structure of Indian economy & industrial reforms

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Information about structure of Indian economy & industrial reforms

Published on March 3, 2014

Author: koppulachandra


UNIT-2 INDIAN INDUSTRY STRUCTURE The term Indian economy is the outcome of two words. Indian plus economy. Indian refers to those concerning India. Economy refers to those refers to all activities and arrangements which the citizens of a country. The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist policies and import-substituting economy that failed to take advantage of the post-war expansion of trade. This model contributed to widespread inefficiencies and corruption, and the failings of this system were due largely to its poor implementation. Nature: 1. Indian economy is an underdeveloped economy. 2. Indian economy is a mixed economy. 3. Indian economy is a planned developing economy. Indian economy is an underdeveloped economy: per capita income of some countries of the world like America, England,japan etc., is much higher than that of some other countries like India, Pakistan, srilanka, Bangladesh etc. Low level of per capita income: In the words of kithara low per capita real income is the main feature of an underdeveloped economy .per capita income of India is low as compared to countries of the world. Country USA JAPAn CHINA INDIA PAKISTAn Per capita income ( in Us dollars) 41400 37180 1290 620 600 1

Low Standard of living: On account of low per capita income level of consumption of such necessaries of life as food, clothing, shelter etc is very low. In India in 1999 average intake of an individual was 2496 carries per day. Unequal distribution of income and wealth: in India on the one hand, per capita income is low and other, there is large inequality in the distribution of wealth and income. Excessive dependence on agriculture: In INDIA about 57% of population depends on agriculture in 2004-2005.this leads to INDIA towards underdeveloped country. Lack o proper industrialization: rate of industrial development has been very slow in India .many important industries are lacking in India. Lack of proper banking facilities: one of the cause of underdeveloped of India is that banking and credit facilities, especially in rural areas have not properly developed. Less development of means of transport: present position of means of transport like railways roads air and waterways is adequate in view of the vast geographical area of the country like India. Pressure of population: In the view of population India has 2 nd place, when population increases it leads to less per capita income. Unemployment: India suffers from large scale of unemployment and under employment. On account of unemployment there is wastage of labour power, production and low per capita income. Shortage of efficient entrepreneurs: entrepreneurs are essential for economy development. But in India there is a shortage of such entrepreneurs. Low grade human capital: Modern economists consider laborers as a form of capital. They call it as human capital. Low grade human capital is both cause and effect of under developed country. Low level of technology: It is low level of out-moded technology that prevails in most industries and a large sector of agriculture industries in India. In many industries like cotton, textile, sugar, etc old and inferior machines are still in use. India economy is a mixed economy: Mixed economy is one that has the merits of both capitalism and socialism. In this kind of economy both part in the economic development of the country economy both public and private sectors take active part in the economic development of the country. Public sector: according to industrial policy 1991 three industries are reserved in the public sectors.  Atomic energy  Atomic minerals  Railways 2

Licensed sector: industrial licensing provisions have been very liberal .now only 6 industries are covered under licensing. They are  Alcoholic products  Tobacco  Defense  Industrial explosives  Hazardous chemicals  Pharmaceuticals. Private sector: all other industries will be developed by the private sector.  Industrial regulation act 1951  Development of Cooperative sector  Production reserved for small scale industries. India economy planned developing economy: Economic development: Increases in national income are an index of economic development. Plans First plan Second Third Fourth Fifth % growth of national Plans income 3.6 Sixth 4.1 Seventh 2.5 Eighth 33 Ninth 5.0 Tenth % growth of national income 5.4 5.8 6.7 5.5 7.0 Increase in per capita income: Time to time per capita increasing in India. This is one of the reason India became developing country. Institutional reforms in agriculture and green revolution: because of the great Indian scientist Ms.Swaminadhan take a great revolution in agriculture namely green revolution. This revolution showed best efforts for high production of wheat and rice. Development of industries: plans have succeeded a lot in industrial sector. Basic and capital goods industries like iron and steel, machinery, chemicals, fertilizers etc. have been developed considerably. 3

