Changing Impressions Business Environment Summary

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UNIT -1 MEANING OF BUSINESS ENVIRONMENT As stated earlier, the success of every business depends on adapting itself to the environment within which it functions. For example, when there is a change in the government polices, the business has to make the necessary changes to adapt itself to the new policies. Similarly, a change in the technology may render the existing products obsolete, as we have seen that the introduction of computer has replaced the typewriters; the colour television has made the black and white television out of fashion. Again a change in the fashion or customers' taste may shift the demand in the market for a particular product, e.g., the demand for eans reduced the sale of other traditional wear. All these aspects are external factors that are beyond the control of the business. So the business units must have to adapt themselves to these changes in order to survive and succeed in business. !ence, it is very necessary to have a clear understanding of the concept of business environment and the nature of its various components. "he term 'business environment' connotes external forces, factors and institutions that are beyond the control of the business and they affect the functioning of a business enterprise. "hese include customers, competitors, suppliers, government, and the social, political, legal and technological factors etc. #hile some of these factors or forces may have direct influence over the business firm, others may operate indirectly. "hus, business environment may be defined as the total surroundings, which have a direct or indirect bearing on the functioning of business. $t may also be defined as the set of external factors, such as economic factors, social factors, political and legal factors, demographic factors, technical factors etc., which are uncontrollable in nature and affects the business decisions of a firm. FEATURES OF BUSINESS ENVIRONMENT %n the basis of the above discussion the features of business environment can be summarised as follows. &usiness environment is the sum total of all factors external to the business firm and that greatly influence their functioning. $t covers factors and forces like customers, competitors, suppliers, government, and the social, cultural, political, technological and legal conditions. "he business environment is dynamic in nature, that means, it keeps on changing. "he changes in business environment are unpredictable. $t is very difficult to predict the exact nature of future happenings and the changes in economic and social environment. &usiness 'nvironment differs from place to place, region to region and country to country. (olitical conditions in $ndia differ from those in (akistan. "aste and values cherished by people in $ndia and )hina vary considerably. IMPORTANCE OF BUSINESS ENVIRONMENT
CHANGING IMPRESSIONS, Opp. Samata College, Besides Chowdar !ess Se"tor # 9, $pp%ghar &oad, !'( Colo)
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"here is a close and continuous interaction between the business and its environment. "his interaction helps in strengthening the business firm and using its resources more effectively. As stated above, the business environment is multifaceted, complex, and dynamic in nature and has a far*reaching impact on the survival and growth of the business. "o be more specific, proper understanding of the social, political, legal and economic environment helps the business in the following ways+ ,a- .etermining %pportunities and "hreats+ "he interaction between the business and its environment would identify opportunities for and threats to the business. $t helps the business enterprises for meeting the challenges successfully. ,b- /iving .irection for /rowth+ "he interaction with the environment leads to opening up new frontiers of growth for the business firms. $t enables the business to identify the areas for growth and expansion of their activities. ,c- )ontinuous 0earning+ 'nvironmental analysis makes the task of managers easier in dealing with business challenges. "he managers are motivated to continuously update their knowledge, understanding and skills to meet the predicted changes in realm of business. ,d- $mage &uilding+ 'nvironmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up )aptive (ower (lants ,)((- in their factories to meet their own re1uirement of power. ,e- 2eeting )ompetition+ $t helps the firms to analyse the competitors' strategies and formulate their own strategies accordingly. ,f- $dentifying Firm's Strength and #eakness+ &usiness environment helps to identify the individual strengths and weaknesses in view of the technological and global developments. TYPES OF BUSINESS ENVIRONMENT )onfining business environment to uncontrollable external factors, it may be classified as ,a- 'conomic environment; and ,b- 3on*economic environment. "he economic environment includes economic conditions, economic policies and economic system of the country. 3on*economic environment comprises social, political, legal, technological, demographic and natural environment. All these have a bearing on the strategies adopted by the firms and any change in these areas is likely to have a far*reaching impact on their operations. ECONOMIC ENVIRONMENT "he survival and success of each and every business enterprise depend fully on its economic environment. "he main factors that affect the economic environment are+ (a)Economic Conditions "he economic conditions of a nation refer to a set of economic factors that have great influence on business organisations and their operations. "hese include gross domestic product, per
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capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth. (!)Economic Po"ici#s All business activities and operations are directly influenced by the economic policies framed by the government from time to time. Some of the important economic policies are+ ,i- $ndustrial policy ,ii- Fiscal policy ,iii- 2onetary policy ,iv- Foreign investment policy ,v- 'xport *$mport policy ,'xim policy"he government keeps on changing these policies from time to time in view of the developments taking place in the economic scenario, political expediency and the changing re1uirement. 'very business firm has to function strictly within the policy framework and respond to the changes therein. Im$o%tant Economic Po"ici#s (i) Ind&st%ia" $o"ic' "he $ndustrial policy of the government covers all those principles, policies, rules, regulations and procedures, which direct and control the industrial enterprises of the country and shape the pattern of industrial development. ,ii- Fiscal policy+ $t includes government policy in respect of public expenditure, taxation and public debt. ,iii- 2onetary policy+ $t includes all those activities and interventions that aim at smooth supply of credit to the business and a boost to trade and industry. ,iv- Foreign investment policy+ "his policy aims at regulating the inflow of foreign investment in various sectors for speeding up industrial development and take advantage of the modern technology. ,v- 'xport*$mport policy ,'xim policy-+ $t aims at increasing exports and bridge the gap between expert and import. "hrough this policy, the government announces various duties4levies. "he focus now*a*days lies on removing barriers and controls and lowering the custom duties. ,c- 'conomic System+ "he world economy is primarily governed by three types of economic systems, vi5., ,i- )apitalist economy; ,ii- Socialist economy; and ,iii- 2ixed economy. $ndia has adopted the mixed economy system which implies co*existence of public sector and private sector. NON-ECONOMIC ENVIRONMENT "he various elements of non*economic environment are as follow+
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SOCIA( ENVIRONMENT "he social environment of business includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. "he social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc. .ue to increase in literacy rate the consumers are becoming more conscious of the 1uality of the products. .ue to change in family composition, more nuclear families with single child concepts have come up. "his increases the demand for the different types of household goods. $t may be noted that the consumption patterns, the dressing and living styles of people belonging to different social structures and culture vary significantly. PO(ITICA( ENVIRONMENT "his includes the political system, the government policies and attitude towards the business community and the unionism. All these aspects have a bearing on the strategies adopted by the business firms. "he stability of the government also influences business and related activities to a great extent. $t sends a signal of strength, confidence to various interest groups and investors. Further, ideology of the political party also influences the business organisation and its operations. 6ou may be aware that )oca*)ola, a cold drink widely used even now, had to wind up operations in $ndia in late seventies. Again the trade union activities also influence the operation of business enterprises. 2ost of the labour unions in $ndia are affiliated to various political parties. Strikes, lockouts and labour disputes etc. also adversely affect the business operations. !owever, with the competitive business environment, trade unions are now showing great maturity and started contributing positively to the success of the business organisation and its operations through workers participation in management. (EGA( ENVIRONMENT "his refers to set of laws, regulations, which influence the business organisations and their operations. 'very business organisation has to obey, and work within the framework of the law. "he important legislations that concern the business enterprises include+ ,i- )ompanies Act, 789: ,ii- Foreign 'xchange 2anagement Act, 7888 ,iii- "he Factories Act, 78;< ,iv- $ndustrial .isputes Act, 78=> ,v- (ayment of /ratuity Act, 78=> ,vi- $ndustries ,.evelopment and ?egulation- Act, 7897 ,vii- (revention of Food Adulteration Act, 789;
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,viii- 'ssential )ommodities Act, >@@> ,ix- "he Standards of #eights and 2easures Act, 789: ,x- 2onopolies and ?estrictive "rade (ractices Act, 78:8 ,xi- "rade 2arks Act, 7888 ,xii- &ureau of $ndian Standards Act, 78<: ,xiii- )onsumer (rotection Act, 78<: ,xiv- 'nvironment (rotection Act ,xv- )ompetition Act, >@@> &esides, the above legislations, the following are also form part of the legal environment of business, (i) P%o)isions o* t+# Constit&tion "he provisions of the Articles of the $ndian )onstitution,
particularly directive principles, rights and duties of citi5ens, legislative powers of the central and state government also influence the operation of business enterprises. (ii) ,&dicia" -#cisions "he udiciary has to ensure that the legislature and the government function in the interest of the public and act within the boundaries of the constitution. "he various udgments given by the court in different matters relating to trade and industry also influence the business activities. ,d- "echnological 'nvironment "echnological environment include the methods, techni1ues and approaches adopted for production of goods and services and its distribution. "he varying technological environments of different countries affect the designing of products. For example, in ASA and many other countries electrical appliances are designed for 77@ volts. &ut when these are made for $ndia, they have to be of >>@ volts. $n the modern competitive age, the pace of technological changes is very fast. !ence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. $t may be noted that scientific research for improvement and innovation in products and services is a regular activity in most of the big industrial organisations. 3ow a days infact, no firm can afford to persist with the outdated technologies. -EMOGRAP.IC ENVIRONMENT "his refers to the si5e, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. For example a country where population rate is high and children constitute a large section of population, then there is more demand for baby products. Similarly the demand of the people of cities and towns are different than the people of rural areas. "he high rise of population indicates the easy availability of labour. "hese encourage the business enterprises to use labour intensive techni1ues of production. 2oreover, availability of skill labour in certain areas
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motivates the firms to set up their units in such area. For example, the business units from America, )anada, Australia, /ermany, AB, are coming to $ndia due to easy availability of skilled manpower. "hus, a firm that keeps a watch on the changes on the demographic front and reads them accurately will find opportunities knocking at its doorsteps.
NATURA( ENVIRONMENT "he natural environment includes geographical and ecological factors that influence the business operations. "hese factors include the availability of natural resources, weather and climatic condition, location aspect, topographical factors, etc. &usiness is greatly influenced by the nature of natural environment. For example, sugar factories are set up only at those places where sugarcane can be grown. $t is always considered better to establish manufacturing unit near the sources of input. Further, government's policies to maintain ecological balance, conservation of natural resources etc. put additional responsibility on the business sector. E/TERNA( ENVIRONMENT $t is now un1uestionably accepted that the prospects of a business depend not only on its resources but also on the environment. An analysis of strengths, weaknesses, opportunities and. "hreats ,S#%"- is very much essential for the business policy formulation. "he external environment consist of a micro environment and a macro environment. MICRO-ENVIRONMENT "he micro environment consists of the factors in the company's immediate environment that affect the performance of the company. $t is 1uite obvious that the micro environment factors are more intimately linked with,*'the company than the macro factors. "hese include the suppliers, marketing intermediaries, competitors, customers and the public. a) S&$$"i#%s
An important force in the micro environment of a company is the suppliers i.e., those who supply the inputs to the company. "he importance of reliable source4sources of supply to the smooth functioning of the business. Ancertainty regarding the supply often compel companies to maintain high inventories causing cost increases. #hen compared to Capan with our country Va"&# S'st#ms
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"he value systems of the founders and those at the helm of affairs has important bearing on the choice of business, the mission and ob ectives of the organi5ation business policies and practices for ex+ After the &$. parry group was taken by the 2urugappa group. %ne of most profitable business ,li1uor- of the ailing parry group was sold off the li1uor business did not fit into the value system of the 2urugappa /roup. !) Mission and O!0#cti)#s "he business domain of the company, priorities, directions of development, business philosophy, business policy etc., are guided by the mission and ob ectives of the company. c) Mana1#m#nt St%&ct&%# and Nat&%# "he organi5ational structure, the composition of the &oard of .irectors, extent of professionalisation of management etc., are important factors influencing business decisions. d) Int#%na" Po2#% R#"ations+i$ Factoi*b like amount of support the top management en oys from different levels of employees. Share holders and &oard of .irectors have important influence on the decision and their implementation. #) .&man R#so&%c#s "he characteristics of human resourcesD like skill, 1uality morale commitment attitude etc. could contribute to the strength and weakness of an organi5ation. Some organi5ations find it difficult to carry out restructuring or moderni5ation because of resistance by employees whereas they are smoothly E done in some others. d) Ma%3#tin1 Int#%m#dia%i#s "he immediate environment of a company may consist of a number of marketing intermediaries which are Ffirms that and the company in promoting, selling and distributing its goods to final buyersF. "he marketing intermediaries include middlemen such as agents and merchants who Fhelp the company find customers or close sales with themF. 2arketing intermediaries are vital links between the company and the final consumers. A dislocation or disturbance of this link, or a wrong choice of th link may cost the company very heavily. #) P&!"ics A company may encounter certain publics in its environment FA. public is any group that has an actual or potential interest in or impact on an organi5ation's ability to achieve its interestsF. 2edia publics citi5ens action publics and local publics are some examples.
