Regulatory Role of

Government
Module-3

08/30/09 Surana College PG Centre 1

 Political System

Forms of Political Role of Political System

System Political system in a
country
Democratic – Power is  Decides
vested with people  Promotes
Totalitarian- Power is  Encourages
vested with one or a group
of people  Shelters
 Directs and
 Controls
the Business Activity

08/30/09 Surana College PG Centre 2

 Role of Individual Constituents of Political
System

Legislatur Governme Judiciary • Constituents of

e nt
Policy Directing Settle Political
Making Legal
System
Law Controlling Disputes
Judicial
Making Review
Budget Implement
approval ing  Legislature
Executive
Control
Acts as a
 Executive/
mirror of
public Government
opinion

 Judiciary
08/30/09 Surana College PG Centre 3
 Impact of Government on Business
Government’s Government’s Impact on
Action
Labour Laws Ensure Motive Business
Social security, Cost of production
( Role – Improving Standard of increases, Affects
Direct / Control ) Living, Working Profitability &
condition Competitiveness
Tax Laws Generating revenue Cost of production
( Role – for re-investment , increases, Affects
Direct / Control ) saving affected Profitability &
people, industry Competitiveness

Commercial Laws To ensure rights of Increased business

( Role – parties confidence
Direct
Tariffs // Control )
Subsidies To protect local Local industries
/ Import ban / industries from global compete globally
Export ban competition
( Role –
Encourage /
Products reserved To promote mixed Limited area of
Shelter
for SSIs) & Public economy operation , could not
sectors ( Role be diversified, Vertical
Integration not
– Decides
08/30/09 / Surana College PG Centre 4
possible ,cost increase
Policy
Industrial Policy – 1948
1948, 1956 ,
 Accepted Importance of both
1991
Private & Public sectors
 Industrial policy  Divided industries into 4 categories
Indicates the
State Monopoly Arms,
relationship ammunitions ,
Atomic Energy,
between
Mixed Sector Rail
Coal,transport
Iron , Steel ,
Government & aircraft, ship
Business building,
Manufacture of
 It contains Telecom, Aircraft ,
Government Wireless,
Automobile,oil,
guidelines for govt’s mineral
Control Chemical, Textile
administrative Private Control All other Industries
action
 Recognised importance of Foreign
 it has no Capital
08/30/09  Recognised
Surana College PG Centre importance of SSIs’ 5
quantitative target
Policy
Industry Classifications
Schedule-A: ( 17 industries ) –
1956 Govt.
Arms , Ammunitions , Defence
Objective: equipments , atomic energy ,
Accelerate iron & steel , Heavy plant
Economic growth &Machinery, Heavy electrical
rate plant , Coal & lignite, mineral
Expand public oil, mining ,aircraft , air & rail
sector transport, Telecom cables,
electricity generation &
Increase
distribution , ship building
employment
opportunities Schedule- B: ( 12 industries )
Private & Govt.
Prevent creation
of monopoly machine tools , Ferro-alloys ,
drugs ,fertilizers , synthetic
Expand
rubber , chemical pulp ,road
Cottage,village,SSI
transport , sea transport ,
s
08/30/09
carbonisation of coal , mining6of
Surana College PG Centre
aluminum & non-ferrous
 Policy
Policy Initiatives

1991
Objective: 3.Industrial Licensing Policy
Remove regulatory
system 4.Public sector Policy
Incentives for
industries in backward 5.Foreign Investment
areas
To Run the PSUs on
business lines 6.Foreign Technology
Encourage
Entrepreneurship Agreements
Link Indian economy
to global market
7.MRTP Act
Develop indigenous
technology
08/30/09 Surana College PG Centre 7
Promote productivity
 ial
Policy  Industrial Licensing - It is required to
establish, to manufacture goods at a specific
1991 location before 1991.
 In the new policy licensing requirement was
abolished
except for
1. Distillation & Brewing of alcoholic
drinks
Industri
2. Manufacturing Cigarettes &
Tobacco substitutes
al
3. All types of electronic aerospace &
Licensi Defence equipments
4. Industrial Explosives
ng 5. Certain Hazardous chemicals
 Exempted factories have to furnish a
Policy memorandum to Industries department
 Location:
08/30/09 Surana College PG Centre 8
 In the new policy projects can be
al Policy
 Number of Industries reserved
for public sector reduced to 8
1991 and then to 2 ( Atomic energy &
Railway )
 Growth of PSUs in the following
Priority sectors
1.Essential infrastructure Goods
& Services
Public 2. Exploration & Exploitation of
Oil & Mineral resources
Sector 3. Strategic Defence
equipments
4. Technology development &
Policy building of manufacturing
capabilities in areas which are
crucial for economic
development
 Autonomy through MOU –
08/30/09
Navaratnas
Surana College PG Centre 9
Policy  Foreign Investment
allowed up to 51 % of
Equity capital in FERA
1991 companies
 Foreign Investment
allowed up to 26 % of
Equity capital in Defence
productions sector.
Foreign  Up to 100 % in certain
sectors ( real estate )
 Stock market opened for
Investmen foreign investment
 EXIM Policy liberalised ,
t tariffs reduced , lifted
import restrictions
 Foreign exchange rate
policy liberalised , Rupee
08/30/09
was made fully convertible
Surana College PG Centre 10
on current account and
Policy

