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Articles> Economics > Industry

A bird's eye view of Indian Industry

(Circa : Pre 1947 to 1997)
Rohit Vishal Kumar

CONTENTS
Chapter 1
Bombay Plan
Chapter 2
Industrial Development and Regulations Act - 1951
Chapter 3
Fifty Years of Industrial Policy
Chapter 4
New Industrial Policy- 1991
Chapter 5
Growth and Concentration of Economic Power
Chapter 6
Monopolies and Restricted Trade Practises Act - 1969
Chapter 7
Stagflation in the Indian Economy

References


Chapter 1 : Bombay Plan

Introduction
India, in the period prior to 1947 was, in every word of the way, a devastated economy. Blatant extortion of wealth by the colonial powers had seen India's per capita income decline by 9% over 1905-35, leading to growth in poverty. It was a predominantly rural economy with a low level of technological and task force development. Industry - besides jute and cotton - were negligent. Railway, which had an extensive network, was developed for military and famine reasons. It had a bad effect on Agriculture as agriculture prices converged and Indian agricultural markets became susceptible to world prices, leading to growing exports of food grains.

Under these circumstances in 1942-43 a group of leading industrialist, mostly from Bombay, and notably amongst them Tata’s, Birlas and Purushottamdas Thakurdas presented, "A plan for economic development of India". The plan, more commonly known as the Bombay plan, is a historic document, which accurately highlights India's plight and suggests sustainable ways to relieve them over a period of 15 years. It is no accident that the echoes of the plan can still be found in Indian Planning. Here in a nutshell we present the plan.

Aim and Objectives of the Plan
In the words of its authors "...The object of the plan is to put forward a basis for discussion, in as concrete form as possible, of the objectives to be kept in mind in economic planning in India, the general lines on which development should proceed and the demands which planning is likely to make on the country's resources."

They assumed that after the end of W.W.II or shortly thereafter, India will achieve Freedom and a national government will come into existence which will have full freedom in economic matters. This government will have Federal basis, with states as an intermediate links. There will be a national planning commission with responsibilities for drawing up plans and a supreme economic council, working in tandem with the planning commission to execute the plan. The plan was based on an explicit assumption That Indian population will grow at the rate of 5 million per annum.

The main objective of the plan was the doubling of the per capita income within 15 years of implementation. This, according to the planners, necessitate a trebling of aggregate national income which would be achieved by doubling agriculture output, and raising industrial output 5 times at the end of the plan. The core of the plan was to guarantee a minimum standard of living to the population and after that generate industrial growth.

They anticipated that implementation of the plan would face many difficulties as most of the objectives may run counter to the deep seated prejudices and tradition. They also foresaw that political bickering may divert attention from the real problems of the country. Also they anticipated that India, after the war, may not have enough resources to carry out the development as required.

Plan Outline
The crux of the plan lay in raising the income level of the populace to such a level "... that after meeting the minimum requirements, every individual will be left with enough resources for enjoyment of life". This, they believed, to be a must for the economic development of the country. They have then gone on to lay down the parameters of minimum standard of living in the fields of :

For reasons of space we are not delving deeper into the details of raising the standard of living. Side by side they saw developments in Agricultural, Industrial and services sector.

Agriculture Developments
Agricultural sector was to be left more or less unchanged, because according to them the demand of food crops would be more or less inelastic. But the demand for raw materials to industry was to increase substantially. They proposed corrections in the area under cash and subsistence crops so that the minimum requirements of food required to meet the living standards were met. Consolidation of land holding without depriving the landowners their right to ownership and co-operative farming were advocated. They were not averse to the use of "measures of compulsion" to bring about the desired change.

They further advocated that long term debt should be made freely available to that sector. Irrigation, Crop Rotation, High Yielding Seeds, Manure were to be used in agriculture, in a scientific manner, to increase the yield per acre. They also advocated the development of Model Farms - 1 per 10 villages - for popularisation of improved methods of cultivation, animal husbandry and veterinary practices.

Industrial Developments
Industry was classified into two major groups :

Development of power was given top priority because they believed that no industry could develop without it. They admittedly were influenced by the strides Soviet industries had made after the completion of Golero i.e. the plan for Soviet electrification. To bring about such a change in India they suggested tapping into massive hydro electric energy available in the country, then estimated at 27 million kilowatts.

The Basic industries were to play the role of engine of growth with the Consumer goods Industries supplementing them by producing goods required for daily consumption and freeing the basic industries to concentrate on projects of industrialisation. Small Scale Industries were to act as an integral part of Large Consumer Goods Industries in an effort to reduce unemployment and need of capital - particularly external capital.

They also advocated the development of Transport and Communications facilities. According to them "...Trade and consequently development will not be possible until and unless Transport and Communications developed". They proposed 50% increase in railway mileage - from 41,000 miles to 62,000 miles - and 100% increase in Roads - from 3,00,000 miles to 6,00,000 miles, over the next 15 years. Coastal Shipping was to be improved by improving the small natural harbours which dot Indian Coastlines.

Financing of the Plan
For financing of the expenditure they relied on 5 major instruments. They are :

Creation of money was to be the last resort, because they foresaw the problem of inflation that would occur and which may derail the plan. Rather than going in for massive amount of money creation, they had recommended curtailing down plan targets to maintain harmony between growth and inflation.

Execution of the Plan

Basic industries should be built on a scale that is no larger than what is strictly necessary for economic working of the economy and whic could come into production in a short time and lend themselves to regional distribution.
Conclusion
This, in essence, is the Bombay Plan, which although not an official document, reflected very well the problems of India and proposed a sensible methods for their solution.
 
Chapter 2 : Industrial Development and Regulations Act - 1951

Synopsis
Industrial (Development and Regulations) Act (IDRA) was passed in 1951 in the early stages after Independence. India had an ideal of socialistic model for development and growth. Planned economic growth was the goal. It introduced industrial licensing for proper industrial growth. It was also found that some industries were becoming sick due to mismanagement and or other reasons. Provisions were therefore made to take over such units. Uptil 1975 many industries were nationalised. However it was observed that the policy of compulsory industrial licensing was stifling industrial growth instead of promoting it. India was quickly turning into a "license & quota Raj". Many industries, which were taken over by the government and the Public Sector Undertakings(PSU) were fast becoming models of inefficiency and corruption. Realising this the government has not taken over any unit for the last 15 years except for Bombay cotton mills a few years back.

New Industrial Policy (NIP) announced in July 1991 has made radical departure from earlier policies. Most of the industries barring a few are delicensed. IDRA has lost most of its significance in the present situation. But as the act is neither repealed nor modified substantially, legally it is still binding very much on Indian industries and as such is very much relevant.

Purpose of IDRA
The purpose of the IDRA is to implement the industrial policy. It provides for development and regulation of major industries. It envisages a balanced growth all over India and optimum use of available resources and infrastructure. It also sees that industries do not suffer from financial mismanagement, technical inefficiency and/or operational defects. In certain cases the act provides for investigation by central government (CG)in cases of mismanagement and maladministration. The act is applicable to the whole of India.

Constitutional Background
As per the Constitution of India, industries - excepting those relating to Defence or prosecution of war - is a state subject. But again, entry 7 of list 1 to 7th schedule, gives the Centre the power to bring "industries, the control of which is declared by law to be expedient in the public interest" under its purview. This power was used extensively and by the time IDRA was passed, 38 industries covering virtually all types of industries were brought under the purview of the central government.

The act can be divided into the following major heads :

A) Licensing and Registration

Section 10 of IDRA envisages compulsory licensing of all industries. Licensing is also required by units … :

The license can be revoked by the Central Government if the licensed undertaking did not take effective steps for implementation of the license agreement. The license can also be revoked if the industrial undertaking fails to conform to the environmental laws of central and stare governments and local regulations regarding zoning and land use regulations.

Companies not under Schedule A (i.e. compulsory licensing) are to submit information only on prescribed forms called Industrial Entrepreneur Memorandum (IEM) Form to the Central Government. Small Scale industries (SSI) and ancillary industries are exempt from submitting any such memorandum. However all industries - both licensed and delicensed - have to submit monthly returns to various Central Government departments. SSI's and ancillary units have to submit it to various proscribed State Government departments. Also, license may still be required from other authorities under whose purview the industries may fall. e.g. Directorate of Food Preservation, Controller of Drugs etc.