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2any companies are also affected by local publics. 'nvironmental poilution is an issue often taken up by a number of local publics actions by local publics on this issue have caused some companies to suspend operations and or take pollution abatement measures. /rowth of consumer publics is an important development affecting business. $t is wrong to think that all publics are threats to business some of the actions of the publics may cause problems for companies. !owever, some publics are an opportunity for the business. in maintaining indigeneous stock they maintain an average oka few hours to two weeks while we maintain G*; months stock. $t is very risky to depend on single supplier because a strike or production problem with supplier may seriously affect the company. !ence multiple sources of supply often help reduce such risks. !) C&stom#%s As it is often exhorted, the ma or task of a business is to create and sustain customers. A business exists only because of its customers. 2onitoring the customer sensitivity is therefore a pre re1uisite for the business success. "he choice of the customer segments should be made by considering a number of factors including the relative profitability, dependability stability of demand, growth prospects and the extent of competition. c) Com$#tito%s A firm's competitors include not only the firms which market the same or similar products but also all those who compete for the discretionary income of the consumers. "his competition among these products may be described as desire competition as the primary task here is to influence the basic desire of the consumer. Such desire competition is generally very high in countries characteri5ed by limited disposable income and many unsatisfied desires. $f the consumer decides to spend his discretionary income on recreation he will still be confronted with a number of alternatives to choose. F"he competition among such alternatives which satisfy a particular category of desire is called generic competitionF.
MACRO-ENVIRONMENT
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2acro environment consists larger societal forces that affect all the factors in the company's macro .environment * namely, the demographic, economic, natural, technological, political and cultural forces. 2acro environment is again divided into two environment those are 14 Economic En)i%onm#nt 1) Economic En)i%onm#nt 'conomic 'nvironment broadly covers the aspects relating to nature of the economy, anatomy of the economy, functioning of the economy, economic progress and programmes, economic policy statements and proposals, economic controls and regulations, economic legislations, economic problems and prospects and to understand all these, we should invariably discuss the concept of economic system. 'conomic environment of business refers to the broad characteristics of the economic system in which a business firm operates. An economic system defines the institutional frame work of environment. %nce w"e are fully conversant with the different aspects of economic systems, they provide us an overall view about the economic environment under which the business unit has to function. 5) Non-Economic En)i%onm#nta" Facto%s 3on*economic environmental factors refer to social, political, legal, technological and cultural factors. 0et us discuss briefly about those factors which itself influence the decisions of a business enterprise. a) Socio-c&"t&%a" En)i%onm#nt &usiness must have a social purpose H business concerns must discharge social responsibility, social obligations and social commitment without which business cannot en oy social sanction. "he following aspects are of much help of us+ 7- Social $nstitutions and System+ "he caste system, the oint family system, the child marriage etc. may >. 3on*'conomic 'nvironment
be cited as illustrations under this head. >- Social Ialues and Attitudes+ "hese are changing very fast in almost all the nations including $ndia. "he influence of western values of individualism has its bearing impact on the $ndian population. "he role of $ndian women is not confined only to house hold duties. %n the other hand, she has been competing e1ually with her counter part in all the fields similarly4 choosing a particular profession at present is not based on community or caste as it was G- 'ducation and )ulture+ Ander this, we may refer to the attitude towards education need for business education, educational match with skill re1uirements of industry, business culture etc.
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;- ?ole and ?esponsibility of /overnment+ "he role of government especially in a democracy is very significant in order to bridge the gap between the aspirations and achievements of the society. "he government has a very responsible function of maintaining social order and harmony to protect the interests of the ma ority. 9- Social /roups and 2ovements+ $n a society individuals have groups basing on caste, creed, religion, language, trade H profession, etc., which may have direct business interests consumerism, trade*unionism, co*operative movement, shareholders association, &ank .epositors Association, may be mentioned as examples under this head. :- Social (roblems and (rospects+ "he excessive population growth rate in a country like $ndia is a definite potential source of danger, as it results in growing.unemployment and poverty, poor housing and incidence of social tensions. "hat is the reason why the business enterprise must consider the problems while they take business decisions. b(olitical*0egal 'nvironment+ $n the present world, business of any type and si5e is influenced by government policies, programmes and legislations. "he following aspects help us to understand more about political*legal environment. 7- "he Form of /overnment+ $rrespective of the economy, government intervention in business activity all over the world is an existence in one form or the other. "herefore, the form and structure of government is very significant. .emocratic government, Federal Form of /overnment etc. may be cited as examples. >- $deology of the ?uling (arty+ "his factor influences much on the management, ownership structure and si5e of business. $f the ruling party has the rightist ideology, it usually formulates pro*business policies on the other hand if it is inclined towards leftist ideology, it will adopt measures like nationali5ation and excessive centrali5ation. G- Strength of %pposition+ $n the democratic nations, the opposition has to play a significant role. "he strength of the opposition to a greater extent depends on whether or not opposition parties are invited or divided. "hough there may likely be ideological differences among different opposition parties. "hey must be united a udge the every more of the ruling party critically. $f the opposition is fair, firm and consistent, it can initiate constructive criticism of the ruling parties policies affecting business. As a result, the government can not act irresponsibility with regard to the business sector. ;. &ureaucracy+ $n order to run the government administration without any break, bureaucracy is having a pivotal role to assume. $t is meant to keep the continuity in government policy operations in connection with business and non*business sectors. $n a system which is influenced more by government controls and regulations with regard to business, bureaucracy is very powerful in enforcing government rules and regulations, systems H procedures, licenses and restrictions.
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9. (olitical Stability+ "his is another factor which governs business operations. &usiness flourishes in an economy which is politically stable. As we observed, whenever the nation becomes politically not stable, the flow of foreign capital and enterprise is adversely affected and this sends wrong signals to the business both national and multi*national. :. (lans and (rogrammes of the /overnment+ "he /overnment formulates and executes a variety of policies and programmes. $f the government fre1uently change its policies on industries, money, fiscal and other economic matters, it adversely affects the business sector. %n the other hand, if government policies are stable, the business unit can plan their activities accordingly.
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UNIT - II STRUCTURE OF T.E IN-IAN ECONOMY )ountries in the world are divided into developed and backward or developing countries. MEANING OF A -EVE(OPING ECONOMY "here is no doubt that the distinction between developing and developed countries is rather loose and also arbitrary to a certain extent. "he Anited 3ations /roup of experts states. F#e have had some difficulty in interpreting the term. F.eveloping )ountriesF. #e use it to mean countries in which per capita real income is low when compared with the per capita real incomes of Anited States of America, )anada, Australia and #estern 'urope. BASIC C.ARACTERISTICS OF T.E IN-IAN ECONOMY $ndia is an developing economy. "here is no doubt that the bulk of its population lives in conditions of misery. (overty is not acute but is also a chronic melody in $ndia. At the same time there exist unutili5ed natural resources. $t is therefore, 1uite important to understand the basic characteristics of $ndian economy which are as follows+ 14 G#n#%a" Po)#%t' And (o2 P#% Ca$ita Incom# 2ost of the under developed countries have ma ority of people living in poverty. "his is because of low levels of income. "he low levels of income are due to low levels of production. !ence, most of these countries remain backward. According to )airn*)ross the poverty in under developed countries is reflected by the low level of per capita income when compared with developed countries. According to the estimates of the world development report in 78<8 about G@ countries in the world have a per capita income which is less than ;@@ dollars. %ut of this $ndia is one. "his is very low when compared with many of the 'uropean countries. 'ven the oil rich countries like Buwait and A.A.'. possessed a per capital income of around of 7;,@@@ dollars.,; "he per capita income of Anited States of America and Swit5erland areJtill high. "hey are around 7=,9@@ dollars. .ue to the low per capita income of these undeveloped countries the standard of living and the consumption of food in calories is also very low. #hile in $ndia >,@@@ calories of food is consumed in A.S.A. be a visious circle o poverty in these countries. 54 P%#dominanc# O* A1%ic&"t&%# 2ost of the under developed countries are predominantly; depended upon agriculture. "hey are either typically raw*material producers or primary good producers, anyway G,:;9 calories of food is consumed. !ence, most of the undeveloped countries people are ill*fed, ill educated and also ill housed. "here will
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these economics are excessively depended on agriculture. "his means higher percentage of people are concentrated in agriculture about =@K to <@K people depend on agiiculture. !ence, the secondary and the territory sectors are not developed properly. "his feature can be seen in the case of $ndian economy also. Agriculture is.the main sector in the $ndian economy,. 2ore than =@K of the people aire depended on agriculture, while the developed countries like A.S. A and A.B. only ;K of the people are engaged in agriculture. "he other feature here is that almougfiHmost of the people depend on agriculture, it remains still backward. holdings, old methods of Small si5ed land production, fragmentation of land and absence of mechani5ation in
agriculture makes the productivity of agriculture very low. According to some estimates agricultural productivity per head of agricultural labourer is times less than that of 3ew Lealand or #est /ermany. "herefore can be clearly said this is not conducible for economic development. 64 .i1+ Po$&"ation P%#ss&%# "his feature is four in $ndian economy also. "here is high pressure by population growth. "he population is increasing very rapidly. #hile according to 78<7 census the total population in $ndia was estimated :<.; crores within 7@ years i.e. by 7887 census it progressed rapidly to <;.G crores. 2ost of the underdeveloped countries a facing the problem of population pressure. "hey have high population growth rate and less death rate. "he birth rates per thousand are nearly abut ;@, this is very high when compared with developed countries. "he death rate which was high early is declining now due to extended medical facilities. At present $ndia's population is estimated to be 7:K o the worlds population. $t is more than the population of whole Africa. $t exceeds the combined population of A.S.A., ?ussia, 'ngland, Sweden, Australia and )hina. &ut when compared with this the total land area for $ndia is only >.;K of the total world area. "he present rate of growth of population is around >.9K. "his is the main cause for economic under development in $ndia as well as other un*developed countries. Although the countries are achieving growth in their /.3 .(. it is being in ineffective due to high growth rate of population. 74 Ca$ita" -#*ici#nc' "his is another basic character of un*developed countries. #hile capital
accumulation cause economic development these countries are capital deficient. "his is because capital springs out of savings. &ut in these countries the per capital income is very low. !ence, the rate of savings is also very low. 0ow rate of savings is leading to capital deficiency in these countries. $ndia the rate of capital formation is said to be around 7@K *79K when compared with developed countries this is very low while incase of develop countries the capita formation is around to >99 to G@9. According to )olin*)lark for every 7K growth rate of population threshold be an increase in capital formation by 9K. "his is re1uired to meet the necessaries of the grown population. !ence, for $ndia as the annual growth rate of population is >.9K an additional capital formation of 7@K is re1uired annually. !ence, we can say the under*developed countries are featured with the existence of capital deficiency.
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84 Un#m$"o'm#nt 9 Und#% Em$"o'm#nt "he under developed economy is characteri5ed 2oreover, another feature is that there by* *the existence of unemployment and under employment. is disguised unemployment. due to deficiency in capital formation.
