Business Environment Project on Industrial Growth

7/31/2019 Business Environment Project on Industrial Growth

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Dr. S K Chadha Pritosh Gharu

Rakesh Pingua

24-03-2012 Sagar Rajpal


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7. CHALLENGES & OUTLOOK (32-34)

6. INDUSTRIAL COMPETITIVENESS (29-31)

5. INDUSTRY GROWTH BY SECTORS (20-28)

4. INDEX OF INDUSTRIAL PRODUCTION (16-19)

3. EVOLUTION OF INDUSTRIAL POLICY IN INDIA (9-15)

2. INDUSTRIAL DEVELOPMENT STEPS TAKEN IN 1947 (4-8)

1. INTRODUCTION (3)


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INTRODUCTION

India has made considerable economic progress since its Independence. Most noticeable are the

expansion and diversification of production both in industry and agriculture. New technologies

were introduced in many industries. Industrial investment took place in a large variety of new

industries. Modern management techniques were introduced. An entirely new class ofentrepreneurs have come up with the support system from the Government, and a large number

of new industrial centres have developed in almost all parts of the country. Over the years, the

Government has built the infrastructure required by the industry and made massive investments

to provide the much-needed facilities of power, communications, roads etc. A good number of

institutions were promoted to help entrepreneurship development, provide finance for industry

and to facilitate development of a variety of skills required by the industry as well as agriculture.

The Government also followed a policy of encouraging indigenous industries and provide them

all facilities and encouragement. As a result, we have now a widely diversified base of industry

and an increased domestic production of a wide range of goods and services. The index of

industrial production has gone up from 7.9 in 1950-51 to 154.7 in 1999-2000. Electricity

generation went up from 5.1 billion Kwh to 480.7 billion Kwh in the same period.

Particularly significant achievement has taken place in the field of agriculture. Between 1950-

2000, the index of agricultural production increased more than four-fold. Between 1960 and

2000, wheat production went up from 11 to 75 million tonnes, and the production of rice

increased from 35 to 89.5 million tonnes. We are now having a problem of plenty, with

Government godowns overflowing with wheat stocks. This is not a mean achievement for a

country that relied on imported food aid until the early 1960s. The credit for this green revolution

goes to Indian scientists as well as to millions of Indian farmers, who wholeheartedly cooperated

with the Government, to make India self-sufficient in the matter of its food requirements.

This economic expansion contributed to a steady and impressive growth in Indias GNP. With

the exception of 4 years, India experienced a positive rate of growth. As a result, Indias per

capita Net National Product (NNP) in 1999-2000 was 2.75 times higher than that of 1951. The

rate of growth before 1980 was 1.2% per capita. Thereafter, it grew at the rate of 2.4%, and

between 1950-90, by 3.2% on average every year. Between 1993-94 and 1999-2000, it registered

an average rate of growth of 4.8% per year.

A variety of promotional policies were followed by the Government to achieve this success. In

the early years, Indian industry thrived within protective tariff walls. The policy was toencourage Indian industries and though foreign technical collaborations were encouraged, direct

foreign investment in any corporate body was restricted to 40%. In 1991, this policy was

changed completely and foreign majority investment was encouraged in a variety of industries,

import restrictions were removed, customs tariff was brought down and the doors of the Indian

economy were opened for foreign competition.


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INDUSTRIAL DEVELOPMENT STEPS TAKEN IN 1947

After India became independent in 1947, the country embarked upon an ambitious plan of

industrial development and encouraged the setting up of new industries and the expansion of

existing industries.

We may briefly recapitulate some of the steps that were taken to achieve these objectives.

Protection to Indian Industries

India is probably one of the few countries in the world which used its import policy for the

healthy development of local industries. Barring the first few years after Independence, the

country was facing a shortage of foreign exchange, and because of this shortage, imports had to

be restricted. Imports of consumer goods were, therefore, disallowed. A good number of

restrictions were put on the import of industrial goods, and the effort of the Government was to

encourage the production of these goods indigenously. Local industries were encouraged to have

foreign collaborations and to import the technical know-how needed to produce what was being

imported into the country.

Levying higher tariffs restricted imports, and there was also a total or partial physical ban on the

imports of such products. This gave a much needed sheltered market for Indian goods, and many

industries thrived within these protective walls. Initially, products produced by Indian industries

were not of good quality. But as years went by, industries acquired experience in manufacturing

and turned out quality products comparable with imported products. There was a continuous

effort to improve quality.

During the Second and Third plans, the emphasis was on the development of capital goodsindustries. India wanted to make machines that helped to produce other machines. Therefore,

greater emphasis was given to the development of machine tools, textile machinery, power

equipment and so on. We were importing these mother machines, and the new effort was to

produce them in India, to achieve self sufficiency.

Protection from imports encouraged Indian industry to undertake the manufacture of a variety of

products. There was a ready market for all these products. The Government also gave

encouragement to industries to import parts and components that were required for indigenous

production. The import policy was meant to serve two categories of importers - actual users and

established importers. Actual users of imported raw materials or products were given preferenceover the category of established importers i.e. traders. Certain items that were scarce and not

available were channelized through the State Trading Corporation, Mines & Minerals Trading

Corporation and such other Government bodies. They arranged for the import of such products

and distributed them to indigenous industries according to requirements. Thus, imports were

strictly controlled by the import policy announced every year by the Government of India.


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High Customs Tariffs

Apart from strict control over imports and the physical ban on the imports of many products,

customs tariffs were raised in some cases to 200 to 300% on imported products. This gave

protection to local industries. The price of local products was comparatively cheaper than those

of imported goods. The Government also followed a policy of low tariffs on the import of rawmaterials, parts and components compared to those on finished products. This encouraged Indian

industries to import parts and components, and to manufacture or assemble final products in

India.

Financial Infrastructure

To provide the financial infrastructure necessary for industry, the Government set up a number

of development banks. The principal function of a development bank is to provide medium and

longterm investments. They have to also play a major role in promoting the growth of enterprise.

With this objective, the Government of India established the Industrial Finance Corporation ofIndia (IFCI) (1948), Industrial Credit and Investment Corporation of India (ICICI) (1955),

Industrial Development Bank of India (IDBI) (1964), Industrial Reconstruction Corporation of

India (1971), Unit Trust of India (UTI) (1963), and the Life Insurance Corporation of India (LIC)

(1956). For financial assistance to small entrepreneurs, Finance Corporations were established in

all states on the basis of an Act that was passed by Parliament in 1951. In addition to this, the

National Small Industries Corporation was also established at the Centre and a Small Industries

Development Bank of India was established in 1989.

Control of Indian Business

As a consequence of the restrictions on imports, those who were importing products entered into

collaboration with their principals and entered the field of manufacturing. Thus, what was once a

trading community, gradually transformed into a community of industrialists.

Regulations under the Foreign Exchange and Regulation Act (FERA) restricted foreign

investment in a company to 40%. This ensured that much of the control in companies with

foreign collaboration remained in the hands of Indians. To succeed, Indian businessmen had to

learn and apply modern management and production techniques.

Encouragement to small industries

Though some of the policies of the Government resulted in inhibiting the growth of large-scale

industries, they gave encouragement to small-scale industries by providing a number of support

measures for growth. Policy measures undertaken by the Central and State Governments

addressed the basic requirements of the SSI like credit, marketing, technology, entrepreneurship

development, and fiscal, financial and infrastructural support. These promotional measures

covered:


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Industrial extension services through small industries service institutes and otherorganisations.

Factory space in industrial estates through cooperative and other industrial estates, readybuilt shades and developed industrial plots made available through State Government

agencies.

Credit facilities at concessional rates of interest and credit guarantees throughcommercial banks and State Finance Corporations.