Section 10(1) of IDRA has compulsory registration of all industries, except those started by CG itself. Any change in production capacity required compulsory re-registration.

B) Control over Industries

IDRA gives Central Government massive powers for exercising control over industries. The Central Government, if it so wishes, could :

  1. Regulate Supply and Prices: Central Government can provide for regulating supply and distribution of any industrial article by issuing a notified order under Section 18-G(1) of the Act. Such orders can be for :
It should be noted that as per section 18-G(4) of the act, orders made under this section cannot be challenged in any court.
  1. Investigation of schedule industries:
Central Government can order full and complete investigation of any industry or industrial undertaking, if it is of the opinion that After making its investigations the Central Government can issue directions for : C) Take over and management of Industries

Central Government can take-over any industry or industrial undertaking, in whole or in parts thereof, if the industrial undertaking fails to follow the directions issued after investigation and/or regulation or if the said industry is managed in a highly detrimental way. Such orders can be issued for an initial period of 5 years, extendible for 2 years at a time, subject to the provision that such extensions shall not exceed 12 years beyond the initial 5 year period.

It can also take-over a company without investigation if it thinks that the company is indulging in fraud, or the unit is closed for 3 months. However any industry which is being wound up under the supervision of the High Court cannot be taken over under this provision.

After take-over the persons holding the office of managers and directors shall have been deemed to have vacated their offices and government nominated persons take control. The removed managers and directors are not entitled for compensation. Contracts made previous to take-over can be re-evaluated and those deemed to be detrimental to the undertaking can be cancelled without any residual obligation(s). The shareholders ceases to have any powers and the government is the sole owner proprietor as far as law is concerned.

The take-over order can be cancelled anytime when the government feels that the reason for take-over has been rectified and then the previous management could take charge.

The IDRA also goes on to describe the provisions for liquidation, reconstruction of industries and other laws and bye laws as required, but the crux of the act lies in the above 3 main head.

New Industrial Policy and IDRA:
With the introduction of the New Industrial Policy in 1991, the IDRA underwent a major sea change. The main changes, could be classified under the following three heads and are as follows :

A) Delicensing of Industries

5 industries, listed in Annexure I, viz. - Arms and Ammunitions and allied Defence equipment’s, Atomic Energy, Coal and Lignite, Mineral Oils, Minerals and Railway Transport - have been kept exclusively for PSU's. Even this is being pruned as upto 13 mineral and mineral bearing areas have been deregulated.

Only 15 industries, listed in Annexure II, require compulsory licensing. They are - Coal and lignite, Petroleum and distilled derivatives, Alcoholic Drinks, Sugar, Animal Fats and Oils, Cigars and Cigarettes, Asbestos and allied products, Tanned or Dressed Fur skins & Chamois Leather, Paper and Newsprint, Electronic, Aerospace and Defence equipments, Industrial Explosives, Hazardous Chemicals, Entertainment Electronics and Drugs. In the new Drug Policy, only 5 drugs have been kept for PSU's and drugs involving recombination technology will require license. All other drugs are delicensed.

This list, as can be seen, covers industries that are sensitive from security, Defence and or scarcity point of view. License, thus, is not required if :

  • All the industries have to fill up the IEM form and submit it to the government to start a business. Carry on Business license is required if there is substantial expansion in production capacity. Monthly production returns have to be submitted to concerned CG authorities for all non SSI units. SSI and ancillary units have to submit the returns to State government authorities.

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    B) Policy regarding Foreign investment

    Automatic approval up to 51% in priority industries which are listed in Annexure III subject to the restriction that the foreign equity should cover :

    Companies not covered in Annexure III and not eligible for automatic approval, can apply to foreign investment promotion board for Subject to the above approval to be granted within 6 weeks. Dividend balancing is allowed, for industries in Annexure III, for a period of 7 years from the date of commencement of the project

    Raising foreign equity in existing companies can be done directly through application to RBI. 51% foreign investment is permitted in trading companies predominately engaged in export activities. Existing trading companies are allowed to automatically increase foreign share holding if they are registered as export houses, trading houses, star trading houses with the ministry of commerce. New companies seeking to do so will have to register themselves as exporters / importers.

    Foreign investment in SSI is allowed upto 24% by other industrial undertaking, with normal approvals. If the investment rises above 24% then the SSI automatically looses its status as a SSI.

    Development of Export Oriented Units(EOU), Export Processing Zone(EPZ), Electronic Hardware Technology Park(EHTP), and Software Technology Park(STP) have been promoted. The industries settled in these areas are allowed special privileges. Thy can bring in raw materials without paying custom duties, but in return they have to export 100% of their production. Alternatively they can sell 25% of their product within India (called Domestic Tariff Area - DTA) if they pay 50% of import duties. 100% foreign investment is permitted.

    Foreign Technology Agreements (FTA) is permitted in all industries in order to promote technological dynamism in India. The prescribed limits of royalty are as follows : " Lump sum payment upto Rs. 1 Cr. 5% royalty on domestic sales + 8% royalty on export ".

    However total royalty should not exceed 8% of sales over a 10 year period from the date of agreement or 7 years from commencement of production. Approval for FTA is automatically given within 2 weeks. NRI and Overseas Corporate Bodies(OCB) are provided extra facilities over and above what industry normally gets. They can fully repatriate capital invested and accruing thereon and they can sell off their equity anytime.

    C) Other Relaxation’s

    Hiring of foreign technicians is permitted without any prior approval of the Central Government. Indian technicians can be deputed abroad for training and other purposes. Foreign Exchange to be released directly by the authorised dealer within RBI prescribes limits.

    Raw materials and products manufactured with indigenous developed technology can be sent abroad for testing without prior CG approval. Foreign Exchange to be released directly by the authorised dealer within RBI prescribes limits. Foreign brand names / Trademarks are allowed to be used on goods for sale in India without any restrictions - subject to the approval of the original owner of the brand name / trademark and as per the Indian Trademark act.

    Conclusions
    Thus these are the main provisions of the IDRA. The act itself is a huge document, as any act in India is, but in the above few pages we have hoped to capture the essence of the act which gives us a powerful insight into the functioning’s of the Indian industry and Indian industrial policy, as a whole, in the pre and post liberalisation periods.
     
     
    Chapter 3 : Fifty Years of Industrial Policy

    Background
    In India, the Directive Principles of State Policy, given in the Indian Constitution, and the adoption of the socialist pattern by the Parliament in 1954 provided the general thrust for social and economic policies, which in turn affected the industrial scenario of the country. The IDRA - 1951, already discussed above, provided the main thrust to the industrial scenario till liberalisation in 1991. Coupled with this, were various policy resolutions passed from time to time, to keep industrial policy in the desired direction. We shall study the various policy statements in some details.

    Industrial Policy Resolution 1948
    This was the first formal enunciation of the relative roles of the Public Sector and the Private Sector in the industrial field. It stated that any improvement in the field of economic condition of the country required an increase in the national wealth and not just redistribution of wealth. In bringing about this increase in wealth, it envisaged an active role of state in the development of industries. It formally grouped industries into 4 categories:

    Category 1: Arms and Ammunition, Atomic Energy, Rail Transport.

    This category was under total central government control and no participation in this sector was envisaged from the private sector and or the state governments. State governments could petition the Centre for setting up an industry in their state, if it felt under this category, but the final say was always with the Central government.

    Category 2: Coal, Mineral Oils, Iron & steel, Aircraft and Telecommunication.

    The state was to have exclusive provision, except where it thought that it is advisable for the Private Sector to participate. This was also the "Dual Category" because quite a few Private Sector giants were already operating in this category. To protect their interests, the Government announced that they would be allowed free growth for 10 years, at the end of which their performance would be evaluated and if it was found necessary to nationalise, in whole or in parts, any industry full and fair compensation would be paid. This paved the way for unhindered development and investment by the existing private sector industries.

    Category 3: Automobiles, Tractors, Prime Movers, Electrical Engineering, Heavy Machinery, Fertilisers, Cement, Paper, Salt, Air and Sea Transport etc. There were in all 18 industries in this head.