1991
 Foreign technology
agreement under
automatic route for
Foreign priority sector
Priority sectors are
Technolog -Infrastructure ,
Exploration , Defence
y products

Agreemen
08/30/09
t Surana College PG Centre 11
Policy
 The government will not

1991 scrutiny the investment

decisions of MRTP companies
 Prior approval of MRTP
companies for expansion not
MRTP Act required

Monopolies and  Restrictions on merger,

Restrictive Trade acquisition and transfer of

Practices Act shares will be replaced
 MRTP commission will be
strengthened to take action
against restrictive & unfair
08/30/09 Surana College PG Centre 12
trade practice. MRTP
 Public Sector
 Public sector enterprise is an undertaking owned &
managed by Government.
 244 enterprises are public sector enterprises under
the control of Central Government
 Total investment Rs. 4,21,000 Cr.

 1100 are State Public sector enterprises with 50,000

Cr. Investment
 These PSUs accounts for 25% of GDP & One-third of
export
 PSUs accounts for 70 % of workers employed in
organised sector
08/30/09 Surana College PG Centre 13
 Public Sector
Objective:

 Help in rapid economic growth

 Earn return on investment & generate resources for

development
 Create employment opportunity

 Assist & develop ancillary & small scale industries

 Promote redistribution of income & wealth

08/30/09 Surana College PG Centre 14

 Public Sector

Organisation of Public sector Units:

Public enterprises are organised in the following forms:

3. Ministry

4. Departmental Undertakings

5. Government Company

6. Public corporation

7. Holding company

08/30/09 Surana College PG Centre 15

 Public Sector

Organisation of Public sector Units:

Ministry Management by a ministry, Railways, Budget

to be approved by Parliament, Headed by
Departmental Minister and subordinate
It is directly management toboard
ministry, ICF,
Undertaking Ordnance factory, financed by annual
appropriation from treasury, revenues are paid
into treasury. Employees are civil servents, can
be sued by following the procedure to sue the
Government government
51% or more of equity owned by government,
Company created under Company Law, Directors are
appointed by Govt., fund from government

08/30/09 Surana College PG Centre 16

 Public Sector

Navaratnas:
In 1997 govt. granted autonomy to 9 public sector
units so as to support them to become global
companies. These 9 companies are BHEL, BPCL,
HPCL, IOC, ONGC, SAIL, VSNL, NTPC, IPCL. Later
GAIL ,MTNL,BEL,HAL were given the navaratna
status.

These companies are free to decide upon joint

venture, capital expenditure, set up PSEs, set
up subsidiaries / office in foreign countries,
08/30/09 Surana College PG Centre 17
 Privatisation
Privatisation :
Privatisation means transfer of ownership and /or
management of an enterprise from the public sector to the
private sector.
Disinvestment:
Disinvestment means sale of shares of public sector
enterprises to outsiders. It is one of the method of
privatisation.
Purpose of Privatisation
6. To increase efficiency
7. To reduce the monopoly of govt.
8. To encourage private & foreign investment
9. To reduce the state’s administrative work
10.To encourage wider ownership of public

