rcplaced traditional ones. As Abid Hussain points out:"" it is important 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 redesigp of such institutions at all levels.'3o The tasks before us in the coming decade are indeed formidable; and there are many who throw up their hands in despair

about the future of the economy and the polity. But in the four decades of independence, the democratic poliqr has shown remarkable resilience and an ability to meet the challenges. The first challenge was essentially one of overpoming the economic stagnation which was an inheritance ftorn the colonial economy. After several decades of stagnation, the economy has shown a steadily rising trcnd even though the per capita gtulvth has been small. The other challenge facing the country in the sixties and sevendes was one of self-reliance especially in food and fuel. This was met by achleving self-srrffiCiency in food and thmugh a significant increase in self-reliance in the enens/ sector thrcugh larger production of oil, coal and electricigr. Now the countqr will need to face up to the third challenge which is to ensur a mar{<ed increase in factor productivity in order to attain intemational competitiveness. There is no reason why we cannot meet this challenge as well. But this will require a political will and a willingness and abilit5r to escherv soft options. The concluding portion of the Epilogue to the first edition remains as relevant todav as it was then. To quote:

The future not only of India but of many other deveioping countries in this part of the world and elsewhere would depend largely on what they are able to achieve or fail to achieve in the next decade or two because beyond a point accurmulated problems can become so large as to be beyond the competence of the system to handle. No orderly solutions arE then possible. Fortunately for us in India, it is not that problems are not knorvn or that solutions ar still to be found. The main prublem is that there is a stmng tendency to opt for a soft option in the hope that it would be adequate at least for. the time being. The argument usually is that politics is the art of the possible and that in a democratic society there is danger in moving too fast even if the direction is right. It is incrcasingly clear, however, that the time has come when the dangers of going too slow ane far gteater than the dangers of moving fast in the matter of reform and restructuring and in any went, lust

306
as

EPIITOGUE

politics is the art ofthe possible, effective politics is essentially 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 not once again accept populist solptions as substitutes for maior
reforms.

1.

lndia, Planning Commission, seventh F\ve-Year Plan Lgs,'go, Mid'term Appzi6d. Pani 5.3

IUd., pq.ra 5.7. 3. It'id., pam 5.8.

2.

4.

tndia Ministy ofFinance, Economic SlnYey 1988{9. Delhi: Controller of PublicationD 19E9, Table 4.8 ofAppendtur p. 5-56 5. Resrve Bank of Indi& Bombay, fieport on Cuflency and Finance 7987-8a. vol n: Statistical Statements, Statement 67, P. 87. 6. In.fir. Minisuy ofFinance, Economic Sltn4Jy 198849. Delhi: Controller of PtrbUcations, 19E9, Table 6.1, p. 69. 7. Ibrid., Table 6.1.

Ibid, Table 2.1 Appendi& p. $36. 9. speech of Shri S.B. Chavan (Minister df rinance) prcsenting central Govemment Budget for 19s9-90, Part A" paras 10 and 11. 10. tndia, I|'inistty of finance, Economia surr9J/ 798839. Ilelhi: contmller of Publicationc, 1969, para 62. u. Ibtd" pam 9.5. 12. Ibid, par r.29. 13. IDt"d, para 9.6. 14. Cent|e for Monitoring Indian Economyl Bombay, 'A Review of Cdntral Budget: 19E9-9O,' February 1989, Table 1.9. 15. Spech of Shri S.B. Chavan (Minister Of Financl prsenting Central Governrnnt BudSet br 1989-90, Part A, pala 15.
E.

16. 17.

rhld. India, MiniEtry of Finance, Economic SWey 1988-89.'table 910.

Table 6.5, p. 77.

1.6 of

ApPendirr p.

lE lbid,
rs.

ftid

zo. Hui8aln,

Abi4 'lndian Industy in the lggos-challenges Ahead' (17th hank

Begulation and

Development fiz

Moraes Menorial lctur deliverd at Madras on 3 January 1969, iointly orgaCommerce and Industry), para 16. 27. Ibid., parc 17. 22.lndia, Ministry of Finance, Economic Suttey 198dd9. Table 6.2 of Appendix,

nised by United Writeru' Association and the Southem India Chambr of

p. 5-66.
23. Reserve Bank of lndia, Annual Eeport

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 tcture 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 it would be in the public interest to make an announcement of the conclusions neached by them on vaLious aspects of policy. 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 of

collaboration 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' prc visional, thq Government of thdia consider that an announcement of their views may hBlp to clean up the uncertainty which appeam at Present to be impoding planE of develop mont by private indusuy.

nwlation
2.

and

Deltelopment

309

Under the Government of India Act, 1935, the develop ment of industries is a provincial subject, |ut is open to the Centre to declare by law that the development of ce ain industrieS under Central control is expedient in the putrlic interest and thereupon, the development of such industries becomes a Central subject. No such Act has, in fact, been passed by the Central Legislature with the consequence that the development of industries is at the moment wholly a provincial subject. In view of this, some explanation is necessary as to why the Government of India feel themselves called upon to issue a statement of their industrial policy. The reasons are two-fold. In the first place, the general economic policy pursued by the Govemment of India under their own constitutional powers exercises a profound influence over industrial development. It is a matter of history, for example, that the cotton textile, the iron and steel and the sugar industries have made rapid strides in I ndia largely Js a result of the fiscal policy pursued by the Central Government. In the second place, the progress of planning has made it abundantly clear that certain industries must be taken over under Central control in the intercsts of coordinated development. It was indeed contemplated by parliament, when the Government of India Act was passed, that industries in which a common policy was desirable would be brought under Central contrul. Government consider that for achieving the foregoing object the following industries should be centralised, but before coming to a final decision they will consult the provinces 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

fertilisers and pharmaceutical drugs.

