• Nature of Industrial growth in India can be examined by dividing the

time period since 1951 in to four phases.

• Phase-I : 1951-1965

• Measures were initiated to build strong industrial base for the

economy

• In this period investments were made in iron and steel, heavy

engineering and machine building industries

• Iron and steel industries were established in Bhilai, Durgapur and

Rourkela.

• Phase-I covers first three five year plans

• Use based functional classification of industries ACG

• 1951-55 1955-60 1960-65

• 1.Basic goods 4.7 12.1 10.4

• 2.Capital goods 9.89 13.1 19.6

• 3.Intermediate gs 7.8 6.3 6.9

• 4.Consumer goods 4.8 4.4 4.9

• a) Con durables - - -

b) Con non- durables -- -- --

5. General Index 5.7 7.2 9.0

• Phase-II: 1965-1980

• This phase is characterised by the deceleration and retrogression.

• Falling growth rate

• Negative growth rate of industrial sector

• Use based functional classification of industries ACG

1
 • 1965-1974 1974-79 1979-80

• 1.Basic goods 6.5 8.4 (-)0.5

• 2.Capital goods 2.6 5.7 (-)2.3

• 3.Intermediate gs 3.0 4.3 1.9

• 4.Consumer goods 3.4 5.5 (-)4.4

• a) Con durables 6.2 6.8 5.6

b) Con non- durables 2.8 5.4 (-) 6.1

5. General Index 4.1 6.1 (-)1.6

• Causes of deceleration and Retrogression

• 1. Various exogenous factors such as wars with Pakistan and China,

successive droughts in 1965-67 and 1971-73, supply constraints such
as infrastructural bottlenecks and oil crisis in 1973.

• 2. Poor performance of agriculture sector

• 3. Unequal distribution of income in favour of rich followed by

stagnation in demand for consumer goods

4. Bureaucratic obstacles- licensing policy

Causes of Industrial recovery

• 1. Introduction of liberalization policy, huge budgetary deficits to

generate adequate demand

• 2. Good performance of agriculture sector which contributed to over

all growth of the economy by pushing the demand for agricultural
inputs

• 3. Revival of investment in infrastructure sectors

• 4. Introduction of measures to raise the degree of efficiency in

industrial sector.

2
 • Phase-IV : 1991 Onwards

• In this phase there are fluctuations in industrial growth rate, In the

early years of 1990s there was retrogression followed by an up turn
and down turn . This phenomenon continued even after the year
2000.

• Use based functional classification of industries ACG

• 1991-92 1996- 97

• 1.Basic goods 6.2 8.2

• 2.Capital goods -12.8 5.9

• 3.Intermediate gs - 0.7 9.7

• 4.Consumer goods - -

• a) Con durables - 12.5 5.4

b) Con non- durables 1.2 3.7

5. All manufac Inds - 0.05 8.6

6. General Index - 0.10 7.1

Annual Growth Rates of Major Sectors of Industry

• 1999-00 2009-10 2014-15

• Mining 1.0 7.9 1.5

• Manufacturing 7.1 4.8 2.3

• Electricity 7.3 6.1 8.4

• General index 6.7 5.3 2.8

Industrial policy-1991

3
• In line with the liberalization policy introduced during 1980s, 1n 1991
the government announced new industrial policy which further
liberalised the Indian industrial sector.

• The basic objective of this new policy is to:

• Unshackle the Indian industrial economy from the cob-

webs of un necessary bureaucratic controls

• To achieve this objective the govt announced many measures. These

measures are:

1. De-licensing

• De-licensing does not mean doing away with licensing policy

altogether.

• It implies that for certain types of industries licensing is not required.

• But for certain other types of industries licensing is a must.

• The industries which require compulsory license are:

• 1. Strategic items

• 2. Hazardous chemicals

• 3. Commodities having social consequences

• 4. Commodities which pollute the environment

• 5. Elite consumption goods

• These five broad categories of industries consists of 18 products.

These are:

• 1. Coal and lignite

• 2. Petroleum ( other than crude)

• 3.Brewing of alcoholic drinks

• 4. Sugar

4
• 5. Animal fat and Oils

• 6. Cigarettes and other tobacco products

• 7. Asbestos

• 8. Plywood and decorative veneer

• 9. Raw hides & skins , leather products

• 10. Tanned and dressed skin products

• 11. Motor cars

• 12. Paper and news print

• 13. Electronic aero space and dfense equipment

• 14. Industrial explosives

• 15. Hazardous chemicals

• 16. Drugs and pharmaceuticals

• 17. Entertainment electronics

• 18. White goods such as domestic refrigerators, washing machines,

microwave ovens and air conditioners

• The compulsory licensing provision not applicable to small scale units

taking up the manufacture of any of the bove 18 items exclusively
reserved for small scale sector.

• 2. Policy regarding public sector

• This new policy reduced the number of industries reserved for public
sector from 17 to 8.

• These are:

• 1. Arms and ammunition, defence equipment, warships air crafts

• 2. Atomic energy

5
• 3. Coal and lignite

• 4. Mineral oil

• 5. Mining of iron ore, chrome, manganese ore, gold, diamonds

• 6. Mining of copper, led, zinc, tin,

• 7. Minerals specified in the schedule to atomic energy order 1953

8. Rail transport

• 3. MRTP limit:

• Since 1985, as per MRTP act, any firm with assets over Rs 100 crore
was classified as MRTP firm.