"he un*employment is being caused because of lack of opportunities Ander employment..is. due to lack of technology to utili5e the
natural resources. "he another feature of disguised un*employment is seen in these countries. "his is because of over crowding un*employment is seen in these countries. "his is because of over crowding un* employed in the primary sector means that although the labourers seemed to be employed in the primary sector the productivity of that sector will not fall even if some labour force is removed. "his means that the marginal productivity of these disguisedly employed people is '%' $n $ndia this; situation is being caused due to lack of alternative employment opportunities. :4 (o2 (#)#" O* T#c+no"o1' "echnological backwardness is another common feature of developing countries. "his means that the under developed or the developing countries are backward in their Feconomic performance as compared to the developed countries. "his is because due to lack of capital, they use backward and out dated technology. .ue to this the labour productivity is very low. 2oreover the cost of production becomes .high. !ence, when compared with the developed countries the goods produced by these countries are not only of inferior 1uality but are also high priced. !ence, they become uncompetitive in the international markets. "his feature is seen in the ease of $ndian economy also. $n $ndia lack of scientific research, absence of skilled labour force and trained technicians are some of the constraints for introducing modern technology. 'ven in the primary sector also the methods of production are very olds and primitive. "his is casing lower productivity in that sector also. ;4 Uti"isation And Und#% Uti"is#d Nat&%a" R#so&%c#s the natural resources in Although these
underdeveloped or developing countries are either unutili5ed or remain under utili5ed.
countries are not deficient in natural resources like land, water, minerals, forests etc., most of them remain unutili5ed or under utili5ed. "his is because they are not able to overcome the natural resources by making the necessary institutional and technological changes. "his is seen in the case of $ndian economy also. $t is aptly said that $ndia is a rich country inhabited by poor people. "his is because the resources are not being utili5ed properly which is the main cause of poverty in the country. resources. 2oreover the forest wealth in our country is also mis*utilised. .main cause for underdevelopment. resources but they have to be utili5ed completely. , <4 Poo% =&a"it' O* .&man R#so&%c#s (oor 1uality of human resources in another character which is the main cause of underdevelopment in underdeveloped countries. 0ack of education is leading to low of efficiency in labour. 2oreover they are notable to suit the demands of the new technological changes. 2oreover most of these countries have less dynamic entrepreneurs. "hey do not take initiative. "his is because of the social system which is not conducible for development. $n $ndia only G:K of the population For example in $ndia 7= million hectares of land is still remaining unutili5ed. #e have not yet utili5ed more than >9K of our water #astage of resources is the For any country to achieve development not only it should have
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are literate, :;K of the population are illiterate. 2oreover cast'eism, oint family system, regionalism and the philosophic trends sharing Barma Siddantham are the main causes for low of mobility of labour and the efficiency of labour becoming very low. !ence poor 1uality of human resources is not only the cause but also the effect of economic backwardness of these countries. >4 -#*#cti)# Economic O%1anisation 'conomic organi5ation plays an important role in the "hey are regressive.
economic development in any country. * &ut the underdeveloped countries kick in such organi5ation. 2ost of taxes like customs, central excise and other indirect taxes are very high. 2oreover economic institutions such as banks, credit institutions ,, are not also well develope;d. "his is a feature of $ndian economy also. "here is no scientific economic organi5ations for the $ndian economy. Financial institution are not sufficiently developed for financing agriculture. 2oreover in case of industrial structure 2anaging Agency System which as several defects dominates the $ndustrial organi5ation. of economic development. 1?4 Fo%#i1n T%ad# O%i#ntation 2ost of the underdeveloped countries were found to be foreign $n case of agriculture land reforms are not properly implemented. "hese are the fundamental causes for lack
trade oriented according to a study. !owever this foreign trade is dome mainly through the complete expert of primary commodities. "hey import consumer goods and machinery from other countries. Forex in 7897 <@K of the foreign exchange earnings have been accounted for by exporting rice. 'ven in case of $ndia most of the agricultural products are exported to other countries. "hey are the main source of earning foreign exchange. "his dependence on foreign trade has serious effects on the economy as a whole. "he economy becomes vulnerable to trade cycles and also. $nternational price fluctuations which may either yield profit or damage the whole economy. 2oreover these countries without utili5ing the available labour force they export raw materials and import consumer goods. 2oreover the economy becomes vulnerable to importing foreign nations. 114 Ot+#% Misc#""an#o&s Facto%s &esides the above causes there are many other features like. a. 0ack of infrastructural facilities like banks, financial institutions, transport,
communication etc., b. 0ow labour, efficiency due to lack of mobility of labour and social structure. c. 0ack of entrepreneurship and political awakening conducive for economic development etc., d. 2oreover inefficient, corrupt, inexperienced bureaucratic setup are some features found in the economy of under developed countries. ECONOMIC P(ANNING
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$ndia, which embarked on a programme of structural reforms in Cune 7887 after four decades of planning, is currently attracting significant attention throughout the world. $ts large economy and population, vast natural resources and, above all, its highly educated, skilled and scientific labour force mean that $ndia is destined to play a ma or role in the community of nations. #ith a per caput income of about ASMG7@ in 788;, $ndia is one of the world's low*income countries. Anlike those of most 'ast Asian countries, the economy in $ndia was characteri5ed by slow growth during most of the period since the Second #orld #ar. $t was only during the 78<@s that the /.( growth rate accelerated to 9.; percent and per caput income grew by G.G percent per annum. "his decade of high growth was followed in 788@ by one of the severest foreign exchange crises in the history of the country. $n response, $ndia initiated radical stabili5ation measures and a structural ad ustment programme in Cune 7887. Soon after independence, $ndia adopted the path of planned development where the public sector was to play a dominant role in fostering growth at both the central and state levels. "he First Five*6ear (lan, which was launched in 789@*97, was based on the !arrod*.omar model and primarily concentrated on raising the level of investment in irrigation, power and other infrastructure for accelerating growth. "he development strategy was changed radically in 789: with the initiation of the 3ehru*2ahalanobis model of industrial development that emphasi5ed the development of heavy industry under the public sector. .omestic industry was protected from foreign competition through high tariff walls, exchange*rate management, controls and licences. "his strategy of import substitution and heavy*industry promotion has been critici5ed for having created a non*competitive, inefficient, capital*intensive and high*cost industrial structure. $t is further argued that this policy discriminated against labour*intensive tradable agriculture and resulted in unwarranted export pessimism because of excessive concern about self*sufficiency. "he criticism, however, must be balanced against the fact that during this period $ndia built a large infrastructure not only in heavy and machine goods industries, but also in the areas of power, irrigation, credit, higher education, scientific research and training. "he mid*78:@s and early 78=@s were characteri5ed by serious economic problems. First, because of wars with neighbours, large resources were diverted towards defence, resulting in a sharp decline in public investment that adversely affected the growth of the economy. Second, the foreign exchange situation forced $ndia to devalue its currency in 78::. Finally, food production failed to keep pace with demand and the country became increasingly dependent on food imports under the Anited States /overnment's (0 ;<@. "he situation became critical in the mid*78:@s with the failure of two consecutive crops in 78:;4:9 and 78:94:: and the country had to import large 1uantities of food*grains under (0 ;<@. $n the late 78:@s, agricultural growth revived with the adoption of green revolution technology in some regions. )oincidentally, the manufacturing sector which had seen a notable deceleration in growth from 78:;*:9 to 78=9*=:, began registering far higher growth from 78== to 78=<.
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.uring the 78<@s, the $ndian economy witnessed an unprecedented growth rate of 9.; percent per annum. "he 78<@s was also a period when limited liberali5ation measures were initiated and steps were taken to moderni5e some of the most important industries, such as cement, steel, aluminium and power generation e1uipment. T+# 1#n#sis and ca&s#s o* t+# 1>>? c%isis From 789@ to 78<@, while the $ndian economy was growing at a relatively slow rate of G.: percent, domestic investment exceeded domestic savings by only a small margin. "he gap could be bridged through foreign borrowing on a small scale. !owever, during the period 78=8 to 788@, when the growth rate of /.( accelerated to 9.; percent, the gap between savings and investment widened substantially. "he need to finance large capital expenditures and imports of machinery and raw materials, including oil, necessitated heavy borrowing from abroad. "he result was a cumulative increase in foreign debt and in repayment liability. Foreign debt increased from ASM>G.9 billion in 78<@ to M:G.;@ billion in 7887. $n 7887, nearly >< percent of total export revenues went to service the debt. "he most important reason for the internal savings rate falling increasingly short of investment re1uirements was the expanding fiscal deficit of the government which had risen from an average of :.G percent of /.( during the Seventh Five* 6ear (lan to <.> percent by 788@*87. 0arge fiscal deficits arose for a number of reasons+ exorbitant expenditures were incurred by the central government's subsidies of fertili5ers, food and exports and by the state governments' of power, transport and irrigation. "he inefficient functioning of many of the central and state public sector enterprises further burdened the government budget. Finally, in addition to the current account deficit, mounting capital account expenditures by the government and public enterprises had to be financed through public borrowing. &y 788@, internal debt liabilities had increased to 9G percent of /.( compared with G9 percent in 78<@, and interest payments accounted for as much as >; percent of total government expenditure. $n addition, the sources of foreign borrowing underwent some important changes, as soft $nternational .evelopment Association ,$.A- and government*to*government loans dried up and high*cost commercial loans from the banks and non* resident $ndians had to fill the gap. As long as the international credibility of $ndia was high, loans were forthcoming and the country could go on living on foreign borrowing. !owever, the combination of a number of factors, including the sharp rise in import prices of oil and the downgrading of $ndia's credit rating, led to a loss of confidence that resulted in the drying up of short*term credit along with a net outflow of non*resident $ndian deposits. "hus, in spite of borrowing from the $nternational 2onetary Fund ,$2F-, the foreign exchange reserves declined.
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$t was against this background that the new economic policy was introduced. "he multilateral agencies such as $2F and the #orld &ank insisted that the policymakers undertake structural reforms before they agreed to salvage the country from the foreign exchange crisis. T+# main com$on#nts o* n#2 #conomic $o"ic' "he aim of the new policy was to bring about a realignment of domestic demand with available resources and to initiate changes in supply and production structures with a view to eliminating the external imbalance. "he economy was to be liberali5ed and gradually integrated with the world economy by the dismantling of tariff walls, the protection of foreign direct investment and upgrading the technology of production in various fields. "he broad thrusts of the programmes were financial stability, outward*looking policies and deregulation of domestic markets. "he reforms consisted of two components. "he short*term immediate stabili5ation measures focused on correcting the dise1uilibrium in the foreign exchange market through demand reduction, reforms in trade policy, a reduction in the fiscal deficit and the dismantling of barriers to the free flow of capital. 'xternal competitiveness was to be improved through a large nominal depreciation of the exchange rate. "he medium*term structural ad ustment programme introduced reforms in fiscal, exchange rate, trade and industrial policy as well as policies concerning the public sector, the financial sector and the capital market. "hese reforms included elements such as deregulation of prices and investments, changes in the structure of taxation and public expenditure, moderation in wage increases, privati5ation of public enterprises and greater integration with the world economy. "he ad ustment policies introduced were not specific to the agricultural sector, but concerned the entire economy. 3evertheless, keeping in view the importance and predominance of the agricultural sector in the $ndian economy, in terms of both income generation and employment and its intimate relationship with other sectors of the economy through input*output and consumption linkages, the macroeconomic and other changes implied in the stabili5ation and structural ad ustment programme had a significant impact on the sector. A general review of agricultural development since independence helps to provide the necessary basis for understanding the full implications of structural reform for the agricultural sector of $ndia. P(ANNING in $ndia derives its ob ectives and social premises from the .irective (rinciples of State (olicy enshrined in the )onstitution. (ublic and private sectors are viewed as complementary. "he private sector covers not only organised industry but also small*scale industries, agriculture, trade and a great deal of activity in housing, construction and other fields. $ndividual effort and private initiative are considered necessary and desirable in national endeavour for development with optimum voluntary cooperation. Although in the past, economic planning did envisage a growing public sector with massive investments in
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basic and heavy industries, now the emphasis on the public sector is less pronounced and the current thinking on planning in the country, in general, is that it should increasingly be of an indicative nature. "he (rime 2inister Atal &ihari Ia payee is the )hairman of the (lanning )ommission and B.). (ant, .eputy )hairman, (lanning )ommission. 2embers of the (lanning )ommission include Shri Caswant Singh, 2inister of 'xternal Affairs and 2inister of 'lectronics; Shri 6ashwant Sinha, 2inister of Finance; Shri ?am 3aik, 2inister of State for (lanning and (rogramme $mplementation ; Shri 2ontek Singh Ahluwalia, .r S.(. /upta, .r S.?. !ashim and .r ..3. "iwari. FIRST P(AN Beeping in view the large*scale imports of foodgrain in 7897 and inflationary pressures on the economy, the First (lan ,7897*9:- accorded the highest priority to agriculture including irrigation and power pro ects. About ;;.: per cent of the total outlay of ?s >,@:8 crore in the public sector ,later raised to ?s >,G=< crore- was allotted for its development. "he (lan also aimed at increasing the rate of investment from five to about seven per cent of national income. SECON- P(AN "he Second Five 6ear (lan ,789:*9= to 78:@*:7- sought to promote a pattern of development which would ultimately lead to the establishment of a socialistic pattern of society in $ndia. $ts main aims were+ ,i- an increase of >9 per cent in the national income; ,ii- rapid industrialisation with particular emphasis on the development of basic and heavy industries; ,iii- large expansion of employment opportunities; and ,ivreduction of ine1ualities in income and wealth and a more even distribution of economic power. "he (lan also aimed at increasing the rate of investment from about seven per cent of the national income to 77 per cent by 78:@*:7. "he (lan laid special stress on industrialisation, increased production of iron and steel, heavy chemicals including nitrogenous fertili5ers and development of heavy engineering and machine* building industry. T.IR- P(AN "he "hird (lan ,78:7*:> to 78:9*::- aimed at securing a marked advance towards self*sustaining growth. $ts immediate ob ectives were to + ,i- secure an increase in the national income of over five per cent per annum and at the same time ensure a pattern of investment which could sustain this rate of growth during subse1uent (lan periods; ,ii- achieve self*sufficiency in foodgrains and increase agricultural production to meet the re1uirements of industry and exports; ,iii- expand basic industries like steel, chemicals, fuel and power and to establish machine*building capacity so that the re1uirements of further industrialisation could be met within a period of 7@ years or so mainly from the country's own resources; ,iv- utilise fully the manpower resources of the country and ensure substantial expansion in employment opportunities; and ,vestablish progressively greater e1uality of opportunity and bring about reduction in disparities of income
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and wealth and a more even distribution of economic power. "he (lan aimed at increasing the national income by about G@ per cent from ?s 7;,9@@ crore in 78:@*:7 to about ?s 78,@@@ crore by 78:9*:: ,at 78:@*:7 prices- and per capita income by about 7= per cent from ?s GG@ to ?s G<9 during the same period. ANNUA( P(ANS "he situation created by the $ndo*(akistan conflict in 78:9, two successive years of severe drought, devaluation of the currency, general rise in prices and erosion of resources available for (lan purposes delayed finalisation of the Fourth Five 6ear (lan. $nstead, between 78:: and 78:8, three Annual (lans were formulated within the framework of the draft outline of the Fourth (lan. FOURT. P(AN "he Fourth (lan ,78:8*=;- aimed at accelerating the tempo of development and reducing fluctuations in agricultural production as well as the impact of uncertainties of foreign aid. $t sought to raise the standard of living through programmes designed to promote e1uality and social ustice. "he (lan laid particular emphasis on improving the condition of the less privileged and weaker sections especially through provision of employment and education. 'fforts were also directed towards reduction of concentration of wealth, income and economic power to promote e1uity. "he (lan aimed at increasing net domestic product ,at 78:<*:8 factor cost- from ?s >8,@=7 crore in 78:8*=@ to ?s G<,G@: crore in 78=G*=;. Average annual compound rate of growth envisaged was 9.= per cent. FIFT. P(AN "he Fifth (lan ,78=;*=8- was formulated against the backdrop of severe inflationary pressures. "he ma or ob ectives of the (lan were to achieve self(lanning reliance and adopt measures for raising the consumption standard of people living below the poverty*line. "his (lan also gave high priority to bringing inflation under control and to achieving stability in the economic situation. $t targeted an annual growth rate of 9.9 per cent in national income. Four Annual (lans pertaining to the Fifth (lan period were completed. $t was subse1uently decided to end the Fifth (lan period with the close of Annual (lan 78=<*=8 and initiate work for a new (lan for the next five years with new priorities and programmes. SI/T. P(AN ?emoval of poverty was the foremost ob ective of the Sixth (lan ,78<@*<9-. "he strategy adopted for the (lan consisted essentially in moving simultaneously towards strengthening infrastructure for both agriculture and industry. Stress was laid on dealing with inter*related problems through a systematic approach with greater management, efficiency and intensive monitoring in all sectors and active involvement of people in formulating specific schemes of development at the local level and securing their speedy and effective implementation.