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. Coal

20. Radio engineering.

When the necessary legislaXion rs passd by the Centre, the Government of India willl have direct constitutional authority for shapiitg the prosress of a number of industries of vital importance to the country's development. It may be pointed out, although the point is 'clear enough/ that this arrangement has no long range constitutional impli cations. It is intended to be in operation for so long as the present Constitution lasts; and to what extent it will survive beyoid 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 obiectives of industrial developmbnt and the steps that will be necessary, in the conditions in which India will find herself after the war, to enable these objectives to be achieved. Govemment consider lhat thd fundamental obiects of indus. trialisation are three-fold:

To increase the national wealth by the maximum exploitation of the countryf s resounces. It is well-known that there are considerabl unused resources of manpower and material; andl clearly Government policy must be directed towards btimulating their fullest and most effective utilisation. (ii) To make the country better prepared for defence. The experience of two wars has demonstrated the dangers, both to India and to the nest of the Commonwealth, inherent in India's depetrdence on overseas supplies for vital commodities requi[ed for defence.
(i)

fi4g:ulation and

&l,opfnerrt 3ll

(iii) To provide a high and stable level of employment. At

present the volume of industrial employment is comparatively speaking small, but if the country's industrial resources are developed to their maximum possible extent, industrial employment, including employment in ancillary trades and professions, will considerably affect the volume of total employnient in the country. GovernmeDt consider that their industrial policy should be directed lowa|ds maintaining employment at the hi6Jhest possible degree ol stability and volume.

It is axiomatic in Government's policy that the additional wealth created by industrial development should be dig tributed in a manner that may be regarded as socially equitable. Powers rnust be taken and consciously used to
secure this purpose.

4. 'I'he atlitude of Government towards industry in the past was, for many years, one of laissez faire. Till the war of 1914-18 this policy was maintained in the beliel ryhich was in accordance with the current economic doctrine,
that industrial progress was best achieved by unregulated private enterprise. . This attitude undervyent some modification after lhe lasl war through the adoption of the pcrlicy of discriminating protectipn. The Secretary of State, Mr. Edwin Montague, in a despatch to the Government of India in fgig'on the Fiscal Commission report, announced a new policy. He said,

If tbe active parti6ipation by Government lit industrial development is to be accepted as one of its legitimate
functions a new policy is required. Wirh the quickening of political life that will follow the grant of constitutional reforms the demand for progress in administration and social reform may be expected to become insistent, and if progress is not to be hampered by want of funrls the taxable capacity of the people will have to be increased. To this end the natural resources of India must be effectively utilised. as new opportunities for the investment of capital present themselves, in order that the standard of comfort of the people may be raised, and the economic strength of the country may increase. Further, ie

312

APPENDICES

the experience of the past few years has shown that in time of war, India cannot rely on sources for hen needs, the rhatter is one in which tical expediency, economic advantage and military are 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 future

Government should play an ve part in the industrial development of the country; secondly, that Government cannot undertake this work unless provided with adequate administrative equipment arid forearmed with reliable scientific and technichl advice. This despatch was soon followed by the Government of India Act, 1919, under which induslries became a provincial subject. The Government of India, therefore, lost direct interest in industrial developrlent and the Provinces had neither the financial nor the tEchnical resources to stimulate development on any significant scale. The Government of India consider that the continuance of their existing policy, in the conditions in which India will find herself after this war, will not meet the oblectives of sound post-war developmentf Though industrially strcnger than in 1939, India will find h$rself in a position of rclative inferiority, In other countries lechnological advances have been immense and, as a resrtrlt of the naturc of modern warfare, there has been a striking increase in the total volume of skilled industrial laboun. If India is to m4ke rapid headway and if the standard of living of the masses is to be effectively raised, a vigorous and sust:riued efforl is necessary in which the State fio less than plivate industry
must take a part.
5.

Government have decided 1o take positive steps to encourage and promote the lapid industrialisation ol the country to the fullest extent possible. They attach particular importance to lhe development of those industries which constitute the fbundation of modern industriql life, such as the iron and steel industry, tbe heavy engtneering industry, the machine tool industry, the so on, But wlrile the

Regulation and

Development

313

developrDent of these industries nrust take high priofih,, it must form part of a balanced plan irr rvhiclr tluc placc is given to consumplion goods ir-rclust|ies. It is cleal tlrat if progress is to be achieved, the development of industlr must be planned bv Govelnment in ooopel?lir)n \vitl) thrl industry and everv ellbrt made to nake the plan
effective.
6. The

formulation of a tariff policv appropriate to the postwar needs and conditions of the country is under active consideralion. The subiect, however is one of great complexity, and will require a little further time for the Government of India to determine its policy and devise the machinery for implementing it. In the meantime, the position of ildustries which have been established or developed in rvartime requires consideration. Some of these are covered by the announcement made in 1940 in regard to the glant of an assurance of post-war pnotection to esbential wartime indushies. Outside the scope of this announcement, howeven, lie a large number of indus" tries which have helped to sustain the national economy during an exceptionally difficult peniod. The provision of assistance to or protection of such of these industries as have been ebtablished on sound lines is likely to assume a measure of urgency during the period of transition. Government propose to set up machinery without delay for the investigation of the claims of such industries for assistance or protection. This is a short-term measure pending the formulation of a long-term tariff policy and the establishment of a permanent machinery for the

purpose.
7. (r)