• Such firm was allowed to start only selected industries on a case by

case approval.

• But the government realised the fact that the provisions in MRTP act
adversely effected the growth of industrial sector in India.

• Therefore the government aimed and controlling unfair trade

practices rather than pre-entry scrutiny of investment decisions.

• In line with this objective, the government relaxed stringent

provisions in MRTP act.

• Role of public and private sector

• The structure of Indian economy is known as mixed economy.

• Where there is coexistence of public and private sectors

• All industries have been divided between public and private sectors

• After the industrial policy resolutions came in to operation from 1948

and especially from 1956,most of the industries have been in the
public sector. welfare

6
 • Private sector was not given due importance in industrial activity
prior to 1980.

• Too much importance was assigned to the public sector.

• It was decided to manufacture nail pins to aeroplanes in public sector

in the name of protecting consumer’s welfare.

• In a mixed economy set up, some industries were owned and

managed by the state through its public sector and remaining
industries are owned and managed by the private sector

• In India only those industries which are essential for speedy

development of the economy and where private sector is reluctant to
invest either due to low rate of return or heavy risk involved.

• Public sector occupied an important place for achieving systematic

and planned development in a country like India.

• To provide necessary support to the development strategy of the

country, the public sector offers necessary the minimum push for
bringing the economy to a path of self sustained growth

Evolution and development of public sector enterprises in India

• During the pre-independence period, public sector participation in

economic activity was virtually absent in Indian economy

• A few undertakings were under the management and control of

government were Railways, Ports, Posts and telegraphs, Aircrafts and
ordinance factories.

• In the post independence period a huge expansion of the industrial

sector was under taken particularly after the announcement of
Industrial policy in 1956.

• In 1951, there were 5 central public sector undertakings with an

investment of Rs 29 crore

7
 • By 2015 the number of central public sector undertakings increased
to 235 with an investment of Rs10,96,057 crore.

• Public sector has been playing a positive role in the industrial

development of the country by laying down a sound foundation of
industrial structure.

We can understand the role of public sector from the following :

• 1. Promoting economic development at a rapid pace by filling gaps in

the industrial structure

• 2. Promoting infrastructural facilities for the growth of the economy

• 3. Undertaking economic activity in those strategically important

areas where private sector may distort the spirit of national objective

4.Contribution to public exchequer

• 5. Checking monopolies and concentration of power in the hands of

few

• 6. Promoting balanced regional development

• 7. Reducing disparities in the distribution of income and wealth by

bridging the gap between the rich and poor

• 8. Creating and enhancing adequate employment opportunities in

different sectors by making heavy investments

• 9. Attaining self reliance in different technologies as per requirement

• 10. Eliminating dependence on foreign aid and foreign technology

• 11. To have social control and regulation through varipous public

financial institutions

• 12. Reducing the deficit in BoP by promoting exports and reducing

imports by establishing import substituting industries

Role of private sector

8
• India being a mixed economy, has assigned a great importance on the
private sector of the country for attaining rapid economic
development.

• The government has fixed a specific role to private sector in the field
of industries, trade and service sector.

• The most dominant sector of India that agriculture and other allied
activities like dairying, animal husbandry, poultry etc is totally under
the control of private sector

• Thus private sector is plying an important role in managing the entire

agriculture sector and there by providing food stuffs to entire
population

• At the same time, major portion of industrial sector engaged in the

non-strategic and light areas, producing various consumer goods both
durable and non-durable, electronics and electrical goods,
automobiles, textiles, chemicals , food products, light engineering
goods etc is also under the control of private sector.

• In addition to this the development of small scale and cottage

industries is also the responsibility of private sector.

• The private sector is also playing an important role in the

development of service sector.

• The entire whole sale and retail trade in the country is also in the
hands of private sector.

• Major part of transportation especially road transport is also

managed by the private sector.

• With growing liberalization of Indian economy in recent years, the

private sector is assigned greater responsibility in various spheres of
economic activity.

• Problems of public sector units:

9
• 1. Under utilization of capacity: Units in public sector failed to
utilise the installed capacities fully. Presence of excess capacity is a
general phenomena in majority of the public sector undertakings.

• 2. Absence of rational pricing: The price policy of public sector

undertakings consists of:

• A) Profit as the basis of price fixation

• B). No profit as the basis of price fixation

• C). Import-Parity price

• Formal and informal regulation of prices by the government in the

interest of the economy and consumers in general and price
stabilization are also responsible for huge losses incurred by some of
the public sector units.

• Subsidisation of the prices of some of the produce by these public

enterprises had added a new dimension to the problems.

• 3. Government’s interference:

• The interference of the government in day to day activities of public

sector units had reduced the degree of autonomy enjoyed by the
managements in respect of employment , pricing, purchases etc.

• 4.Heavy social cost : Public sector undertakings suffering from

heavy social cost in the form of expenditure on townships, schools,
hospitals, recreation and other welfare expenditures

• 5. Surplus manpower: Many of the public sector undertakings are

over staffed. This leads to drain of resources and hence increase in
average cost of production.

• 6. Industrial disputes: Strikes and lok outs are a regular

phenomena in public sector undertakings leading to loss in man days
and output.