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"he actual expenditure in the Sixth (lan stood at ?s 7,@8,>87.= crore ,current price- as against the envisaged total public sector outlay of ?s 8=,9@@ crore ,78=@*<@ prices- accounting for a 7> per cent increase in nominal terms. Average annual growth rate targeted for the (lan was 9.> per cent. SEVENT. P(AN "he Seventh (lan ,78<9*8@- emphasised policies and programmes which aimed at rapid growth in foodgrains production, increase in employment opportunities and productivity within the framework of basic tenets of planning, namely, growth, modernisation, self*reliance and social ustice. Foodgrains production during the Seventh (lan grew by G.>G per cent as compared to a long*term growth rate of >.:< percent during 78:=*:< to 78<<* <8 and a growth rate of >.99 per cent in the eighties due to overall favourable weather conditions, implementation of various thrust programmes and with concerted efforts of the /overnment and the farmers. "o reduce unemployment and conse1uently, the incidence of poverty, special programmes like Cawahar ?o5gar 6o ana were initiated in addition to the already existing programmes. .ue recognition was also accorded to the role small scale and food processing industries can play in this regard. "he total expenditure during the entire Seventh (lan stood at ?s >,7<,=>8.:> crore ,current pricesas against the envisaged total public sector outlay of ?s 7,<@,@@@ crore, resulting in a >7.9> per cent increase in nominal terms. .uring this (lan period, the /ross .omestic (roduct ,/.(- grew at an average rate of 9.: per cent exceeding the targeted growth rate by @.: per cent. ANNUA( P(ANS "he 'ighth Five 6ear (lan ,788@*89- could not take off due to the fastchanging political situation at the )entre. "he new /overnment which (lanning assumed power at the )entre by Cune 7887 decided that the 'ighth Five 6ear (lan would commence on 7 April 788> and that 788@*87 and 7887*8> should be treated as separate Annual (lans. Formulated within the framework of the earlier Approach to the 'ighth Five 6ear (lan ,788@*89-, the basic thrust of these Annual (lans was on maximisation of employment and social transformation. EIG.T. P(AN "he 'ighth Five 6ear (lan ,788>*8=- was launched immediately after the initiation of structural ad ustment policies and macro stabilisation policies which were necessitated by the worsening &alance of (ayments position and inflation position during 788@*87. "he various structural ad ustment policies were introduced gradually so that the economy could be pushed to a higher growth path and to improve its strength and thus prevent the &alance of (ayments and inflation crisis in future. "he 'ighth (lan took note of some of these policy changes which were to come about due to these reforms. "he 'ighth (lan aimed at an average annual growth rate of 9.: per cent and an average industrial growth rate of about =.9 per cent.
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"hese growth targets were planned to be achieved with relative price stability and substantial improvement in the country's &alance of (ayments. Some of the salient features of economic performance during the 'ighth Five 6ear (lan indicate, among other things, ,a- faster economic growth, ,b- faster growth of manufacturing sector and agriculture and allied sector, ,c- significant growth rates in exports and imports, improvement in trade and current account deficit, and significant reduction in the )entral /overnment's fiscal deficit. !owever, shortfall in expenditure in the )entral sector due to inade1uate mobilisation of internal and extra budgetary resources by the (SAs and various departments was witnessed. $n the States sector, the reason for shortfall was lack of mobilisation of ade1uate resources due to deterioration in the balance of current revenues, erosion in the contribution of state electricity boards and state road transport corporations, negative opening balance, mounting non*(lan expenditure and shortfalls in the collection of small savings, etc. "he total expenditure during the entire 'ighth (lan stood at ?s ;,89,::8 crore ,by taking 788:*8= ,?'- as actual- at current prices as against envisaged total public sector outlay of ?s ;,G;,7@@ crore ,7887*8> prices- resulting in a 7;.> per cent increase in nominal terms. .uring the 'ighth (lan, the /.( grew at an average rate of :.< per cent exceeding the targeted growth rate of 9.: per cent. NINT. P(AN "he 3inth Five 6ear (lan ,788=*>@@>- launched in the 9@th year of $ndia's $ndependence is based on a careful stock taking of the strengths and weaknesses of past development strategies and seeks to provide appropriate direction and balance for the socioeconomic development of the country. "he principal task of the 3inth (lan is to usher in a new era of growth with (lanning social ustice in which not only the /overnment at the )entre and States, but the people at large, particularly the poor can become effective institutions of a participatory planning process. Nuality of life, generation of productive employment and regional balance summarise the main dimensions of State (olicy. $t focuses on accelerated growth, recognising a special role for agriculture for its stronger poverty reducing and employment generating effects and for ensuring food and nutritional security. "he ob ectives of the 3inth (lan include + ,i- priority to agriculture and rural development with a view to generating ade1uate productive employment and eradication of poverty; ,ii- accelerating the growth rate of the economy with stable prices; ,iii- ensuring food and nutritional security for all, particularly the vulnerable sections of society; ,iv- providing the basic minimum services of safe drinking water, primary health care facilities, universal primary education, shelter and connectivity to all in a time bound manner; ,v- containing the growth rate of population; ,viensuring environmental sustainability of the development process through social mobilisation and participation of people at all levels; ,vii- empowerment of women and socially disadvantaged groups such as scheduled castes, scheduled tribes and other backward classes and minorities as agents of socio* economic change and development; ,viii- promoting and developing people's participatory institutions like (anchayati ?a institutions, cooperatives and self*help groups; and ,ix- strengthening efforts to build
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selfreliance. "he process of reforms which has yielded many good results will be continued and strengthened during the 3inth (lan. "he reforms involve a ma or reorientation of role of the State and the contribution of the private sector. A vigorous private sector operating under the discipline of competition is central to the attainment of the 3inth (lan ob ectives. $t also must increase its involvement in the areas of social development and economic infrastructure. 'xport performance will be critical to the attainment of high growth rates and achieving self*reliance. "he foreign trade and investment policies should facilitate greater integration with the world economy. "here is an imperative need to motivate the private sector to participate in the development process, if the infrastructure gap has to be bridged. !owever, public sector investment in infrastructure will continue to be crucial in this area. As the second largest developing economy in Asia, $ndia can be a ma or destination for foreign investment and policies in the 3inth (lan have been designed to take advantage of this possibility. ANNUA( P(ANS "he envisaged total public sector outlay of ?s 7,7>,78= crore for the Annual (lan 788;*89, was revised to ?s 7,@9,@<9 crore. $n the states and the A"s sector the approved outlay was ?s ;>,@9: crore which was revised to ?s G:,=:8 crore. "he share of the states and A"s in the total provision ,?'- was G9.@ per cent. "he Annual (lan 7889*8: provides for the public sector an outlay of ?s 7,>=,G<G crore at current prices. "he states and A"s plan outlay at current prices is ?s ;<,9G; crore, which works out to G<.7 per cent of actual public sector outlay for the year. "he public sector outlay for Annual (lan 7889*8: (lanning was revised to ?s 7,7<,9:: crore. $n the states and A"s sector, the approved outlay was revised to ?s ;G,8=> crore. "he share of the states and A"s in total plan provision ,?'- was G=.7 per cent. "he Annual (lan 788:*8= envisaged a total public*sector outlay of ?s 7,;;,=8< crore comprising ?s <=,@<: crore for the )entre, ?s 9;,8<; crore for the States and ?s >,=>< crore for the A"s. "his represents an increase of 7@.; per cent for the )entre and 7<.8 per cent each in the case of States and the A"s over the budget estimates of 7889*8:. "he total public sector outlay for Annual (lan 788:*8= was revised to ?s 7,>8,7<8 crore. $n the State and A"s sector, the approved outlay was revised to ?s 97,:=@ crore. "he share of the States and A"s in the total plan provision ,?'- was ;@ per cent. "he overall public sector plan outlay during the 'ighth Five 6ear (lan ,788>*8=- amounts to ?s ;,G;,7@@ crore at 7887*8> prices. "he share of the )entral (lan in this amount is ?s >,;=,<:9 crore or 9=.7 per cent whereas the share of State (lans accounts for ?s 7,=8,8<9 crore or ;7.9 per cent. "he (lans of the Anion "erritories account for the remaining share of ?s :,>9@ crore or 7.; per cent of the overall 'ighth (lan (ublic Sector outlay. A review in real terms ,i.e. after allowing for inflation- has shown that the (lan performance in financial terms during the 'ighth (lan ,788>*8=- accounts for about 8> per cent of the approved 'ighth (lan outlay in the )entral Sector. "he corresponding proportion works out to about =8 per
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cent and 7@; per cent for State (lans and A" (lans respectively. "hus, in the case of the )entre, the shortfall in anticipated (lan expenditure during the 'ighth (lan period has been marginal vis*a*vis the approved 'ighth (lan outlay. #hereas there is no shortfall in the case of A" (lans, ma or shortfall was likely to occur in the (lan provision as well as expenditure of States vis*a*vis their 'ighth (lan approved outlays. .uring 788=*8<, the first year of the 3inth Five 6ear (lan, the total public sector outlay for the Annual (lan was ?s 7,99,8@9 crore at current prices. "he States and A"s plan outlay at current prices is ?s :;,@:: crore. "he share of States and A"s in total plan provision ,?'- was ;7.7 per cent. "he total public sector outlay for annual plan 788=*8< was revised to ?s 7,G8,:>: crore. $n the states and A"s sector, the approved outlay was revised to ?s 9<,98> crore. "he share of the States and A"s in the total plan provision ,?'- is ;> per cent. "he public sector outlay envisaged for the Annual (lan 788<*88 is ?s 7,<9,8@= crore at current prices comprising ?s 7,@9,7<= crore for the )entre, ?s ==,78> crore for States and ?s G,9>< crore for A"s. IN-USTRIA( PO(ICY OF T.E GOVERNMENT PO(ICY RESO(UTION AN- PO(ICY STATEMENTS "he concept of F$ndustrial (olicyF is comprehensive and it covers all those procedures, principles, policies, rules and regulations which control the industrial undertakings of a country and shape the pattern of industriali5ation. IN-USTRIA( PO(ICY 1>7< Attainment of $ndependence by $ndia on 79th August 78;= made a tremendous difference to the industrial landscape. (roduction in $ndia had declined but population was increasing. $nflation was worsened by the economic upheaval of the partition of the country and the need to set up production and counter inflationary tendencies, it was essential to announce an industrial policy which would create conditions of economic security so very vital for the growth of the industry and thus produce a climate for stimulating investment in industry. SA(IENT FEATURES OF T.E IN-USTRIA( PO(ICY OF 1>7< "he first $ndustrial policy resolution has been announced in $ndia on April :th 78;< thus policy aimed at creating a mixed economy in the country with the existence of both private and public sectors. "his policy envisaged that Fstate should play a progressively active role in the development of industriesF. "his policy aimed at providing e1ual opportunities to all improvement standard of living of ali increasing the production and also providing employment opportunities in whole community. FEATURES OF T.E PO(ICY
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"he industries were classified by the /overnment into ; categories. $. )ategory industries which are an exclusive monopoly of the state.