Special financial assistance schemes at concessional rates of interest and low margins fortechnician entrepreneurs.

Availability of indigenous scarce raw materials through special quotas and importedmaterials through import licenses.

Provision of training facilities. Subsidised power tariffs and exemption of electricity duties. Supply of local and imported machinery on hire purchase basis. Assistance for domestic as well as export marketing. Special incentives for setting up units in backward areas. Differential central excise levies for the small-scale sector. Preference for products produced in small-scale industries and 15% price preference to

them in State Government purchases.

Reservation of products for exclusive manufacture in the small-scale sector. Creation of a large number of institutions both by the State Governments and the Central

Government to help small enterprises.

Special effort to promote new entrepreneurs by providing them training inentrepreneurship development.

While most of the institutional support services and some incentives were provided by the

Central Government, the State Governments offered others in varying degrees to attract

investments and to promote small industries.

Investment in Infrastructure

Energy-Transport-Communications facilities are extremely essential for smooth and accelerated

industrial growth. The Government made huge investments in providing such infrastructure

facilities to industries. The Central Government, as well as the State Governments invested huge

funds in power generation and distribution, and many new power projects were undertaken andcompleted. Similarly, investments were made in road building, communications, creation of port

facilities etc. Apart from this, various State Governments made developed plots of land or

industrial estates with power, water, roads, and communications available to entrepreneurs who

wanted to set up industries. This helped considerably in the growth of industries.

Oil and natural gas emerged as significant sources of energy since the eighties.


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The pattern of sectoral consumption has also undergone noticeable changes over the years as can

be seen from the following table:

Power shortages caused by substantial shortfalls in achieving power targets have been a

recurring theme from plan to plan.

Oil and natural gas

The Oil and Petroleum industry must be considered a gift of the planning era. The indigenous oil

exploration programme gained credibility in the seventies. New sources of oil were discovered,

and considerable refining capacity was created. The Oil and Natural Gas Commission was set up

for oil exploration. Additional refining capacity was created through the expansion of some of

the existing plants, and the commissioning of new refineries.

Training and skills development

Trained manpower is necessary for industrial growth. To cater to the growing needs of industriesduring the last fifty years, the Government set up a large number of industrial training institutes,

all over the country to train skilled workers. It also set up Indian Institutes of Technology,

Management Institutes and Engineering Colleges to train persons with higher management and

technical skills.

Our youth have been quick at learning skills. We have therefore had no shortage of skilled

manpower to cater to the growing requirements of industry.

Scientific research

Research in science and applied technology is very much needed in order to sustaintechnological development in industries. The Government of India set up 48 national laboratories

to undertake applied research in chemistry, physics, electronics, botany, etc., and these research

institutes developed a number of new processes which are commercially exploited by industries.

Indian scientists and technologists also ushered in the Green Revolution, and the White

Revolution, and developed space technologies on their own.

Backward area development

Before Independence, industries were mostly located in and around port cities like Mumbai,

Kolkata or Chennai. After Independence, new centres of industries were developed as a result of

the infrastructural facilities that were made available by the State Governments. Baroda,

Coimbatore, Bangalore, Pune, Hyderabad, Faridabad, Rajkot, and many others, grew up as new

industrial cities.


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Both the Central Government and the State Governments followed a deliberate policy of

encouraging industries in backward areas. The Central Government selected a few backward

districts and offered 25% capital subsidy for industries set up in these areas. Various State

Governments also offered similar capital incentives, exemption from sales tax levy, subsidies on

power rates, cheap developed land, sales tax, loans and other facilities for the growth of

industries in these areas. This considerably helped the growth of under developed or backward

areas in the different states.

Emphasis on public sector

Right from the beginning, the planners attached great importance to the public sector. It was

expected that the sector would control the Commanding heights of the Indianeconomy.

In the Industrial Policy Resolutions of 1948 and 1950, a very important role was assigned to the

public sector. Power, telephones, communications, atomic energy, defence industries and some

areas were reserved for the public sector. Certain industries like life insurance, civil aviation,banks were nationalized and were included in public sector.

Thereafter, whenever there was a shortage, the Government stepped in to bail out, as it did with

the cement and paper industries. The Government took over sick industries to provide

employment. That is how a large number of textile industries came into the public sector.

Upto the year 1999, there were 235 public sector undertakings and the Government had invested

an amount of Rs. 273700 crores in such undertakings. In 1998-99, they made a gross profit of

Rs. 397.7 crores.


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EVOLUTION OF INDUSTRIAL POLICY IN INDIA

Before Independence, the policy of the British Government was against encouraging industrial

development in India. No incentives were offered to Indian industries for their growth. There

were many desired and undesired hurdles placed in the way of the growth of Indian industry.

Whatever industrial development took place in India was in spite of the negative and hostileattitude of the British Government. Credit must be given to pioneers like Jamshedji Tata,

Walchand Hirachand, Lala Sriram, G.D. Birla and others, who laid the foundations of modern

industry in India.

After independence

Immediately after Independence, the Government of India announced its industrial policy in

1948 and laid down the plan for future industrial growth in the country. It also declared its policy

on foreign capital in 1949, and invited foreign capital for investment in the country. The

Government was keen to dispel the apprehension that foreign enterprises may be taken over.

Industrial policy resolution, 1948

The first Industrial Policy Resolution, announced in 1948, broadly laid down the objectives of

the Governments policy in the industrial field and clarified industries and enterprises into four

categories, namely:

Those exclusively owned by the Government, e.g. arms and ammunition, atomic energy,railways, etc.; and in emergencies, any industry vital for national defence.

Key or basic industries, e.g. coal, iron and steel, aircraft manufacture, ship building,telephone, telegraphs and communications equipment except radio receivers, mineraloils, etc. The undertakings already existing in this group were promised facilities for

efficient working and reasonable expansion for a period of ten years, at the end of

which, the State could exercise the option to nationalise them.

The third category of 18 specified industries were to be subject to the Governmentscontrol and regulation in consultation with the then provincial (now State) Governments.

The rest of the industrial field was, more or less, left open to the private sector.Industrial (development & regulation) act, 1951

The Industrial Policy Resolution of 1948 was followed by a Government of India (GOI)Resolution on 2nd September 1948, constituting a Central Advisory Council of Industries under

the chairmanship of the Minister for Industry.

In 1951, the Industrial (Development and Regulation) Act was passed by the Parliament. The

main provisions of the Act were:


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All existing undertakings at the commencement of the Act, except those owned by theCentral Government were compulsorily required to register with the designated authority.

No one except the central Government would be permitted to set up any new industrialundertaking except under and in accordance with a licence issued in that behalf by the

Central Government.

Such a licence or permission prescribed a variety of conditions, such as, location,minimum standards in respect of size and techniques to be used, which the Central

Government may approve.

Such licenses and clearances were also required in cases ofsubstantial expansion of anexisting industrial undertaking.

Implementation of the industrial development and regulation act, 1951 (idr)

The IDR Act gave very wide powers to the Government. This resulted in more or less complete

control by the bureaucracy on the industrial development of the country. They had full control

over:

approval of any proposal on capacity, location, expansion, manufacture of new productsetc;

approval of foreign exchange expenditure on the import of plant and machinery; approval for the terms of foreign collaboration.

Industrial policy resolution, 1956

The Industrial Policy Resolution - 1956 was shaped by the Mahalanobis Model of growth, which

suggested that emphasis on heavy industries would lead the economy towards a long term highergrowth path. The Resolution widened the scope of the public sector. The objective was to

accelerate Bombay Plan prepared by leading Indian industrialists in 1944-45 had recommended

government support for industrialization, including a direct role in the production of capital

goods. economic growth and boost the process of industrialization as a means to achieving a

socialistic pattern of society. Given the scarce capital and inadequate entrepreneurial base, the

Resolution accorded a predominant role to the State to assume direct responsibility for industrial

development. All industries of basic and strategic importance and those in the nature of public

utility services besides those requiring large scale investment were reserved for the public sector.