10
• 7.Technological gap: Some public sector enterprises in India could
not adopt up-to-date technology leading to higher average cost and
lower yield.

• SMALL SCALE INDUSTRIES

• In Indian economy small-scale and cottage industries occupy an

important place, because of their employment potential and their
contribution to total industrial output and exports.

• Government of India has taken a number of steps to promote them.

• However, with the recent measures, small-scale and cottage

industries facing both internal competition as well as external
competition.

• There is no clear distinction between small-scale and cottage

industries.

• However it is generally believed that cottage industry is one which is

carried on wholly or primarily with the help of the members of the
family.

• As against this, small-scale industry employs hired labour.

• Moreover industries are generally associated with agriculture and

provide subsidiary employment in rural areas.

• As against this, small scale units are mainly located in urban areas as
separate establishments

Small scale Industries

• Industrial units are generally classified in terms of small scale,

medium scale and large scale units taking into account the size of
capital and labour employed. The fiscal commission in 195, classified
small scale industry is one which is operated mainly with hired
labour usually 10 to 50 hands.

11
• As per Industries development and Regulation act 1951, a small scale
industry is one which employs less than 50 workers with power and
less than 100 workers with out power.

• Fixed capital investment in a unit is also adopted as a criterion to

define small sale industries

• Initially the fixed capital investment was restricted to Rs 5 lakhs

• In 1977 the fixed capital investment limit of small scale sector raised
10 lakhs and for ancillary industries it was fixed at Rs 15 lakhs

• In 1980 the limit was further raised to Rs 15 lakh for SSIs and Rs 20
lakh for ancillary units.

• In 1985 the limit was further raised to Rs 35 lakh for SSIs and Rs 45
lakh for ancillary units

• In 1990 limit was revised and fixed at Rs 60 Lakh and Rs 75 lakh for
SSI and ancillary units respectively

• For export oriented SSIs the limit was fixed at Rs 95 lakh with a
condition that these units must export 30 percent of their output by
the third year of commencement of production

• The official definitions of a small scale unit are as follows:

• (i) Small-Scale Industries: These are the industrial undertakings

having fixed investment in plant and machinery, whether held on
ownership basis or lease basis or hire purchase basis not exceeding
Rs. 1 crore.

• (ii) Ancillary Industries: These are industrial undertakings having

fixed investment in plant and machinery not exceeding Rs. 1 crore
engaged in or proposed to engage in,

• (a) The manufacture of parts, components, sub-assemblies, tooling

or intermediaries, or

12
 (b) The rendering of services supplying 30 percent of their production
or services as the case may be, to other units for production of other
articles.

• (iii) Tiny Units: These refer to undertakings having fixed investment

in plant and machinery not exceeding Rs. 23 lakhs.

• These also include undertakings providing services such as laundry,

Xeroxing, repairs and maintenance of customer equipment and
machinery, hatching and poultry etc. Located in towns with
population less than 50,000.

(iv) Small-Scale Service Establishments: These mean enterprises

engaged in personal or household services in rural areas and town with
population not exceeding 50000 and having fixed investment in plant and
machinery not exceeding Rs. 25 lakhs

• (v) Household Industries: These cover artisans, skilled craftsman and

technicians who can work in their own houses if their work requires
less than 300 square feet space, less than 1 Kw power, less than 5
workers and no pollution is caused.

• Handicrafts, toys, dolls, small plastic and paper products, electronic

and electrical gadgets are some examples of these industries.

• Characteristics of Small-Scale Industries:

• (i) Ownership: Ownership of small scale unit is with one individual

in sole-proprietorship or it can be with a few individuals in
partnership.

• (ii) Management and control: A small-scale unit is normally a

one man show and even in case of partnership the activities are
mainly carried out by the active partner and the rest are generally
sleeping partners. These units are managed in a personalised fashion.
The owner is activity involved in all the decisions concerning
business.

13
 • (iii) Area of operation: The area of operation of small units is
generally localised catering to the local or regional demand.

• The overall resources at the disposal of small scale units are limited
and as a result of this, it is forced to confine its activities to the local
level.

• (iv) Technology: Small industries are fairly labour intensive with

comparatively smaller capital investment than the larger units.

• Therefore, these units are more suitable in areas where capital is

scarce and there is abundant supply of labour.

• (v) Gestation period: Gestation period is that period after which

teething problems are over and return on investment starts.

• Gestation period of small scale unit is less as compared to large scale

unit.

• (vi) Flexibility: Small scale units as compared to large scale units

are more change susceptible and highly reactive and responsive to
socio-economic conditions. They are more flexible to adopt changes
like new method of production, introduction of new products etc.

• (vii) Resources: Small scale units use local or indigenous resources

and as such can be located anywhere subject to the availability of
these resources like labour and raw materials.

• (viii) Dispersal of units: Small scale units use local resources and
can be dispersed over a wide territory.

The development of small scale units in rural and backward areas

promotes more balanced regional development and can prevent the influx
of job seekers from rural areas to citie

Objectives of Small Scale Industries:

• The objectives of small scale industries are:

• 1. To create more employment opportunities with less investment.

14
• 2. To remove economic backwardness of rural and less developed
regions of the economy.

• 3. To reduce regional imbalances.

• 4. To mobilise and ensure optimum utilisation of unexploited

resources of the country.

