6. Dilution of protection to Small Scale Industries (SSI) and emphasis on competitiveness

SSIs enjoyed a unique status in Indian economy due to its diversified presence across the country and thereby utilizing resources and skills, which would have otherwise remained unutilized. Due to their potential to generate large-scale employment, produce consumer goods of mass consumption, alleviate regional disparities, etc., industrial policies protected the sector for its growth. The principal protective measures for SSI comprised:

♤ Demarcating SSI from the rest of industry through a definition under the IDR Act, 1951.

♤ Concessional credit from the banking system.

♤ Fiscal concessions.

♤ Exemption from industrial licensing and labor legislations.

♤ Preferential access to scarce raw materials, both domestic and imported.

♤ Market support from the government through reservation of products for government purchase and price preferences.

♤ Reservation of products for exclusive manufacturing in SSIs and restrictions on the growth of output and capacity in the large-scale sector for products reserved for SSI manufacturing.

These policy measures protected SSIs from both internal and external competition.

However, since 1991 the protective emphasis of SSI policy has undergone dilution. In August 1991, government of India brought out an exclusive policy for SSI. The policy marked:

♤ the beginning of an end to protective measures to small industry.

♤ promotion of competitiveness by addressing the basic concerns of the sector namely technology, finance and marketing.

Subsequently, the number of items reserved exclusively for small industry manufacturing was gradually brought down. The policy of reserving items had lost its relevance to a large extent because though these products could not be manufactured by large enterprises domestically, they could be imported from abroad due to the removal of quantitative and non-quantitative restrictions on most imports by the year 2001. Concession element in lending rates for small industry was largely withdrawn during the 1990s. The number of products reserved exclusively for purchase from small industry by the government has also been reduced. Measures have been adopted to improve technology and export capabilities of SSIs. Thus, the overall promotion orientation of SSI has shifted from protection towards competitiveness.

2.3.1. Assessment of New Industrial Policy (NIP)

The response to the balance-of-payments crisis was to not only put in place policies for macroeconomic stabilization but seize the opportunity to launch wide-ranging economic reforms to realize the potential of the Indian economy for higher growth. Beginning in 1991, the policymakers attempted to take significant steps towards integrating the economy with the world and improving the macroeconomic environment from the deterioration of the 1980s. The transformation in the policy regime away from extensive control and a strong inward orientation in the decade and a half since 1991 have been attained through incremental/ gradualist changes, occasional reversals, and without any big ideological U-turns. Coalitions of

various political parties at the centre and different political parties ruling the states have taken turns in moving the economic reform process forward, albeit in a haphazard manner.

The period from 1991–2 to 1996–7 saw rapid and wide-ranging reforms in industrial and trade policies, tax policies, and other policies impacting on macroeconomic management. There was a distinct slowing down of reforms after 1996–7, partly because of complacency at the favourable response to the early reforms, partly because of confusion resulting from change of government at the centre, and also because by the mid-1990s, the competition had begun to pinch and Indian industry was becoming less supportive of change including external liberalization. In 2001, India regained the momentum of change towards improving the environment for private investment, opening the economy to foreign competition, and infrastructure development. However, macroeconomic management (after an excellent start when the consolidated fiscal deficit of the centre and the states was brought down from 9.6 per cent of GDP in 1990–1 to 7 per cent in 1992–3) has been an area of weakness that could undermine the achievement of sustainable growth at high rates in the future.

The industrial policy reforms during the 1990s were bold in doing away with numerous barriers to entry, for example, removal of industrial licensing for investment, opening up all but a few strategic areas to other than the public sector, and replacing the earlier MRTP Act with a new Competition Law to regulate anti-competitive behaviour. Even on the policy of reservation for the small-scale sector, a beginning was made by dereserving a number of items for manufacturing as well as purchase. However, the microeconomic reforms and judicial reforms which would make the factor markets more flexible and enable individual firms to benefit from the more competitive environment were slow to come by.

Trade policy reforms made a radical break with the past by discontinuing with the complex system of import licensing and making an open commitment to lowering the tariff rates on imports. At the outset, import licensing was dispensed with for most goods other than consumer goods, thereby removing a major source of corruption and inefficiency. In 2001, India finally began to remove the quantitative restrictions on consumer goods and agricultural products over a three-year period.

Import duties were reduced gradually if not always steadily. After a sharp decline from an average of 73 per cent in 1991–2 to around 25 per cent in 1996–7, the import-weighted import duty crept up again to 36 per cent in 2000–1 reflecting a revival of protectionist pressure from established Indian industry, Subsequently there was a reversal of this trend and the government reiterated the objective of reducing India's tariff protection rates to Association of East Asian Nations (ASEAN) levels.