A primary point in induStrial policy is the extent to which the State will take part in industrial enterprise. In India, ordnance factories, public utilities and railways together forming a considerable proportion of the total industrial enterprise are already very
largely State owned and State operated. This arrangement will naturally continue. Further, Government have recently decided that the bulk generation of eletric power should, as far as possible, be a State concern. This decision falls within the existing

3I4

APPENDTCES

pattern of State and private enteqrrise. Apa|t fi.om oldnance factolies, publiq utilities and railrvavs, basic industries of national importance may be nationalised provicled adequate private bapital is not forthcoming and it is regarded as essential, in the national interests, to prom()te such industries. For the purpose of Government poiicy, ba$ic ir-rdrrstries can be defined as including aircraft, automobiles and tractors, chemicals and dyeg iroh and steel prime movers, transport vehicles, electrical machinery machine tools, electrachemical arid non-ferrous metal industries. It is contemplated also that Government may takeover certain industri in which the tax element is much more than the profit element and it is necessary ancl venient for the State to takeover the industry. example of such action in
the paSt is 'Salt Man

All other industries be left to pnvate enterprise under varying deglees ol contml. There may be no control except such, as is fequired to ensure fair conditions for labour, in the case of such industries as those catering for ordinary consumers' demands and subject to free competitiorl, while in the case of indus' fies of a semi-monopolistic nature or which control
scance natural nesources there may be a stricter control varying with the circumstances of each case. The views expressed in [his paragraph regarding the scope of nationalism will tte discussed with the Provinces and also with the more important Indian States and a further statement issued as to whether the scope should be enlarged at all and if so to what extent. Within the field considered open for State enterprise, the question whethor the existtng units which are privately owned should be taken over by the State will be exsmined on the inerits of each type of such cases. The Reconstructiorl Committee of the Council has decided with regard to electricity undertakings that, as licences fall due, they will as far as possible be taken over bi the State

The case

negulation and

D.welopmena

31S

separatelv.

(ii) Certain industries of national importance such as shipbuilding and the manufacture of loc -motives and boilers will be run by the State as well as by private
capitalists. (iii) Normally State enterprises will be managed by the State. In special cases the possibility of management thnrugh a private agency for a limited period may have to be explored. (iv) In some cases, State enterprises may be operated through public corporations. Iri order to gain experi ence of management through public corporations, further experiments will be tried:

Goternment Assistanqe to Industrv

8. Goverllntent have a primary responsibility, which they propose to dischar.ge without delay as soon as war conditions allow, for developing certain prerequisites of industrial progress. One of them is the development of transport facilities. 'Ihis is a matter in which both the Centlal and h-ovincial Governments as well as the lndian States are vitally inter.ested and steps to ensure a ce ordinated policy have already been initiated and made considerable headway. Another prerequisite is the development of powen. f'he Govelnment of India-have made good progress in ensur.ing co-ordinated development in this field. In many cases, power schemes-particularly where they are combined with irrigation-are the primary r6sponsibility of Provinces, but whene regional projects, which overrun Provincial and State boundaries, are considered necessary, the Government of India are taking action for the development of resources on a regional trasis. 'Ihe survey of minenal resources is another field n'here the responsibility falls squarely on the Central Government. Steps arc being taken to extend the Geological survey and to put it on a footing where it can be of the maximum service lo the country. Another pre. requisite of indusirial progress is scientific and industrial

research; the Governmeni of India have alreadv

316

panicularly through high gfade technological institutes, a4d technical training of personnel required lbr skilled employment are also matter$ in which the Government of India have initiated actiorl which will directly assist industrial progress. 9. In addition to discharging their responsibility for thus laying the foundation of indtustrial progtess, the Government of India are prepared to assist industry in one or more of the following ways ' (i) Government will take either by making loans or try subscribing a share of the capital in indusfial unden to be of importance to takings which are the counlry's but for which adequate priro Within this category atb capital may not be might fall such industri as those manufacturing aircraftt, automobiles and tinactors, chemicals and dves, transport vehicles, elecirpn and steel, prime trical machinery, machine tools, electrochemical and non-ferrous metal industries. This list will be modified tiom time to time ab circumstances warrant' Inof assistance will be subject dustries receiving this contml than others. to a greater degree of might rcquire representqFor example., ent and that their sanction on the Board of
for certdin a_ppointinents. in suitable cases capital equipment like buildings, serwices and/or machinery on terms to be settled on the merits of each case. This the form of bulk covernmight in.certain cases which might then be ment orders for capital allocated to industrialists on suitable terms. (ii) In special cases, enterprise wiII be encoun aged by guaranteeing a um dividend on capital or undertaking to meet ue losses for a fixed numbor of yearq subiect to condition that Government would have a voice in management and that a ceil: expenditure
aYrd

Govemment might provide

Regulation and

DevEloPment

31?

ing wi! be fixed for the return on capital. where this procedure is followed, profits in subsequent yearc over and above the ceiling will be appropriated towards rturning the funds paid by Government and after this has been done, such excess profits as continue to accrue will be divided by the Government and the Company in agreed ProPortions. (iii) Government will be prepared to give adequate financial support to research organisations set up by Industrial Associations representing organised industries and

to provide for grants to Universities for approved

schemes 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 and
(iv) Subiect to reasonable safeguards as to the quality and