• 5. To improve standard of living of people.

6. To ensure equitable distribution of income and wealth

• 7. To solve unemployment problem.

• 8. To attain self-reliance.

• 9. To adopt latest technology aimed at producing better quality

products at lower costs

INVESTMENT CEILINGS FOR SSIs & SSSBEs Small scale industries

were first defined in 1950. At that time, in addition to a limit on
investment in fixed assets, there was also an employment stipulation.
The employment condition was deleted in 1960. In 1966, the limit on
investment in fixed assets was changed to a limit on investment in plant
and machinery (original value) only. The Table below indicates the
historical evolution of the definition of small scale and ancillary units

• TABLE YEAR SMALL SCALE INDUSTRIES ANCILLARY

INDUSTRIES*

• 1955 Upto Rs. 5 lacs in fixed assets and employment less than 50/ 100
workers with / without power. ---

• 1960 Upto Rs. 5 lacs in fixed assets ---

• 1966 Upto Rs. 7. 5 lacs in plant and machinery Upto Rs. 10 lacs in
plant and machinery ancillary

• 1975 Upto Rs. 10 lacs in plant and machinery Upto Rs. 15 lacs in plant
and machinery in ancillary

15
• 1980 Upto Rs. 20 lacs in plant and machinery and Rs. 25 lacs in
ancillary

• 1985 Upto Rs. 35 lacs in plant and machinery and Rs. 45 lacs in
ancillary

• 1991 Upto Rs. 60 loacs in plant and machinery and Rs. 75 lacs in
ancillary

• 1997 Upto Rs. 300 lacs in plant and machinery and Rs. 300 lacs in
ancillary

• 1999 Upto Rs. 100 lacs in plant and machinery ** and Rs. 100 lacs in
anciallry

• ** The investment ceiling for SSI units manufacturing reserved items

in the hosiery and hand tools sectors has been enhanced to Rs. 500
lacs since October 2002 and for reserved items in the stationary and
pharmaceutical sectors since June 2003.

• Importance of SSIs in Indian Economy

• . 1. Employment generation: The basic problem that is confronting

the Indian economy is increasing pressure of population on the land
and the need to create massive employment opportunities.

• This problem is solved to larger extent by small-scale industries

because small- scale industries are labour intensive in character.

• They generate huge number of employment opportunities.

Employment generation by this sector has shown a phenomenal
growth. It is a powerful tool of job creation.

• 2. Mobilisation of resources and entrepreneurial skill:

Small-scale industries can mobilize a good amount of savings and
entrepreneurial skill from rural and semi-urban areas remain
untouched from the clutches of large industries and put them into
productive use by investing in small-scale units.

16
• Small entrepreneurs also improve social welfare of a country by
harnessing dormant, previously overlooked talent.

• Thus, a huge amount of latent resources ;re being mobilised by the

small-scale sector for the development of the economy.

• 3. Equitable distribution of income: Small entrepreneurs

stimulate a redistribution of wealth, income and political power
within societies in ways that are economically positive and without
being politically disruptive.

• Thus small-scale industries ensures equitable distribution of income

and wealth in the Indian society which is largely characterised by
more concentration of income and wealth in the organised section
keeping unorganised sector undeveloped.

• This is mainly due to the fact that small industries are widespread as
compared to large industries and are having large employment
potential.

• 4. Regional dispersal of industries: There has been massive

concentration of industries m a few large cities of different states of
Indian union.

• People migrate from rural and semi urban areas to these highly
developed centres in search of employment and sometimes to earn a
better living which ultimately leads to many evil consequences of
over-crowding, pollution, creation of slums, etc.

• This problem of Indian economy is better solved by small- scale

industries which utilise local resources and brings about dispersion of
industries in the various parts of the country thus promotes balanced
regional development.

• 5. Provides opportunities for development of technology:

Small-scale industries have tremendous capacity to generate or
absorb innovations.

17
 • They provide ample opportunities for the development of technology
and technology in return, creates an environment conducive to the
development of small units.

• The entrepreneurs of small units play a strategic role in

commercialising new inventions and products.

• It also facilitates the transfer of technology from one to the other. As a

result, the economy reaps the benefit of improved technology.

• 6. Indigenization:Small-scale industries make better use of

indigenous organisational and management capabilities by drawing
on a pool of entrepreneurial talent that is limited in the early stages of
economic development.

• They provide productive outlets for the enterprising independent

people.

They also provide a seed bed for entrepreneurial talent and a testing round
for new ventures.

• 7. Promotes exports: Small-scale industries have registered a

phenomenal growth in export over the years.

• SSIs contributes about 35% India's total export.

• Thus they help in increasing the country's foreign exchange reserves

thereby reduces the pressure on country's balance of payment.

• 8. Supports the growth of large industries: Small-scale

industries play an important role in assisting large scale industries
and projects so that the planned activity of development work is
timely attended.

They support the growth of large industries by providing, components,

accessories and semi finished goods required by them. In fact, small
industries can breath vitality into the life of large industries.

18
• 9. Better industrial relations: Better industrial relations between
the employer and employees helps in increasing the efficiency of
employees and reducing the frequency of industrial disputes.

• The loss of production and man-days are comparatively less in small-

scale industries.

• There is hardly any strikes and lock out in these industries due to
good employee-employer relationship.