    The government felt that for industries in this category, planning and regulation was essential, in the national interest.

    Category 4: All other industries.

    Consisted of the reminder of the industries, which were left for private enterprises, but where the state "would not hesitate to intervene, whenever the progress of that industry was unsatisfactory."

    The Policy Statement ascribed to the government the responsibility of providing facilities in form of removal of bottlenecks, protection from unfair foreign competition, encouraging productive investment, facilitation of imports of essential raw materials etc. Small Scale industries were ascribed an important role to help develop village, individual and co-operative enterprises.

    The declaration of the governments industrial policy, within 8 months of independence, helped remove the uncertainties facing the industrialist regarding the role of public sector. The announcement that existing industries in category 2 would not be nationalised for a period of 10 years, also paved way for more productive investments.

    In December 1954, Parliament adopted the socialistic pattern of development. This meant that the basic criterion for determining lines of advancement would not be private profits, but social gains, and that economic development should not result in increase in national income but also in greater equity in income and wealth.

    Industrial Policy Resolution 1956
    The introduction of the 2nd Five Year Plan in 1956 necessaciated changes in industrial policy. It stressed that all industries of basic and strategic importance, public utilities and any other industry which required investment on a scale which only a state could provide must be in public sector. It reclassified industries into three (3) categories

    Schedule A: (i) Arms and Ammunition, (ii) Atomic Energy, (iii) Railways, (iv) Air Transport, (v) Iron and Steel, (vi) Heavy plant and machinery, (vii) Heavy electrical plant, (viii) Aircraft, (ix) Shipbuilding, (x)Coal and Lignite, (xi) Mineral Oils, (xii) Mining of Iron ore, Manganese, Chrome, Gypsum, Sulphur, Gold and Diamond, (xiii) Mining and processing of Copper, Lead, Zinc, Tin, Molybdenum, and Wolfram, (xiv) Minerals specified in the schedule to the Atomic Energy order, 1956, (xv)Telephones, Telephone Cables, Telegraphs, Wireless Sets (excluding Radio Receivers), (xvi) Generation and distribution of Electricity (xvii) Heavy casting and Forging

    There were in all 17 industries in schedule A. The first four industries were to be government monopolies. In the rest 13 industries, all new units would be started by the State government only.

    Schedule B: (i) All other minerals except minor minerals (ii) Aluminium and other non ferrous metals not included in schedule A (iii) Machine Tools (iv) Ferro Alloys and Tool Steel (v) Basic intermediate products required by the chemical industry (vi) Antibiotic and other essential drugs (vii) Fertilisers (viii) Synthetic Rubber (ix) Carbonisation of Coal (x) Chemical Pulp (xi) road Transport (xii) Sea Transport.

    There were in all 12 industries in this categories. In these categories, the state would increasingly establish new industrial units without denying private sector the opportunities.

    Schedule C: Covered all other industries whose future development would be left to the initiative and the enterprise of the private sector.

    While reaffirming the rights of the state to start any industry, the resolution stressed that the states main role would be to facilitate and to encourage development of those industries by adopting appropriate fiscal methods and provision of services and financial assistance. It allowed the Central and the state government to have equity participation in the above industries, either directly or through co-operation with other industries. It also emphasised the reduction of natural disparity and supported the idea of balanced and co-ordinated growth between agriculture and industry. It stressed on improving the working and living conditions of the workers. It also encouraged workers participation in management and maintenance of industrial peace. It also reaffirmed its policy of 1948 towards SSI and other mini industries.

    The effect of this resolution was enormous. The share of PSU investment in the total investment was raised from 46.4% in the 1st plan to 56.6% in the 2nd plan. It went on increasing and in subsequent plans was well over 60.0%. Implicit in the second plan resolution was the assumption that PSU contributed not only to the attainment of socialistic objectives but also provided rapid growth. This motion without any major change continued to dominate Indian planning for a long time, despite repeated failures by the PSU’s to fulfil the role it was envisaged for.

    With the submission of Dr. R. K. Hazari’s report on the growth of Indian Business Houses and other subsequent studies which conformed the growth of monopoly concentration in India, the focus shifted from defining the role of public sector to containment of the growth of the private industrial houses.

    Industrial Licensing Policy 1970
    This was the first licensing policy statement, and was specifically aimed at restricting the growing concentration of monopoly power in the hands of the private business houses. The IDRA 1951, which made licensing compulsory got new weapons to combat the growth of monopoly houses. The following changes were announced in the licensing policy :

    The government became amenable to the concept of Joint Sector. There was a marked shift in economic policy, as the government moved more and more towards acquiring the "commanding heights" of the economy. 14 commercial banks were nationalised in 1969. In 1972, 214 cooking coal mines and 12 coal mines were nationalised. In 1974, 103 sick textile units were nationalised.

    Industrial Policy Statement 1973
    This was an interim statement to update the Industrial Licensing Policy of 1970 and to reflect the governments stance to the 5th Five Year Plan. A new list of 19 groups of industries were inducted in the "core" sector. Co-operation in small and medium investment areas were encouraged. Secretariat for Industrial Approval (SIA) was set up to take complete charge of licensing from the stage of application to actual issue.

    No explanations were given as to how the "core" list was determined, nor how industries such as detergent, record players or decorative plywood, were inducted into the core sector and declared to be of basic, critical, and strategic importance.

    Industrial Licensing Policy 1975
    This was the first Industrial Policy to see some sort of liberalisation. Twenty One (21) industries were delicensed. It permitted unlimited expansion beyond the licensed capacity to monopoly and foreign houses in industries such as drugs, cement, papers, chemicals, and fertilisers. Entrepreneurs not under the MRTP Act would not be required to obtain a license up to Rs. 1.00 crores in the case of new units, and up to Rs 5.00 crores in the case of expansion. The government also announced the regulations of unauthorised capacity installed by monopoly and foreign houses. 25% of excess unauthorised capacity was declared as legal on the basis of normal expansion, another 25% was sought to be covered in the next 5 years by automatic licensing.

    Industrial Policy Resolution 1977
    This policy, announced by the Janata government in 1997, was heavily biased towards the SSI and the tiny sector. The exclusive items reserved for the SSI’s were increased from 180 to 807 items. Tiny sector i.e. units with investment upto Rs. 1.00 lakhs and situated in towns and villages with population less than 50,000 were given special consideration. District industrial centres were to be set up to serve as focal points of development to SSI and the tiny sector.

    Large business houses were required to rely on internal resources, for financing new projects or for expansion, instead of relying on Public Financial institutions. New units in urban areas of population of more than 5 lakhs were banned. Assistance was provided for setting up industries in backward regions.

    Export oriented projects were to be considered favourably and were exempted from customs and excise duties, provided they generated additional employment. Sick industrial units would be taken up selectively.

    For the first time in the history of Industrial Policy statements, the emphasis was not on categorising industries, nor on demarcating spheres of influence, but on employment generation and regional dispersal of industries; a prerequisite to balanced industrial development.

    Industrial Policy Statement 1980
    With the return of Congress to power, the flavour of industrial policy also changed. The statement of 1980 decided to increase the limits of investment in various industries to bring them in tune with the erosion of rupee values. The Tiny sector investment limit went up from Rs. 1.00 lakhs to Rs. 2.00 lakhs, SSI went up from Rs. 10.00 lakhs to Rs. 20.00 lakhs and ancillary industries went up from Rs. 15.00 lakhs to Rs. 25.00 lakhs.

    This was done with a view to boost the development of these industries and eliminate the tendency to circumvent the present limit by understating the value of plant and machinery.

    The policy of not granting licenses in areas with more than 5 lakhs population was revoked, on the grounds of "maximising production". The government would recognise additional capacities as a result of increased labour productivity or technical improvements to permit automatic approval upto 25% of the approved capacity. 100% EOU’s would be given top priority. The emphasis was on production and to automatic increase in capacity to 50% of the existing limit within the next 5 years, in many cases, without the approval of MRTP.