Arms ammunition defence atomic energy industries which are of strategic importance. $$. )ategory industries which include basic and key industries. "hey consists of non and steel telephone telegraph ship building, transport, power etc. "he new units will be in private sector for the next 7@ years. After 7@ years they will be nationali5ed. $$$. )ategory industries which also included certain basic industries like automobiles, fertili5ers, chemicals, tractors, heavy machines, machine tools etc., "he new industries in this category will be started by the private sector. &ut the state can also start progressively the new units in this category. "he $I category industries which are remaining industries such as + 7. Small scale industries+ "he 78;< industrial OO resolution emphasis OOOO of small scale industries in co*operative basis and also as comliments OOOO industries. >. workers participation in management+ "his policy gave importance for good relations between the 0abour and management of various industries for ensuring this policy stressed the need for workers participation in management. G. "his policy explained the important role to be played by the foreign capital in the industriali5ation. ;. "o prevent unhealthy competition from foreign industrial units the policy assured the implementation of a sound and suitable tariff policy. REVIE@ OF IN-USTRIA( PO(ICY RESO(UTION OF 1>7< "he first industrial policy resolutions announced by the /overnment of $ndia in 78;< had a mixed reaction from the public. Some thinkers expressed great satisfaction over the policy. #hile others critici5ed it. (rof. Bawchal termed this policy as the most useful one 2inoo 2asani said that this policy said the foundation for democratic socialism. !owever, may others critici5ed it on the following grounds. 7. "his /overnment has taken up great responsibility by separating some industries from private sectors. >. "his policy has mixed two opposite lines. $t backed the $ndustries and also promised protection to labourers which cannot happen. G. "here was always a fear of nationalism to private enterprise. develop. !ence private enterprise could not
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;. "here was a doubt about the co*ordination of private sector and public sector.
IN-USTRIA( PO(ICY RESO(UTION OF 1>8: "he $ndustrial (olicy ?esolution of 78;< announced by the government faced several criticisms. $t was critici5ed that the threat of nationali5ation which was proposed in that policy has effected the growth of private enterprise. 2oreover in 789@ we have drafted our constitution and decided to move towards establishing a socialistic pattern of society. "he directive principles of state policy were announced and the second plan started as the first plan was over by 789:. All of these above factors made the government to announce another industrial policy within < years of the announcement of first policy. "hat was the industrial policy resolution of 789:. IN-USTRIA( PO(ICY RESO(UTION OF 1>8: a. 3ew classification of industries+ "he 789: industrial policy resolution gave a new classification of industries consisting of three categories. i- 'xclusive responsibility of states+ 7= industries are included in this schedule. "hey are arms and ammunition, atomic energy, iron and steel, minerals like copper, transport, telephone, telegraph and radio e1uipment, generation and distribution of electricity. ii- (rogressively state owned+ #hich includes industries, machine tools, ferro alloys, antibiotics, essential drugs, fertili5ers road transport and sea transport. iii- %ther $ndustries+ All the remaining industries were left to initiative and enterprise of the private sector. "hese industries were also sub ect to the control and regulation of the state. b; ?ole of small scale and cottage industries+ "hese are having higher employment potential ensure more e1uitable distribution of income and wealth. !ence /overnment could support actively these industries through various ways by giving direct assistance and indirect assistance. c. "he need for removing regional disparities+ "he industrial xJolicy resolution of 789: suggested
that one of the aims of national. IN-USTRIA( PO(ICY (1>>?) "he Canatha .al /overnment announced its new industrial policy on 2ay G7F 788@. FEATURES OF PO(ICY 14 PROMOTION OF SMA(( SCA(E IN-USTRIES
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7. "he investment ceiling in plant and machinery for small * scale industry of 78<9 was revised from the present ?s.G9 lakhs to :@ lakhs. >a. (resently <G: items have been reserved for exclusive manufacture in the small * scale sector. 'fforts would be made to certify some more items amendable to similar reservation. c. (rogrammes for moderni5ation and upgration of technology would be implemented. A number of
technology centers, tool rooms, process and product development centers, testing centers etc. will be set up under the umbrella of an apex technology. .evelopment center in small industries development organi5ation. d. "o ensure ade1uate and timely flow of credit for the small scale industries a new apex bank
known as S$.&$ has already been established. e. An exercise will be undertaken to identify location in rural areas endowed #ith ade1uate power
supply and intensive campaigns would be launched to attract suitable entrepreneurs provide all other inputs and faster small scale and tiny industries. f. An exercise will be undertaken to identify the locations in rural areas endowed with ade1uate
power supply and intensive campaigns would be launched to attract suitable entrepreneurs provide all other input. And foster small scale and tiny industries. g. %ne of the persistent complaints of the small scale units in their being sub ected to a large number
of acts laws, being re1uired to maintain a number of registers, submit plethora of returns and face an army of inspectors, particularly in the field of labour legislations. "hese bureaucratic controls will be reduced so that unnecessary interference is cheminated. II4 P%omotion o* A1%o - Bas#d Ind&st%i#s
i. $n order to assist the large number of artisans engaged in the rural and cottage industries, the activities of Bhadi, Iillage $ndustries ,BI$- boards would be expanded and these organi5ations would be strengthened to discharge the responsibility more effectively. Special marketing organi5ations at centered and states levels shall be created to these industries to market their products. ii. $n agro*processing industries greater success has been achieves where growers and processors have been integrated as in the case of sugar. For the success of other agro * based, industries also close links must be forged between the growers are processor units. iii. Agro processing industry would receive high priority in credit allocation from the financial
institution. III4 PROCE-URES FOR IN-USTRIA( APPROVA(S
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$ndian $ndustry must be made more competitive internationally. $t also needs to be released from unnecessary bureaucratic shackles by reducing the government would continue to examine large pro ects in view of resource constraints, decision in respect of medium si5ed investments would be left to the entrepreneurs. "o achieve these ob ectives the following decision have been taken. a. .elicensing+ All new units up to an investment of ?s.>9 crores in fixed assets in non*backward
areas and ?s.=9 crores in centrally notified backward areas would be exempted from re1uirement of obtaining licence4registration. b. $mport of capital goods+ $mport of capital goods the entrepreneur would have entitlement to
import upto a landed value of G@K of the total value of plaint and machinery re1uired for the unit. c. $mport of raw material+ ?aw material and components, imports would be permissible upto a
landed value of G@K of the ex*factory value of annual production. "he ex*factory value of production will exclude, the exercise duty on the item of production. d. foreign )ollaboration+ $n respect of transfer of technology, if import of technHlogy is considered
necessary by the entrepreneur, he can conclude an agreement with the collaborator without obtaining any clearance from the government provided that royalty payment does not exceed 9K on domestic sales and <K on exports e. Foreign $nvestment+ $nvestment upto ;@K of e1uity will be allowed on an automatic basis. $n such proposals also the landed value of imported capital goods shall not exceed G@K of value of plant and machinery. IV4 (OCATION PO(ICY AN- ENVIRONMENT C(EARANCES "he location policy would be applied to such industries by the center except for the location in and around metropolitan cities with population above four million. For these cities location will not be permissible within >@ km. )alculated from the periphery of the metropolitan area except in prior designated industrial areas and for non*polluting industries such as electronics computers software.
V4
E/PORT - ORIENTE- UNITS 7@@ per cent export oriented units ,'NAS- and units to be set up in export processing4 ones ,'(L's- are
also being deli censed under the scheme up to an investment limit of ?s.=9 crores. AN EVA(UATION OF IN-USTRIA( PO(ICY
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$ndustrial 2inister 2r. A it Singh announcing the new industrial policy made a case for the growth of the small scale industries ust on the lines of the Canata party /overnment in 78=8 the new industrial policy is a curious amalgam of the philosophy of the Canata .al and the philosophy of indiscriminate liberalisation followed by the congress,$-. "he new industrial policy intends to identify more items amendable to reservation besides the <G: items included in the list. Although the minister made a brave assertion that encroachments would be effectively Cealt with, but the experience of the past reveals that through tooth paste was reserved for the small scale sector, but after more than a decade, 8@ per cent tooth paste was produced by multinationals not only these but footwear, domestic appliances, safety matches soap etc. are reserved for small sector as for back as 78:= but in all these items big business sectors still dominates. "herefore the 1uestion is not of enlarging the list make it impressive but to improve market share of small scale sector by phasing out the large sector from this area. "he initiatives proposed in the new industrial policy to moderni5e the small scale sector is welcome. "his is to increase the competitive strength of small units by improving their 1uality of output and reducing their costs. "he government should therefore take a bold stand not in worlds but in action so that the professed goal of generating more employment and dispersal of industry can be achieved. NE@ IN-USTRIA( PO(ICY 1>>1 "he congress ,7- government led by 2r. (.I. 3arasimha ?ao announced the new industrial policy on Culy >;, 7887. "he main aim o the new industrial policy is to unshackle the $ndian industrial econcruv with the world economy to remove restrictions on direct foreign investments as also free the domestic entrepreneur from the industrial of 2?"( Act. All these refpfms of industrial policy have led the government to take a series of initiatives in respect of policies in the following areas. a. $ndustrial 0icensing.
b. Foreign $nvestment. c. Foreign "echnology (olicy
d. (ublic Sector (olicy e. 2?"( Act. .
a4 Ind&st%ia" (ic#nsin1 $n the Sphere of industrial licensing, the role of the government was to be changed from that of only exercising control to one of providing help and guidance by making essential procedures fully transparent and by eliminating delay. "his calls for bold and imaginative decisions designed to remove restraints on capacity creation, which at the same time ensure that over * riding national interests are not eopardi5ed.