In the 1990s, the FDI rules were liberalized with a view to gaining improved access to technology and world markets and also helping release the resource constraints on investment. Many industries were deregulated and opened to FDI. For others, the Foreign Investment Promotion Board was set up to expedite applications for foreign investment. In addition, the Indian stock market has been opened for investment in equity to foreign institutional investors (FIIs). These policy changes have led to a sharp increase in FDI flows from almost nothing in 1990 to considerable levels at present.

A major challenge of the reforms was how to attract private investment into sectors such as electricity, telecommunications, roads, railways, ports, and airports, in order to meet the enormous investment requirements of upgrading infrastructure. These sectors were opened up to private investment at different times in the subsequent years with varying degrees of success.

Telecommunications is the area where reforms have been most successful, helped by the fact that pricing of telecom services (unlike that of power) was not uneconomic. Access to telecom

services has expanded greatly, costs have come down, and quality improved as a handful of strong private-sector telecom service suppliers are competing effectively with the public-sector companies. Private investment has also been attracted in ports and airports. In roads, new investment has been dominantly in the public sector, as is the case in most countries, but there has also been some private-sector involvement, which could increase in future.

With respect to the power sector, the expectations of attracting large investments in generation capacity were belied by continuing financial problems of the distribution segment, which remained unviable for long because of a combination of unrealistically low tariffs for some sections of consumers (households and farmers) and very large inefficiencies in collection. In recent years, attempts have been made to depoliticize the process of fixing power tariffs. The Electricity Act of 2003 lays out a broad legal framework of regulation for the sector and effectively empowers state governments to accelerate power-sector reforms through fostering greater competition, increased involvement of the private sector, and better governance.

Profit-making public-sector units (PSUs) were allowed greater autonomy and larger freedom to raise resources in the capital market, but the relatively less well-performing PSUs languished for want of public funds and political will to restructure, privatize, or close down. A Disinvestment Commission was set up in 1997, but privatization was not seriously put on the policy agenda until 2001. A few public-sector enterprises were privatized with the transfer of management control during 2001–3, the most important being BALCO (Bharat Aluminium Company Ltd), which was sold to a strategic private investor. But resistance surfaced strongly when privatization of two oil companies was attempted. Further brakes were put on privatization by the government which came to power in 2004. However, there has been a renewed focus on disinvestment off late to increase the efficiency of the public sector.

The increased market orientation of policy regime generated a favourable investment response from the private sector up to 1996–7. Indeed, the rate of private fixed investment increased from a low of 12.9 per cent in 1991–2 to 15.9 per cent in 1996–7.

The slowdown in reforms after 1996–7, together with a worsening of the external economic environment after the Asian financial crisis, resulted in slowing down of industrial growth rate. From 12.3 per cent in 1995–6, industrial growth rate dropped to 7.7 per cent in 1996–7 and 3.8 per cent in each of the successive two years. However, the subsequent period has shown industrial revival with improved growth rates. Moreover, the software boom has continued and created a new brand image for India in world markets.

There is substantial evidence to suggest that Indian industry has been restructuring and reducing costs in a slow but steady manner since the mid-1990s. The pace of adjustment and adaptation has been slow in some of the important traditional industries, for example, textiles and garments which are facing new challenges of the competitive world market scenario after the end of the Multifibre arrangement (MFA) in January 2005. On the other hand, pharmaceuticals and automotive components are examples of manufacturing industries that have successfully turned around and developed a global vision to penetrate world markets.

The Indian pharmaceutical industry, while making inroads into the fast-growing generics market worldwide, is also positioning itself under the new Intellectual Property Rights (IPR) regime through increased research and development (R&D) expenditures and strategic alliances to move up the value chain. With a more liberal foreign investment policy, multinational corporations and international generics companies have also been attracted to restructure their operations and increase their stakes in existing ventures in India and set up new ventures.

The post-reform era has also spurred the development of the biotechnology industry which is driven by new enterprise and new innovation. Skilled human resources, active government support, and increased investment–public as well as private–promises sustained growth of this

industry with global orientation. India is emerging as the most favoured destination for collaborative R&D, bioinformatics, contract research and manufacturing, and clinical research as a result of growing compliance with internationally harmonized standards. Several states have taken steps to develop bio-clusters based on academic and entrepreneurial strengths.