Industrial Research.

price, Government will continue to encourage Indian industry by buying its products in pfeference to others. (v) The Government of India are examining the question of 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! while securing the ends of social lustice and national budgetary interests, the taxation does not tend to act adveP sely on development, (vii) Government will assist in the procurement of capital goods required by industrialists. They propose to set up an organisation in the UK and in the USA for this
purpose.
(r4ii) trn certain branches of industry, the advice of experts is particutarly essential. Government will help in mak-

ing the services of such experts available to industry. L[censing of IndustrY 10. Government have come thdy must assume power to license industrial undertakings. They have at present nQ powel' excepl lbr emergency

to the conclusion that

wartime controls, to regulate the growth of indu$try;

318

APPENDICES

normally a pefson mav sel up a factory wherever he likes and may manufactufe in it whatevqr commoditv he chooses. 'I'lrere alt:, oll course, locrrl larvs whicl.t Iegrrlate the size of tlre buildings, lhe proportiorl of open space, public health rleeds and so lblth and it is possible under these leguhrtions to refuse pennission to put up a lactolv ltuilcling, l)ut such relusal cartnot be based on consider.alibns r:f lndustrial develorrment. One efl'ect of this unlegulated Ileedour to plorirore industlial entelprise has been the corlcentration of industrv in certain ar.eas, for. instanctb, the ntanufactrlre of cotton
textiles has been conceltrated in Bombay and Ahmedabad sugar in the United pr.ovince$ and lliltaq paper in Bengal. In some cases, there ale good glounds for the concen_

not been developed because industty has tended to flow in particular channels 11. The effects of such concentfation are economic, social as well as strategic. It seems unsound from the strategic point of view that so lange a of industrv should be concentrated in a few cities which might well be vulnerable to attack. On.th( social side it is clear that concentration creates housidg problems of a most acute type. Perhaps, an even m important consideration is that concentration de other areas of the country 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, are situated all over India, and cotton, the main raw mate rial, is also grown in parts of Ihdia. From the point of view of the it would nbviously be right to cut out unnecessary tion costs and to locate manufacture where both raw material and the market are situated. Even concentration appears reLatively cheap on the basis costs of production

tration of palticulal industriies in panticular areas, but in manv cases, it has been lhe lesult of foltuitous and haphazard g|owth. There afe vast afe.ts ilt this country which, though suitable for itrdusrial development, have

Begulation and

Development

319

if regard is paid to the benefits of a widely spread industrial .,-tructure and its inteAration with agriculture. 12. Contnol over development- would be necessary from another point of view. In an unregulated industrial economy there is likely to be a tendency for capitalists to go in for schemes which promise quick returns. This will lead to lopsided development,-a scrarnble for some industries, with the danger of overproduction and excessive compelition and inadequate attention to other industries which are equally necessary in the national interest. 'fo overcome this difficulty, it would be necessary to fix targets, to allocate them on a regional
disperse industry,
13.

lasis, and to se that these fargets are achieved. As Governmenl has no authoiitv al present to do thii, they will have to take polvers by legislation. Government proposb that they should take power to license the sta ing of new factories and the expansion of existing factories, for, without this power, planned industrial development will be quite impossible. At the same time in order to avoid unnecessary delays, it is proposed to set a monetary limit to the plants or proiects riquiring licence so that very small plants, moderate extension of existing plants or replacements which do not add to the output should not be subtect to licensing. Details of this Iegislation are under consideration. E-ven on o preliminary examination, it is manifest that the power prt> posed to be taken by Government must be used in a manner that will command general public confidence, It is equally clear that the administration of the licensing system must be such as to assure Indian States that their legitimate desire for industnial development is nol overlooked. It is accordingly proposed that a Board should be constituted at a high level to advise the Central Gove, nrrtent in the matter of granting licences for industribs specified in paragraph z above. betails of the personnel 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 from liiensing control should bp undertaken to achieve the following objects:

lil To secure balanced investment in industry, agriculture and the social services. It will be necessary, after
the war, to ensure that the available capital resources are utilised on a balarrci-'d plaa oJ agricqltural, indus. trial and other developnlrent and that inside the field of

industrial developmen{, a balance is kept between

manufacture of capital pnd consumer goods. Agricultural development will be undertaken almost wholly under the auspices of {he State. This is because the bulk of the holders of larrd 4re poor and cannot themselves finance, at any rate, initially, improvements such as contour bundinfi and irrigation by lift pumps' In many cases it will bp possible to recover the cost ultimately, but the capital expenditure will have to be advanoed by the State. The State will also require to borrow hear.y sums eilther directly for itself or on behalf of local authoritiBs for financing road develop ment, irrigation, electrical power, public health and other 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 counSs savings. This will make it necessary to maintain control over'capital issue$; for, otherwise, capital may flow excessively in one direction and lead to lopsided development. (il) To secure for industrial workers a fair wage, decent condition$ of work and living and a reasonable security of tenune. It is a fundaFnental objective of industrial development 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 matters 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 the necessary legislation will be undertaken from time to

time. (iii) To prevent excessive profits to private capital ln the case of private undertakings, subiect to free competition, 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 pro fits. In the normal course, the tax system may be expected to prevent any excessive accumulation ol pnofits. Where, however, conditions of free competition 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
(iv)

it arises. To ensure the quality of industrial products in the interests ofboth internal and external markets' It is of the utmost importanie to ensure good quality for the internal as well as the external markets. This involves standardisation of products and administrative machinery to enforce standardisation. (v) To ensure that unhealthy concentration of assets in the hands of a few persons or of a special community would be avoided. This may be secured by a judicious exercise ofcontrols, such as capital isSues control and the licensing machinery for the regionalisation of
industry.