• Of course, increase in number of units, production, employment and

exports of small- scale industries over the years are considered
essential for the economic growth and development of the country.

• It is encouraging to mention that the small-scale enterprises accounts

for 35% of the gross value of the output in the manufacturing sector,
about 80% of the total industrial employment and about 40% of total
export of the country.

Sickness in small scale sector

• One of the adverse trends observable in the small scale industries in

India is the growing incidence of sickness.

• It is causing considerable concern to planners and policymakers.

• It is also putting a severe strain on the economic system, particularly

on the banks.

• Criterion of sickness.

• According to the criteria accepted by the Reserve Bank of India “a

sick unit is one which has reported cash loss for the year of
its operation and in the judgment of the financing bank is
likely to incur cash loss for the current year as also in the
following year.”

19
 • A sick unit is one which is unable to support itself through the
operation of internal resources.

• As a general rule, the sick units continue to operate below the break-
even point and are, thus, forced to depend on external sources for
funds of their long-term survival.

• Industrial sickness creates various socio-economic problems.

• When an industrial unit falls sick, those who depend on it have to face
an uncertain future.

• They fear loss of jobs.

• Even if they do not lose jobs they do not get their wages and
compensation in time and are, thus, forced to live in extreme
hardship.

• External vs. Internal Causes:

• The factors leading to sickness can be due to reasons of finance,

technical issues, mismanagement, non-availability of raw materials,
power or natural calamities or disasters such as fire or earthquake or
a combination of such factors.

• The causes of industrial sickness may be divided into two

broad categories:

• (i) external and

• (ii) internal.

External causes are those which are beyond the control of its management
and seen to be relatively more important than internal causes

• (a) Delay in land acquisition and building construction

• (b) Delay in obtaining financial assistance from public financial

institutions

• (c) Delayed supply of machinery by the manufacturers

20
• (d) Problems related to recruitment of technical and managerial staff

• (e) Delay on the part of the Government in sanctioning licences,

permits, etc.

• (f) Shortages of basic inputs like power and coal.

• (g) Cost over-runs due to factors beyond the control of management

• (h) Lack of demand for products or shift of demand to products of

rival firms due to delays in project implementation

• (i) Unsatisfactory performance by collaborators—financial and

technical

• (j) Large changes in the scale of operation and optimum product mix
in the long run and, last but not the least

• (k) Changes in the policy of the Government relating to movement of

goods from one place to another within the country

• The primary cause seems to be:

• (i) “Lack of experience of the promoters in a specific line of activity”.

• (ii) Differences among various persons associated with the promotion

and management of the enterprise

• (iii) Mechanical defects and breakdown

• (iv) Inability to purchase raw materials at an economic price and at

the right time

• (v) Failure to make controls effective in time, in case of deficiencies

• (vi) Deteriorating labour-management relations and the consequent

fall in capacity utilisation

• (vii) Faulty financial planning and lack of balance in the financial

(capital) structure.

21
• It is often observed that many projects are started without proper
feasibility study.

• Hardly any long-term view of the future is taken.

• Instead, a project is sought to be managed on the basis of myopic

vision, inadequate analysis and improper approach.

• Often industrial projects are started on an ad hoc basis without

gathering much information about the expertise and competence
needed for the purpose.

• Moreover, once the construction work is started on the basis of a

project report, there is no periodic assessment (or review) of the
economic viability of the project.

• Often major changes in the political and economic environment

make the basic assumptions underlying the project unrealistic or
inappropriate.

• Yet the project is made to remain operational without considering the

after effects

Rural industries in India

• One of the major objectives of developmental policies in India is to

provide employment to millions of unemployed rural youth.

• The core of the problem in countries like India is surplus agricultural

labour and closure of traditional village industries, resulting in
increased unemployment in rural areas and migration of rural youth
to urban areas in desperate search of jobs, in turn putting more
pressure on the urban infrastructure and amenities.

• There are a large number of products and services available in rural

areas, which can be leveraged by entrepreneurs to set-up new and
small micro enterprises.

• Rural industries play a pivotal role in the development of India.

22
 • It is a fact that rural industrialization not only raises per capita
income and living standards of the people by providing employment
opportunities but also reduces income disparities between rural and
urban areas.

• Moreover, promotion of rural industries provides an ample

opportunity for optimum utilization of local resources to serve the
local needs.

Rural industrialization has become one of the major economic and social
goals of economic development and formed part and parcel of planning and
development of India

• Role of Rural Industries in India

• The fundamental role is to provide employment opportunities and

consequently, applying a check on migration.

• Industries in rural areas are mostly micro or tiny in structure and

quick yielding.

• In other words, their gestation period is much less as compared to

large scale industries.

• Rural industries are also labour intensive and provide substantial

employment opportunities to rural people of all age groups.

• Few examples of such type of industries are Food Processing industry,

Poultry industry, cottage and handicrafts industry, etc.

These industries also helps in balanced regional growth and promotion of

artistic activities

• In India, industrialization with urban bias resulted in uneven

development between agriculture and industry on one hand and the
rural and urban area on the other.

• Further, the relationship between traditional agriculture and modern

industry made the rural sector at a greater disadvantage in

23
 appropriating the gains of development leading to increasing
disparities in the level of income between rural and urban areas.

