Post Liberalization Industrial policies

 

Table of Content

1. Introduction
   
2. PSUs and Disinvestment
   
3. MOU scheme for Autonomy of PSUs
   
4. Sick Industrial Companies Act and BIFR
   
5. Manufacturing Policy
   
6. Industrial Corridors
   
7. FDI policy
   
8. Make in India
   
9. Export Promotion Policies
   
10. Policies for MSMEs
    
11. Defense Production and Procurement Policies
    

    
    

Introduction

Fact that economy is being over regulated and controlled was realized in 1980’s. As a result government pursued policy of deregulation and liberalization, rather in tardy and non-coherent manner.  During the period from 1980-90 the economy began to pick up and the rate of growth (GDP) increased to 5.8 per cent. However, it was driven mainly by a massive expansion in the country’s fiscal deficit (FD increased demand in economy). Also, as we noted imports liberalization in 1980 industrial policy resolution, this led to high industrial growth based on imported raw materials. Consequently India’s FOREX reserves depleted and neither there were enough exports to finance the imports. This all led to 1991 balance of payment crisis, which among other things forced government to adopt New Industrial Policy, features of which are discussed at end of last article.

PSUs and Disinvestment – From now on government was to leave more space for private sector and facilitate creation of a robust free market economy. It decided to keep for itself only those sectors which are of strategic or social importance, which are beyond capacity by private players. For this government had to roll back from most of the areas it was operating in, which ranged from bread making to Heavy Industry. Further, as part of Structural Adjustment Program of IMF, govt. was required to raise Rs. 2500 crores through disinvestment. Given that stakes were high because of safety of government investment and PSUs were biggest employers in those days, withdrawal had to be gradual and planned. Further, government faced stiff opposition from left wing and trade unions. So preference was to get rid of PSUs which had piled up losses and were nonperforming. Other performing PSUs were to be retained (atleast for the time being), and were to be provided more autonomy in their operations.

Purpose to be served by Disinvestment were many. One was revival of that PSU itself. More private control more will be the autonomy and in turn, better management. 2^nd, it was expected that piled up public debt will be brought down by proceed of disinvestment. Also, by exiting from non-crucial areas government could focus more on core sectors. Shares were to be offered to Mutual Funds, Workers and Public. In beginning policy was to bundle the share of profitable and loss making PSUs and that bundle was offered. Gradually individual shares were being offered. So far, in majority of cases only minority (less than 50%) stakes have been sold. Consequently PSUs remains PSUs despite of disinvestment

In Late 1990’s distinction was (on recommendation of disinvestment commission) made in Strategic and non-strategic PSUs. Government policy was to retain control only in Strategic enterprises by keeping atleast 51% of shares and bringing its stake down to 26% in non-strategic enterprises. It was decided that reduction of the Government’s shareholding to 26 per cent would not be automatic and the manner and pace of doing so would be decided on a case- by-case considering interests of consumers and avoiding concentration of economic power in private hands. Strategic Sectors were those which were completely reserved for government (currently 3 in number).

There are only three instances (other than strategic and slump sale) where Government divested itself of a majority shareholding. Those are of Bongaingaon Refinery & Petrochemicals Limited (BRPL), Chennai Petroleum Corporation Limited (CPCL), and Kochi Refineries Limited (KRL). Comically, these shares were brought by other different PSEs. It was felt that disinvestment by sale of shares to PSEs did not result in any of the advantages normally associated with the block transfer of majority shareholding, since the public sector character of the company did not change.

Strategic Sale (this is different concept from Strategic PSUs) –

It refers to sale of a large block of shares in a PSE (including subsidiary of a CPSE) along with transfer of management control to a strategic partner identified through a process of competitive bidding. This was termed as strategic sale. After the strategic sale, these PSEs ceased to be a Government Company as defined under Companies Act.

Maruti Udyog Ltd. was the first Government Company to be privatized. It ceased to be a Government company in 1992. However, strategic sale as a policy measure commenced in 1999- 2000 with the sale of 74 per cent of the Government’s equity in Modern Food Industries Ltd (Modern bread). Thereafter, twelve PSEs (including four subsidiaries of CPSEs), and seventeen hotels were sold to private investors along with transfer of management control by the Government.