(vi) To require necessary technical training of personnel and to extend the benefit of such training to minodtias

and backward communities'

15. The Government

of India prcpose without delay to.enter into discussions with the Provinces and with the Indian States in the light ofthe policy stated above and are confident that it wiil be possible to evolve a machihery which

322

A"PPENDICES

will enable

in a spirit of friendly cooperation on,the part of all

parties concerned.
Planni ng and Developme nt Depattment, New Delhi, 27 Apri\ 7945.

an agreedpolicy to be

implsmented in practlce

Appendix II

SCHEDULES A AND B ATTACHED TO THE

INDUSTRIAL POLICY RESOLUTION, 1356 Schedule'.A

l. Arms and ammunition and allied items of delence

equipment.
2. Atomic energy. 3. Iron and steel. .4. Heavy castings and forgings of iron and steel. 5. Heavy plant and machinery required for iron and steel

by the Central Government.

6. Heavy

production, for mining, for machine tool manuracture and for suc.h other basic industries as may be specified

stearn turbines. 7 Coal and lignite. 8. Mineral oils.

q

electrical plant including large hydraulic and

Mi,nrlg of irorr ore, manganese ore, crome ore, ypsum, sulphur, gold and diamond. 10. Mining and processing of copper, lead, zinc, tin, molytr denum and wolfram. 11. Minerals specified in the Schedule to the Atomic Energy (Control of production and Use) Order, 19s3.

3A

APPENDICES

la. Aircnaft. 13. Air transPort.

14. Railway transport.

r5. Shipbuilding. 16. Telephones and telephone cables, telegraph and wire' less apparatus (excluding radio receiving sets)' rz. Geneiaiion and distributibn of electricity.
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.
3. 5.

Machine tools. Basic and intermediate prqducts required by chemical industries such as the mariufacture of drugs, dye-stuffs

4. Ferro alloys and tool steels'

and plastics. Antibiotics and other essen{ial drugs Fertilizers. E. Synthetic rubber. L Carbonisation of coal' ;10. Chemical PulP. x1. Road transport. 12. Sea transPort.
6.

Appendix III

APPENDIX I INDUSTRIES LISTED IN PRESS NOTE DATED 2 FEBRUARY 1973

I. Metal

rgical lndu.stries

(a) Ferro alloys.

{b) Steel castings and forgings. (c) Special steels. (d) Non-fen'ous metals and their alloys.

Boilers and Steam Generating plants 3. 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
2.

(b) '"itY' Electrical motors.

Electrical furnaces. 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
(d).

(c)

!28
7

APPENDICES

7. Machine Tools A.]IS$, F*tu,'s, Tools and Dles of Specialised Types 8. Agricultural Machinery TFaetors and power tillers. 9. Earthmoving M achinery 1d. Industrial instruments indicating recor.ding and regulating 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 First Schedule 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 formulation from all sourcd of 1 : 5. !5. Paper and Pulp including Paper Products' .16. Automobile Tyres and Tubas u. 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

falling under (1), Coal lignite, coke and their der_ ivatives unden the heading ,2, Fuels,. 2. Textile falling under the heading,23, Textiles (including those 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 prncessing Industries'.
1. Coal

4. Oil-seed

'(2) Vanaspati' and under the heading Za, Vegeta-ble Oils

crushin! falling under,(1) Vegetable oils includ_ ing solvent extracted oils, and Vanaspati falling under falling under the heading,31, Leather, Leather

and Vanaspati'.
5. Leather 6. Matches

Goods and pickers,.

'J6, Timbef products,.

falling under ,(3) Matches, under the heading

326
7.

APPENDICES

Distillation or brewing of alcoholic drinks falling unden the heading '26, Fermentation Industries'. 8. Hoi rolling cf sentie, bars, wire rods and (A) structural
sections of steel.
9. Tractors and

self-propelled combine harvestors.*

OTHER.ARTICLES
Sched,ule V 0)

1.

All qualities of steel manufacturedfrom electric furnaces based on scrap, falling under (1) Iron and steel (metal) and'(6)Special steel'under the heading'1. Metallurgical
Industri-es': A Ferrous'.

2.

Iron and steel pipes and trubes and stainless tubes falling under '(5) Iron and steel pipes' under the heading '1. Metallurgical lndustries : A. Ferrous'.

Bright ba rs. Tin containers and metal crontainers. c. Drums and barrels. 6. Wires of mild steel, special steel and alloys steel-coated 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 of iron and steel' under the heading '1. Metallurgical Induslries : A. Ferrous'. 8. Non-fernous semi alloys, flat products and extrusions falling under the heading '1. Metallurgical Industries : B. Non-Ferrous'. 9. ACC/ACSR Conductors fallling under '(6) Electrical cables and wires' under the heading'5. Electrical Equipment'. 10. Cold rolled lormed section. 11. Hamilton poles. '12. Tubular poles. 13. Steel structurals. 74. Sheet metal components.
3.
t+.

(4 Added vide notification * Added on 30.3.19a4.

No. 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 otherwise 21. Da iry machinery induslrY 22. Fooi processing machinery and equipment industry' 23. All types of rubber based conveyor beltings, PVC conveyor 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. Aniline 37. Acetanilide. 38. Meta-amino Phenol' 39. m-Dinitrobenzene.