Development of infrastructure: Transport, communication, irrigation and power generation capacity has developed considerably. Social services: During the period of planning, social services like production, social services like education , health , medical , family planning etc. Modernization: Technological up gradation tool place in almost all the areas in the period of economic planning. Export promotion: Diversification and import: during planning period exports have not only significantly increased but there has also been diversified of exports items. Development of science and technology: Using planning period significant growth of science and technology has been achieved. In the field of information technology significant progress. Production according to needs: economic planning leads to need oriented production goods and services. In this time production is based on the requirements of customers. Sartorial distribution: • Primary sector : agriculture, forestry, dairy and mining • Secondary sectors: manufacturing sectors, construction and power. • Tertiary sector: services like banking, insurance, telecommunication and IT. Indian Industry Structure: In India before independence the industries are ruled by private people. So that most of the priority they will share with profits as well as work exploitation and energy conjunction. After that our India became an independent .so that they can give the priority for self development of Indian industries. Indian industries can develop in three stages.  In the 1st stage they develop the industries like milling grains, extracting oils, spinning vegetables and tanning leather.  In the second stage they develop the industries depending on technology bases like paper, sugar, cement, textile and furniture.  After this the Indian govt gave the priority for consumer and capital goods. Consumer goods means transform from manufacturer to consumer , where as capital goods transfer from one business to other for producing other products. 4

Other modernizations in India: Increase in GDP rate in industries: At the time of independence we have a number of industries are in the hands of public. So they are unable to contribute more GDP in Indian economy. The changes in GDP from independence to present are 1950-51: Industries contribution in GDP is 13.6% 1980-1981: The GDP rate increases to 22%. In 2010 the GDP 24.6% because of Industries. Infrastructural GDP development: With the contribution of electricity, cement, steel and crude oil GDP was changes from 1950 – 2006. Industry Electricity Coal Steel Crude petroleum Cement 1950-1951 5.1B.Kwh 32.3M.T 1.04M.T 0.3M.T 2.7 million tones 2006-2007 66.6B.Kwh 50.7mt 42.3mt 34mt 61.7mt Diversified company: At the time of independence our Indian govt have four diversified companies. Like wood, food, textile and furniture. Now a days Indian govt diversified in all sectors. Concentrate on consumer durability products: For benefits to the consumers Indian govt take a step forward for producing durable goods. Durability- long lifespan or repeated usage Persiability: short lifespan or one or two usage capacity. Development of heavy industries: When we compare pre independence and post independence industrial sector and their GDP contribution is in increasing order. So that it is a need to Indian govt to increase or develop heavy industries like automobiles, telephone and IT. Public sector: after the independence Indian govt take contribution in industrial sector for increasing GDP .public sectors contribution also leads a great revolution in Indian economy development. 5

Sickness in Indian industries: Industrial sickness is a natural and universal phenomenon of industrial economy. In India the industrial sickness came to being during 1970’s when large industrial units faced closure in westbengal. The industrial sickness results great unemployment, wastage of natural resources , loss of production of goods and social unrest. Definition: A sick unit referred to as one that operates at lower than BEP. Another description holds that a sick unit is one that fails to generate internal surplus on continuing basis. According to V.N.Nadkari “to a layman a sick unit is one which is not healthy. To an investor it is one which skips dividends. To an industrialist it is unit which his making losses and tottering on the brink of closure. Causes OR factors of industrial sickness: Industrial sickness factors can be classified into two types.  Internal factors  External factors. Internal factors: internal factors again classified into two types. born sickness factors and achieved sickness factors. Faulty financial planning: faulty financial planning is the major factor of industrial sickness. under capitalization is responsible for it and its signs become evident from very beginning of its functioning. Lack of experience of promoters: sometimes promoters are new and they lack in experience. Wrong section of the project and faulty project planning and wrong guidance given by promotional agencies of the govt may leads to the birth of a sick unit. Selection of wrong location Technological factors: adoption of inappropriate technology, obsolete technology, standard machinery, wrong technological collaboration, license, production restricted goods etc may also leads to sickness.  Wrong estimation of capital  Poor organization structure  Marketing conditions. 6