08/30/09 Surana College PG Centre 18

 Privatisation
Method of Privatisation in India:
2. Disinvestment Route
This involves sale of equity shares of public sector units to
outsiders.
 Disinvestment policy was introduced in 1991-92. Up
to 20% of equity in select PSUs sold to Public sector
Institutional investors like LIC, UTI .
 In 1993 Disinvestment committee under the chairmanship
of C.Rangarajan was set up to advise on the mode of
disinvestment.
 1996 Disinvestment commission was set up and 58 PSUs
were recommended to shift to private management without
sale of shares
 1999 – PSUs were classified under Strategic & non-Strategic
areas for disinvestment purpose.
 Strategic Sectors – Defence
08/30/09
equipments , arms ,
Surana College PG Centre 19
ammunitions, air crafts, warships, atomic energy , railways.
 Privatisation
Method of Privatisation in India:
1. Disinvestment Route….Cont.
 Rangarajan Committee Report Recommendations:
1. Industries reserved for PSUs – Up to 49% of equity can
be sold
2. PSUs having dominant market share – Up to 74 % can be
sold
3. In all other cases equity can be sold up to 100%
4. Best disinvestment method is offering equity to public at
a fixed price
5. Once shares of PSUs are traded in Stock market ‘Fixed
price ‘ method can be used . Untill such time sale can be
made through auction
 Disinvestment Commission:
1. Was set up in 1996 , to determine extent of
disinvestment, to select
08/30/09 the
Surana PSU
College to be divestd, to
PG Centre 20
 Privatisation
National Investment Fund:
Set up in 2005 , into which the sale proceeds of
PSUs will be credited. This fund will be used to
develop Infrastructure & Education, health,
employment generation and in capital projects.

08/30/09 Surana College PG Centre 21

Medium
Enterprises
( SMEs)
THE MICRO, SMALL AND MEDIUM
ENTERPRISES DEVELOPMENT
ACT, 2006

Micro
Enterprise means an industrial
undertaking or a business
Industries concern or any other
establishment, by whatever
Small name called, engaged in the
manufacture or production of
goods, in any manner pertaining
Industries to any industry specified in the
First Schedule to the Industries
Medium Development and Regulation
Act, 1951.
08/30/09 Surana College PG Centre 22
Industries
Small &
Medium
Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES

Type Micro
DEVELOPMENT ACT, 2006 Small Medium

Plant & Machinery P&M P &M

Manufacturi <=Rs.25 L > Rs.25 L >Rs.500 L<
ng <=500 =1000

Equipment Equipment Equipment

Service <=Rs.10 L >Rs. 10 >Rs. 200
L<=200 L<=500

08/30/09 Surana College PG Centre 23

Small &
Medium
Enterprises
 Dynamic Economy

 Socio-Economic
Role of
Development
SMEs’
 Accounts for
35% – Industrial
Production
40% - Export
08/30/09 Surana College PG60%
Centre - Employment24
Small &
Medium
Enterprises  Provide – Increased employment

 Require Low gestation period

Importance  Easy to set up in rural &

backward areas

 Need Small market

 Encourage Local Entrepreneur

 Influence standard of living of

08/30/09 Surana College PG Centre 25
 Small & Medium Enterprises
• Protection  Promotion
• Aim : Promotion & Strengthening of
SMEs’
• Changes in Investment Limit

• Government • 24 % Equity Participation by other

Policy Companies
Initiatives • Integrated Infrastructure
1991 development
• Encouraging Industry associations

• Common Testing facility

08/30/09
•Surana
Productivity
College PG Centre
Training 26
 Small & Medium Enterprises

• Aim : Promotion of SMEs’

• Changes in Investment Limit
• De-reservation of items

• Government • Foreign participation

Policy • Establishment of Growth centres

Initiatives • Export promotion

1999 • Marketin assistance

• Incentives for Quality Improvement

08/30/09 Surana College PG Centre 27

 Small & Medium Enterprises

• THE MICRO, SMALL AND MEDIUM

ENTERPRISES DEVELOPMENT ACT –
2006 ( MSMED Act – 2006 )

• Recent • NATIONAL MANUFACTURING

Policy COMPETITIVENESS

Initiatives PROGRAMME (NMCP)

2006 3. PACKAGE FOR PROMOTION OF MICRO

AND SMALL ENTERPRISES

4 . RESERVATION / DERESERVATION OF
PRODUCTS FOR MANUFACTURE IN THE

08/30/09 SMALL
Surana SCALE
College PG Centre SECTOR 28
 Small & Medium Enterprises
Recent Policy Initiatives
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• PROMOTION
• Objective
• DEVELOPMENT and