Rural industries developed on proper lines can serve as an effective means

of reducing imbalances and also play a prominent role in providing
subsidiary occupations and supplementary incomes especially to personnel
engaged in the agriculture besides facilitating a more intensive economic
utilization of material resources and man-power

• Rural industrialization may be looked upon as a process confined to

the development of village industries.

Rural industrialization fulfils several economic and social needs of rural

areas such as increasing employment opportunities, diversifying rural
occupations, raising income and living standards of rival communities,
reducing exodus to urban centres, eliminating regional and economic
imbalance and ensuring social justice

LIBERALIZATION AND PRIVATIZATION IN INDIA

• The economy of India had undergone significant policy shifts in the

beginning of the 1990s.

• This new model of economic reforms is commonly known as the LPG

or Liberalisation, Privatisation and Globalisation model.

The primary objective of this model was to make the economy of India the
fastest developing economy in the globe with capabilities that help it match
up with the biggest economies of the world

• The chain of reforms that took place with regards to business,

manufacturing, and financial services, industries targeted at lifting
the economy of the country to a more proficient level.

• These economic reforms had influenced the overall economic growth

of the country in a significant manner.

24
 Liberalisation
Liberalisation refers to the slackening of government regulations.

• The economic liberalisation in India denotes the continuing financial

reforms which began since July 24, 1991.

Privatisation and Globalisation

Privatisation refers to the participation of private entities in
businesses and services and transfer of ownership from the the public
sector (or government) to the private sector as well.

• Globalisation stands for the integration of the Indian economy

with the world economies.

• LPG and the Economic Reform Policy of India

Following its freedom on August 15, 1947, the Republic of India stuck
to socialistic economic strategies.

• In the 1980s, Rajiv Gandhi, the then Prime Minister of India, started
a number of economic restructuring measures.

• In 1991, the country experienced a balance of payments problem

following the Gulf War and the downfall of the erstwhile Soviet
Union.

• The country had to make a deposit of 47 tons of gold to the Bank of

England and 20 tons to the Union Bank of Switzerland.

• This was necessary under a recovery pact with the IMF or

International Monetary Fund.

• Furthermore, the International Monetary Fund necessitated India to

assume a sequence of systematic economic reorganisations.

• Consequently, the then Prime Minister of the country, P V Narasimha

Rao initiated economic reforms.

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 • However, the Committee formed by Narasimha Rao did not put into
operation a number of reforms which the International Monetary
Fund expected.

• MNCs in India: Characteristics and Growth

• Multinational Corporations (MNCs) or Transnational Corporation

(TNC), or Multinational Enterprise (MNE) is a business unit which
operates simultaneously in different countries of the world.

• In some cases the manufacturing unit may be in one country, while

the marketing and investment may be in other country.

• In other cases all the business operations are carried out in different
countries, with the strategic head quarters in any part the world.

• The MNCs are huge business organisations which extend their

business operations beyond the country of origin through a network
of industries and marketing operations.

• They are multi-process and multi-product enterprises.

• The few examples of MNCs, are, Sony of Japan, IBM of USA, Siemens
of Germany, Videocon and ITC of India, etc.

Previously American based multinationals ruled the world, but today, many
Japanese, Korean, European and Indian multinational companies have
spread their wings in many parts of the world

• Characteristics of Multinationals:

• MNCs will always look out for opportunities.

• They carry out risk analysis, and send their personnel to learn and
understand the business climate.

• They develop expertise in understanding the culture, politics,

economy and legal aspects of the country that they are planning to
enter.

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The essential element that distinguishes the true multinational is its
commitment to manufacture, marketing, developing R&D, and financing
opportunities throughout the world, rather than just thinking of the
domestic situation

• ) Mode of Transfer:

• The MNC has considerable freedom in selecting the financial channel

through which funds or profits or both are moved, e.g., patents and
trademarks can be sold outright or transferred in return through
contractual binding on royalty payments.

• Similarly, the MNC can move profits and cash from one unit to
another by adjusting transfer prices on intercompany sales and
purchases of goods and services.

• MNCs can use these various channels, singly or in combination, to

transfer funds internationally, depending on the specific
circumstances encountered.

• ii) Value for Money:

• By shifting profits from high-tax to low-tax nations, MNCs can reduce

their global tax payments.

• In addition, they can transfer funds among their various units, which
allow them currency controls and other regulations and to tap
previously inaccessible investment and financing opportunities.

• (iii) Flexibility:

• Some of the internationally generated claims require a fixed payment

schedule; other can be accelerated or delayed.

• MNCs can extend trade credit to their other subsidiaries through

open account terms, say from 90 to 180 days.

• This give a major leverage to financial status.

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In addition, the timing for payment of fees and royalties may be modified
when all parties to the agreement are related

• The three broad categories of multinationals and their

associated strategies are:

• A. Innovation Based Multinationals:

• Companies such as IBM, Philips and Sony create barriers to entry for
others, by continually introducing new products and differentiating
existing ones.

• Both domestically and international companies in this category spend

large amounts on R&D and have a high ratio of technical to factory
personnel.

• Their products are typically designed to fill a need perceived locally

that often exists abroad as well.

• B. The Mature Multinationals:

• The primary approach in such companies is the presence of

economies of scale.