 Achieved sickness:  Bad management  Unwarranted diversification and diversion  Inventory management  Failure in marketing  Unsatisfactory labour-management relations. External factors: The government interference or adverse government policy.  Economic crisis  Statutory price control  Continuous power cuts  Fast technological changes  Cut-throat competition. Extent of industrial sickness: there is no précised information is available regarding the prevalence of sickness in various industries and there is no comprehensive standard and universally accepted definition for sickness .but some other actions taken by the Indian govt for reducing industrial sickness. Govt policy towards industrial sickness: for handle effectively and systematically the Indian govt announced sickness policy in 1985 .according to that policy every govt should concentrate on sickness industries who are running in India. Role of administration plans: The administrative ministers have been assigned the specific responsibility to deal with this problem. At the time of preparation of five years plan govt should give priority for sickness industry. Strengthening monitoring mechanism: banks and financial institutions should strength the system of monitoring and also take timely corrections in industrial sickness. Under taking diagnosis: Before support to the industrial sickness everyone should identify what is the problems reason for sickness and who is responsible for this. Consulting regular meeting between govt and financial institutions: There is a necessity for conducting meetings between industry people and govt because of these both have the knowledge about different problems faced by industrialist and policies implemented by govt. 7

Sickness industry Acts: An important peace of legislation dealing with industrial sickness by using industrial sickness act 1985. They take actions like  Timely direction of sick and potential industries who are undertaking by the govt.  The speed up actions determined by the govt for recovery of such companies.  Reconstruction of industries.  Efficient management for sickness industries.  Takeover by the efficient management.  To sale or lease by the other successful industries. Competition Act 2002: The competition bill 2001 may be called as the competition act 2002, t extends to the whole of India except Jammu and Kashmir. The competition bill 2001, has been introduced into parliament in august .the MRTP act has been replaced by competition act 2002on the recommendations of S.V.rangarajan committee. It will be decided the healthy competition guidelines for business people. Coverage: This act is applicable throughout India except the state of Jammu & Kashmir. It empowers all enterprises and individuals from the act of applicability. it will supervise all national and international activities. Under his act there is no civil adjudication. This act will provided policies for business activities along with economic conditions of particular country. Competition commission: The act provide for the establishment of competition commission of India consisting of • General Deputy manager • 2 chair persons • 8 other members • Register These all people are recruited by central govt. The chair person have duration of 5 years and he most possess 15 years experience as high court judge and 15 years of experience in professionalism and have knowledge in interdisciplinary. The other members in its committee are deputy manager, advisor and consultancies. Objectives: 8

1. To shift the focus from curing monopolies to promoting competition. 2. To ensure fair and healthy competition. 3. To promote and sustain competition in markets. 4. To protect interest of consumers. 5. To ensure freedom of trade carried by other participants in Indian markets. Features: • Competition commission of India to be established. • Repeal of MRT act • Prohibition of abuse dominance. • Competition fund released. Components of the Act: • This act has four components. • Prohibition of anti competitive agreement • Prohibition of abuse dominance • Regulation of mergers and acquisitions • Establishment of 10 members in CCL. Other applications: To create barriers t the new marketers in the market: for protecting the local industries or small scale industries competition act always maintain some barriers to the MNC”s companies and new marketers. Hindering entry to market: by intentionally if any business people give any difficulties to the competitors then competition act is prohibited. Promote the production, distribution goods and services: this act not only protect enterprises but also concentrate on production activities, distribution activities and quality of goods and services. Promotion of technical economical and scientific method: this act also concentrate on technology development in the business, development of science methods and also economic development industries as well as govt. 9