    Conclusions
    Thus we can see, that with the passage of time the objectives of the industrial policy of India has been consistently changing. The policy resolutions of ’48, ’56 lay great stress on demarcating the spheres of Public and Private influence. The policy statements of 1970 and ’73 were oriented towards regulating the growth of Private industries through licensing regulations. The statements of 1975 and 1980 lay great stress on maximising production. They have also been affected by the mood at the Centre, as the policy resolution of 1977 shows.

    The New Industrial policy has been put into another section by itself, so that it could be dealt with in a fair and square manner.
     
    Chapter 4 : New Industrial Policy - 1991

    Introduction
    Beginning with mid 1997, the Government of India made some radical changes in its policies of trade, foreign investment, exchange rate, industry, fiscal affairs etc. These various elements when put together constitute an economic as well as industrial policy which marked a big departure form the old policy. Hitherto, the major policy announcement of 1956 ,with minor changes held ground.

    Objectives of the New Industrial Policy
    The overall aim of the policy was to achieve a sort of development which would made industries dynamic in their growth and which rendered social justice. To quote the policy statement, it involves a "struggle for social and economic justice, to end poverty and unemployment and to build a modern, democratic, socialist and forward looking India."

    The 3 key words to the NIP of 1991 were LPG i.e. Liberalisation, Privatisation and Globalisation. The main thrust of the policy was in these areas, and the major policy reforms were with regard to these sectors primarily.

    1) Liberalisation:

    The NIP laid a lot of stress on the market forces and a market driven economy. It intended to dismantle the restrictive and regulatory system and thereby "unshackle the industrial economy from the cobwebs of unnecessary bureaucratic control". This was to allow private entrepreneurs to venture into any industrial sector based on their own commercial decisions with no government judgement to bind them. In the absence of Government controls these decisions were in terms of market prices and profits. The market-oriented environment would also foster co-operation among those who would now compete to take advantage of the market opportunities.

    In other words, allocation of resources among industries with respect to the scale, size of production and the nature of the product would be determined by market prices. The role of the state was confined to selected non-market areas-largely to ensure a smooth functioning of the market economy.

    2) Privatisation:

    The NIP aimed at strengthening the private sector in a big way. As has been mentioned earlier the thrust of the NIP was a market driven economy ; so in line with that objective, the new policy provided for the privatisation of the public sector units(PSUs).

    The most important criticism levied against the public sector has been that, in relation to the capital employed, the level of profits are too low. The Eighth Five Year Plan notes that the public sector has been unable to generate adequate resources for sustaining the growth process. It was argued that all the problems confronting the public sector could be handled effectively if they were handed over to the private sector. Such a transfer, it was said, would promote competitive efficiency, reduce political interference, produce higher quality products, provide better quality services, reduce wastage and optimise resources.

    The NIP provided for an enlargement in the field of operation of the private sector (and a contraction in the fields of operation of the public sector). A number of activities (17 in number) which so far had been the exclusively in the realm of the public sector were thrown open to private sector. Only 8 industries where security and strategic concerns predominated were reserved for the public sector under the new policy.

    The Government also, to a certain extent, privatised the ownership of the PSUs. This was done by the sale of a part of the capital of some enterprises through mutual funds etc. Thus by disinvestment of a part of the capital, the Government made the public enterprises accountable to the private sector criterion, namely market-related profits.

    3) Globalisation:

    The NIP took great steps towards the integration or the unification of the Indian economy with the world economy. It made the economy outwardly oriented so that its activities were now governed both by the domestic as well as the foreign market.

    The first step in this direction was the decision to do away with the artificially controlled overvalued exchange rate of the Rupee, and to bring it down to more realistic levels in terms of domestic as well as world price levels. The rupee was also made fully convertible on current account of the balance of payments. The high custom duties on imports were also reduced with a view to bring them in line with custom duties of other countries. In the field of exports too there is a much larger area to operate upon.

    As in the case of domestic industrial investment, foreign investment had also been traditionally regulated in India. In the case of foreign technology agreements or investments sought by Indian firms, it was necessary to obtain prior approval for each specific project. However, in the NIP of 1991 the doors of the Indian economy were thrown open to foreign investment. Foreign investors were allowed to have 51% equity holdings.

    All this adds up to an ‘open’ economy with respect to the movements of exchange rate, foreign exchange, imports, exports and foreign direct investment(FDI).

    Features of the Industrial Policy of 1991
    To achieve the aforesaid objectives the Government of India made a series of policy announcements which paved the way to a global, market driven India which was far more attractive to foreign investors than the strictly regulated and closed economy that India was, prior to the announcement of the NIP of 1991. Some of the main features of the NIP are being discussed below :

    A) Abolition of industrial licensing:

    In a major move to liberalise the economy the Government Of India abolished all industrial licensing irrespective of the levels of investment ,except for certain industries(18 in number) for security and social concerns.
    In the past, the main instrument of industrial planning was the mechanism of licensing capacity creation in a planned manner. The main objectives of the licensing policy were

    However, none of these objectives were fulfilled by licensing. On the other statistics point to the contrary i.e. there has been an increase in the concentration of economic power, capacity utilisation of the licensed industries was not achieved, and licensing has tended to increase regional inequalities.

    Hence, to do away with the main entry barrier in the manufacturing sector the Government Of India announced a more or less across the board abolition of licensing - thereby giving a big boost to the manufacturing sector. Entrepreneurs were now free to enter and invest in most of the industries and operate without requiring any prior permission of the Government Existing industries will also be able to expand their capacities according to the market needs without obtaining prior approval or capacity clearance from the Government

    In April 1993, the Government exempted three more industries from licensing-leaving only 15 industries in which licensing is compulsory. With this step ,almost 80% of the industry has been taken out of the licensing framework, much to the relief of the Indian businessmen and entrepreneurs.

    B) Removal of the MRTP Limit:

    Under the MRTP Act, all firms with assets above a certain limit (Rs. 100 crores since 1985) were classified as MRTP firms. Such firms were permitted to enter selected industries only and this also on case-by-case approval basis. In addition to control through industrial licensing, separate approvals were required by such large firms for any investment proposals, expansion of existing capacity, establishment of new undertakings, mergers, amalgamations and take-overs.
    The new Industrial Policy scrapped the threshold limit of assets in respect to MRTP and dominant undertakings. These firms were now at par with other firms and would not require any prior permission for entry or expansion into the delicensed areas. However firms holding more than 25% of the market share are now identified as ‘monopolies’ and the emphasis has now shifted to taking appropriate action against monopolistic and unfair trade practices. In this sense it not only strengthened the MRTP Act but also increased its scope.

    3) Dilution of the role of the Public Sector:

    In the old industrial scenario ,the public sector had been assigned a greater and more crucial role in the development of industries relative to the private sector. It was the public sector which had the responsibility of infrastructure development during the first few years of Indian Independence. It was encouraged to form a strong industrial base in the country involved heavily with industries requiring huge investments which the private sector was not able to provide then.
    Although, profits are not the criterion for judging the performance of public sector enterprises their financial performance for of wide interest and concern as they were set up at huge costs to the national exchequer. It was in this area with respect to profits that the performance was abysmal. The gross profit as a proportion of capital employed fell from 12.10% in 1981-82 to 11.69% in 1991-92 while net profit as a proportion of the capital employed increased by a small margin from 2.03% in 1982-82 to 2.09% in 1991-92. In view of the many problems suffered by the PSUs, the NIP seeks to examine their placing in the economy. It aims at repositioning the public sector and giving more importance to the private sector.

    The number of industries reserved for the public sector since 1956 was 17. Among the industries reserved earlier were core industries like iron and steel, electricity, air transport, ship building, heavy machinery industries. The NIP has removed all these industries from the Reserved List reducing the number of reserved industries to 8. Industries which continue to be reserved for the public sector are in areas where security and strategic concerns predominate.

    The NIP also states that the Government will review the existing public enterprises in low technology, small scale and non-strategic areas and also in areas where there is low or nil social consideration or public purpose.

    Enterprises which are chronically sick and which unlikely to be turned around will be referred to the Board for Industrial and Financial Restructuring (BIFR) or other similar high level institution for advice about rehabilitation and reconstruction. Enterprises remaining in the public sector, it is stated, will be provided a much greater degree of management autonomy through the system of Memorandum of Understanding (MOU).