The Industrial Policy Resolution - 1956 classified industries into three categories:

First category comprised 17 industries (included in Schedule A of the Resolution)exclusively under the domain of the Government. These included inter alia, railways, air

transport, arms and ammunition, iron and steel and atomic energy.

Second category comprised 12 industries (included in Schedule B of the Resolution),which were envisaged to be progressively State owned but private sector was expected to

supplement the efforts of the State.


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Third category contained all the remaining industries and it was expected that privatesector would initiate development of these industries but they would remain open for the

State as well. It was envisaged that the State would facilitate and encourage development

of these industries in the private sector, in accordance with the programmes formulated

under the Five Year Plans, by appropriate fiscal measures and ensuring adequate

infrastructure.

Another objective spelt out in the Industrial Policy Resolution 1956 was the removal of

regional disparities through development of regions with low industrial base. Accordingly,

adequate infrastructure for industrial development of such regions was duly emphasized. Given

the potential to provide large-scale employment, the Resolution reiterated the Governments

determination to provide all sorts of assistance to small and cottage industries for wider dispersal

of the industrial base and more equitable distribution of income. The Resolution, in fact,

reflected the prevalent value system of India in the early 1950s, which was centered around self

sufficiency in industrial production. The Industrial Policy Resolution 1956 was a landmark

policy statement and it formed the basis of subsequent policy announcements.

Industrial Policy Measures in the 1960s and 1970s

Monopolies Inquiry Commission (MIC) was set up in 1964 to review various aspects

pertaining to concentration of economic power and operations of industrial licensing under the

IDR Act, 1951. While emphasizing that the planned economy contributed to the growth of

industry, the Report by MIC concluded that the industrial licensing system enabled big business

houses to obtain disproportionately large share of licenses which had led to pre-emption and

foreclosure of capacity. Subsequently, the Industrial Licensing Policy Inquiry Committee (Dutt

Committee), constituted in 1967, recommended that larger industrial houses should be givenlicenses only for setting up industry in core and heavy investment sectors, thereby necessitating

reorientation of industrial licensing policy.

In 1969, the monopolies and restrictive Trade Practices (MRTP) Act was introduced to

enable the Government to effectively control concentration of economic power. The Dutt

Committee had defined large business houses as those with assets of more than Rs.350 million.

The MRTP Act, 1969 defined large business houses as those with assets of Rs. 200 million and

above. Large industries were designated as MRTP companies and were eligible to participate in

industries that were not reserved for the Government or the Small scale sector.

The new Industrial Licensing Policy of 1970 classified industries into four categories. First

category, termed as Core Sector, consisted of basic, critical and strategic industries. Second

category termed as Heavy Investment Sector, comprised projects involving investment of more

than Rs.50 million.

The third category, the Middle Sector consisted of projects with investment in the range of

Rs.10 million to Rs.50 million. The fourth category was Delicensed Sector, in which


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investment was less than Rs.10 million and was exempted from licensing requirements. The

industrial licensing policy of 1970 confined the role of large business houses and foreign

companies to the core, heavy and export oriented sectors.

The Industrial Policy Statement - 1973

With a view to prevent excessive concentration of industrial activity in the large industrial

houses, this Statement gave preference to small and medium entrepreneurs over the large houses

and foreign companies in setting up of new capacity particularly in the production of mass

consumption goods. New undertakings of up to Rs.10 million by way of fixed assets were

exempted from licensing requirements for substantial expansion of assets. This exemption was

not allowed to MRTP companies, foreign companies and existing licensed or registered

undertakings having fixed assets of Rs.50 million and above.

The Industrial Policy Statement -1977

This Statement emphasized decentralization of industrial sector with increased role for small

scale, tiny and cottage industries. It also provided for close interaction between industrial and

agricultural sectors. Highest priority was accorded to power generation and transmission. It

expanded the list of items reserved for exclusive production in the small scale sector from 180 to

more than 500. For the first time, within the small scale sector, a tiny unit was defined as a unit

with investment in machinery and equipment up to Rs.0.1 million and situated in towns or

villages with a population of less than 50,000 (as per 1971 census). Basic goods, capital goods,

high technology industries important for development of small scale and agriculture sectors were

clearly delineated for large scale sector. It was also stated that foreign companies that diluted

their foreign equity up to 40 per cent under Foreign Exchange Regulation Act (FERA) 1973were to be treated at par with the Indian companies. The Policy Statement of 1977 also issued a

list of industries where no foreign collaboration of financial or technical nature was allowed as

indigenous technology was already available. Fully owned foreign companies were allowed only

in highly export oriented sectors or sophisticated technology areas. For all approved foreign

investments, companies were completely free to repatriate capital and remit profits, dividends,

royalties, etc. Further, in order to ensure balanced regional development, it was decided not to

issue fresh licenses for setting up new industrial units within certain limits of large metropolitan

cities (more than 1 million population) and urban areas (more than 0.5 million population).

Industrial Policy Statement -1980

The industrial Policy Statement of 1980 placed accent on promotion of competition in the

domestic market, technological upgradatrion and modernization of industries. Some of the socio-

economic objectives spelt out in the Statement were i) optimum utilisation of installed capacity,

ii) higher productivity, iii) higher employment levels, iv) removal of regional disparities, v)

strengthening of agricultural base, vi) promotion of export oriented industries and vi) consumer

protection against high prices and poor quality.


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Policy measures were announced to revive the efficiency of public sector undertakings (PSUs)

by developing the management cadres in functional fields viz., operations, finance, marketing

and information system. An automatic expansion of capacity up to five per cent per annum was

allowed, particularly in the core sector and in industries with long-term export potential.

Special incentives were granted to industrial units which were engaged in industrial processesand technologies aiming at optimum utilization of energy and the exploitation of alternative

sources of energy. In order to boost the development of small scale industries, the investment

limit was raised to Rs.2 million in small scale units and Rs.2.5 million in ancillary units. In the

case of tiny units, investment limit was raised to Rs.0.2 million.

Industrial Policy Measures during the 1980s

Policy measures initiated in the first three decades since Independence facilitated the

establishment of basic industries and building up of a broadbased infrastructure in the country.

The Seventh Five Year Plan (1985-1900), recognized the need for consolidation of thesestrengths and initiating policy measures to prepare the Indian industry to respond effectively to

emerging challenges. A number of measures were initiated towards technological and managerial

modernization to improve productivity, quality and to reduce cost of production. The public

sector was freed from a number of constraints and was provided with greater autonomy. There

was some progress in the process of deregulation during the 1980s. In 1988, all industries,

excepting 26 industries specified in the negative list, were exempted from licensing. The

exemption was, however, subject to investment and locational limitations. The automotive

industry, cement, cotton spinning, food processing and polyester filament yarn industries

witnessed modernization and expanded scales of production during the 1980s.

With a view to promote industrialization of backward areas in the country, the Government of

India announced in June, 1988 the Growth Centre Scheme under which 71 Growth Centers were

proposed to be set up throughout the country. Growth centers were to be endowed with basic

infrastructure facilities such as power, water, telecommunications and banking to enable them to

attract industries.

Era of liberalization

After 1980, an era of liberalisation started, and the trend was gradually to dilute the strict

licensing system and allow more freedom to the entrepreneurs. The steps that were taken in

accordance with the policy included:

Re-endorsement of licenses: The capacity indicated in the licenses could be re-endorsed,provided it was 25% more than the licensed capacity (1984).

Automatic re-endorsement of licensed capacities (1988). Broad banding and selective delicensing (1985-86) extended to 25 industries. Liberalisation of 31 May 1990.