Prohibition of anti competitive agreement: the act prohibits persons and enterprises for entering into any agreement which has adverse impact on any area in business like production, distribution, supply chain, storage, merger and acquisition of goods and services. The act also prohibits the following agreements Decision taken but an association of commission • Directly or indirectly involving in the activities of buying and selling • Controlling actions on production, supply, market, technical development, investment etc. Share the market or source of information • Tie arrangement • Refuse to deal • Repositioning price maintenance • Results in big rigging (dishonesty) Dis-investment: It means to take return of equities from govt public sector units. Means the process of reducing the amount of money in govt sectors that was replaced by public and private sector. The govt of India has been decided to withdrawal their money from industrial sector in accordance with this decisions the govt has adopted the root of disinvestment. Objectives: • To strengthening of public sector units. • To increase competition. • To promote the growth of Indian companies. Features: • Under utilization of resources • Lack of price planning and construction. • Low price of govt shares. • Methods followed by Indian govt for disinvestment was not effective. 10

• Lack of finance minister supervision. • Labour problems • Lack of autonomy. Methodologies & process of disinvestment: for the disinvestment process the govt has adopted two types of methodology. They are 1. Sale the shares in selected public sector units in strategic way. 2. Non -Strategic sales of public sector units for a pvt company. The govt has done the strategic sale of public sector units to pvt sector through a process of composite bidding after 2004 ,2005 in disinvestment realized that the total sale of shares to pvt sector units. Initially in 1991 -92 govt offers share in the form of bundle a combination of equity from poor and good performance. In bundling method the results for govts are a very low average price for each bundle ( group of share).  After 1992-93 the govt has follow the abundant of bundling shares and sale the shares of each company separately by following actions.  In1994-95 the NRI and other persons were involved in auction process.  In 1996-97 the globalization of disinvestment is implemented.  In 1998-99 the disinvestment is spread throughout the universe by the transfer of ownership.  In 1999-2000 as stated earlier focus of govt shifted to the second method of disinvestment.i.e the strategies scale of public sector units to pvt sector. The govt resorted to strategy sale of a no. of companies. Utilization of fund or money for disinvestment: by the following programme of disinvestment was initiated in 1991-92 the finance minister of central as well as the state as announced that the disinvestment money should be used in the form of NRF ( national renewal fund) and also for various schemes like non-inflationary position, employment scheme and for the development of back ward people. The govt has used the entire process of disinvestment which will offer to development of Indian natural resources and their proper consumption and also reduce fiscal deficiency. 11

Actions for failure of disinvestment process: The different reason for disinvestment process failure are explained below  The govt carried out the exercise of disinvestment process in a hasty and un planned and hesitated way.  The govt launched the disinvestment process without creating the required positions or conditions its takeoff.  The govt has not adopted suitable methods for disinvestment process as well as for supervision.  The department of enterprise and the finance ministry adopted techniques and methods which are resulted in low realization and justify. Actions required in Dis-investment:  Dilution of minor shares to navarthnas.  Strengthening of PSU’s.  Restructuring of PSU’s.  Formation of a board for dis-investment.  Selling and closing of sickness industries. Conclusion: On the account of all these factor there was considerable under pricing of public enterprises shares and resulting in considerable loss to the govt. Economic reforms had its c reforms: The first phase: the first phase of economic reforms had its origin in 1985 initiated by young Prime Minister Mr.Rajiv Gandhi soon after taking over the office.the prime minister in his first national broadcast said “the public sector has entered into too many areas where it should not be. 12

to provide large scope to the pvt sector, a no. of changes in policy were introduced with regard to industrial licensing, export-import policy, fiscal policy, foreign equity policy, etc.the govt introduced the various measures in the following manner:  Cement : cement was totally decontrolled.  Sugar: the share of free sale of sugar in open market.  Broad banding: it is introduced in four wheelers, chemicals, type-writer etc.  Drug: 94 drugs were completely delicensed 27 are placed outside.  Textile: introduction of new textile policy 1985.  Electronics: electronics industry was liberalized from MRTP.  Foreign trade. Second phase: Economic reforms introduced under Rajiv Gandhi regime didn’t yield the desired results. Thus India was forced to approach the world bank and IMF to provide huge loan.. The congress govt, soon after resumption of office on june,1991 realized the importance of megaindustrialization for country to keep pace with the industrially advanced nations ‘open door’ policy by Dr.Manmohan Singh. Economic reforms in new economic policy Liberalization Privatization Globalization Liberalization of the economy means to free it from direct or physical controls imposed by the government. Measures taken for liberalization: following measures have been taken under economic reforms for liberalization of Indian economy: 13