Currently there are 277 Central Public Sector Enterprises under the administrative control of various ministries/departments. Out of these 149 CPSEs are profits making ones among them top 5 are The Oil and Natural Gas Corporation Ltd, National Thermal Power Corporation Ltd, Fertilizer Corporation of India Ltd, Coal India Ltd, and Bharat Heavy Electricals Ltd.

Disinvestment Commission – It was constituted in 1996 and reconstituted again in in 2001 to recommend on disinvestment in various PSUs. It was dissolved finally in 2004 with change in government.

Present Disinvestment Policy

The salient features of the current Policy are:

Apart from this there is action plan for disinvestment in ‘profit making’ government companies –

1. Already listed profitable CPSEs – to be made compliant by ‘Offer for Sale’ (they should have atleast 10% public holding)
   
2. Unlisted profitable CPSEs – to be listed in stock exchange
   
3. Follow-on public offers? – based on needs of that company and is to be considered on case to case basis.
   
4. Government would retain at least 51% equity and the management control
   

Keep in mind that this policy is not for loss making PSUs. For loss making PSUs (non-strategic ones) government will fetch very low value and any transfer in private hands will result curtailment of operations and lay off workers. Hence this becomes an even more politically sensitive issue and not much discussed.

National Investment Fund

The Government constituted fund in 2005, into which the proceeds from disinvestment were to be channelized. The corpus of the fund was to be of permanent nature and the same was to be professionally managed in order to provide sustainable returns to the Government, without depleting the corpus. NIF was to be maintained outside the Consolidated Fund of India.

Originally it was decided that – 75% of the annual income of the Fund (not proceeds of disinvestment) will be used to finance selected social sector schemes, which promote education, health and employment.

Residual 25% of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/ diversification.

But this scheme was suspended after economic downturn in 2009. Original position was that only Income/return/profit from corpus
of fund will be utilized in social sector schemes (upto 75%). So proceeds of disinvestment were invested (other companies) and income from such investment was used as explained. In 2009 government decided to use proceeds of PSUs directly to finance its social sector expenditure. This went on till 2013 when fund was restructured.

Restructuring of the National Investment Fund – In 2013 it was decided that the disinvestment proceeds with effect from the fiscal year 2013-14 will be credited to the existing ‘Public Account’ under the head NIF and they would remain there until withdrawn/invested for the approved purpose. Now corpus could be utilized for subscribing to the shares being issued by the CPSEs or for investing government companies.

Recent policy is ambiguous one. On one side a PSU sell stake in line with disinvestment, on other hand this fund owned by government subscribe to shares. Only account gets changed, ownership remains with government. So, motive of disinvestment policy is not clear.

Recently government disinvested 5% in Steel Authority of India Ltd., and Coal India, ONGC, NHPC, Power Finance Corporation, Rural Electrification Corp, Hindustan Zinc and Balco, are in line.

Please note that in order to sell stakes to public (as per DIV policy) listing of a company on stock exchange is prerequisite. In 2011 some shares in Coal India Ltd was offered to public through an ‘Initial Public Offer’, this was biggest PSE IPO. Since then stock market was not performing well. Some IPO’s were not even fully subscribed. Even valuations of listed public companies were quite low. Only main investor in PSE offers last year were cash rich government corporations like LIC. In effect, government was unable to carry on with policy as planned. Now that rigour in stock markets is back, Shares of PSUs are reflecting decent prices. That’s why there is so much of talk about disinvestment this year.

 

Policies for Autonomy of PSEs

MOUs in Ministries and Their PSUs – Memorandum of understandings are signed between management of PSU and respective ministry (in capacity of owner). These MOUs are directed towards strengthening management by results and objectives and effectively government gives up it erstwhile regime of controls and procedures. These MOUs are instrumental in giving autonomy to PSEs. These were first implemented in 1980’s.With New Industrial Policy of 1991 specifically promoting autonomy in PSEs, these received strong impetus. PSEs are also rated depending upon their performance vis a vis targets set.

To further induce professionalism in enterprises and increase autonomy the can be designated status of Miniratna, Navaratna or Maharatna. Access the list of PSEs so designated here.

Miniratna Status – The Central PSEs that have made profits in the last three years in a row and have positive net worth are eligible to be considered for grant of Miniratna status. There are around 71 Miniratna PSEs.

Navaratna Status – The entity must have Miniratna Category. It should have Schedule ‘A’ listing.