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This policy included:1. Exemption from licensing for all new units and those having an investment of

Rs.2.5 crores in fixed assets, and an entitlement to import upto 30% of the total

value of plant and machinery.

2. Investment of foreign equity up to 40% was freely allowed.3. Location restrictions were removed.4. Investment ceiling for small industries were removed.

Industrial Policy Statement- 1991

In July 1991, the Government of India announced drastic changes in the industrial and foreign

trade policies. Since then, further liberalizations have been introduced every year with each new

budget. The changes that have been included are:

Abolition of licensing in most industrial sectors; Removal of most of the regulations restricting the growth of large companies; Opening up many areas to the private sector previously reserved for development by

the public sector;

Removal of numerous regulations pertaining to foreign investment and transnationalbusiness collaborations (mainly contained in FERA before 1991);

Introduction of various incentives to encourage technology transfers in general andforeign investment in high priority industries in particular;

Partly freeing of foreign trade from government interference; and Steps to make the Rupee fully convertible on the current account (not the capital

account).

The new economic policies marked a fundamental break with the past. They drastically reduced

the degree of state regulations in several respects and introduced a much more market friendly

and open economy policy environment. There is widespread agreement among both Indian and

foreign investors that business opportunities in India improved after 1991. The following are the

outcomes of new industrial policies:

Costly and time consuming controls have been abolished. Until 1991, the industrialapproval implied that private investors and companies had to spend considerable time and

resources to obtain the necessary clearances.

It has been made easier for big companies to expand monopolies and respective tradepractices legislation has been radically changed so that even big companies with

market share above one third can expand their production and sales without prior

approval from the government.

Several sectors which used to be reserved for the public sector have been opened up forprivate investment and in some of the sectors, special incentives are offered to foreign

investors.


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Foreign majority ownership is now allowed as the general rule while before thegeneral rule allowed only 40 per cent of foreign ownership.

Quantitative import restrictions have been abolished and tariffs lowered. On average,weighted tariffs were brought down from 87 per cent in 1991 to less than 30 per cent in

1997.

Convertibility of the rupee on the current account has been introduced. This change ofpolicy has been an improvement.

However, it appears that broad agreement has emerged among Indian industrialists that the new

policy framework has introduced certain biases in favour of foreign companies and new foreign

investors, the following are the disadvantages for Indian promoters and companies visa-via new

foreign investors:

o Foreign investors can access capital funds abroad at much lower interest rates thanIndian promoters can obtain in India.

o Indian companies pay customs duties on all their imports while foreign companiescan obtain exemption.

o Sales tax in relation to interstate transfers applies only to Indian companies.o While Indian companies have to pay excise duty immediately, foreign companies can

often postpone their payment.

It appears warranted to conclude that while Indias post 1991 industrial policies reflected attempts

at accommodating more than before the interests of foreign capital, the institutional arrangement

for their implementation embodied biases mainly in favour of large India based companies with

established relations with government bureaucracies. Companies involved in Indias industrialdevelopment through investment and trade can be divided into At least five main categories may

be identified in the following manner:

o Indian controlled companies and groups of companies which previously, until 1991 cameunder the purview of MRTP Act. These are the big India companies and business

houses.

o Foreign controlled companies established in India before 1991 which until 1991, wereaffected by the FERA and at the same time come under the MRTP Act. These are the big

foreign branches and subsidiaries of transnational corporations with foreign equity at

40 per cent and above.o Foreign companies considering establishing manufacturing branches or subsidiaries and

entering into strategic alliances in India after 1991.

o Foreign companies interested only in trading with India.o Indian companies not covered by the MRTP Act, including small and medium sized

companies.


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INDEX OF INDUSTRIAL PRODUCTION (IIP)

Index of Industrial Production (IIP) in simplest terms is an index which details out the growth of

various sectors in an economy. E.g. Indian IIP will focus on sectors like mining, electricity,

Manufacturing & General.

Also base year needs to be decided on the basis of which all the index figures would be arrived

at. In case of India the base year has been fixed at 1993-94 hence the same would be equivalent

to 100 Points but now it changed its based year to 2004-2005.

Index of Industrial Production (IIP) is an abstract number, the magnitude of which represents the

status of production in the industrial sector for a given period of time as compared to a reference

period of time.

Successive Reviews

As the structure of the industrial sector changes over time, it became necessary to revise the baseyear of the IIP periodically to capture the changing composition of industrial production and

emergence of new products and services so as to measure the real growth of industrial sector

(UNSO recommends quinquennial revision of the base year of IIP). After 1937, the successive

revised base years were 1946, 1951, 1956, 1960, 1970, 198081 and 1993-94. Initially it was

covering 15 industries comprising three broad categories: mining, manufacturing and electricity.

The scope of the index was restricted to mining and manufacturing sectors consisting of 20

industries with 35 items, when the base year was shifted to 1946 by Economic Adviser, Ministry

of Commerce & Industry and it was called Interim Index of Industrial Production. This index

was discontinued in April 1956 due to certain shortcomings and was replaced by the revised

index with 1951 as the base year covering 88 items, broadly categorised as mining & quarrying

(2), manufacturing (17) and electricity (1) compiled by CSO. The items in this index were

classified according to the International Standard Industrial Classification (ISIC) 1948 of all

economic activities.

The index was further revised in July 1962 to the base year 1956 as per the recommendations of

a working group constituted by the CSO for the purpose and it had covered 201 items, classified

according to the Standard Industrial and Occupational Classification of All Economic Activities

published by the CSO in 1962. The index with 1960 as the base year was based on regular

monthly series for 312 items and annual series for 436 items. Hence, though the published index

was based on regular monthly series for 312 items, weights had been assigned for 436 items with

a view to using the same set of weights for the regular monthly index as well as the annual index

covering the additional items. However, the mineral index prepared by the IBM excluded gold,

salt, petroleum and natural gas.

The next revised series of index numbers with 1970 as the base year, had taken into account of

the structural changes occurred in industrial activity of the country since 1960 and this index was


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released in March 1975 covering 352 items comprising mining (61), manufacturing (290) and

electricity (1). The working group (set up in 1978) under the Chairmanship of the then Director

General of CSO, decided to shift the base to 1980-81, to reflect the changes that had taken place

in the industrial structure and to accommodate the items from small-scale sector.

A notable feature of the revised 1980 index number series was the inclusion of 18 items from theSSI sector, for which the office of the Development Commissioner of Small-Scale Industries

(DCSSI) could ensure regular supply of data. The production data for the small-scale sector were

included only from the month of July 1984 onwards; prior to this the production data from the

directorate general of technical development (DGTD) for large and medium industries alone had

been utilised. For the period April 1981 to June 1984 in respect of these 18 items, average base

year (198081) production as obtained from DGTD was utilized.

The latest series with 1993-94 as the base year containing 543 items (with the addition of 3 items

for mining sector and 188 for the manufacturing sector) has come into existence on 27 May 1998

and ever since, the quick estimates of IIP are being released as per the norms set out for theIMFs SDDS2, with a time lag of six weeks from the reference month. These quick estimates for

a given month are revised twice in the subsequent months. To retain the distinctive character and

enable the collection of data, the source agencies proposed clubbing of 478 items of the

manufacturing sector into 285 item groups and thus making a total of 287 item groups together

with one each of electricity and mining & quarrying. The revised series has followed the

National Industrial Classification NIC-1987. Another important feature of the latest series is the

inclusion of unorganised manufacturing sector (That is, the same 18 SSI products) along with

organised sector for the first time in the weighting diagram.

Base Year Number of Items Covered1946 35

1951 88

1956 201

1960 312

1970 352

1980 352

1993-94 538

Weighted arithmetic mean of quantity relatives with weights being allotted to various items in

proportion to value added by manufacture in the base year by using Laspeyre's formula:

I = (WiRi)/ Wi.