• It exists whenever there is an increase in the scale of production,

marketing and distribution costs could be decreased in order to retain
the existing position or more aggressive.

• The existence of economies of scale means there are inherent costs

advantages of being large.

• The more significant these economies of scale are, the greater will be
the cost disadvantage faced by a new entrant in the same field in a
given market.

• (i) Reduction in Promotion Costs:

• Some companies like Coca-Cola and Proctor and Gamble take

advantage of the fact that potential entrants are wary of the high costs
involved in advertising and marketing a new product.

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 • Such firms are able to exploit the premium associated with their
strong brand names.

MNCs can use single campaign and visual aspects in all the countries
simultaneously with different languages like Nestle’s Nescafe

• (ii) Cost Advantage through Multiple Activities:

• Other companies take advantage of economies of scope.

• Economies of scope exists whenever some investment can support

multi-profitable activities, which are less expensive.

• Examples abound of the cost advantages of producing and selling

multiple products related to common technology, production facilities
and distribution network.

• For example, Honda has increased its investment in small engine

technology in the automobile, motorcycle, marine engine, and
generator business.

• Reasons for the Growth of MNCs:

• (i) Non-Transferable Knowledge:

• It is often possible for an MNC to sell its knowledge in the form of

patent rights and to licence foreign producer.

• This relieves the MNC of the need to make foreign direct investment.

• However, sometimes an MNC that has a Production Process or

Product Patent can make a larger profit by carrying out the
production in a foreign country itself.

The reason for this is that some kind of knowledge cannot be sold and
which are the result of years of experience

• (ii) Exploiting Reputations:

• In some situation, MNCs invest to exploit their reputation rather than

protect their reputation.

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• This motive is of particular importance in the case of foreign direct
investment by banks because in the banking business an international
reputation can attract deposits.

• If the goodwill is established, the bank can expand and build a strong
customer base.

• Quality service to a large number of customers is bound to ensure

success.

• This probably explains the tremendous growth of foreign banks such

as Citibank, Grind-lays and Standard Chartered in India.

• (iii) Protecting Reputations:

• Normally, products, develop a good or bad name, which transcends

international boundaries.

• It would be very difficult for an MNC to protect reputation if a

foreign licensee does an inferior job.

• Therefore, MNCs prefer to invest in a country rather than licensing

and transfer expertise, to ensure the maintenance of their good name.

• (iv) Protecting Secrecy:

• MNCs prefer direct investment, rather than granting a license to a

foreign company if protecting the secrecy of the product is important.

• While it may be true that a license will take precautions to protect

patent rights, it is equally true that it may be less conscientious than
the original owner of the patent.

• (v) Availability of Capital:

• The fact that MNCs have access to capital markets has been
advocated as another reason why firms themselves moved abroad.

• A firm operating in only one country does not have the same access to
cheaper funds as a larger firm.

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 • (vi) Product Life Cycle Hypothesis:

• It has been argued that opportunities for further gains at home

eventually dry up.

• To maintain the growth of profits, a corporation must venture abroad

where markets are not so well penetrated and where there is perhaps
less competition.

• This hypothesis perfectly explains the growth of American MNCs in

other countries where they can fully exploit all the stages of the life
cycle of a product.

• A prime example would be Gillette, which has revolutionized the

shaving systems industry.

• (vii) Avoiding Tariffs and Quotas:

• MNCs prefer to invest directly in a country in order to avoid import

tariffs and quotas that the firm may have to face if it produces the
goods at home and ship them.

• For example, a number of foreign automobile and truck producers

opened plants in the US to avoid restrictions on-selling foreign made
cars.

• Automobile giants like Fiat, Volkswagen, Honda and Mazda are

entering different countries not with the products but with technology
and money.

• (viii) Strategic FDI:

• The strategic motive for making investments has been advocated as

another reason for the growth of MNCs.

MNCs enters foreign markets to protect their market share when this is
being threatened by the potential entry of indigenous firms or
multinationals from other countries

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• Multinational Corporations in India:

• MNCs have been operating in India even prior to Independence, like

Singer, Parry, Philips, Uni- Lever, Proctor and Gamble.

• They either operated in the form of subsidiaries or entered into

collaboration with Indian companies involving sale of technology as
well as use of foreign brand names for the final products.

• The entry of MNCs in India was controlled by existing industrial

policy statements, MRTP Act, and FERA.

• In the pre-reform period the operations of MNCs in India were

restricted.

• New Industrial Policy 1991 and Multinational Corporations:

• The New Industrial Policy 1991, removed the restrictions of entry to

MNCs through various concessions.

• The amendment of FERA in 1993 provided further concession to

MNCs in India.

• At present MNCs in India can—

• (i) Increase foreign equity up to 51 percent by remittances in foreign

exchange in specified high priority areas.

• Subsequently MNCs are free to own a majority share in equity in most

products.

• (ii) Borrow money or accept deposit without the permission of

Reserve Bank of India.

• (iii) Transfer shares from one non-resident to another non-resident.

• (iv) Disinvest equity at market rates on stock exchanges.

• (v) Go for 100 percent foreign equity through the automatic route in
Specified sectors.

• (vi) Deal in immovable properties in India.

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• (vii) Carry on in India any activity of trading, commercial or
industrial except a very small negative list.

• Thus, MNCs have been placed at par with Indian Companies and
would not be subjected to any special restrictions under FERA.