• Enhancement of
Competitiveness

08/30/09 Surana College PG Centre 29

 Small & Medium Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• Development of skill
• provisioning for
• PROMOTION technological
• DEVELOPMEN upgradation
T and • providing marketing
• ENHANCEMEN assistance or
T of infrastructure facilities
Competitiven • Credit Facilities
ess • Measures against Delayed
through
payments
08/30/09 Surana College PG Centre 30
 Small & Medium Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• Development of skill
• National Institute for small
• PROMOTION Industry Extension &
Training - Hyderabad
• DEVELOPMEN
( NISIET)
T and • Indian istitute of
• ENHANCEMEN Entrepreneurship ( IIE ) –
T of Guwahati
• National Institute for
Competitiven
Entrepreneurship & small
ess
Business Development –
through Newdelhi ( NIESBUD )
08/30/09 Surana College PG Centre 31
• + 12 other Institutes
 Small & Medium Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• provisioning for
technological
upgradation
• PROMOTION
• Small Industries Development
• DEVELOPMEN Organisation ( SIDO )
T and • National Small Industries
• ENHANCEMEN Corporation Ltd. ( NSIC
T of • National science and technology
Entrepreneurship Development
Competitiven
Board ( NSTEDB
ess
• National Productivity Council
through
08/30/09
( NPC )
Surana College PG Centre 32
 Small & Medium Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• providing marketing
assistance or
• PROMOTION infrastructure facilities
• DEVELOPMEN
T and
Director of export Promotion
• ENHANCEMEN
( DEP)
T of
Competitiven Director General of Supply &
ess Disposal ( DGSD )
through Rural Industrial & Marketing 33
08/30/09 Surana College PG Centre
 Small & Medium Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• Credit Facilities
• Commercial Banks
• PROMOTION • Counsil of Scientific &
• DEVELOPMEN
Industrial Research
• Small industries Service
T and
Institute
• ENHANCEMEN • National Small industry
T of Corporation
Competitiven
ess

through
08/30/09 Surana College PG Centre 34
 Small & Medium Enterprises
THE MICRO, SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT ACT, 2006

• Measures against Delayed

payments
• PROMOTION
• DEVELOPMEN
• Micro and Small Enterprises
T and Facilitation Council
• ENHANCEMEN
T of • Arbitration and Conciliation
Competitiven Act 1996
ess
• Courts
through
08/30/09 Surana College PG Centre 35
 Small & Medium Enterprises
Recent Policy Initiatives - 2006

2. NATIONAL MANUFACTURING
COMPETITIVENESSPROGRAMME (NMCP)

Objective : To support manufacturing enterprises to

become Competitive

Schemes : 1. Support for Lean manufacturing (Without

Waste & implementing flow )
2. Promotion of ICT in manufacturing
( Information communication Tech )
3. Setting up Mini Tool Rooms
4. Encouragement for Quality Management
08/30/09 Surana College PG Centre 36
Standards & Tools
 Small & Medium Enterprises
Recent Policy Initiatives - 2006
3. PACKAGE FOR PROMOTION OF MICRO AND
SMALL ENTERPRISES

Objective : To Enhance Competitiveness

Package : 1. Legislative backup

2. Credit support
3. Tech & Quality up gradation support
4. Marketing support
5. Empowerment of women entrepreneur
08/30/09 Surana College PG Centre 37
 Small & Medium Enterprises
Incentives for SMEs’
Export Incentives:
 Import Replenishment
Licenses (REP)
Importers are eligible for REP to
import raw materials and
spares which are used to
produce export items.
 Deemed Export Benefits
Producers who supply the inputs
to final exporters are deemed
to be exporters and are eligible
for REP
 Import Export Pass Book
Scheme
Exportes having good track
record are eligible to import
duty free raw materials.
08/30/09
Surana CollegePG Centre
Excise Concession:
Incentives for
backwrad areas:
 Investment Subsidy:
Category –’A’ Districts – up to
25 Lakhs
Category –’B’ Districts – up to
15 Lakhs
Category –’C’ Districts – up to
10 Lakhs
 Tax Holidy:
 Tax deduction upto 6% of
profit – 80J for 5 years from
production date
 EOU, EPZ – exempt fro
corporate income tax upto 5
yrs.
CST exemption for Khadi &38
 Small & Medium Enterprises
Incentives for SMEs’ …….Contd.
Other Incentives: Incentives for
 Interest free loans  Handicapped
 Price preference  NRIs’
 Allotment of developed shed,  Retired defence personnel
raw material  Women Entrepreneurs
 Land & building at concessional
Exemptions from:
rates
 Income tax
Subsidy for
 Property tax
 Artisans, handlooms
 Stamp duty
 Buying test equipments
 Sales tax
 Capital investment
 Interest
 Market / Feasibility studies
 Power generation
 R&D works
 Transport
 Technical consultancy
08/30/09 Surana College PG Centre 39
 Small & Medium Enterprises
Sickness in SMEs’
• Sickness Definition :
• The definition of sickness in SME sector has been
changing over time.
The Third Census on SSI Sector
Kohli Committee:
"A small scale industrial unit is considered as sick when
if any of the borrowal accounts of the unit remains
substandard for more than six months, i.e., principal or
interest, in respect of any of its borrowal accounts has
remained overdue for a period exceeding 6 months