Where I is the index, Ri is the production relative of the ith item for the month in question and

Wi is the weight allotted to it.


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Recent industrial growth, measured in terms of IIP, shows fluctuating trends. Growth had

reached 15.5 per cent in 2007-8 and then started decelerating. Initial deceleration in industrial

growth was largely on account of the global economic meltdown. There was, however, a

recovery in industrial growth from 2.5 per cent in 2008-9 to 5.3 per cent in 2009-10 and 8.2 per

cent in 2010-11. Fragile economic recovery in the US and European countries and subdued

business sentiments at home affected the growth of the industrial sector in the current year.

Overall growth during April-December 2011 was 3.6 per cent compared to 8.3 per cent in the

corresponding period of the previous year. Growth of IIP in terms of its major components is

indicated in Table


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INDUSTRIAL GROWTH BY SECTORS

Textile-sector

The textile sector has so far remained subdued during the current financial year. The total cloth

production has declined by 4.74 per cent during April-December 2011. The decline in productionhas been due to two major segments, namely power loom (-2.54 per cent) and hosiery (-14.89

per cent). Cloth production by the mill and handloom sectors increased by 1 per cent and 2 per

cent respectively during the period. During April December 2011, man-made fibre production

and filament yarn production recorded a decrease of about 2 per cent and 7 per cent respectively.

Production of cotton yarn decreased by 13 per cent during this period. However, blended and

100 per cent non-cotton yarn production increased by 5 per cent.

Telecommunication

India's telecom sector has been one of the major successes in the country. With more than 270

million connections, India's telecommunication network is the third largest in the world and the

second largest among the emerging economies of Asia. The total number of telephones has

increased from 76.53 million on March 31, 2004 to 688.38 Million telephone (landlines and

mobile) subscribers and 652.42 Million mobile phone connections as of July 2010 it is projected

that India will have 1.159 billion mobile subscribers by 2013.Furthermore, projections by several

leading global consultancies indicate that the total number of subscribers in India will exceed the

total subscriber count in the China by 2013.The industry is expected to reach a size of 344,921

crore (US$74.85 billion) by 2012 at a growth rate of over 26 per cent, and generate employment

opportunities for about 10 million people during the same period. According to analysts, the

sector would create direct employment for 2.8 million people and for 7 million indirectly. In2008-09 the overall telecom equipments revenue in India stood at 136,833 crore (US$29.69

billion) during the fiscal, as against 115,382 crore (US$25.04 billion) a year before. The tele-

density has also increased from 23.9 per cent in December 2007 to 58.17% July 2010.

Chemicals

Major chemicals undergo several stages of processing to be converted into downstream

chemicals. These processed chemicals are used in agriculture and industry as auxiliary materials

such as adhesives, unprocessed plastics, dyes, and fertilizers. Chemicals are also directly used by

consumers in the form of pharmaceuticals, cosmetics, household products, paints, etc. Alkali

chemicals, inorganic chemicals, and organic chemicals constitute the major segments of the

chemicals industry. Production of major chemicals during April-November 2011 has been

comparatively higher except for pesticides and insecticides and dyes and dyestuff. Total output

for the sector is higher by 1.77 per cent


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Petrochemicals

Petrochemicals include synthetic fibres, polymers, elastomers, synthetic detergents, and

performance plastics, apart from their intermediates such as synthetic fibre intermediates,

synthetic detergent intermediates, olefins, and aromatics. The main sources of feedstock and fuel

for petrochemicals are natural gas and naphtha. Petrochemical products cover the entire spectrumof daily-use items ranging from clothing, housing, construction, furniture, automobiles,

household items, toys, agriculture, horticulture, irrigation, and packaging to medical appliances.

The production of major petrochemicals in primary form from 2008-9 onwards is given in Table

9.16. During April-November 2011-12 major petrochemicals have increased by 2.95 per cent.

The production of synthetic fibers, which is the second largest segment of the petrochemicals

sector, has declined during the current year.

Fertilizers

India is meeting 80 per cent of its urea requirement through indigenous production but is largelyimport dependent for its requirements of phosphatic and potassic (P & K) fertilizers either as

finished fertilizers or raw materials. Its entire potash requirement, about 90 per cent of

phosphatic requirement, and 20 per cent urea requirement is met through imports. In addition to

urea, 25 grades of P & K fertilizers namely di ammonium phosphate DAP), muriate of potash

(MOP), mono-ammonium phosphate (MAP), triple super phosphate (TSP), ammonium sulphate

(AS), single super phosphate (SSP) and 18 grades of NPKS complex fertilizers are provided to

farmers at subsidized prices under the Nutrient Based Subsidy (NBS) Policy. Farmers pay only

50 per cent of delivered cost of P & K fertilizers, the rest is borne by the Government of India in

the form of subsidy. The Government has also included seven new grades of NPKS complex

fertilizers under the NBS Policy. At present 25 grades of P & K fertilizers are under the NBSPolicy.

Food Processing

Food processing is one of the most heterogeneous sectors of manufacturing covering marine

products, dairy products, grain, meat products, fruits and vegetables, sugar, edible oils and

beverages. This sector has, however, been one of the fastest-growing segments in manufacturing

in the current year contributing 27 per cent to average industrial growth, more than three times

its weight in the IIP. Growth rates of some of the important products in this group are indicated.

A vibrant agrarian and rural economy requires establishing forward linkages in the form of thefood processing industries. Such linkages improve the income levels of the producers and help

reduce wastages, which are crucial for food and livelihood security. A recent study by the

Central Institute for Post Harvest Engineering Technology (CIPHET) in 2010 has assessed that

the post harvest losses of agricultural products amount to around ` 44,000 crores annually. The

Ministry of Food Processing Industries Formulates appropriate policies and implements targeted

schemes to reduce wastage and increase.


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Steel

India ranked as the fourth largest producer of crude steel in the world during January-November

2011 after China, Japan, and the USA. After a sharp increase in world consumption of finished

steel in 2010 (15 per cent), the consumption is estimated to slow down to 6.5 per cent for 2011

and 5.4 per cent in 2012 as per World Steel Association estimates. The country has also been the

largest sponge iron producer in the world since 2002. Domestic crude steel production grew at a

compounded annual growth rate (CAGR) of 8.4 per cent during 2006-7 to 2010-11 (Table 9.19).

The increase in production is driven by 8.8 per cent growth in crude steel capacity mainly in the

private-sector plants and high utilization rates during this period. The Indian steel industry has

diversified its product mix to include sophisticated value-added steel used in the automotive

sector, heavy machinery, and physical infrastructure. Despite the softening of industrial demand

as reflected in a 4.4 per cent growth in real consumption of total finished steel during April

December, 2011 over the same period of last year, the overall April-December 2011

performance of the Indian steel industry is optimistic. In 2011, it was faced with stiff challenges

posed by rising inflationary pressures at home and deteriorating global growth conditions. The

multiple hikes in interest rates by the central bank also impacted the industrys growth directlyand indirectly through their effect on the growth of key user industries. Raw material security

(e.g. getting iron ore mining lease), infrastructure (affecting logistics and transport), quality of

coking coal, and uncertainties in land acquisition have emerged as bottlenecks to setting up new

steel plants.