• Criticism against MNCs in India:

• (i) They are interested more on mergers and acquisitions and not on
fresh projects.

• (ii) They have raised very large part of their financial resources from
within the country.

• (iii) They supply second hand plant and machinery declared obsolete
in their country.

• (i v) They are mainly profit oriented and have short term focus on
quick profits. National interests and problems are generally ignored.

• (v) They use expatriate management and personnel rather than

competitive Indian Management.

• (vi) Though they collect most of the capital from within the country,
they have repatriated huge profits to their mother country.

• (vii) They make no effort to adopt an appropriate technology suitable

to the needs. Moreover, transfer of technology proves very costly.

• (viii) Once an MNC gains foothold in a venture, it tries to increase its

holding in order to become a majority shareholder.

• (ix) Further, once financial liberalizations are in place and free

movement is allowed, MNCs can destabilize the economy.

• (x) They prefer to participate in the production of mass consumption

and non-essential items.

• 1. SONY CORPORATION Make-believe- ( Japanese)

• 2. HEWLETT PACKARD (HP) U.S Company ----- hp

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• 3. TATA GROUP – India

• 4. Microsoft ------ U.S.A

• 5. IBM – U.S.A

• 6. NESTLE- Swiss transnational company

• 7. PROCTER & GAMBLE P&G U.S.A

• 8. CITI GROUP U.S.A

• 9. PEPSICO U.S.A

• 10. THE COCA-COLA COMPANY U.S.A

CONCENTRATION OF ECONOMIC POWER IN INDIA

• Since independence India has experienced a spectacular growth of

few large enterprises or industrial houses which has led to growth of
monopoly capital .

• This indicates small number of business firms in private sector

acquired dominant position in the market

• In 1960, the government of India appointed a committee under the

chairmanship of Mahalanobis to ascertain the extent of
concentration of economic power and the committee submitted its
report in 1964.

• As per the report of Mahalanobis committee there is substantial

concentration of economic power in the Indian economy.

• Government appointed monopolies enquiry commission in 1964

under the chairmanship of K.C. Das Gupta to enquire in to the
existence of monopoly power and restrictive trade practices of large
business houses in private sector and also to examine its socio
economic consequences and also to suggest various legislative and
other measures to contain such tendencies.

• Das Gupta committee submitted its report in 1965.

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 • The committee examined product-wise concentration and country-
wise concentration

• In case of product-wise concentration, out of 100 commodities, if the

share of top three business firms turned out to be 75 percent or more,
concentration is said to be vary high.

• If the share of top three is between 60-75% concentration is said to be

medium

• If the share of top three is between 50-60% concentration is said to

be low

• If the share of top three is less than 50% concentration is said to be

nil.

• Product-wise high concentration

• High concentration: Infant milk food ,petroleum, kerosene oil,

dry batteries, sewing machines, domestic refrigerators, foot wear
rubber, toothpaste, razor blades etc

• Medium concentration: Biscuits, electric fans,electrical lamps,

bicyles and cement

• Low concentration: Woollen fabrics, printing paper

Nil concentration: tea, coffee, textiles, coal and sanitary ware

• Country-wise concentration

• This committee has taken in to consideration 75 large industrial

houses controlling 1536 companies.

• It found substantial concentration of economic power in the hands of

few industrial houses.

• Reasons or causes for concentration of economic power

• 1. Industrial policy and expansion of private sector

• 2. Inter company investment

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• 3. Government’s licensing policy

• 4. Import duties and protection

• 5. Planning process

• 6. Control over banking companies

• 7. Credit policy of public sector financial institutions

• 8. Tax policy and concessions by the government

• Measures initiated by the government to control

Concetration of Economic Power

• 1. Restrictions on entry of large business houses in different

industries

• 2. MRTP act

• 3. Expansion of public sector

• 4. Encouragement to small and medium industries

Industrial proliferation and environmental preservation

• Industrial proliferation Meaning:

• Encouraging industrial development in ecologically sensitive

regions.

• For example giving license to industrial units to be located in

Himalayan region

• Industrial proliferation, in general, is being promoted by the

government at the helm of affairs.

• One of the reasons for government encouraging the industrial

units is it projects industrial development as essential
• Industrial units which proliferate the environment generally opposed
by the people of that region and also by environmentalists.

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• For example cement plants will be detrimental to the agricultural
land and the health of the people residing in the area near the plants.
• Therefore, those who will be affected by these decisions of the
government must be consulted before such steps are taken.
• If the government neglects the ecological sensitivity of any region
while establishing and also encouraging industries in the name of
essential for development or in the name of backward region then
there may be natural calamities from which we can not escape
• Indiscriminate location of units based on political, social and
economic reasons may endanger the peaceful environment.
• Therefore, while taking decisions related to establishment of
industrial units we must consider environmental preservation is the
top most agenda.
• Because, if we destroy the environment, the imbalance in
environment in due course of time cause unimaginable (far beyond
the expectations of scientists) damage on the earth.
• Human beings with their actions can not prevent the damage caused
by the environmental imbalance.
• Therefore, the need of the hour is that, all governments and around 7
billion people on this earth shall think in such a way that ‘prevention
is better than cure’.
• We shall collectively prevent environmental destruction rather than
initiating measures after destruction takes place

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