    Moreover, the Government Has announced the disinvestment of public holdings to the extent of 20% of some PSUs through mutual funds etc. A beginning in this direction was made in 1991-92 itself by divesting part of the equities of 30 selected PSUs (which were placed with mutual funds) and Rs. 3000 crores was raised through these means.

    The NIP indicated the Government’s intention to invite a greater degree of participation by the private sector in the important sectors of the economy.

    4) Entry of foreign investment and technology:

    The NIP envisaged a broader role of foreign investment and capital in the industries. Hence, the NIP had a specific list of high technology and high investment priority industries wherein automatic permission would be available for FDI up to 51% foreign equity. The list contained 34 industries in which firms, capable of financing their capital equipment imports through foreign equity, were allowed to invest up to the extent of 51% of the equity. This was a major departure from the earlier policies which required case-by-case approval of foreign investment normally limited to 40% equity participation.

    5) Industrial location policy liberalised:

    In a departure from the then prevailing location policy for industries, the new industrial policy provides that in locations other than cities of more than 1 million population, there will be no requirement of obtaining industrial approvals from the Centre, except for industries subject to compulsory licensing.

    6) Removal of mandatory convertibility clause:

    A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions followed a mandatory practice of including a convertibility clause in their lending operations for new projects. This has provided them with the option of converting part of their loans into equity. This option has always been interpreted as a threat to private firms of take-overs from financial institutions. The NIP provided that henceforth financial institutions would not impose this mandatory convertibility clause.

    7) Abolition of phased manufacturing programmes for new projects:

    To force the pace of indigenisation in manufacturing, phased manufacturing programmes had been in force in a number of engineering and electronic industries. The NIP abolished such programmes in the future as the Government Felt that with substantial reforms made in the trade policy and the devaluation of the Rupee, there was no longer any need to enforce local content requirements on a case-by-case basis.

    Appraisal of the New Industrial Policy
    It was noted that the period of the eighties was marked by industrial recovery after a phase of industrial deceleration spanning over almost a decade and a half. Some economists argued that a major factor accounting for this recovery was the series of liberalisation measures announced by the Government in the eighties. Looking at the NIP from this point of view it can be easily argued that more liberalisation would result in still faster industrial growth in the future.

    Some important benefits expected from the NIP are enlisted below :

    So, the economy required technological upgradation, improvement in management etc. to do away with these inefficiencies. With the removal of controls and restrictions the NIP would promote individual entrepreneurs and this increased competition would also help in promoting industry in India. The privatisation of the PSUs and the entry of FDI would also bring about an improvement in efficiency.
    Chapter 5 : Growth& concentration of Economic Power

    Introduction
    Dr. R. K. Hazari submitted his report "Business Houses in Indian Industry" in 1960 and the submission of this report led to immediate reaction from the government. The report, more commonly known as the Hazari Report, was a meticulously researched work on the Indian industries and the growth and concentration of economic power in their hands over the period of study (1951 - 1958). IF the report was true then the Indian government faced deep trouble, because the report pointed to the failure of the licensing mechanism - a potent weapon in government control over industries. In response to the Hazari Report, the government set up the Monopolies Inquiry Committee (MIC) in 1964, and the Industrial Licensing Policy Inquiry Commission (ILPIC) in 1967. Unfortunately both of these reports confirmed the findings of Hazari Report. The impact of these findings were enormous, as the policy statements started showing a change from demarcation between the private and the public sector and started focusing on control of growth of private industries.

    But before we can grapple with the phenomenon of economic concentration, we have to have a brief understanding of the Hazari Report, and it’s findings about the Industrial Houses.

    Nature of Corporate Houses
    According to Dr. Hazari, a Business House or a corporate group may be defined as consisting of units, which are subject to the decision making power of a common authority. This definition of a corporate group tells us that a group consists of various units i.e. companies, which are subject to a common control. However the power exercised over the units may vary in strength, depending on how the controlling authority views the unit and wishes to exercise his control, but whatever be the method of exercising control, there should be no doubt as to who is exercising the control.

    Based on this idea of control, He was able to classify company ownership into the following six classes :
     
    Type of Ownership Description
    Narrowly owned companies  The central authority has more than 80% of the equity control.
    Majority owned companies  The central authority has more than 50% but less than 80% equity control.
    50 - 50 companies  The central authority has exactly 50% equity control.
    Minority owned companies  The central authority has between 0% to 49% equity control.
    Under management companies  The central authority has no equity control, but has the company under his management.
    Widely owned public companies  The companies are controlled by the central authority, but there is a wide degree of public participation in equity control
    SOURCE : Tabulated from Dr. R. K. Hazari "Business Houses in Indian Industry". Chapter 1. Page 5-6.

    However Dr. Hazari admits that his classifications are not iron clad. According to him, narrowly owned companies , do not necessarily mean that the company is more or less independently controlled, because it is difficult to find out the extent and the sphere of control of the other controlling assets. For example consider the case of Hindustan Shipyards Limited. It is a minority owned company of Walchand and Scindhia Steamship. But again Scindhia Steamship itself is a minority controlled company of Walchand. Under this circumstances it becomes difficult to sat whether Hindustan Shipyard is a majority owned company of Walchand or minority owned company of both Walchand and Scindhia.

    These patterns of control led Dr. Hazari to conclude that control in a corporate group might be concentric in nature. According to the pattern of control the companies can be classified into four different classes. The first class denoted by "A" is the "Core Group of Companies". These companies are largely or wholly owned by the central authority. Next to the core group comes the "Inner Group" denoted by "B". The inner group is comprised of companies which are under direct control of the controlling authorities through nominees and or through subgroups, but they may or may not have some degree of public participation. Next comes the "Majority owned companies" denoted by "C". The majority owned companies have other interests actively participating in them, but the decision making power is reserved by the controlling authority.

    A+B+C is called the "Group Proper". The group proper denotes the area of direct influence of the controlling authority of a corporate group.
    Concentric Circles of Power
    Outside the group proper is the "Outer Group" denoted by "D". This comprised of 50-50 companies, minority owned companies and the management only companies. In these companies the central authority has material participation and a voice, but not the controlling voice. The "Group Proper" plus the "Outer Group" is known as the "Complex".

    The Complex is not rigidly defined. Liquidation, Sales acquisition etc. may change the nature of companies in the group. Companies are moveable in inwards and outwards direction within the totem pole of the Complex, depending on the profitability, growth prospects, etc.

    Control over the companies of the group was maintained through the chain breeding process. The central authority made an initial investment into a company or a group of companies. These group of companies were generally the "Core Group" of companies. These core group of companies invested in other companies and these companies invested in yet other companies, thus creating a chain of control. After some time the chain of control started to interlink and overlap and by the time the chain reached the "Outer Group" of companies it was not clear who was controlling whom. This ambiguity in control allowed the Corporate Houses to evade government directives with impunity.

    Basing his study on the study of share capital, Net fixed assets, Net Capital Stock, and Gross Capital Assets of various corporate houses and their corresponding companies, Dr. Hazari classified the various business houses operating in India as follows :

    The groups may have changed positions amongst themselves over the last 30 years. Unfortunately no other study has been done on the subject and therefore this area has not been fully updated. For the sake of this discussion we shall stick with the classifications of Dr. Hazari.

    These corporate groups, although diverse in size and control showed some similarity of behaviour. These similarities could be called as the features of Corporate Houses. They are :

    Increase in Economic Concentration
    Having understood the nature of Corporate Houses, we will now look at some finding of the Hazari report to find out how the corporate house have grown.
     
    Table I : Growth in Total Share Capital and Gross Capital Stock (1951 - 1958)
    ( as a %age of the Total Industrial Share Capital and Gross Capital Stock of Private Sector )
    Description
    Total Share Capital 
    Total Gross Capital Stock
     
    1951
    1958
    1951
    1958
    4 Largest Group (Inner Circle)
    17.97
    22.34
    16.95
    22.14
    4 Largest Group (Complex)
    21.85
    26.60
    20.64
    25.65
    13 Largest Group(Inner Circle)
    26.78
    31.67
    25.78
    30.52
    13 Largest Group (Complex)
    33.09
    38.41
    31.69
    36.35
    20 Groups (Complex)
    34.30
    40.56
    33.14
    38.65
    SOURCE : Tabulated from Dr. R. K. Hazari "Business Houses in Indian Industry"

    The table above shows that the top 13 business houses have, over a seven period increased their share in the total share capital of the private sector from 33.09 to 38.41%, which turns out to be a 16% growth over the period. Their share in Gross Capital Stock of the private sector has gone up from 31.69 to 36.35, an increase of approximately 14% over the period. As the above table is in percentages, it reflects a disturbing phenomenon. The direct implication is that in an era of planned economy, private business houses are not only thriving, but also growing. The direct implication is that government policies have failed in bringing down economic power concentration.