40. 41. 42. 43.

Nitrobenzene' Para-nitrochloro-benzene. 0rthonitrochloro-benzene. 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 system and allied items

330

APPENDICES

51. Two-\,r.av

oz.

radio communications anrl alliecl equipment. Digital electronic vvatches. Che nicals &, pharmaceutic[], maclrinelv irrcluding nrixers and reactor- kneading mills, turbo rnirers ond th" like, filteration equipment- filter press rotarv filters and the like. Centrifugal macb.ines, evaporators. distillation mach equipment, crystallisers, driers

54. Borax. Borax55. Boric acid. 56. Chemical lime. 57. PVC power cables 58. Acetic acid.

with aluminium conductors.

59. Distribution transformers.

60. Dry batteries.

61. Welding electrodes. 62. Electric fans. 63. Overhead cranes. 64. Railway wagons. 65. Industrial gases.
66. Formaldehyde.

68. Hydrogen pemxide.a

67. Vanadium pantoxide catalyst.3

69. Nylon chips/nylon moulding powder.a 70. Industrial explosives, including detonating fuse, safety fuse, gun powder and nitro"cellulose (explosive grade).5 71. Polyester chips/polyester moulding powder.u
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.

Appendix V

BUREAU OF INDUSTRIAL COSTS AND PRICES

During the pre-tndependence perio{ there were no import conrols like we have today. Therefore, tariffs were the only instruments by which the Governrnent of India granted prG tection from imports to Indian industries. The industry seeking tariff protection had to apply to the Governmerrt for the purpose. If the Government anived at an opinion that there was a prima-facie case for giving protection to the industry by means of tariff, ad-hoc Tariff Boards were appointed to investigate the question. The recommendations nrade by the Tariff

If the Government accepted the recommendations, the existing revenue duties on imported articles were converted into protective duties or higher protective duties, as recornmended by the Tariff Board, r /ere imposed on imports of like items till the period for which protection was recornmended by the Tariff Board. Immediately after World War II, a need was t'elt for establishing a tariff body on a more long-term babis for examining the question of protecting the Indian industries by imposing tariffs on imports. Accordingly in 1945, the Government set up an Interim T'ariff Board for two years. Later, the Tariff Commission was constituted by the Government as a slatutory body for, among other things, examining cases of
Board were examined by the Government.

332

A.PPENDICES

tariff protection to Indian industpics. Apart from recommend ing protective tariff duties, the Tariff Commission was also entrusted with the function of observing the performance of the protgcted industries and to rqcommend ex-works prices of certain items referred to it by the Government. The Tariff Commission perforrned a useful nole till the first half of the fifties, i.e., until therre were no problems arising from shortages of foreign excharlge and, hence, there was no need for imposing import controls. From the second half of the fifties, the need for import controls arcse mainly on account of the exhaustion of the accumulated sterling balan,ces. Consequently, over the years import controls were made more and more widespread and rigorous. With either a com_ plete ban or quantitative restrictions on imports, the device of
increasingly superfluous. The only worthwhile function pelr tbrmed by the Tariff Commission in the sixties was that of recommending prices for selected items as might be refered to by the Government of India. In the meantime, the Government of India particularly the Ministry of Industry felt a need for an expert body to advice the Ministry on costs and prices of industrial products. With. the setting up of the Bureau of Industrial Costs and prices for Industrial Products in the Ministry of Industry in 1920, the continuance of the Tariff CommisdiOn w:rs no Ionger necessary. Both the BICP and the Tariff Co/nmission coexisted only till 1972-73 following which the Tarifl Commission was abolished. The Resolution constituting the BlCp is reproduced below:
Resolution dated 15 January 1970 Constituting the Burcau Industrial Costs and prices

tariffs for according protection to industries

became

of

Reforms Commission concerning the setting up of a body to provide advice on a continuing tiasis on industrial costs and prices. Government have now deeided to constitute a Bureau of Industrial Costs and Prices in the Department of Industrial Development to render advice to the Government on various issues pertaining to cost reductiori, improvement of industrial

Government of India have had under consideration for some time the recommendatibn of the Administrative

'

fq/ulation and Det'elopment

933

2.

In order io advise the Government on these igsues, the Bureau would undertake cost studies pertaining to i4dustries referred to it, with reference to costs of inputs, possibilities of technological improvements and prcper utilisation of capital and materials; present costs in relation to the optimum efficiency of industrial units; costs in relation to import substitution schemesl and the scope and methods for achieving cost reduction together with an assessment of the implications thereof. Apart from
the specific industries on which the advice of the Bureau is sought by the Government, the Bureau rl;,av suo moto take utri cost studies for other industries, where it feels such investigation to be desirable, and advise the Government suitably after'a study of the cost structune of the industries in question. The Bureau ma, at its discretion,

efficiency, and pricing pmblems in relation to industdal costs

and in order to obtain maximum results at minimum

cost, hire consultants to assist it in its deliberations.
3.