1. Abolition of industrial licensing and registration: Main feature of the new industrial policy is to adopt a policy of linearization in place of controlled economy. Till now private sector of the economy was functioning under a rigid licensing system. Under new economic policy private sector has been freed, to a rigid licensing system. Under new economic policy private sector has been freed, to a large extent, from the yoke of licenses and other restrictions. In July 1991 a new industrial licensing has been abolished for all other industries. Industries for which licenses are still necessary are: • Liquor • Cigarette • Defense equipments • Drugs • Industrial explosives • Dangerous chemicals Any entrepreneur can float any new company and sell its shares without any restrictions. 2. Concession from Monopolies Act: According to the provisions of monopolies and restrictive trade practices act all those companies having assets worth more than 100 crore used to be declared monopolies and restrictive trade practices firms and were subjected to several restrictions. 3. Freedom for expansion and production to industries: Under the policy of liberalization, industries are free to expand and produce. They need to prior official approval. 4. Increase in the investment limit of the small industries: Investment limit of the small industries has been raised to one crore so as to enable them to introduce modernization. Investment limit of tiny industries has also been increased to 25 lakh. 5. Freedom to import capital goods: under the policy of liberalization, Indian industries will be free to buy machines and raw material from abroad in order to expand and modernize themselves. 6. Freedom to import technology: New economic policy of economic reforms has laid emphasis on the use of high technique to promote modernization. The objective of this policy is to develop sunrise industries, i.e., computers and electronics. 7. Free determination of interest rates: Interest rate of the banking system of the country will no longer be determined by the Reserve Bank of India as per the policy of liberalization. Banks all over the country are now free to determine the rate of interest as they like. 8. Action plan for information technology and software development: A National Task force on information technology and software development submitted 108 point action plan in July 1998. The 14

recommendations have been accepted by the government and directions for their implementations have been given to all concerned departments. Privatization: In the context of economic reforms, privatization means allowing the private sector to set up more and more of industries that were previously reserved for public sector. Under it, existing enterprises of the public sector are either wholly or partially sold to private sector. 1. Change in Ownership: The degree of privatization is judged by the extent of ownership transferred from the public enterprise to the private sector. • Total Nationalization • Joint venture • Liquidation • Workers co-operative 2. Organizational Measures: It includes a variety of measures to limit sate control. They include: • A holding company structure • Leasing • Restructuring 3. Operational Measures: The efficiency of public sector enterprises depends upon the organizational structure. Unless this structure grants a sufficient degree of autonomy to the operators of the enterprise or develops a system of incentives, it cannot raise its efficiency and productivity. Globalization: Globalization is the third pillar of the structure of economic reforms. Globalization is the process of movement from a closed economy to an open economy and the process of removal of restrictions on foreign trade, investments, innovations in communications and transport systems. Globalization Indicators: there are some variables that can be considered as the indictors of globalization. These indicators of globalization are: • Foreign Direct investments: foreign firms falls under the category of foreign direct investments by investing in the real assets like factories, sales offices etc. Globalization in the form of FDI happened in the middle of the 1980s 15

• Foreign portfolio investment: foreign portfolio equity investment has also happened globally by the FDI • Trade: the step of world trade has happened, reaching an average annual rate of 6 to 7 % since 1983. It out paces the expansion of the world GDP, which has risen at an average of only 3.5% p.a. the step of world trade has been slower than the step of world FDI, which has risen at above 15% per year since 1985. • Global governance by international organizations like world trade organizations: from the following three factors outlined it is clear that 1. Economic integration is very deep. 2. Reduction in import duty rates 3. Cooperation between countries for foreign investment is increased. • Business Restructuring – Flexibility and closeness to Market 1. Flexible, just in time production system 2. Moving production closer to the consumer and securing access to the local market 3. Diversification of operations. 16

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