At least three ‘Excellent’ or ‘Very Good’ Memorandum of Understanding (MoU) ratings during the last five years. A composite score of 60 or above out of possible 100 marks in the six selected performance parameters, namely –

1. Net Profit to Net Worth
   
2. Manpower cost to cost of production or services
   
3. Gross margin as capital employed
   
4. Gross profit as Turnover
   
5. Earnings per Share
   
6. Inter-Sectoral comparison based on Net profit to net worth
   

 

Maharatna Status

 

1. The company already has Navratna status.
   
2. Its listed on Indian stock exchange with minimum prescribed public shareholding under SEBI regulations.
   
3. Average annual turnover of more than Rs. 25,000 crore, during the last 3 years.
   
4. Average annual net worth of more than Rs. 15,000 crore, during the last 3 years.
   
5. Average annual net profit after tax of more than Rs. 5,000 crore, during the last 3 years.
   
6. The entity should have significant global presence/international operations.
   

 

Sick Industrial Companies Act – 1980’s

Rationale of enacting this was to determine sickness in the industrial units. It also aimed at expediting the revival of potentially viable units so as to make the investments in such units profitable. At the same time, to ensure the closure of unviable units so as to release the investments locked up in such units for productive use elsewhere. It was not applicable to small scale industry.

It provided for the constitution of two quasi-judicial bodies, that is, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR). BIFR was entrusted with the work of taking appropriate measures for revival and rehabilitation of potentially sick undertakings and for liquidation of non-viable companies.

NEW MANUFACTURING POLICY, 2011

The Government of India has announced a national manufacturing policy with the objective of enhancing the share of manufacturing in GDP to 25% within a decade and creating 100 million jobs.  It also seeks to empower rural youth by imparting necessary skill sets to make them employable.  Sustainable development is integral to the spirit of the policy and technological value addition in manufacturing has received special focus.

The Policy is based on a principle of industrial growth in partnership with the States.

Central Government – will create the enabling policy framework, provide incentives for infrastructure development on a PPP basis through appropriate financing instruments

State Governments – will identify the suitable land and be equity holders in the NIMZs.

The following are the key policy instruments for achieving the objective:

a)     Establishment of National Investment and Manufacturing Zones (NIMZs) – green field (new) integrated Industrial Townships with state of the art infrastructure and land use on the basis of zoning; clean and energy efficient technology and requisite social infrastructure. NIMZ can be proposed with land area of at least 5000 hectares.

b)    Industrial Townships are proposed to be self-governing and Autonomous Bodies under Article 243(Q-c) of the Constitution. (This article concerns with local government – 74^th amendment)

c)     The trunk infrastructure will be financed appropriately by Central Government including through Viability Gap Funding while Special Purpose Vehicle will develop the zone infrastructure in PPP mode.

d)    NIMZ will be managed by Special Purpose Vehicle, headed by. Govt. officials and experts, including those of environment.

e) The policy has also come up with proposals to improve access to finance for SMEs in the manufacturing sector.

 f) The proposals in the policy are generally sector neutral, location neutral and technology neutral except incentivization of green technology.

While the National Investment & Manufacturing Zones (NIMZs) are an important instrumentality, the proposals contained in the Policy apply to manufacturing industry throughout the country including where ever industry is able to organize itself into clusters and adopt a model of self-regulation.

Industrial Corridors

DELHI-MUMBAI INDUSTRIAL CORRIDOR

The Government of India is developing the Delhi Mumbai Industrial Corridor (DMIC), as a global manufacturing and investment destination utilizing the high capacity 1483 km long western dedicated railway Freight Corridor (DFC), as the backbone. In essence, the DMIC project is aimed at the development of futuristic industrial cities. This would involve/attract an estimated investment of around US$ 90-100 billion over the next thirty years.  The DMIC project covers 6 States i.e. Haryana, UP, Rajasthan, Madhya Pradesh, Maharashtra and Gujarat, accounting for 43% of the national GDP, 50% of industrial production and exports and 40% of total workforce. It is estimated that the developments under the project will offer employment opportunities for over three million people. 

DMIC has 24 nodes covering 11 Investment Regions of more than 200 sq. kms each and 13 Industrial Areas of about 100 sq. kms each. Initially, 7 (Seven) investment nodes are being developed with assistance from Government of India.