    The questions that arise now is that whether concentration of economic power necessarily leads to monopoly ? This question was of vital importance, because Indian at that time had a huge Public Sector, with a proclaimed policy of socialistic development. To answer this question we turn to the paper by Dr. Aurobindo Ghosh - "Monopoly in Indian Industry - An Approach". Dr Ghosh studied the market structure in India and based his conclusions on the findings.
     
    Table II : Market Structure of India in 1964
    Type
    No. of Products
    %age
    Cum. %age
    Monopoly (1 Product)
    437
    33.67
    33.69
    Duopoly (2 Products)
    229
    17.64
    51.31
    Oligopoly (2-8 Products)
    472
    36.36
    87.67
    Competition (8+ Products)
    160
    12.33
    100.00
    Total
    1298
    100.00
    -
    SOURCE : Aurobindo Ghosh "Monopoly in Indian Industry. An Approach" - EPW 1972 Annual Issue

    Taking the text book definition of markets, Dr. Ghosh found that only 12.0% of the Indian market shows competition, whereas the rest were all under distorted markets. However Dr. Ghosh failed to qualify whether the Monopoly markets were of natural monopoly or whether they represented transient monopoly - i.e. markets protected by product or process patients. Subject to this qualification we can see that Indian market is characterised by market distortions.

    Dr. Ghosh further went on to describe Product concentration and classified the goods in the above table into their concentration type, as shown below. He described a product concentration to be high if top three firms produced more than 75% of the total output of the product. Product concentration was said to be medium if the top 3 firms produced more than 50% but less than 75% of the total output, and product concentration was said to be low when the top 3 firms produced less than 50% of the total output.

    Table II and III leave us with no option but to conclude, that Indian markets were monopolistic in nature.
     
    Table III : Product Concentration in Indian Markets (1964)
    Type
    No. of Products
    Percentage
    High
    1131
    87.13
    Medium
    96
    7.40
    Low
    71
    5.47
    SOURCE : Aurobindo Ghosh "Monopoly in Indian Industry. An Approach" - EPW 1972 Annual Issue

    Coupled with the report of Dr. Hazari, the MIC report of 1964 showed that the top seven - Tata, Birla, Martin Burn, Surajmull Nagurmull, Bangur and Thapar - Controlled 20% of total assets and 19.04% of total paid up capital of the private sector.. The ILPIC of 1966-67 also concluded that 73 of the large industrial houses and 60 large independent companies (companies with assets greater than Rs. 5 crores) controlled 59.8% of total paid up capital of all private sector companies.

    Although the reports are not inter comparable, due to differences in definition and concepts, but they allow us to conclude that a large proportion of stock of productive capital (assets) in the Indian private corporate sector Centralised in the hands of a few business groups, leading us to conclude that monopoly capital is well entrenched in India and that Indian corporate houses are the most representative unit of monopoly in India.

    Reasons for increase in Monopoly Concentration
    The question that obviously arises is that how did this growth of monopoly capital come about in the Indian economy? The answers are not hard to find.

    1) Access to Finance:

    The business houses were closely connected to the financial institutions either through goodwill, or through equity ownership, or through interlocking of control. This allowed for a quicker and cheaper access to finance, which allowed then to fund expansions and pre-empt competition.

    2) Well diversified and integrated:

    The corporate houses had their presence in more than one industrial category. This diversification helped the corporate houses to integrate various stages of production into a single roof, allowing for greater economies of scale, reduction in costs, and deterring new entrants.

    3) Growth through mergers, acquisitions and expansions:

    This is by far the most effective way for the group to grow. Mergers and acquisitions allow for pre-emption of markets from potential competitor, and expansion allows the groups to go into new activities, or to reduce cost in current activities. Also being in the same social strata, the captains of the corporate houses not only know each other but the ties are further strengthened through marriages etc. The groups have also indulged in tacit collusion in a bid to protect markets.

    4) High entry of cost and continuation:

    Presence in every industry of the corporate houses prevents new entrepreneur from entering the market, as not only the initial cost of entry is too high, but the cost of continuation is also very high. An already established group, if it feels threatened by the new entrant can unleash a price and non price war against the entrant, thus increasing his cost of continuation. Unless and until the entrant is able to establish a large market share very quickly, he may find it difficult to continue.

    5) Pre-empting of Investment Opportunity:

    Prior to liberalisation, Industrial Licensing limited not only the area but also the direction of the private investment. In such a circumstances, competition manifested itself through competition of investment opportunities, which were limited by the availability of license. Thus competition for investment meant competition for licenses. Licenses became a weapon in the hands of the industrial houses to be used in a manner beneficial for them. These were:

    Conclusion
    In conclusion we see that the policy of licences, introduces in the IDRA and the government inability to monitor and enforce correct usage of licenses helped monopoly growth in India. The increase in monopoly power was inconsistent with the stated policies of development laid down in the plans. If value judgements are left aside, increase in economic power - leading to technological and economies of scale - can, in tandem with plan objectives benefit the economy. This was consistently shown by Tata and Martin Burn companies. However whether it is desirable or not is open to debate.

    A question may arise here as to what is the relevance of all this today ? The relevance lies in the fact that almost all the groups are still surviving and consistently growing in power and economic concentration. Further more the evil of economic concentration is an ever present threat to the overall development of the economy. It has not vanished, but only changed form in this era of liberalisation, by becoming conglomerates and Strategic Business Houses, instead of group companies.
     
     
    Chapter 6 : Monopolies and Restricted Trade Practises Act - 1969

    Background
    According to the Constitution of India "The state shall in particular, direct its policy towards securing, that the ownership and control of the material resources of the community are so distributed as to best subserve the common good, and that the operation of the economic system does not result in the concentration of wealth and the means of productions to the common detriment."

    These concerns for a fair distribution of income and wealth and prevention of undue concentration of economic power has always figured prominently in the official policy documents of the government of India. How so ever the study of growth of economic concentration during the decades of 60’s continuously pointed out that Indian markets are seeing an emergence of monopoly houses and concentration of economic wealth into the hands of the few. To combat this menace the government came out with the Monopolies and Restrictive Trade Practises (MRTP) Act in 1969 and the MRTP Commission in 1970.

    1. Inter-Connected and Dominant Undertakings:

    The MRTP act covered two types of undertakings viz. national monopolies and product monopolies. National Monopolies, which were covered by section 20(a) of the act, described national monopolies either as "single large undertakings" or a "group of interconnected undertakings" (i.e. large houses) which had assets of at least Rs. 100 crore (prior to 1985, the limit was Rs. 20 crore). Product monopolies covered under section 20(b) and called "dominant undertakings" were those which controlled at least one fourth of production or a market of a product and had assets of at least Rs. 3 crores (prior to 1985 this limit was Rs. 1 crores). By the end of March 1990, 1854 undertakings were registered under the MRTP act. Of these 1787 belonged to large industrial houses and the remaining 67 were dominant undertakings. The New Industrial policy has now scrapped the assets limits for MRTP company.

    The definition of inter-connected as adopted by the MRTP was not free of flaws and has enabled many companies, which are a part of a large industrial house, completely bypass the clutches of MRTP. How flawed this definition was would be clear from the fact that TELCO was able to claim that it was not under the Tata’s and that Century Rayon successfully established that it was not a Birla company. It is perhaps here that the reader will understand the effectiveness of the chain breeding process of control, as described by Dr. Hazari. To quote N. K. Chandra "… The widespread practise of benami shareholders … allow companies to prove that they are not ‘legally’ interconnected." In fact the Dutt Committee report has established that in 1966 there were 48 large business houses together controlling 1500 companies with a combined assets of Rs. 4,000 crores. However only 450 companies having a combined assets of Rs 1,000 crores have got themselves registered. The committee further lists that Birla family controls around 280 companies, out of which only 29 have registered.