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$ndustrial licencing will henceforth be abolished for all industries, except those specified irrespective of levels of investment. "hese specified industries will continue to be sub ect to compulsory licensing for reasons related to security and strategic concerns, social reasons, problems related to safety and over riding environmental issues, manufacture of products of ha5ardous nature and articles of elitist consumption. !4 Fo%#i1n In)#stm#nt $n order to invite foreign investment in high priority industries re1uiring large investments and advanced technology, it*has been decided to provide approval for direct foreign investment upto 97 percent foreign e1uity in such industries. For the promotion of exports of $ndian products in world markets the government will encourage foreign trading companies to assist $ndian exporters in export activities. &eside this the government will appoint a special board to negotiate with such firms so that purposive negotiations can be carried out with such large firms, which provide the avenues for "arge investments in the development of industries and technology in the national interest. c4 Fo%#i1n T#c+no"o1' #ith a view to in ecting the desired level of technological dynamism in $ndian $ndustry government will provide automatic approval for technology agreements related to high priority industries with in specified parameters. d4 P&!"ic S#cto% Po"ic' (ublic enterprises have shown a very low rate of returns on capital invested. "he result is that many of the public enterprises have became a burden rather than being an asset to the government. "he most striking example is to take over of sick units from the private sector. "his category of public sector units accounts for almost one third of the total losses of centered public enterprises. $t is time therefore that the government adopt a new approach to public enterprises. Anits which may be faltering at present but are potentially viable must be structured and given a new lease of life. "he priority areas of growth of public enterprises in the future will be the following. i. ii. 'ssential infrastructure goods and services. 'xploration and exploitation of oil and mineral resources.
iii. "echnology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inade1uate. a. 2anufacture of products where strategic consideration predominate such as defence e1uipment. #4 Mono$o"' And R#st%icti)# T%ad# P%actic#s Act (MRTP Act) #ith the .growing complexity of
industrial structure and the need for achieving ; ecdrvomics of scale for ensuring higher productivity and
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competitive advantage in the international market, the interference of the government through 2?"( Act in investment decisions of large companies has become delirious in its effects on $ndian industrial growth. "he pre*entry scrutiny of investment decisions by so*called 2?"( companies will no longer be re1uired. $nstead emphasis will be on controlling and regulating monopolistic, restrictive and unfair trade practices rather than making in necessary for the monopoly houses to obtain prior approval of central government for expansion, establishment of new undertakings, merger take over and amalgamation and appointment of certain directors. "he trust of policy will be more on controlling unfair or restrictive business practices.
-#cisions o* 1o)#%nm#nt $n the view of the considerations outlines above government decides to take a series of measures to unshackle the $ndian industrial economy from the cobwebs of unnecessary bureaucratic control. "hese measures being taken by government in the areas of trade policy, exchange rate management, fiscal policy, financial sector reform and overall macro*economic management. Ind&st%ia" (ic#nsin1 Po"ic' i. $ndustrial 0icensing will be abolished for all pro ects except for a short list of industries related to security and strategic concern, social reasons, ha5ardous chemicals and overriding environmental reasons and items of elitists consumption. $ndustries reserved for the small scale sector will continue o be reserved. ii. Areas where security and strategic concerns predominate will be continue to be reserved for the
public sector. iii. $n locations other than cities of more than one million population there;J will be no re1uirement of obtaining industrial approvals from the central government except for industries sub ect to compulsory licensing. $n respect of cities will population great than one million industries other than those non* polluting nature such as electronics will be located outside >9 km of the periphery except in prior designated industrial areas. iv. v. vi. !4 'xisting units will be provided a new broad banding facility to enable them to produce any article "he exemption from licensing will apply to all substantial expansions of existing units. All existing registration schemes will be abolished. Fo%#i1n In)#stm#nt without additional investment.
i. Approval will be given for direct foreign investment upto 97K foreign e1uity in high priority industries. )learance will be available if foreign e1uity covers the foreign exchange re1uirement for imported capital goods.
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ii. "he payment of dividends would be monitored through the reserve bank of $ndian so as to ensure that outflows on account of dividend payments are balanced by export earnings over a period of time. iii. %ther foreign e1uity proposal which do not meet criteria ,i- will continue to need prior clearance. c4 Fo%#i1n T#c+no"o1' A1%##m#nts
i. Automatic permission will be given for foreign agreements in high priority industries upto a lump sum payment of ?s.l )rore 9K of royalty of domestic sales and <K for export sales. "he prescribed royalty rates are not of laxesJ;rA;rwill be calculated according to stand and procedures. ii. Automatic permission will be given sub ect to the same guidelines as above if no free foreign exchange is re1uired for any payments. iii. 3o permission will be necessary for hiring of foreign technicians foreign testing of indigenously
developed technologies, d4 P&!"ic S#cto%
i. (ortfolio of public sector investments will be reviewed with a view to focus the public sector on strategic, high*tech and essential infrastructure. #hereas some reservation for the public sector is being retained there would be no bar for areas of exclusively to be opened up to the private sector selectively. Similarly the public sector will all be allowed entry in areas not reserved for it. ii. (ublic enterprises which are chronically sick and which are unlikely to be turned around will for the formulation of revival rehabilitation schemes be retried to the board for industrial and financial reconstruction ,&$F?- or other similar high level institutions created for the purpose. iii. $n order to raise resources and encourage wider public participants a part of government a shareholdings in the public would be offered to mutual funds financial institutions general public and workers. iv. "here will be a greater trust on performance improvement through the 2emorandum ,2%Asystem through %f
Anderstanding accountable. #4 i.
which managements would be granted and will be held
MRTP ACT "he 2?"( act will be amended to remove the threshold limit of assets in respect of 2?"(
)ompanies and dominant undertakings. "his eliminates the re1uirement of prior approval of central government for establishment of new undertakings etc.
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ii. 'mphasis will be placed on controlling and regulating monopolistic restrictive and Funfair trade empowered 2?"( commission will be authori5ed to initiate practices simultaneously newly
investigations on complaints received from individual consumers or classes of consumers in regard to monopolistic, restrictive and unfair trade practices. A4 CRITI=UE OF T.E NE@ IN-USTRIA( PO(ICY "he new industrial policy announced by the government of $ndia on >;th 7887 fulfils a long felt demand of industry. 0icencing has been abolished for all industries except 7< industries. &esides this all industrial policy proposes to remove the limit of assets fixed for 2?"( companies and dominant undertakings numerous cases of bottlenecks created by the bureaucracy are given a go*bye by this singular decisions of the government. !owever, there are several other areas which have come in for sharp criticism. $t should be desirable to take a few points. 14 PO(ICY REGAR-ING FOREIGN CAPITA( "he new industrial policy goes all out to foreign capital. $t has been decided to provide approval for. direct foreign investment upto 97K foreign e1uity in high priority industries "he government has further clarified that it will permit 7@@K foreign e1uity incase the entire output is exported. All this is done in the belief that foreign investment is crucial to our development. &ut events have not turns the way 3ehru would have endeavoured to build the $ndian economy. "he idea of free flow of foreign capital is being sold with the understanding that it shall provide the much * needed foreign exchange and secondly that it shall lead to in ecting a heavy do5e of investment in high priority sector. So government should therefore should be very careful about the hidden implication reverse outflow of foreign exchange in the coming 2oreover the government has also assured ma ority foreign e1uity holdings upto 97K even for trading companies primarily engaged in export activities. $t does not seem ustified as to whether $ndian trading companies cannot probe foreign market effectively, this area does not re1uire model technology .then why should government add additional burden by permitting foreign e1uity in trading companies. PUB(IC SECTOR PO(ICY $ndustrial policy very rightly classifies public enterprises in to three categories. i. "hose which fall in the reserved areas of operations.
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ii. (ublic units which may be faltering at present but are potentially viable must be restructured and given a new life and iii. "hose public enterprises which are chronically sick and incur heavy losses, operating in a competitive market and serve little or no public purpose. "hese enterprises the government either intends to close down or pass their ownership to the private sector. -EVE(OPMENT AN- REGU(ATION ACT OF 1>81 "he $ndustrial .evelopment and ?egulation Act of 7897 was passed for securing a planned industrial development in the country for regulating controlling and developing the industries prescribed in schedule A of the Act. ?egulation of industries is done by means of registration of existing industrial undertakings and licensing o substantial expansion, production of new articles change of location of undertakings etc., )ontrol of industrial undertaking can be achieved by investigation into the affairs of industrial under* takings. .evelopment of industries is sought to be achieved through )entral Advisory )ouncils and .evelopment )ouncil by offering various facilities. OB,ECTIVES OF T.E ACT "he act has three important ob ectives. 7. $mplementation of $ndustrial (olicy+ "he Act provides the necessary means to the central government for implementation the industrial policy. >. ?egulation and .evelopment $ndustries+ "he act provides that the imported, industries which are mentioned in the first schedule should be brought under the control of the )entral /overnment. "he development and regulation of such industries is important for the country. !ence, the development of such industries should be considered by taking the economic factors on all $ndia basis. G. (lanning and .evelopment of Future Andertakings+ "he Act provides a system of licensing to regulate planning and future development of new undertakings on sound and balanced lines as may be deemed necessary in the opinion of central government for achieving this act. a. b. c. )onfers powers on the central government to make rules for the regulation of existing For regulating the production and development of industries specified in the first schedule. "he act also provides for constitution .of )entral Advisory )ouncils and development councils. "his act applies to whole of $ndia including the states of Cammu and Bashmir. $t is applicable to all the industries and undertakings manufacturing goods specified in the first schedule. According to the provisions of Act an industrial undertaking is said to be one. undertakings.
SCOPE OF T.E ACT
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a. b. #hich carries on the process of manufacture with the aid of power and having 9@ or more workers )arrying on the process of manufacture without aid of power with 7@@ or more workers in the in the preceeding 7> months. preceding 7> months. "he act exempts certain industries which in the opinion of the central government deserve exemption. PROVISIONS OF T.E ACT "he provisions in this act may be broadly classified into G categories. ,7- (reventive provisions ,>)urative (rovisions and ,G- )reative provisions. PREVENTIVE PROVISIONS "he preventive provisions provided in the act are ,a- ?egistration of undertakings and licensing of undertakings, ,b- $nvestigation, ,c- ?evocation of licence. a. ?egistration of Andertakings+ Section 7@ of the Act provided that the owner of any industrial undertaking other than the central government shall get registered within a specified period. !owever, the central government may also cause every industrial undertaking under the government also to get registered. !owever, as a conse1uence of the new industrial policy of 7887 the registration system has been abolished. 0icensing of undertakings+ Section 77, 77A, 7G of this Act provides that licence is re1uired for establishing a new undertaking for raanufacturing a new article by an existing undertaking for effecting a substantial expansion by existing, unit for changing location of an existing undertaking and to carry on business by an existing undertaking. !owever, these provisions have become inoperative from >9th Culy, 7887 wide+ /.%. 3o.;==7'. b. $nvestigation+ Section 79 of this Act give powers to the central government to investigate into the industrial undertaking on the happening of ,a- substantial fall in the volume of production of any article produced by these undertakings ,b- deterioration of the 1uality of the product which could have been avoided ,c- rise or likely rise in the price of product ,d- for the conservation of natural resources of national importance conserved by this undertaking ,e- where the industrial undertaking is being managed by person who are highly detrimental to the public interest. Section 7: of the Act. 'mpowers the central government to give directions regarding regulating the production of articles controlling the price of any article regulating the distribution of any article produced by this undptaking after investigation. D
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c. ?evocation of ?egistration and 0icence; Section 7@ of the Act provides powers to the central government for revoking the registration of any industrial undertaking whose registration has been obtained by misrepresentation or got an exemption under the Act or has become useless. II4 CURATIVE PROVISIONS "he curative provisions include power to takeover management and power to control supply and price of certain articles. PO@ER TO TAAE OVER MANAGEMENT AN- CONTRO( Section 7<A of the Act provides that the central government may by notification takeover the management or exercise control over any industrial undertaking if it has failed to comply with the directions issued under 7:A of the Act or if affairs of the undertaking are being managed by persons in such a manner which are detrimental to the public interest Section 7<A also authori5es the central government the power to take over any industry without irJe*stigation if it thinks fit. PO@ER CONTRO( SUPP(Y AN- PRICE OF CERTAIN ARTIC(ES $n order to secure e1uitable distribution and availability at fair prices or any article or class of articles the central government may by a notification order to any scheduled industry regulate supply and the distribution of anyarticle produced by that industry.
III4
CREATIVE PROVISIONS
"hey include the following+ a. )onstituting .evelopment councils+ "he central government by a notifying order establish
development councils in respect of any industry or a group of indusiiie's. "he development council consists of persons representing the owners, persons having technical knowledge, person representing the employees and persons not belonging to any of the above categories. "hese development councils perform many functions. "hey are+ i. ii. iii. iv. )ommanding targets of production. Suggesting norms of efficiency eliminating waste. ?ecommending measures for achieving fuller utili5ation of installed capacities. (romoting arrangements for better marketing of products. '
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Assisting industries in obtaining raw materials and advising the industries regarding methods of production, increasing the productivity of labour, training of persons, standardi5ation of products etc. Sec 8 of the Act provides that central government may collect cess on the products which may be levied as an excise duty. "his amount is remitted to the development councils. )entral Advisory )ouncil + Section 9 of the Act provides for the establishment of a central advisory council. $t advises the central government regarding development and regulation of scheduled E industries. "he central advisory: council consists of a )hairman and members not exceeding 7G members representing various goods.