OR
There is erosion in the net worth due to accumulated
losses to the extent of 50 per cent of its net worth
during the previous accounting year,
and
The unit has been in commercial production for at least
two years."
08/30/09 Surana College PG Centre 40
 Small & Medium Enterprises
Sickness in SMEs’
• Criteria to identify sickness

In the Third Census, the following criteria were adapted to

identify sick/

1. Continuous decline in gross output compared

to the previous two financial years;
2. Delay in repayment of loan from institutional
sources, for more than 12 months; and
3. Erosion in the net worth to the extent of 50
per cent of the net worth during the previous
accounting year.

• Units satisfying one or more of the above

criteria have to be
08/30/09 treated
Surana as Sick unit
College PG Centre 41
 Small & Medium Enterprises
Sickness in SMEs’- Causes

• External
• Internal

• Anatomical causes 5. Shortage of supply in

inputs
6. Underestimation of Project 6. Rise in raw material
cost cost
7. Old Technology 7. Radical change in
8. Wrong Site govt. policy
9. Unwanted investment in 8. Recession in Industry
Fixed assets 9. Foreign exchange
10.Defective Plant & fluctuations
Machinery
• Operational causes

13.Defective Financial
planning
14.No R&D planning
15.Incapable Management
08/30/09 Surana College PG Centre 42
 Small & Medium Enterprises
Sickness in SMEs’ - Symptoms
At Implementation Stage
 Undue delay in implementation
 Lack of coordination with various agencies
When the project has started operation
 Increase in level of inventories
 Increase in rejection rate of finished goods
 Irregularity in payment of loan
 Industrial relations Problem
Position of cash credit account
 Cash credit or overdraft account has been overdrawn
or frequently drawn
 Returned unpaid cheques
 Long pending unpaid bills
 Pledged stocks are overvalued to obtain fund from
government
 Uninsured stocks

08/30/09 Surana College PG Centre 43

 Small & Medium Enterprises
Sickness in SMEs’ - Cures

• Discover new Products & Markets

• Enhance accessibility to market Information
• More thrust on R & D
• More Professionalism
• Planned training
• Modernising Operation
• More attention to Marketing
• Frequent use of advertisement
• Efforts to collect dues from buyers
08/30/09 Surana College PG Centre 44
 Small & Medium Enterprises
Sickness in SMEs’ – Role of BIFR
• Under Sick Industries Companies Act -1985 , Board for
Industrial and Financial Reconstruction ( BIFR ) was setup to
make the sick companies viable.
 The BIFR can direct a financial institution to prepare a
scheme for revival of sick companies.
 The scheme could provide for
1. Financial reconstruction of the company
2. Proper management of sick company by change or
takeover the management
3. Amalgamation of sick company with other company
4. Sale or lease of the sick company
 Based on the scheme provided by financial institution BIFR
will take action in line with the High court proceedings.
08/30/09 Surana College PG Centre 45
 Entrepreneur
• A person who creates something
new with value and assuming
the risk & Reward

• Something New + Value + Risk + Reward

08/30/09 Surana College PG Centre 46

 Some Entrepreneurs
Entrepreneur Something New Value Risk Reward

‘Speedee Demand Mr. Ray American

Service System side Kroc Way of Life
‘ Innovatio
J. n
McDonald
‘Pay from Demand Credit risk Global
future earnings side productivity
‘ Innovatio
Cyrus McCromick n

Pace ‘Evening Demand Perception High –Middle

University
College’ side class
innovatio Education
n
08/30/09 Surana College PG Centre 47
 Types of Entrepreneurs
Type of Business Others Motivation
Business Imitating Pure
Trading Forced Induced
Industrial National/Internati Motivated
Corporate onal Spontaneous
Agricultural Intrapreneur
Retail Immigrant
Service
Franchise
Growth Stage of Use of Technology
Growth Development Technical
Super Growth First generation Non-Technical
Modern Professional
Classical High/Low Tech.
Gender Scale of Operation Area
Male, Female Small, Large Rural , Urban

08/30/09 Surana College PG Centre 48

 Role of entrepreneurs in Economic
Development

• Promotion of capital formation.

• Immediate large-scale employment.
• Promotion of balanced regional
development.
• Reduced concentration of economic
power.
• Encourages effective resource
mobilization.
• Promotes export trade.
08/30/09 Surana College PG Centre 49