 The 7 Investment Regions under DMIC will be NIMZs as under:

Ahmedabad-Dholera Investment Region, Gujarat (900 sq km)

 Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra (84 sq km)

Manesar-Bawal Investment Region, Haryana (380 sq km)

Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan (150 sq km)

Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh (370 sq km)

Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh (250 sq km) and

Dighi Port Industrial Area, Maharashtra (230 sq km).

Twenty four manufacturing cities are envisaged in the perspective plan of the DMIC project. In the first phase, seven cities are being developed, one each in the states of Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh and Gujarat and two in Maharashtra. The manufacturing cities will provide international and domestic investors with a diverse set of vast investment opportunities. The initial phase of the new cities is expected to be completed by 2019.

Sectors of focus include general manufacturing; IT/ITES; electronics including high-tech industries; automobiles and auto ancillary; agro and food processing; heavy engineering; metals and metallurgical products; pharmaceuticals and biotech; and services sector.

Other four corridors which have been conceptualized are –

1. Bengaluru-Mumbai Economic Corridor (BMEC);
   
2. Amritsar – Kolkata Industrial Development Corridor (AKIC);
   
3. Chennai-Bengaluru Industrial Corridor (CBIC),
   
4. East Coast Economic Corridor (ECEC) with Chennai Vizag Industrial Corridor as the first phase of the project (CVIC).
   

 

FDI Policy

A foreign company willing to take part in Indian industry can open up a company in India, they may setup a subsidiary company (of foreign co.), joint venture or they may open a branch in India. This is called foreign Direct Investment. Investment in current Indian companies can be done in stock markets through ‘Foreign Portfolio Investment’. FDI is long term and more stable investment as compared to FPIs. FDI results into initiation of some Greenfield projects in the country and adds more value to the industry and economy of the country. In contrast, FPI is just change in hands of existing investments, through transfer of shares.

Ministry of Commerce & Industry, Department of Industrial Policy and Promotion, Foreign Investment Promotion board are the bodies involved in framing and changes in the policy. With every change in policy RBI has to amend Forex Management Regulations.

FDI is completely disallowed in following sectors –

1. Atomic Energy
   
2. Lottery Business
   
3. Gambling and Betting
   
4. Business of Chit Fund
   
5. Nidhi Company
   
6. Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
   
7. Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification.
   
8. Trading in Transferable Development Rights (TDRs).
   
9. Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
   

FDI is allowed either through ‘Automatic Route’ or after clearance by ‘Foreign Investment Promotion Board’ (which is under Deptt. Of Economic Affairs, MOF). Route allowed differs with percentage of holding by Foreign Company in the Indian company

Some recent Decisions are as follows –

Cabinet has cleared a proposal which allows 100 per cent FDI in railway infrastructure, excluding operations. Though the move does not allow foreign firms to operate trains, it allows them to do other things such as create the network and supply trains for bullet trains etc.

Bill is about to be passed to raise the foreign investment ceiling in private insurance companies from 26 per cent to 49 per cent, with the proviso that the management and control of the companies must be with Indians.

While the FDI limit for defense production has been maintained at 26% (Cabinet Committee on Security may approve proposals for FDI beyond 26% if they result in access to state of the art technology).

FDI in multiband Retail was allowed with subject to clause that 30% of total procurement should be from Small Industry having investment in machinery below $1 million. States have overriding discretion to allow or disallow FDI in Multi brand retail. This however failed to attract FDI in organized retail sector. So government diluted provisions by replacing ‘small scale’ with ‘micro, small and medium enterprises’ and investment limit to $2 Million. Originally there was time limit for fulfilment of commitment toward domestic sourcing. This time limit was also removed.

 

Make in India

Make in India is an international marketing campaigning slogan coined by the Prime Minister. As per website it aims at – facilitating investment to foster innovation, Skill Development, Protecting intellectual property and providing best in class manufacturing infrastructure in India. It involves sector wise initiatives and covers almost all crucial sectors.

Export promotion policies

Concept of Special Economic Zone

Special Economic Zone is one or more areas of a country where the tariffs and quotas are eliminated and bureaucratic requirements are lowered so that more companies are attracted to the area. The companies establishing in the area also gets extra incentives for doing business. 

In India, the policy for setting up SEZ was introduced on April 1, 2000 with a view to provide an internationally competitive and hassle free environment for exports. The policy offered setting up of SEZ in the public, private, joint sector or by State Governments. 