    2. Monopolistic, Restrictive & Unfair Trade Practises:

    According to the MRTP act, a restrictive trade practise (RTP) means a trade practise which has, or may have, the effect of preventing, distorting or restricting competition in any manner and in particular: (i) which tends to obstruct the flow of capital or resources into the stream of productivity (ii) which tends to bring about manipulations of prices or conditions of delivery or to affect the flow of supplies in the market relating to goods or services in such a manner as to impose on the consumer unjustified cost or restrictions.

    A monopolistic trade practise (MTP) is a trade practise which has or is likely to have the effect of (i) maintaining prices at an unreasonable levels or (ii) unreasonably preventing and lessening competition, or (iii) limiting technical development or capital investment to the common detriment or (iv) allowing the quality to deteriorate. As per 1984 amendments, unreasonably increasing (i) the cost of production or charges for services; (ii) the prices of goods or services, or the profit derived by production, supply and distribution; or (iii) lessening and preventing competition in production, supply or distribution also results in monopolistic trade practises.

    Prior to 1984, the MRTP act was restricted to MTP and RTP only. The 1984 amendment extended it to unfair trade practises(UTP). Trade practises which amounted to UTP include (i) the publication of a statement(s), made orally or in writing or by visible representation (ii) the publication of any advertisement for sale at bargain prices (iii) enticement by gift or contest (iv) sale or supply of sub-standard goods and (v) hoarding or destruction of goods, or refusal to sell goods or to provide service.

    Purview of MRTP Act
    A large number of types of agreements were specified in the MRTP act which fell under its purview. Each one of these was required to be duly registered with the Registrar of RTP’s including the names of the parties to the agreement. Registered undertakings were subject to the following control on their industrial activities:

    The responsibility to see that there was no concentration of economic power to the common detriment was that of the government. If it desired it could refer the matter to the MRTP Commission for an enquiry; but it was for the government to pass the ultimate order as to the proposal. This shows that the MRTP commission had only advisory role.

    The Process of Liberalisation
    The government has considerably liberalised the operations of the MRTP act from time to time. The result has been that the large business houses have been given the green signal to enter a number of areas which were formally closed to them. Under the pretension of expanding production, even the illegal set up industrial capacity was regularised. The MRTP act itself provided the following two significant exemptions : (a) expansion in production or in value of assets upto 25% will not be subject to the MRTP clearance and (b) expansion of a large house in so far as it relates to production of the same or similar type of goods already being manufactured by it is outside the purview of the Act, so long as the undertaking is not the dominant undertaking, and so long as the proposal has been cleared under IDRA 1951. The promulgation of the MRTP (Classification of Goods) Rule in 1971 without consulting the MRTP Commission at all; failure to supply data in time to enable a decision to be made about which units are dominant; and failure to ensure that data was now available according to the Classification of Goods announced under MRTP Act etc., made the whole question about dominance confused. Thus provisions of the Act could not be applied in a strict and a vigorous manner.

    A number of relaxation were also announced from time to time. Some of the important ones are listed below.

    1. The Industrial Policy Statement 1973 opened up large number of industries to the large houses. These included not only the core industries, but also industries having direct linkages with such core industries and industries with long term potential.
    1. With a view to provide fillip to production in industries of high national priority and or those meant exclusively for exports, the government introduced section 22-A in the MRTP act whereby it could notify industries or services to which section 21 and 22 would not apply. (a) in October 1982 all 100% EOU’s established in the Free Trade Zone were exempted from section 21 and 22 of the Act. (b) In May 1983 the government notified that the companies registered under the MRTP Act are eligible to set up, without prior approval of the government, new capacities in industries of high national priority or industries with import substitution potential or those using sophisticated technology. However the companies were required to fulfil certain conditions to avail of the exemptions.
    1. The government identified some industries which were specially important from the export angle. These industries were allowed 5% automatic growth per annum, upto a limit of 25% in a plan period over and above the normal permissible limit of 25% excess production over authorised capacity. Large houses did not require separate approval under the MRTP Act for such automatic growth.
    1. The government issued notifications permitting use of existing capacities for other related items without the MRTP clearance and for which the administrative ministries concerned would endorse the industrial license on receipt of application. This facility was allowed in a number of fields of industrial activity such as machine tools industry, electrical equipment industry, steel forging industry etc.
    1. In a major liberalisation of the Industrial Licensing Policy announced in December 24, 1985 the government permitted unrestricted entry of large industrial houses and companies governed by Foreign Exchange Regulations Act (FERA) in another 21 high technology items of manufacture. With this permission, the large industrial houses falling within the MRTP Act and FERA companies were allowed to freely take up manufacture of 83 items.
    1. Under the provisions of Sick Industrial Companies (Special Provisions) Bill 1985, the government removed sick industrial companies from the purview of the MRTP Act for the purpose of modernisation, expansion, amalgamation, or merger.
    1. For promoting the development of backward areas, the government extended the scheme of delicensing in March 1986 to MRTP / FERA companies in respect of 20 industries in Appendix I for location in centrally declared backward areas. The scheme was later extended to 47 industries for location in any centrally declared backward areas and to 24 non appendix industries for location in category ‘A’ backward districts. The conditions permitting MRTP and FERA companies to establish non Appendix I industries were also liberalise. Earlier on the MRTP and FERA companies setting up non appendix I industries were required to fulfil export obligation of 50% in backward districts of category B and C, and 30% in category A. These export obligations were later reduced to 25% for category B and C and zero for category A districts.
    1. The government announced a new scheme in April 1988. Effective from April 1 1988, as per the scheme, the industrial license registrations with technical authorities were to be automatically re-endorsed at the highest level of production actually achieved by the industrial undertaking in any of the financial year between 1988 and 1990. The scheme was to apply to all industrial undertakings including MRTP and FERA Companies as also to all items regardless of whether they are not covered by the Schedule I of the IDRA. In case of the MRTP / FERA companies, the scheme was to be available to both Appendix I and non Appendix I items. This was a major concession as it implied automatic re-endorsement of capacity to the highest level of production.
    1. In an important liberalisation measure announced in June 1988, the government freed dominant undertakings from industrial licensing policy restrictions applicable under the MRTP Act. With this decision the companies which were termed "dominant" could take advantage of the relaxation of the licensing policy announced for non MRTP and non FERA companies. These firms were however required to abide by the licensing policy restrictions for the product in which they were classified as dominant. In respect with other products they were to be treated at par with non MRTP companies for industrial licensing policy.
    1. An important relaxation came in 1985, when the assets limits was raised from Rs 20 crores, for the purpose of the Act, to Rs 100 crores. The New Industrial Policy announced in 1991 scrapped the asset limits for the MRTP companies altogether. The MRTP Act was amended and the Chapter III on monopolies completely dropped, so that now a company no longer needed prior permission of the Commission for investment decisions. The government hoped that this will enable Indian firms to become large enough to compete effectively in global markets. The MRTP Act as now amended will give more emphasis to the prevention and control of MTP’s, RTP,s and UTP,s so that the consumer are adequately protected from such practises.
    Conclusions
    After thoroughly studying the MRTP Act, it is pretty difficult to conclude as to whether this act was made to restrict monopolies or to help them grow. The Act in itself has been diluted so much that it has now, not even remained as a paper tiger, let alone be an effective deterrent against monopoly growth. One distinctly feels the half hearted attempt of the government to implement the lofty ideals of socialism on the concrete bed of capitalism and political business nexus.

    The Post 1991 amendments have not been covered in this section as because they have already been dealt with under New Industrial Policy. We wonder how the MRTP Act will be successful in stopping MTP’s, RTP’s and UTP’s in this era of liberalisation and market force domination.
     