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Heavy industries

The Department of Heavy Industry monitors the performance of the automotive sector, heavy

electrical engineering, heavy engineering equipments and machine tools industry. As per the

Society of Indian Automobile Manufacturers (SIAM) actual production of passenger vehicles

was 2.9 per cent higher during April-November 2011 as compared to the same period in theprevious year. Likewise production of commercial vehicles was higher by 25.9 per cent. Overall

automotive-sector output increased by 15.5 per cent during April-November 2011. While

domestic sales of passenger vehicles contracted by 0.5 per cent, commercial vehicles sales

increased by a robust 20.0 per cent. Exports of all categories of vehicles covering passenger

vehicles, commercial vehicles, and others increased by 21 per cent, 26 per cent, and 33 per cent

respectively during April-November 2011. The heavy electrical engineering industry is an

important manufacturing sector, catering to the needs of the power sector and other industrial

sectors. Major equipment like boilers, turbo generators, turbines, transformers, condensers,

switch gears and relays, and related accessories is manufactured by this sector. The performance

of this industry is closely linked to the power generation capacity addition programme of the

country. Manufacturers of heavy electrical equipment have absorbed sub-critical technology up

to a unit capacity of 600 MW and are gearing up to adopt super-critical technology for unit size

of 660/800MW and above for thermal sets.

Electronics hardware

Indian electronics hardware production increased from ` 1,10,720 crore in 2009-10 to` 1,21,760

crore in 2010-11 (estimated), registering a growth of 10 per cent. During the year 2010-11

exports of electronics hardware are estimated to have registered a growth of 56 per cent in rupee

terms (62.42 per cent in US dollars) over the preceding year. In value terms, exports ofelectronics hardware are estimated to be ` 40,400 crore (US$ 8.9 billion) during of the year

2010-11, up from the ` 25,900 crore (US$ 5.5 billion) estimated in 2009-10. Electronics

hardware production is expected to be US$ 33 billion in 2011-12. It is projected that electronics

hardware exports will cross US$ 10 billion in 2011-12 as against US$ 8.86 billion in 2010-11, an

expected growth of about 12.8 per cent.

Real Estate

The infrastructure sector also growing it wing in a massive scale. Due to commonwealth games

government of India spends Rs 28,054 out of which Rs 16,560 crore was given to the Delhigovernment for upgrading the capital infrastructure and building of various stadiums (Rs 650

crore for street scraping, Rs 900 crore for development bus depots, Rs 3,000 crore for extension

of Metro, Rs 18,000 crore for augmenting DTC bus services and Rs 3,700 crore on flyovers and

bridges). As of newly union budget of Rs.1, 73,552 crore for infrastructure growth in the country

in budget 2010. Government has set the target of constructing 20km of national highways on

daily basis and to trigger these changes projects have been undertaken via public private


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partnerships (PPPs). The government also allotment the road transport to Rs.19, 894 crore

against the previous Rs.17, 520 crore for 2010-11. In an attempt to revise and enlarge the railway

network, he also allocated Rs.16, 752 crore.

Tourism & Hospitality

As per the Travel and Tourism Competitiveness Report 2009 by the World Economic Forum,

India is ranked 11th in the Asia Pacific region and 62nd overall, moving up three places on the

list of the world's attractive destinations. It is ranked the 14th best tourist destination for its

natural resources and 24th for its cultural resources, with many World Heritage sites, both

natural and cultural, rich fauna, and strong creative industries in the country. India also bagged

37th rank for its air transport network. The India travel and tourism industry ranked 5th in the

long-term (10-year) growth and is expected to be the second largest employer in the world by

2019.

Medical Tourism - According to Pawan Verma, senior executive vice-president, hotels division,

ITC the market size of medical tourism in India is worth US$ 2.4 billion and is growing at 27 per

cent annually. The country received 1.1 million medical tourists in 2009, registering a growth of

17 per cent.

According to a report by RNCOS, medical tourism will grow at a CAGR of over 27 per cent in

the period 200912 to generate revenues worth US$ 2.4 billion by 2012. The number of medical

tourists is anticipated to grow at a CAGR of over 19 per cent to reach 1.1 million by 2012. The

report adds that Indias share in the global medical tourism industry will climb to around 2.4 per

cent by the end of 2012.

Automobile Industry

The growth of the Indian middle class along with the growth of the economy over the past few

years has attracted global auto majors to the Indian market. India provides trained manpower at

competitive costs making India a favoured global manufacturing hub.

Propped by the increase in its car sales after the launch of General Motors (GM) new model

Beat, along with the robust growth in the Indian automobile sector, Kevin E Wale, President and

Managing Director, General Motors China Group stated that India should be among the top tenmarkets for the company globally by 2014. As of now all the major player of the Indian market

show huge turn over in the month of August were Indias largest commercial vehicle producer,

Tata Motors reported a rise in its July global sales near about 36% and Hyundai India claims

17.2% of growth.


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Information Technology Sector

Software/BPO/KPO - The Indian BPO market is a highly developed service segment. It is

estimated to grow at 19% annually till 2013. According to Gartner Research, the Indian BPO

market can grow to $1.8 billion by 2013. Gartner Research Director T J Singh says, "In the last

two years, many established Indian BPO providers and some of the multi-national corporation

service providers, focusing primarily on the international offshore services market and have

shifted focus and investments to the Indian domestic market. The IT services which are being

exported include various sectors such as financial services (41%), high-tech/ telecom (20%),

manufacturing (17%) and retail (8%).

According to the latest government survey, 90% of the new jobs were created during the last

quarter of the financial year 2009-2010. During the October-December quarter there was a huge

rise in employment opportunities i.e. around 0.7 million new jobs were created which reflected

in the economy. According to a NASSCOM report, there is a tremendous opportunity in the long

term. The BPO sector in India allows global companies to access the skilled workforce at lesser

wages.

Where The Indian government is providing incentives to the software development industry in

India by way of developing Software technology parks (STP) and Special Economic Zones

(SEZ).Software Technology Park is the most effective scheme provided by the Indian

government. It provides exemptions from custom duty as well as service tax for STPs. Other

policies include exemption from excise duty and rebate in the payment of Central Sales Tax.

However, the most important policy initiative is the provision for 100% income tax exemption

until 31st March 2011.

Special Economic Zones (SEZ) are also encouraged to boost the software development industry.

The SEZ policy came into effect from February 10, 2006. The policy is ideal for big industries.

It provides exemption from income tax for 15 years, 100% exemption for export income in the

first five years and 50% exemption for the next five.

Data Warehousing - Large retail companies such as Wal-Mart and Metro have adopted data

warehousing solutions for Business Intelligence (BI) and analysis. Many companies work on

Business Intelligence applications that are dependent on data warehousing. It provides a retailer

the ability to leverage his data assets to gain strategic insight, recognize emerging trends, andrespond quickly.

Many leading retailers see data warehousing and Business Intelligence as essential strategic

investments for their competitiveness. Investments in Data Warehousing has given companies

substantial returns on investment as they see increased revenues, increased margins, reduced

markdowns and shrink, and increased inventory turns.


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The recent global economic slowdown did not affect the Indian IT industry as disastrously as it

did in Europe and the US. This clearly demonstrates the Indian ITES market potential.

One of the major hubs in India for Data Warehousing is Bangalore, the Silicon Valley of India.

In fact, a major contribution in India's phenomenal growth in the field of software is provided by

the software companies based out of Bangalore. There are various reasons such as a favorable

climate, excellent infrastructure, availability of human resources, International quality research

and development centers, cosmopolitan ambiance, favorable government policies. Cities like

Mumbai, Pune and Nagpur are also growing markets in the field of data warehousing.

Life science

Pharmaceutical - Indias pharmaceutical industry is the third largest in the world in terms of

volume and stands 14th in terms of value. According to data published by the Department of

Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover of India's

pharmaceuticals industry between September 2008 and September 2009 was US$ 21.04 billion.

Of this the domestic market was worth US$ 12.26 billion. India also supplies more than 80% of

AIDS drugs to African countries.