The Bureau would be headed by a Chairman and will for the pnesent have two wholetime members drawn from among economists, cost experts, engineers and managers with experience of the working of industry, assisted by suitable supporting 'staff. The Director General, Technical Development and Economic Adviser to the Government of India (Ministry of Industrial Development) would be ex-officio members of the Bureau. The Director General of the Bureau of Pubtic Enterprises would be associated with the work of the Bureau as and when necessary in connection with cost studies for public sector projects. 4. The Bureau would have an independent status, the Chairman being a person of sufficient seniority, status and experience to make it a really effective organisation. In order that the Bureau is able effectively to advise Government on important issues relating to industrial prices and costs, the Bureau would function like an independent Committee, and the Chairman would have appropriate admin istrative powers. 5. The Bureau would have full powers under Section 19 of ihe Industries (Development and Regulation) Act of 19s1

334

APPBNDICES

to call for any data, records or papers pertaining to any industry listed in Schedule I of the Industries Act, or to take such action as is allowable under the said Section of the Industries Act. 6. The Bureau would maintaitn close contact with other agencies dealing with matters that have a bearing on industrial prices and costs. In this connection, the Bureau would determine ils own procedures; call for notes memoranda, results of studies, data and any other material relevant to its wprk from official and nonofficial bodies and also hold discussions with them. The Bureau would submit confidential reports to Government as and when necesqary in respect of different induotries or Sloups of indusries on which its advice has been sought, or even with refenence to any particular aepect of cost reduction perfaining to any industry, er it may deem fit.

Bibliography

Ac Iw&

SHRfMAN NARAYAN. (1944).

lndr:a. Bombay: padma publications.

AHLUW LI^ ISHER JUDGE. (1985).

The Gandhian plan a,reonomic developnpnt

of

Ne$/ Delhi: Odord University pr6s. BHAcwATt, JAcDlsH N. and T.N. SRtNrvAsAN.
BHmJfiALTNGAM, S. {1g&E,. Asian

Irdusrrrld etagnation in India Eince the mid-sixdos.

17974).

economic devclopment j India. New Delhi: Oxfrrd anJ ff

ForcEn dzde ,t{imes and

ff .

nevie, &loLiJr.

rview ofcentml bud{iit. 1989. 90.' February lssue, Table 1.9. CHAVAN, S.B. (1989). Spech (Minister of Finance) prsenting Centml Govemment Budget for 1969-90, part A. CONGRESS FORUM FOR SOCTAUSTACTTON .l1gZA. An apr,Y,ach to the Fifrh plan: gor'Ie bastc considentions. New Delhi.
DESHMUKH, C.D. (1952).

CRNTRE FOR MONTTORTNG INDTAN ECONOMY. (1989). ,A

policy in lrrdia. poona: Cokhje Institute ofpolitics. GANGUL|, A.S., Chairman, Hindustan tver Ltd. 11965). ,Biotechnolos/ and agriculture.' Speech delivered at the Annual Cener"l Ueuung ot tt" Company, 18 June 1985. Bombay: Hindustan l,ever Ltd. GANGULT, B.N. 11927:, Indian eionomb thought: Ninetf'Jnth centuly pasptiwE. New Delhi: Tata Mccraw Hill.
HArnfsoN, SEuc. (1960J.

lndr'a. Delhi: Federation of Indian tabour. cADGlL, D.R. ftgzL\ planning and economic

an ihstnlment tor en expsitory iew. faper presented at -sack*;rd the seminar on Industdal Development of 'organisea Aras, Uy thc lndustrial Da/elopment Bank of Indie, 16-lz May 19E0. FEDEMTToN oF INDTAN LABouR. (1944). peoples, plan ior economic dwelopment of
indDstialization of Mckwatd
arcas:

Publishing House. DUA, AJAY (7ggOJ. Capitaj inrastment subaidy scheme aa

Economic development in India

6-1gi6. Bombay: Asla

Indir: The mor/t.dangemus

decades.

hinceton: princcton

336

BIBUOGnAPHY

r!'b r oona- .h'ltpnges ;r head. ahead Hussmtl, nsr;. trg8g). 'lndian industry irr the 1990s- Challenges ---

Uniwrcity

Southem lndia chamber of organised by United writers' Associatlon and the Commerce and lndustry. OF INDLISTRIAL IINDIA, DEPARTMENT OF INDUSTRI,AL DE\ELOPMENT, MINISTRI AFFAIRS llg6gl Repoft of the IMDE AND GOMPAN'Y

lTthlmnk lTthlmnk Mo"""" Mernorial Lecture delivered at Madras' 3 January 1989' ioinrly

Press.

Delhi' Indu trial Licenling Policy Inquiry Committee' Main RePoft Ner'v the India F'sca' Commission Simla: INDIA FtscAL CoMMlssIoN \ts21l. Report df
Central Government Prcss. INDIA. 11949). The Constituent Assemd"u

DEIELoPMENT, INTERNAI-

of llldia lLegislative) Debates. Paft II: vol. Iv, No 1. New Delhi: Lok

Proceedings other than questiond and an$wers- New belhi: Mana6er,

Government of lndia Publications. 1795 . Parliamenta4/ debates.

Centr.

Publications. INDI

oF INDUSTRY. 1796n. Industriai Planning and Licensing Poucy' RePoft to Planning Commisiion Neu/ Delhi: Planning Cornmission' lnterim

MINISTRY

(1964],. tNDrA" IrERSPEcrnr, PTANNING DMSIoN.

(

Perspectiw ofduelopment'

7-1976'

implications of planning fur a minfu)pum |ercI of living lMimeographed l INoh iANr.rNc CoMMISsToN 1951) The First Five'Year Plan: A draft outline' Delhil

Manager of Publications

11s74. Draft

rifth

Five-Yeat

tun

1974-79.

2 vole.