    Chapter 7 : Stagflation in the Indian Economy

    Introduction
    One of the most prominent features of the Indian economy, and of the Indian Industrial growth was that for the most part of the period between 1960 - 1981, the industry faced Stagflation. A detailed study of the stagflation of Indian industry requires an in depth study of Indian industrial and economic scenario. What we are presenting here is a very brief sketch of the phenomenon, mainly from the view of agricultural failure and its impact on the industry growth. Another view is that stagflation took place because of increasing inefficiency in Indian exports, but that view is not being dealt here.

    Background
    The first plan period (1951 - 56) is said to be the period of deflationary growth. In other words price actually feel during the period. The plan outlay in the first plan was modest in relation to the size of the economy. Due to extremely good monsoons during the plan period, agricultural production increased at an average rate of 4.2% per annum. This lead to an excess of food output and consequently a fall in food prices. The consumer price index (CPI) actually fell from 101 in 1951 to 96 in 1956. Many of the first plan targets were met and there was an all round optimism at the success of the plan.

    The second plan (1956 1960) saw inflation rear its ugly head in the Indian economy. Buoyed by the success of the first plan, the plan outlay was increased to Rs. 4672 crores, approximately 2.5 times that of the previous plan. The acceptance of Mahalanobis model, placed emphasis on the capital goods sectors and consequently various heavy industrial projects were undertaken. As a result capital goods sector grew by 11.2% per annum. The consumer goods sector which was neglected, and reduced as a result of the Industrial Policy resolution 1956, saw a growth of 3.5% per annum. Side by side, the adaptation of the socialistic pattern of development implied employment generation by the PSU’s. Employment generation, as a result, increased by 37.0% and the consequent increase in the generation in the money income was to the tune of 44.0% over the plan period. The increase in the disposable income, due to massive employment generation, coupled with the inability of the consumer goods sector to produce goods for the fulfilment of demand, lead to the appearance of inflation in the economy. The agricultural sector failed to perform and to meet the shortfall in agricultural goods 20 million tonnes of foodgrains were imported, causing a severe BOP crisis. The net result was that the prices rose by 33.0% over the period.

    Stagflation
    With the start of the third plan (1960 - 1965) Indian was slowly slipping down into grips of stagflation. The huge expenditure incurred in second plan, had relative little to show in terms of production. Agricultural production was dismal, and the rate of agricultural production over the plan period was negative -0.9% per annum. As a result wholesale agricultural prices rose by 42% over the period. The terms of trade moved in favour of agriculture, but even with the huge income flowing in to the agricultural sector as a result, no agricultural development, in terms of improved technology and practises took place.

    The Indo-China war in 1961 and the Indo-Pak war in 1965 lead to defence outlays increasing from Rs. 281 crores to Rs. 884 crores. This was an increase in non productive expenditure i.e. expenditures which did not produce any economic productivity. Coupled with this, the plan outlay in the third plan was increased to Rs 7500 crores, which overshot to Rs. 8608 crores by the end of the plan. Most of the plan outlays could also be considered as non productive, as part of it was for funding the huge projects started in the second plan and the rest was for funding the investment. Such a magnitude of spending in an economy, which was at the vagaries of agriculture and not producing enough consumer goods to satisfy the generated demands was bound to be inflationary.

    The annual plans (1966 - 69) saw India well into the grips of inflation. The demand pull inflation of the third plan slowly changed its nature to that of cost push. The continuos increase in foodgrains prices, leading to increased wage demands on the part of the workers and increasing cost of raw materials, pushed up the cost of production of the industrial sector. Industries reeling from cost escalation could not increase output to desired levels. Coupled with this was the apathetic policy towards the consumer goods industries, which were seen as fulfilling the demands of the idle rich and not as an important contributor of inflationary growth. To keep the inflation in control, foodgrains were imported from USA under PL - 480.

    If we stop to take stock, we would see a marked difference between the policies of the Indian government during the plan periods and that advocated by the Bombay Plan. Bombay Plan specifically warned against neglecting the interest of the consumers and avoiding projects with long gestation periods which was in stark contrast to the directives of the second and the third plans.

    For the first time it was realised that agriculture, a hitherto neglected sector, had an important part to play in the industrial development of the country. The imports under PL - 480, the planners realised, could not go on indefinitely. Also the fact that continuous dependence on a country with which you had ideological differences could be harmful in the latter stages gave impetus to focus on agriculture.

    The fourth plan (1969-74) was focused towards agriculture sector. Agricultural foodgrains saw a marginal increase in their output under the plan. To combat inflationary pressures, Public Distribution Systems (PDS), an anti-famine device initiated by the British, was converted to an anti-inflationary device, by turning them into fair price shops for distribution of foodgrains.

    However, all this was of little help, as agricultural cash crops continued to show sharply fluctuating trends, raising the raw material cost to the industry. The Indo-Pak war in 1971 saw defence expenditure jump upto Rs 1152 crores. The industrial products grew at the rate of 3.9% over the plan period. This low rate of growth affected the revenue collection of the government. In India, agriculture being exempt, the bulk of tax revenues is provided by industry. The poor showing of the industry due to rising cost lead to lower profits and consequently lower tax collections. This lead to increasingly larger budget deficits, leading to increased pressure on inflation. The PSU’s, due to increasing costs and delays in execution and implementation, could not meet the performance standards set for them. Crucial inputs like power, coal, cement, transport, steel etc. were in short supply.

    The problem was further compounded by the oil shock of 1973-74. The overall effect was that the CPI rose to 335 (base 1960 = 100) in August ‘74. Alarmed by this steep rise in prices, the Government of India took harsh measures on a "war footing" to curb inflation.

    Anti Inflationary Measures
    The rate of growth of money supply was slowed down to 6.9%, which was the lowest in the last 14 years. Non developmental outlays and budgetary deficits were cut by approximately 50.0%. The dearness allowance payable to the public sector employees were made compulsorily depositable with the government. Income tax deposits were also similarly treated. Companies were restricted to pay dividends. New excise duties were implemented. Railway freights and fares were increased. Commercial banks interest were made taxable. All these measures mopped up Rs 861 crores plus from the economy. PSU’s and employees in public sector were made responsible for increasing efficiency and output.

    Conclusions
    The net result of the strict anti inflationary measures was that the price level started falling and fell to 321 by March 1975. This was also aided by resumption of agricultural output, approximately 110 million tonnes, approximately 12% more than the output in 1974. This favourable trend continued throughout the emergency period and prices continued to fall. With the restoration of democracy in 1977, inflation was back on track, however the nature of inflation had changed and stagflation in the traditional sense was loosening its grip on the Indian economy.
     
    References

    1. Indian Economy : A.N. Agarwal (16th edition)
    2. Indian Economic Problems - An Analytical Approach : Edited by J.S. Uppal (3rd Edition)
    1. Business Houses in Indian Industry : R.K. Hazari
    2. A Plan of Economic Development of India - Photocopy of the original Bombay Plan
    3. India’s Developmental Experience : Karan Singh, Chapter 6 : Industrial Objectives and Performance (Page 197 - 229)
    4. New Economic Policies - An Assessment : Arun Kumar, Economic and Political Weekly, December 11, 1993
    5. New Industrial Policy : A.N. Agarwal (17th Edition)
    6. Industrial Licensing Policy : A.N. Agarwal (17th Edition)
    7. Monopoly Capital, Private Corporate Sector and the Indian Economy - A Study in relative Growth : N.K. Chandra (IIM Calcutta)
    8. Stratification of Indian Industries : Nasir Tayabji (Indian Institute of Public Administration, New Delhi)
    9. Joint Sector and Control of Indian Monopoly : Aurobindo Ghosh, Economic and Political Weekly, Annual Issue, 1972
    10. Monopoly in Indian Industry - An Approach : ibid.
    11. Investment behaviour of Monopoly Houses - Structure of Fixed investment Decisions : ibid.
    12. Economic Survey 1991-92, General and Sectoral Reviews : Government of India
    13. New Economic Policy : An essay prepared by Ms. Nilanjana Dutt (St. Xaviers College, 1991-94) for C.U. Part II Exams
    14. Paper - "Structure and Control of Indian Business Houses" - submitted as a part of the course on Indian Industry under Dr. C.P. Chandrasekhar at JNU by Rohit Vishal Kumar
    15. Economic Laws and Practises : V.S. Datey (Taxmann 1995 edition) Chapter 2 (Pages 9 -41)

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