According to the All India Organization of Chemists and Druggists (AIOCD), the

pharmaceuticals industry in India will grow by over 100 per cent over the next two years. The

pharmaceutical industry is currently growing at the rate of 12 per cent, but this will accelerate

soon. The sale of all types of medicines in the country stands at US$ 9.61 billion, which is

expected to reach around US$ 19.22 billion by 2012.

Biotechnology - The Indian biotechnology sector is one of the fastest growing knowledge-based

sectors in India and is expected to play a key role in shaping India's rapidly developing economy.

With numerous comparative advantages in terms of research and development (R&D) facilities,

knowledge, skills, and cost effectiveness, the biotechnology industry in India has immense

potential to emerge as a global key player.

The Indian biotech industry grew threefold in just five years to report revenues of US$ 3 billion

in 2009-10, a rise of 17 per cent over the previous year, according to the eighth annual survey

conducted by the Association of Biotechnology-Led Enterprises (ABLE) and a monthly journal,

BioSpectrum, based on inputs from over 150 biotech companies.

The biopharma sector contributed nearly three-fifth to the industry's revenues at US$ 1.9 billion,

a rise of 12 per cent, followed by bioservices at US$ 573 million and bioagri at US$ 420.4

million. The remaining revenue came from the bioindustrials US$ 122.5 million and

bioinformatics US$ 50.2 million segments.


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India is already being globally recognized as a manufacturer of economical, high-quality bulk

drugs and formulations. With a huge base of talented, skilled and cost-competitive manpower,

and a well-developed scientific infrastructure, India has great potential to become a leading

global player in the field of Life science.

Healthcare

The healthcare industry in the country, which comprises hospital and allied sectors,

is projected to grow 23 per cent per annum to touch US$ 77 billion by 2012 from the current

estimated size of US$ 35 billion, according to a Yes Bank and an industry body report published

in November 2009. The sector has registered a growth of 9.3 per cent between 2000-2009,

comparable to the sectoral growth rate of other emerging economies such as China, Brazil and

Mexico. According to the report, the growth in the sector would be driven by healthcare

facilities, private and public sectors, medical diagnostic and pathlabs and the medical insurance

sector. According to the report, diagnostics would contribute US$ 2.5 billion to the healthcare

industry by 2012.

An increasing number of public and private healthcare facilities are expected to propel demand

for the industry, accounting for another US$ 6.7 billion in this period.

The Government of India launched the National Rural Health Mission (NRHM) in 2005. It aims

to provide quality healthcare for all and increase the expenditure on healthcare from 0.9 per cent

of GDP to 2-3 per cent of GDP by 2012.

Moreover, in order to meet revised cost of construction, in March 2010 the government allocated

an additional US$ 1.23 billion for six upcoming AIIMS-like institutes and upgradation of 13

existing Government Medical Colleges.

Exports

Textiles and clothing worth US $26.82 billion were exported during 2010-11 as against US$

22.41 billion during 2009-10, registering an increase of about 19.66 per cent. During April-

November 2011, exports of textiles & clothing were of the order of US$ 19.78 billion as against

US$15.86 billion during the same period of 2010, registering a considerable growth of 24.73 per

cent. In respect of global exports of clothing, India ranked sixth largest exporter as per the World

trade Organization (WTO) (2010 release), trailing Turkey, Bangladesh, Hong Kong, EU-27, and

China. In respect of global exports of textiles, India ranked third, trailing EU-27 and China. In

view of the recessionary trend in the textiles sector, the government has been supporting the

textiles sector exports through various policy initiatives to enable the sector to increase market

share in the global textiles markets. Government has introduced several export promotion

measures in the Union Budget 2011-12 as well as through schemes of the Foreign Trade Policy

2009-14, including incentives under the Focus Market Scheme and Focus Product Scheme;

enhancing the coverage of the Market Linked Focus Product Scheme for textile products; and


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extension of the Market Linked Focus Product Scheme to increase Indias market share in

various countries.

Weight of Eight Core Sectors

S. No. Sectors Weight in IIP

1 Coal 4.379

2 Crude Oil 5.216

3 Natural Gas 1.708

4 Refinery Products 5.939

5 Fertilizers 1.254

6 Steel 6.684

7 Cement 2.406

8 Electricity 10.316

Overall Eight Core Sector Weight 37.903

Weight of Different Demand Based Sectors in Indian IIP

S No. Sectors Weight in IIP

1 Basic Goods 35.57

2 Capital Goods 9.26

3 Intermediate Goods 26.51

4 Consumer Goods 28.66

a) Durables 5.37

b) Non-Durables 23.3


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INDUSTRIAL COMPETITIVENESS

India lags behind 40 other countries in industrial competitiveness, faring poorer than Thailand,

Malta and Malaysia, a United Nations Industrial Development Organisation report said.

In an industrial development scoreboard prepared by the UNIDO, India ranks 41 out of 100different economies in terms of competitiveness of its industry in a liberalising world.

Singapore tops the UNIDO list and is followed by Ireland, Switzerland, Japan, Belgium,

Sweden, Finland, Germany, Korea, Taiwan Province of China, France, the US, Hong Kong,

Austria, Slovenia in the top 15.

However, India fared better than its neighbours with Pakistan ranking at 55, Bangladesh at 67

and Sri Lanka occupying the 75th position. Others in the ranking are UK (16), the Netherlands

(17), Malaysia (18), Canada (22), Malta (23), China (26), Mexico (30), Brazil (39) and Russia

(66).

The scoreboard is based on two sets of components, namely industrial development indicators

and competitive industrial performance index, the latter benchmarking competitive industrial

activity of countries against the backdrop of liberalisation and globalisation, UNIDO said.

The index measures the competitive performance of countries in terms of their ability to produce

goods competitively, keeping abreast with changing technologies as well as the intensity of

industrialisation, which is the share of manufacturing value added in GDP.

It also takes into account export quality, reflecting the role of manufacturing in a country''s

export activity as well as the ability to make more advanced products, thereby moving into moredynamic areas of export growth, UNIDO said.

Economic Development Of India

The economic development in India followed a socialist-inspired policies for most of its

independent history, including state-ownership of many sectors; extensive regulation and red

tape known as "Licence Raj"; and isolation from the world economy. India's per capita income

increased at only around 1% annualized rate in the three decades after Independence. Since the

mid-1980s, India has slowly opened up its markets through economic liberalization. After more

fundamental reforms since 1991 and their renewal in the 2000s, India has progressed towards a

free market economy.

In the late 2000s, India's growth has reached 7.5%, which will double the average income in a

decade. Analysts say that if India pushed more fundamental market reforms, it could sustain the

rate and even reach the government's 2011 target of 10%. States have large responsibilities over

their economies.Maharashtra has proved all time hit contributor to boost up the economic rise

since independence. The annualized 19992008 growth rates for Gujarat (9.6%), Haryana


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(9.1%), or Delhi (8.9%) were significantly higher than for Bihar (5.1%), Uttar Pradesh (4.4%), or

Madhya Pradesh (6.5%). India is the fourth-largest economy in the world and the third largest by

purchasing power parity adjusted exchange rates (PPP). On per capita basis, it ranks 128th in the

world or 118th by PPP.

The economic growth has been driven by the expansion of services that have been growingconsistently faster than other sectors. It is argued that the pattern of Indian development has been

a specific one and that the country may be able to skip the intermediate industrialization-led

phase in the transformation of its economic structure. Serious concerns have been raised about

the jobless nature of the economic growth.

Favourable macroeconomic performance has been a necessary but not sufficient condition for the

significant reduction of poverty among the Indian population. The rate of poverty decline has not

been higher in the post-reform period (since 1991). The improvements in some other non-

economic dimensions of social development have been even less favourable. The most

pronounced example is an exceptionally high and persistent level of child malnutrition (46% in20056).