Delhi;

ReElulation and

DereloPment

337

Conroller of Publications.

l7g?8J. Repoft of inter-ministerial g'oup ot1 hEiqht equali'ation ol oonrnodiIie6. Delhi: Conlrcller of Pul)lieations. \19?9\. Dtaft Sixth Five'Year Plan, 1978'83: flevised Delhi: Controller of Publications. l7g8l| Report on indusfnal dispersal Preparcd by the National Committee on the Development of Baclq /ard Aras. B. Sivaraman, Chairaan. Delhi: Controller of Publications. (19851. seventft Fft-Year Plan. Delhi Controller of Publications. 11988). severlth Five'Year PIan 1985'90, Mid-telrn aPpaissl. New

Delhi: Planning Commission.

INDIA, P]-ANNINC AND DEVELOPMENT DEPARTMENT. (1945), StAtC',ENt Of GOIEMMENT'S

induitial policy, 1945 white Paper. New Delhi: Govemment df India. lNDUsrRnL DEVELoPMENT BANK oF lNDtA.ll962l. Report on develoryent banking

in

-. PREM SHANXAn. JH,\

October.

India,

1980-81. Bombay:
119851.

Industrial Development Bank oflndia. 'Futur of capital 8oods.' nmes of India, 2E and Zg

(19E41.

'why nothing works.' A series of three articles. Timec of

lndia,lD,

14,

2l May.

the 22nd Annual General Meeting of Kirloskar Consultants Ltd. Pune, 10 October 1965. I($sHNAswAMy K.s. (1980). 'What ails the public sector.' Fourth lecturE delivercd on 21 December 19E0. Ahmedabad:Ajit Bhagat Memorial Trust (Mimeographed.) LE$'fs, JoHN P. 179741 Quiet crisis in India: Economic develoPment and American polby. Garden City, N.Y.; Grnwood. MAHArANoBts, P.C. (7961). Talki on planning. Bombay: ABia. ME ,on JoHN w' 119761. The new economics of gvwth: A strate$r' br India and the dmloping wotld. lthaca: Comell UniveEity Ptss. MINH^S, B.S. (1971). Mass povefty and stlztq/ of rural develoPment in India' Washington D.C, MynDAL, GUNNAR. (19681. Asi.en dt'ama. An inquily into the Poverty ofnations. Ne\fl Yort: Random House. NAnASIMHAM, M. i1984). 'Some rhoughts on plannin8.' Sachin Chaudhari Memorial l,ectur deliverd at the Forum of Financiat Writers. New Delhi, 30 March ls84. State Eank of India Monthly f,a/iqw, Vol. xxxiii, June 1984. NARAYANA, P.L. (19841, The Indian phannaceutical industy. hv,blems and prD.epects. Neu/ Delhi: National Council ofApplied Economic Besearch. N0HRU, B.K. (19E3). The prpspect for the Indian econonry - A ne!v percpective. Paper prE8ented at the Workshop on Perspectives on Indian Economy, Shoft and Long Term, orEanised by the Associated Chamber of Commerce and Industry of India, Delhi. 12 January 1983. NEHRU, JAWAHABIAL.11948J. Discfivery oflndia. Calcutta: Signet Prss, 119561. Planning and development. Speeches to the l,ok sabha, December 1952. New Delhi. 11936],. An autofiwaphy.lrndon:John lane, The Bodley Head. PURUSHoTTAMDAS THAKURDAS et aJ. (19441. A plan af econonric dewloPment tbt' Ilrdia. Bombay: Nad Book Co. Iw KIISHNA. {1984). 'The Coromandel lctur, 1984.' Delivered 8t Nevr' Delhi.
KInLosxAR, S.L. {1985}. Chairman s speech at

338

BTBLIOGRAPHY

Secunderabad: Coromandel Fertilizer$ Ltd.

l197El. 'Nehru-Gandhi polarity

and economic

policy.

Mar'nstrEam, Vol. 16, No. 49. nA,, K.N. {19851. New Economic Policy.' V.T. Krishnamachari

Mehorial lctuF

delivered under the auspices ofthe Inbtitute ofEconomic Grolr'th. Nt^, Delhi 20 November 1985. (Cyclosbded.) and RAMAXISHNA, G.V. tlgzal. Repo|t of the study goup on industrial 'rygaladon procedure. New Delhi: Go\mment of India. RaSF,RVF: BANK OF INDTA. [9t ]). Report on cunency and frnance, 1987-8E. Vol. I: Economic ncvicta. l19Eg). fieport on cutfiency and frnanca, 1 7{f.. VoI. II: Statiltical Statements. Bombayr Rederve Bank of Indfu! Department of Dconomic Analysis.

Annual reryft 1 7-*. Rombay:. ResIve Bank of India, Department of Economic Analysis. SHAH, K.T. (ed.). 119491. Bbpoft of the Nationhl nanning Comfr*ttee. Bombay:Vora &
Co.
SINGH, TARr-oK. (197 4]J.

India's dewlopment Exryriencc, Ne',/ Delhi: MacmilLan.

TANDON, PRAK\SH.

l1g8l. Centnl qrstems ahd accountafility in public enterPfires. Paper prsented at the Intemationrit Wor*shop, Intemational Center for Public Enterprises in De!loping coufrtries at'Ljubliana, YuSoslavia, 1-5 June Indb. Bombay. India- Eangalore: Bangalola Pr8s.

1981. {Unpublished.l TATA SER\4cEs LTD. r19EE). stafibolca/ outl|'n of Use'EsvAMYA, M. (19 34],. Planned econamy

br