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IN-USTRIA( PO(ICY RESO(UTION - 1>8: >@77*@8*7; 78+@8+;G /B"oday "he $ndustrial (olicy ?esolution was based upon the Ma+a"ano!is Mod#" o* 1%o2t+. "his 2odel suggested that t+#%# s+o&"d !# an #m$+asis on t+# +#a)' ind&st%i#s , which can lead the $ndian 'conomy to a long term higher growth path. "he most important outcomes of the $ndustrial (olicy ?esolution * 789: were+ 1. Scope of the (ublic Sector in $ndia got widened. 2. "he /overnmentPs aim to achieve a socialistic pattern of growth was reiterated. 3. A clear )ut classification of industries was done in $ndia for the first time. 4. All the industries of basic and strategic importance and the industries which had a nature of public utility of services and all those which re1uired large scale investment were strictly kept under the /overnment sector. 5. (rovision of )ompulsory 0icensing was cemented. 6. "he policy paved the way of development of (ublic Sector in $ndia. C"assi*ication o* Ind&st%i#s $n the $ndustrial (olicy ?esolution * 789:, industries were classified into three categories named as Schedule A, Schedule & H Schedule ). Sc+#d&"# A referred to the industries in which )entral /overnment kept the 2onopoly. Sc+#d&"# B referred to the industries in which State /overnments were given the duty to take measures and; #hatever was left was put in Sc+#d&"# C which was open to the private enterprises. Sc+#d&"# A "his comprised 7= industrial areas which were strictly under the )entral /overnment. "he companies of this area were known as )(S' ,central (ublic Sector Andertakings-. "he )(SAPs later became popular as (SAs. "he 7= areas were+ 1. Arms and ammunition and allied items of defense e1uipment.
CHANGING IMPRESSIONS, Opp. Samata College, Besides Chowdar !ess Se"tor # 9, $pp%ghar &oad, !'( Colo) (age 38
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2. Atomic energy. 3. $ron and Steel. 4. !eavy castings and forgings of iron and steel. 9 . !eavy plant and machinery re1uired for iron and steel production, for mining, for machine tool manufacture and for such other basic industries as may be specified by the )entral /overnment. 6. !eavy electrical plant including large hydraulic and steam turbines. 7. )oal and lignite. 8. 2ineral oils. 9. 2ining of iron ore, manganese ore, chrome*ore, gypsum, sulphur, gold and diamond. 10. 2ining and processing of copper, lead, 5inc, tin, molybdenum and wolfram. 11. 2inerals specified in the Schedule to the Atomic 'nergy ,)ontrol of (roduction and Ase%rder, 12. 789G. 13. Aircraft. 14. Air transport. 15. ?ailway "ransport. 16. Ship &uilding. 7= . "elephones and telephone cables telegraph and wireless apparatus ,#Bc"&din1 %adio %#c#i)in1 s#ts-. 7<. /eneration and distribution of electricity.
Sc+#d&"# B "his comprised 7> industrial areas which were put to the State /overnments to take measures and was left to the state government to follow up with the private sector with provisions of compulsory licensing. !owever, Schedule & -I- NOT gave 2onopoly to State /overnments, as monopoly given to centre in Schedule A. "hey had to be State owned but private sector was expected to supplement the efforts of the State. States were expected to facilitate and encourage development of these industries in the private sector, in accordance with the programmes formulated under the Five 6ear (lans. "he areas of Schedule & were+ 7. All other minerals except Qminor mineralsP as defined in Section G of the 2inerals )oncession ?ules 78;8.
CHANGING IMPRESSIONS, Opp. Samata College, Besides Chowdar !ess Se"tor # 9, $pp%ghar &oad, !'( Colo) (age 39
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> . A"&min&m and ot+#% non-*#%%o&s m#ta"s not included in Schedule A. 3. 2achine tools. 4. Ferro*alloys and tool steels. 9 . &asic and intermediate products re1uired by chemical industries such as the manufacture of drugs, dye*stuffs and plastics. 6. Antibiotics and other essential drugs. 7. F#%ti"iC#%s 8. Synthetic rubber. 9. )arboni5ation of coal. 10. )hemical pulp. 11. Road t%ans$o%t4 12. S#a t%ans$o%t4 ,#ords in !o"d mean nothing except that the author considers them important for ob ective testsSc+#d&"# C "he $ndustrial areas which were left out of the Schedule A H & were left with the private sectors with provisions of licensing and sub ect to regulation under the $.? Act. Som# mo%# *#at&%#s o* Ind&st%ia" Po"ic' R#so"&tion 1>8: A"" t+# Sc+#d&"# B and man' o* t+# Sc+#d&"# C came under provisions of compulsory licensing and thus $ndustrial (olicy established R0icense ?a S $n $ndia. P&!"ic s#cto% *o% +#a)' ind&st%i#s 2as mad# t+# main )#+ic"# *o% Ind&st%ia" 1%o2t+ To tac3"# t+# %#1iona" dis$a%it'D PSUs 2#%# to !# #sta!"is+#d in !ac32a%d %#1ions4 Sma"" Sca"# Ind&st%i#s and A1%ic&"t&%# s#cto% 2as 1i)#n $%io%it' in d#)#"o$m#nt4
1>>1 IN-USTRIA( PO(ICY AN- ECONOMIC PO(ICY .uring the mid 78<@s, the )ongress /overnment headed by ?a iv /andhi made a move to change its policies regarding business, licenses and permits, as also its attitude towards multinational companies ,23)s- operating in $ndia. !owever, it was only during the succeeding government of 3arasimha ?ao ,7887*8:- that a strategy was actually formulated in this direction and marketed both in $ndia and abroad. "he strategy aimed to bring the $ndian economy into the mainstream of the global economy, and, at the
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same time allow a whiff of competition and growth to $ndia business. "his, it was hoped would bring a new dimension to the concepts of 1uality, productivity and growth. $nevitably, the winds of liberali5ation that swept through the nation opened a variable (andora's box, with far*reaching implications for human resource management. $t brought in a new era of technology, 1uality consciousness and competition, which compelled $ndian business to wake up from its somnambulism and reassess its assumptions T+# P%#%#* o%m Sc#na%io $n the pre*liberali5ation period $ndia had pursued a shortsighted policy in the name of self*reliance, blocking out the rest of the world in the manufacturing and services sectors. ?elying on bureaucratic controls, through licensing and centrali5ed planning, the government had imposed restrictions on the capacity of business units, their location, choice and source of raw materials and so on. $t had also kept a check on corporate take*overs and mergers, through the monopolies and ?estrictive "rade (ractices )ommission ,2?"(-. $ndia had actively discouraged foreign investments in its capital markets to protect domestic industries. $t had also denied itself access to international capital, technology and markets; Anlike the Asian "igers who went on to beat the first #orld nations at their own game. !owever, as seen by the recent downslide in the South Asian economy and the currency crisis in $ndonesia, this access to international capital and markets has been a mixed blessing for these countries. 3otwithstanding this, the tremendous progress made by the Asian "igers during the last three decades can certainly serve as an example to developing countries such as $ndia. 3ot that socialistic state planning did not have its benefits in $ndia. !eavy industries were established and significant strides were made in the field of agriculture, $ndustrial growth rose from = per cent in the early 789@s to 8K in the early 78:@s. !owever the inevitable problems of socialism outweighed the benefits. (rotected employment led to loss making units where as the 0icense ?a worked against competitive forces. T+# R#*o%m P%oc#ss and Im$#%ati)#s After 7887 there was a two fold shift in the $ndian economic policy*at the global level as also the national level. 7. At the global level, it sough to integrate the $ndian economy with the world economy by allowing for dealing with the 'compete*or*perish' situation.
free movement of capital investment, both into and from $ndia. "his exchange would also expose $ndia to new technology "here has been a significant time lag between foreign direct investment ,F.$- approvals and actual in*flows. "his has been possibly due to the government's failure to ensure a smooth single* window clearance for pro ects. %ther factors have been the government's tendency to backtrack on its own
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policy, and lack of congruity in )enter*state clearance for F.$ inflows. >. At the national level, it envisaged a decontrolled business environment where free market forces would be given more freedom to operate and state control would be reduced or eliminated. "he omnipotent role of public sector corporations would be redefined, allowing disinvestments of their e1uity holdings by the government. %ne of the desired effects of such a ma or restructuring of the economy was growth and generation of employment which, it was hoped would lead to more purchasing power for the common man. "he central government's reform package was a mix of policy and administrative changes. "he budget was used as a ma or instrument for altering the financial policies. "he 788: budget, which was awaited with both skepticism and hope proved to be turnaround in many ways*custom duties applicable to core industries were reduced, excise duty was rationali5ed and a commitment was made towards disinvestments of (SAs. "he budget identified the existing infrastructure as inade1uate for growth and indicated efforts to encourage investment in this critical area. Further it took cogni5ance of the aspirations of farmers and the poor, offering schemes and subsidies to uplift these neglected sections. Anfortunately the budget elicited a lukewarm response and failed to energies the capital market. "his resulted in a slow down of economic reforms and loss of investor confidence in the $ndian economy. $n February 788=, the budget presented by the formed finance minister, 2r. (.)hidambaram, tried to firmly establish $ndia's commitment to the reform process and managed to enthuse both $ndian and Foreign business. "he budget showed a spirit of optimism and growth. 2arket*men were amply encouraged and share indices recorded their biggest ump in any post budget session in the last two decades. "he budget reformed $ndia's tax structure in line with the structure in developed countries; significantly reduced tariffs; rationali5ed excise rates; encouraged investment in infrastructure; and also opened up the insurance sector partially. %n the negative side, however the budget paid more lip*service to reduction in government expenditure and remained silent on the huge oil*pool deficit. ,"his was subse1uently tackled by an administrative decision-. %ne of the imperatives of the environment is to have a skilled and educated workforce, which can understand and cope with the re1uirements of $" and other technologies in the manufacturing and services sectors. "herefore, the state has to make heavy investments in education. $t is worth noting that 6ashwant Sinha, minister of finance, in his 788< budget speech, stressed on the importance of education as a key vehicle for social transformation and provided total budgetary allocation of ?s=@, ;=@ million to the sector. "his was an increase of 9@K over the preceding year's allocation. !ere, it must, however, be pointed out that a significant share of this increase would go into paying the increases in salaries. "he finance minister also expressed the government's intention to eventually raise total resource allocation for education to :K of /.(, in a phased manner. !e further stated the government's plan to implement the constitutional provision for making primary education free and compulsory up to fifth standard, and also to go beyond and provide free education for girls up to the college level.
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2aha an ,788<- estimates that the central government's expenditure on human resource development ,!?.-, which was ?s G>,;7@ million in 78<8*8@, dropped to ?s><, 87@ million in 788>*8G. "he expenditure by the states was ?s 7,>G,7@@ million in 78<8*8@, which marginally improved to ?s 7,>8,@>@ million in 788>*8G. /iven $ndia's vast population, the number of poor and school drop*outs ,turned child laborers-, it is indeed a critical situation. Anfortunately, not much has gone into the 3ational ?enewal Fund ,3?F- either, which was originally created to impart training, retrain workers whose skills has become inade1uate or redundant as a result of technology up gradation. "he new economic programme has opened up the economy to a greater degree of international participation and investments. "he service industry has taken significant strides in areas such as tourism, hospitali5e or medicine, banking and financial services. )onse1uently, not only have more players come into $ndia, but mergers and ac1uisitions of a large number of $ndia companies have also taken place. "his has compelled $ndian companies to sit up and re*examine their strategies and practices, as also the type of business they are in. Such a shake*out is indeed in stark contrast to their attitude in the recent past, where cornering a license mattered more than a company's product or competence. 0iberali5ation has thus resulted in paradigmatic shift. ECONOMIC SITUATION AT T.E BEGINNING OF T.E -ECA-E OF NINETIES #e learnt in the previous lesson that the economic, planning in $ndia was a mixture of achievements and failures. #hile the rate of economic growth showed some increase, it was slower than anticipated. "here was not enough reduction in economic ine1ualities. (overty continued to persist and mote than one*third of the population lived below the poverty line. "he improvement in the ;uality of life was not satisfactory. $ndustrial growth, modernisation, technological developments were 1uite satisfactory. &ut there was more scope for achievements even in these areas. "he economy had made satisfactory progress in the area of building up social and economic infrastructure. (a) P%o!"#ms Some of the problems that the $ndian economy was facing at the beginning of the decade of nineties were as follows+ 14 In*"ationa%' $%#ss&%# $ndian economy was facing a strong inflationary pressure. (rices of essential commodities were rising rapidly. Since this raised the cost of living of the working class, they asked for higher wages which raised industrial costs. "he industrial costs were also rising because of the rising costs of materials. !igh industrial costs and prices were leading to stagnation in the demand for their products both in the domestic market as well as abroad. 54 S+o%ta1# o* *inanc# "he economy was experiencing shortages of finance for industrialisation etc. "here were also shortages emerging in the economy in the area of transportation, communication. "hese shortages were suppressing industrial growth.