The progress of economic reforms in India is followed closely. The World Bank suggests that the

most important priorities are public sector reform, infrastructure, agricultural and rural

development, removal of labor regulations, reforms in lagging states, and HIV/AIDS. For 2010,

India ranked 133rd in Ease of Doing Business Index, which is setback as compared with China

89th and Brazil 129th. According to Index of Economic Freedom World Ranking an annual

survey on economic freedom of the nations, India ranks 124th as compared with China and

Russia which ranks 140th and 143rd respectively in 2010.

Industrial Output

India is fourteenth in the world in factory output. Manufacturing sector in addition to mining,

quarrying, electricity and gas together account for 27.6% of the GDP and employ 17% of the

total workforce. Economic reforms introduced after 1991 brought foreign competition, led to

privatisation of certain public sector industries, opened up sectors hitherto reserved for the public

sector and led to an expansion in the production of fast-moving consumer goods. In recent years,

Indian cities have continued to liberalize, but excessive and burdensome business regulations

remain a problem in some cities, like Kochi and Kolkata.

Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family

firms and required political connections to prosper was faced with foreign competition, including

the threat of cheaper Chinese imports. It has since handled the change by squeezing costs,

revamping management, focusing on designing new products and relying on low labour costs

and technology.


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Services

India is fifteenth in services output. Service industry employ English-speaking workers on the

supply side and on the demand side, has increased demand from foreign consumers interested in

India's service exports or those looking to outsource their operations. India's IT industry, despite

contributing significantly to its balance of payments, accounts for only about 1% of the totalGDP or 1/50th of the total services.

The ITES-BPO sector has become a big employment generator especially amongst young

college graduates. The number of professionals employed by IT and ITES sectors is estimated at

around 1.3 million as on March 2006. Also, Indian IT-ITES is estimated to have helped create an

additional 3 million job opportunities through indirect and induced employment.


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CHALLENGES & OUTLOOK

Industrial-sector growth during the currentfinancial year is expected to be between 4 and 5 per

cent. At this rate, the annual growth would be less than the annual growth rates achieved in the

recent past and far below the potential growth rate. The challenge in the short term would,

therefore, be to shore up business sentiment, spur investment in productive activities, andidentify bottlenecks thatcan be removed in a reasonably short period of time. The government

has already made some quick movesto clear bottlenecks in some critical sectors suchas coal and

power and is also pushing forward project implementation in some key infrastructure sectors.

With the easing of headline inflation, moderation in commodities prices in the international

market, and revival of manufacturing performance in recent months in the major economies,

Indiasindustrial sector is expected to rebound during thenext financial year.In the medium to

long term several challenges remain. In its approach paper to the Twelfth Five YearPlan, the

Planning Commission has projected growth rates of 9.8 per cent and 11.5 per cent in the

manufacturing sector required to achieve 9 per cent and 9.5 per cent economic growth

respectively. TheNMP, as discussed in earlier sections, has envisaged even higher growth of 14

per cent per annum so asto take the share of manufacturing in GDP to 25 percent and increase

the absorption of labor in thissector from around 50 million as of today to morethan 150 million

by 2022.

For the NMP to successfully meet theobjective of 25 per cent share for the manufacturingsector

in GDP certain specific measures are required, some of which form part of Indias overall

developmentpriorities and strategies. There are several policymeasures, briefly discussed here,

that would haveto be pursued simultaneously.

First, there is need to resolve the issue of availability of land for industrial and infrastructureuse. NIMZs are a key tool for facilitating the growth of manufacturing sector, which cannot take

off in the absence of a well-thought-out and standardized approach to land acquisition.

Allocation of agricultural land for manufacturing is crucially linked with the issue of agricultural

productivity and food security. The situation could turn into a win-win one for both

manufacturing and agriculture if agriculture productivity increases to levels where both less land

and labour were required in this sector for food security.

Second, both forward and backward linkages of the manufacturing sector will need to be

strengthened for making progress on the objectives laid out in the NMP. Thegrowth of the

services sector (as distinct from the real sectors) depends considerably on the growth ofmanufacturing. Likewise, the growth of the services sector with quality benchmarking could

contribute to productivity improvements in the manufacturing sector. Banking, insurance, trade,

transport, communication, and skill development are some of the sectors where growth will be

driven by a competitive and vibrant manufacturing sector. Unlike this strong forward linkage

with the services sector, the backward linkage is of the weak nature with the agriculture sector

due to the inadequate pace of development of agrobased industries. And as a result, the


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employment-generation potential of the manufacturing sector has not been fully harnessed in

India.

Third, within manufacturing, there is a need to shift structurally in favour of high

valueaddition industries. Specific policy thrust is required in high precision machinery,

pharmaceuticals, biotechnology, shipbuilding, defence production, and the aero-space industry,which are some of the areas that provide scope for diversification. Considerable and growing

domestic demand in many of these sectors has to be leveraged for locating production facilities

in the country by bringing in suitable foreign collaborators. It can provide depth to Indian

manufacturing while increasing value addition from this sector. Acquiring depth in

manufacturing is important not only for improving the competitiveness of manufacturing but for

diversifying the industrial base.

Fourth, investment requirements in India will continue to exceed the availability of resources

from domestic savings. The investment-savings gap during 2005-11 was 1.7 per cent of GDP.

The best way of covering this gap is through FDI. Though our FDI policy regime is now moreopen and transparent and has an institutional review mechanism, there are several sectoral issues

that need to be addressed and continuously fine tuned.

Fifth, with the implementation of the direct tax code (DTC), it would become difficult to

incentivize industry through tax exemptions. In exports, the duty entitlement pass book (DEPB)

scheme will get phased out. The new incentive mechanism will need to rely on providing non-

tradable infrastructure services at global prices and in keeping with global standards. These

would be more supply-centric and would considerably reduce the relative cost disadvantages of

the domestic manufacturing sector, thereby giving a fillip to its growth.

Sixth, the new manufacturing sector will need to be environment-friendly. Environment issues

encompass exploration, excavation, and use of resources and their pricing. The resource needs of

manufacturing would require a certain balancing, consistent with sustainable protection of the

environment. A more transparent policy framework for pricing and allocation of natural

resources would be a natural starting point in this regard.Lack of consolidated information and

absence of a unified online service delivery platform in the current system of approvals for

starting a business has made this process laborious, time-consuming, and expensive. In order to

enable businesses and investors to save time and costs and in order to improve the business

environment, an online single window has been conceptualized in the form of the eBiz Mission

Mode Project under the National e- Governance Plan. The core value of this transformationalproject lies in a radical shift in the governments service delivery approach from being

department-centric to customer-centric. eBiz can not only create a 24x7 facility for information

and services, but may also offer joined-up services where a single application submitted by a

customer, for a number of permissions, clearances, approvals, and registrations, will be routed

automatically across multiple governmental agencies in a logical manner. An inbuilt payment

gateway may also add value by allowing all payments to be collected at one point and then


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apportioned appropriately. There is need to scale up and accelerate implementation of this

initiative. Industrial establishments have a variety of statutory obligations to discharge. The

Employees Provident Fund Act; Employees State Insurance Act; Payment of Gratuity Act;

Personal Injuries (Compensation Insurance) Act; Workmens Compensation Act; etc. are some

of the major laws that require not only the regular payouts by industrial units but also involve

filing of periodic returns and maintenance of registers and records. This not only adds to the

transaction cost of industry, it in many ways puts off a potential investor. It might be worthwhile

considering an alternate mechanism, which could address the issues of SMEs limited manpower

and resources. The costly way of compliances, which is often unsatisfactory for the bigger

players, for meeting statutory obligations in a more efficient and economical manner and serving

the interests of both the employers and employees.

Business Environment Project on Industrial Growth

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Transcript of Business Environment Project on Industrial Growth