Prior to Special economic zones, Expert processing Zones (EPZ) were in vogue. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances(SEZ provides ‘single window clearance’), absence of world-class infrastructure, an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. For all specified procedural purposes Special Economic Zones are considered foreign territory within the country. Domestic trade with SEZ is generally eligible for export concessions.

For IT industry there are similar Software Technology Parks . Benefits are available to Export Oriented Units under separate Scheme.

Export Promotion Capital Goods Scheme – Scheme
allows import capital goods at zero or concessional custom duty, provided importer exports specified goods of value not less than 6 times duty saved.

Micro Small and Medium Enterprise

The small scale industry sector output contributes almost 40% of the gross Industrial value-added 45% of the total exports from India (direct as well as indirect exports) and is the second largest employer of human resources after agriculture. The development of Small Scale Sector has therefore been assigned an important role in India’s national plans.

In order to protect, support and promote small enterprises as also to help them become self-supporting, a number of protective and promotional measures have been undertaken by the Government. This job is taken up by both center and state governments. There is separate ministry for MSMEs which helps in following way.

1. Reservation – Reservation of products for exclusive manufacture in the small scale sector was introduced for the first time in 1967 with the reservation of 47 items. As of July 2010, 20 items are reserved for exclusive manufacture in the small scale sector.
   
2. Government has ‘procurement policy’ which prefers SSI – 358 items are also reserved for exclusive purchase from MSE sector. 
   
3. Interest Subvention schemes are started from time to time.
   
4. Technology Upgradation Fund Scheme – under this subsidy is available to small and medium scale industry to adopt new technology. Subsidy is available either on Capital Expenditure, or as interest Subvention.
   
5. Export Assistance & Facilities – In certain cases duty free or with concessional rate of Custom Duty, so as to ensure higher production for exports. There were less restriction for exports by this sector and overall various supporting facilities such as remission of duties paid on input materials were available.
   

   Exporters are recognized as Export House, Trading Houses, Star Trading Houses and Super Star Trading Houses on the basis of certain criteria as laid down in the Export-Import Policy 1997-2002. Criteria are quantitative targets, such as turnover or FOREX earned. For Small Scale Sector their respective figures are considered 3 times the actual. By this they are granted special import license, which gives them rebate on import duty.
   

6. They get government support for participation and exhibition in International Fairs
   
7. Technical & Managerial Consultancy Services to the MSME manufacturers/exporters is provided through a network of field offices
   
8. The National Small Industries Corporation through its ‘export development program’ is playing a vital role to promote the MSME sector in exporting their products/projects in international, markets by providing following assistance to the small enterprises.
   
9. These schemes are Small Scale Industry specific and are available in addition to the general schemes.
   

    

Defense production & procurement policy
– designed for encouraging the formation of joint ventures with 26 per cent foreign direct investment (FDI). This is expected to go up to 49 per cent (100 percent subject to clearance by CCEA), gradually resulting in an increase in arms exports as MNCs will begin to use their Indian joint ventures as hubs for sourcing weapons and equipment components for their factories abroad.

The DPP stipulates an offsets commitment of 30 per cent of the total value of a contract if it exceeds $ 66 million (around Rs 300.00 crore). Under the system of offset commitment, supplier will be obliged to procure from India materials worth atleast 30% of total contract value. (Provided contract exceeds $ 66 m). This policy is precisely aimed at indigenization of defense industry.

 

These are few important industrial policies (among many) which were pursued in post liberalization era. Assessment of Industry in current situation, despite so many of policies, gives bleak picture. Industrial growth plummeted badly in recent years after strong performance in 2010’s. There are few structural problems in economy which makes high growth unsustainable. There is wage- prices spiral. There’s constant upward pressure for wages, which results in high prices. This in turn affects demand in economy negatively. Situation become worse considering majority of industry is informal and labor intensive.

We also have dilemma in choosing between technology backed or Labor backed industry. Labor intensive industry provides employment but at same time makes products uncompetitive.

Overall, current policy regime aims to strike balance between both by providing protection to small scale industry. Further, Globalization and modernization goes hand in hand. Recent IT and telecom revolution were also feared in beginning, but they now employ millions of Indians. Apart from this, policies aim at improvement of Infrastructure. Good policy on Foreign Direct Investment is instrumental for technology transfer and better Infrastructure in India.