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64 S+o%ta1# o* *o%#i1n #Bc+an1# %ne of the most important areas of shortages was that of foreign exchange. $ndian economy had experienced some rise in exports in the preceding decade. &ut the rise in imports was far more. "hus the economy demanded more foreign exchange than was available. "he prices of 'foreign currencies' were, therefore, rising persistently. 74 Un#m$"o'm#nt
'ven ihough industrial growth was taking place, employment hi industry was not increasing proportionately. 84 -#c"in# in t+# s+a%# In t+# 2o%"d t%ad# $n the world economy $ndia's share in the world trade was declining. At the beginning of the era of economic planning $ndia had > per cent share in the world trade. &y the beginning of the decade of nineties, this share had declined to less than half a percent i.e. @.9 percent. Further, in the past few decades, $ndia was experiencing an expansion of trade with former Soviet Anion and other socialist countries of 'urope. After the political changes in these countries, they were opening up their economies to the other 'uropean and industrially advanced economies. $t was 1uite clear that $ndia will have to compete with some of the industrially advanced economies of the world if it has to expand its share in the world trade. :4 .i1+#% %at# o* #conomic 1%o2t+ in ot+#% co&nt%i#s Some of the other developing countries like South Borea, (hilippines, !ong Bong, Singapore, 2alaysia, $ndonesia, )hina were experiencing a far higher rate of economic and industrial growth than $ndia. (!) Po"ici#s %#s$onsi!"# *o% $%o!"#ms $t may also be noteworthy that some of the policy measures followed in the pasAwere considered responsible for these problems of the $ndian economy. #e may enumerate some of these policy measures+ 14 54 S'st#m o* "ic#nsin1 Som# ind&st%i#s in t+# +ands o* 1o)#%nm#nt on"' /overnment was controlling and regulating the growth of industry through a system of licensing. A number of industries were meant to be developed only by the government Some of these industries notably power*generation and transmission, transportation and communication, mining, heavy machinery etc. were to be expanded only by the government 64 R#st%ictions on *o%#i1n t#c+no"o1' ' /overnment had placed several restrictions on the import of foreign technology and prior approval of the government was re1uired if an industrial enterprise was to import technology from a foreign firm. ' 74 R#st%ictions on *o%#i1n in)#stm#nt "here were several restrictions on the participation by foreign investors in the $ndian industries. "hey were not allowed to invest in any one enterprise more than >9 percent of the total capital. (rices of foreign currencies in terms of the $ndian rupee were fixed. "his was known as the ' official exchange rate. Since the demand for foreign currencies was more than their supply and the demand for
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these currencies was increasing more than the increase in their supply. "heir open market what is known as black market in our country prices were increasing.; "he growing gap between the officially fixed exchange rate and the market demand and ; supply determined exchange rate was leading to growing black market in foreign exchange, "hose who earned foreign exchange through exports of goods or services did not report their entire earnings of foreign exchange. "hose who wanted to import from abroad would prefer to obtain all me foreign exchange from the ?eserve &ank of $ndia because the official rate was lower. !ence the earnings of foreign exchange were not enough but the withdrawals were far more. 84 P%ot#ction *%om *o%#i1n com$#tition $ndian industry had been protected from competition with foreignindusuy by imposing heavy, import duties on competing foreign goods. $ndian industry had, however, not increased its competitive strength in view of this protection that it received through high import duties. For increasing exports, $ndian industry was demanding'more and more of subsidies from the government ; CRISIS OF 1>>1 AN- ECONOMIC PO(ICY REFORMS At the beginning of 7887, $ndia faced a severe foreign exchange shortage. As you have learnt in the earlier section, there was a growing gap in the officially fixed exchange rate of the rupee with other currencies and the market determined rate. Since die market determined rate was very high and was rising, there was growing incentive not to report the foreign exchange earned to the official agencies 0e. ?eserve &ank of $ndia. At the same time there was an increasing demand for withdrawal of foreign exchange from official sources because it was cheaper. "he foreign exchange reserves were, therefore, depleting rapidly. At the beginning of 7887, because of a war between Buwait and $ra1, there was a shortage of petroieum products. "heir prices rose. $ndia's earnings from these and other /ulf countries were suddenly blocked as $ndian's workers in these countries were not allowed to transfer incomes to $ndia. 2oreover, there was < large number of workers who returned to $ndia because of the war. $ndian political situation was also not very stable. "here was a minority government at the centre. "hose depositors who had deposited their foreign currency in $ndia started withdrawing their deposits. "here was, therefore, a growing withdrawal of foreign exchange. "he situation became so difficult that $ndia had to take drastic measures to meet the foreign exchange re1uirements. ?eserve &ank of $ndia mortgaged its gold reserves to borrow foreign currencies to meet the re1uirements of the country. $ndia also sought loans from the $nternational 2onetary fund. $n the domestic economy also the situation called for a change. $ndian industry needed to become more competitive and efficient so that it could compete in the world market. .ependence of exports on subsidies was a burden on the government. "he government, therefore, thought of bringing about a massive change
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in its policy. $ndustrial policy was modified. Foreign exchange control system was changed. /overnment's role in the economy was reduced considerably. #e may note some of the policy measures that were taken. (a) Ind&st%ia" Po"ic' C+an1#s -#"ic#nsin1 o* ind&st%i#s ,i- "here was a delicensing of all industries except a few whose growth had harmful impact on the environment. "his introduced an element of competition within the economy. $t was expected that there will be expansion of industry and industrial efficency would improve. ,iiFreedom to import technology $ndian industry was given freedom to import technology from abroad. $t was expected that the best technology will be imported and there will be continuing improvement in technology. ,iiiFreedom of foreign investment Foreign investors were given freedom to enter into selected industries with upto 97 percent of the total capital. "his would not only bring finance from other countries but will also help bring the latest technology, management methods etc. in $ndian industry. ,iv?estriction on large industry removed ?estrictions placed on large industry m order to prevent the growth of monopoly were removed. 0arge industrial houses were free to expand their activities in several directions. ,v$ndustries reserved for government open for the private sector $ndustries which were reserved for development by government were now opened up for the private sector except for some of the industries producing defence goods and other similar industries. (!) (i) T%ad# and Fo%#i1n EBc+an1# Po"ic' C+an1#s R#d&ction in im$o%t d&ti#s
"here was systematic reduction in import duties on several items of imports. "his increased the competition between the domestic producers and foreign producers. (ii) Im$o%t "ic#nsin1 "i!#%a"iC#d 2any of the items of imports were put on the category which did not re1uire any license for imports. (iii) Cont%o"s on *o%#i1n #Bc+an1# %#mo)#d $nitially the price of foreign currencies in terms of the $ndian rupee was raised officially. 0ater controls on foreign exchange were removed. 3ow foreign exchange is available in the open market only and there are no differences between the official and market rates. "his would compel the importers to keep the actual cost of foreign exchange in view while planning for imports. 2oreover, variations in the prices of foreign exchange will bring about a balance between the supply and demand for foreign exchange. (c) Fisca" Po"ic' C+an1#s /overnment also brought about several changes in fiscal policy. (i) R#d&ction in #Bcis# d&ti#s "here was a reduction in excise duties on a number of items. "his enabled to increase their competitiveness with imported goods for which the import duties were reduced. (ii) R#d&ction in t+# %at#s o* di%#ct taB#s
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"here was a gradual reduction of direct tax rates to improve the compliance of tax payment. $t was expected to raise the total tax revenue as it was expected that the evasion of taxes will not be beneficial any more. (iii) (i)) R#d&ction in 1o)#%nm#nt #B$#ndit&%#s Sa"# o* 1o)#%nm#nt ca$ita" "he government was expected to reduce its avoidable expenditure so as to increase its ability to invest
"he government also decided to. sell a part of the capital of some of its enterprises. "his was done to mobilise resources for meeting die expenditure re1uirements of the government. %n the whole there was a general environment of relaxation of controls, opening the sectors reserved for government, investment to private sector, opening up the economy to foreign investment and technology inflow, reduction of taxes, etc. "his has been given the nomenclature of 'liberalisationD although the government statements called the entire policy framework as the 'structural ad ustment programmeD. "he ob ective of introducing more competition among producers was to increase the efficiency of resource use, improve the 1uality of products and bring it to the international standards. "he relaxation of controls on imports, opening up of industries to foreign investment and measures to encourage the foreign capital to build up industries in $ndia has been called 'globalisation' programme. "en ob ective of these measures is to make the $ndian industry competitive in the world market and find more and more avenues for export ECONOMIC REFORMS AN- T.E RO(E OF ECONOMIC P(ANNING $n this part of this lesson, we shall learn about the effects of the new economic policy adopted in 7887 and later on the role of economic planning in $ndia. 0et us recall the economic planning in $ndia had certain ob ectives before it #e have also learnt that the achievement of these ob ectives was a mixed bag of successes and failure. $t is, therefore, important for us to ask whether the new economic policy will facilitate the. achievement of those ob ectives at a greater speedE #e have noted that the new policy or the economic reform is aiming at acceleration in growth of the industrial sector. "he new policy aims at reducing and eliminating all the difficulties that may have been created by government controls on the growth of the $ndian industry. %nce again the emphasis is rapid industrial growth so that economic growth also becomes rapid. &y reducing the controls and regulation of the economy the government is expecting that the economic progress will be faster. "he need for fast economic progress is as strong as it was in the decade of fifties when economic planning was started. "he only change is the change in policy to ensure fast economic progress. $t is, therefore, that the then Finance 2inister, called die new industrial policy as a 'policy of change with continuity'.
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(a) Ro"# o* t+# 1o)#%nm#nt %#d&c#d Since the role of government in the economy has been considerably reduced, it is now limited to indicate the targets to be achieved during each five year plan. "he fulfilment of those targets is now the task of private sector. $t is, therefore, that the eighth five year plan stated that now the nature of economic planning in $ndia is 'indicative planning'. &ut as we have already learnt that economic planning does not aim at securing a higher growth rate. "he. basic ob ectives of reduction of economic ine1ualities, self*reliance, modernisation, reduction of unemployment and balanced regional growth are e1ually important. 'conomic growth without the fulfilment of these other ob ectives will not result in the economic progress that the economy needs. (!) P%i)at# s#cto% to ta3# initiati)# "he new policy is leaving the economic growth to the initiative of the private sector. Since private sector is motivated by 'the desire for profit making' the rate of economic growth will depend upon its ability and capacity to earn profits. &ut such a policy can lead to the ine1ualities increasing over time rather than reducing. /overnment will, therefore, have to step in to reduce ine1ualities. (c) T+# n#2 %o"# o* 1o)#%nm#nt
"he need for eradication of poverty is as strong as ever. "he role of economic planning to start and cany on programmes for the elimination of poverty and improvement in the 1uality of life will now be the responsibility of the government. "he new policy also does not ensure that unemployment will be reduced. "he private industry will adopt technology which enables it to earn more profits and not necessarily create more employment opportunities. ?eduction of unemployment will, therefore, depend upon how 1uickly does industry expand and how far does it spread. /overnment will have to take steps to encourage industry to spread rapidly and into various states as well as rural areas. "hus, the role of economic planning is not reduced by the adoption of the new economic policy. $t is only changed. "he government will not be concentrating on increasing industrial production itself now. $t will be concerned with making plans such that industrial progress is accompanied by reduction of ine1ualities, removal of poverty, reduction of unemployment and balanced regional growth.
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(age 49

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underdeveloped or developing countries are either unutili5ed or remain under utili5ed.

institution. III4 PROCE-URES FOR IN-USTRIA( APPROVA(S

b. Foreign $nvestment. c. Foreign "echnology (olicy

d. (ublic Sector (olicy e. 2?"( Act. .

developed technologies, d4 P&!"ic S#cto%

which managements would be granted and will be held

SCOPE OF T.E ACT

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