Eight industrial and economic co-operation marked by
Eight areas where strategic and security concerns predominate continue to be reserved for public sector.
The exemption from licensing will be particularly helpful to the many dynamic small and medium entrepreneurs who have been unnecessarily hampered by the licensing system.
As a whole, the Indian economy will benefit by becoming more competitive, more efficient and modern and will take its rightful place in the world of industrial progress.
No industrial approvals will be required for putting up plants in locations other than cities with a population of more than one million.
Where the population is more than one million, industries (with the exception of electronics, computer software and printing) will have to set up units outside a 25 km radius, except in prior designated industrial areas.
As per the industrial policy statement, the mandatory convertibility clause will no longer be applicable for term loans from financial institutions for new projects put up by large houses.
With the sweeping liberalisation measures, the existing procedures have been streamlined accordingly. All existing registration schemes have been abolished.
2. Foreign Investment and Technology Agreements:
While freeing Indian industry from official controls, opportunities for promoting investments in India should also be fully exploited.
Foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports.
This is particularly necessary in the changing global scenario of industrial and economic co-operation marked by mobility of capital.
The government will therefore, welcome foreign investment, which is in the interest of the country’s industrial development.
In order to invite foreign investment in high priority industries requiring large investments and advanced technology, it has been decided to provide approval for direct foreign investment up to 51 per cent foreign equity in 34 groups of high priority industries.
These include commercial vehicles and two wheelers, inorganic fertilizers, chemicals, man-made fibres, drugs and pharmaceuticals, papers, tyres, Portland cement, hotels, many food processing industries, soya products and industrial and agricultural machinery.
There shall be no bottlenecks of any kind in this process. This change will go a long way in making Indian policy on foreign investment transparent. Such a framework will make it attractive for companies abroad to invest in India.
The trading companies primarily engaged in export with foreign equity up to 51 per cent will be treated on par with domestic trading and export houses as per the import-export policy.
Special Empowered Board to be set up to negotiate with large international firms for directs investment in select areas; the aim is to attract substantial investment that would provide access to high technology and world markets.
With a view to injecting the desired level of technological dynamism in Indian industry, the government will provide automatic approval for technology agreements related to high priority industries within specified areas, subject to certain conditions.
Similar facilities will be available for other industries as well if such agreements do not require the expenditure of free foreign exchange.
Indian companies will be free to negotiate the terms of technology transfer with their foreign counterparts according to their own commercial judgment.
3. Public Sector Policy:
The public sector has been central to our philosophy of development. Public ownership and control in critical sectors of the economy has played an important role in preventing the concentration of economic power, reducing regional disparities and ensuring that planned development serves the common good.
The Industrial Policy Resolution of 1956 gave the public sector a strategic role in the economy. Massive investments have been made over the past four decades to build public sector which has a commanding role in the economy. Recently, a number of problems have begun to manifest themselves in many of the public enterprises.
In addition, public enterprises have shown a very low rate of return on the capital invested. Many of the public enterprises have become a burden rather than being an asset to the government. The original concept of the public sector has also undergone considerable dilution.
The most striking example is the takeover of sick units from the private sector. This category of public sector units accounts for almost one-third of the total losses of central public enterprises.
It is time that the government adopts a new approach to public enterprises. The priority areas for growth of public enterprises in the future will be:
(a) Essential infrastructure goods and services,
(b) Exploration and exploitation of oil and mineral resources,
(c) Technology development and building of manufacturing capabilities in areas which are crucial in the long term development of the economy and where private sector investment is inadequate,
(d) Manufacture of products where strategic considerations predominate such as defense equipment.
At the same time the public sector will not be barred from entering areas not specifically reserved for it.
The Government will strengthen those public enterprises which fall in the reserved areas of operation or are generating good or reasonable profits.
Such enterprises will be provided a much greater degree of management autonomy through the system of memoranda of understanding. Competition will be induced in these areas by inviting private sector participation.
In the case of selected enterprises, part of government holdings in the equity share capital of these enterprises, will be disinvested in order to provide further market discipline to the performance of public enterprises.
There are a large number of chronically sick public enterprises incurring heavy losses and serve little public purpose. These need to be attended to.
4. MRTP Act:
The principal objectives sought to be achieved through the MRTP Act are as: (i) prevention of concentration of economic power to the common detriment, (ii) control of monopolies and (iii) a prohibition of monopolistic and restrictive and unfair trade practices.
With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher productivity and competitive advantages in the international market, the interference of the government through the MRTP Act in investment decisions of large companies has become deleterious in its effects on Indian industrial growth.
The pre- entry scrutiny of investment decisions by so-called MRTP Companies will no longer be required. The provisions relating to merger, amalgamation, and takeover will also be repealed. Similarly the provisions regarding restrictions on acquisition of and transfer of shares will be appropriately incorporated in the Companies Act.
Thus the government has decided to take a series of measures to unshackle the Indian Industrial economy from the cobwebs of unnecessary bureaucratic control.
5. Exit Policy:
The term exit refers to the right of an industrial unit to close down. A logical corollary of the economic reforms is a liberal exit policy. It deals with the closure of loss-making units and retrenchment of labour.
For the speedy implementation of structural reforms, an effective exit policy is a must. ‘Golden handshake’ is a management term for exit. It is also known as ‘retrenchment without tears’ by managers and ‘forced retirement’ by labour.
Voluntary Retirement Scheme (VRS) or the Golden Handshake or the Diamond Handshake has become the basic component of labour adjustment strategies adopted by managements in both the public and private sectors.
One of the major industrial probers is industrial sickness. In the normal course, such units would be closed down or would undergo extensive restructuring to modernise equipment, eliminate activities that are unprofitable and reduce staff. However, in the situation prevailing in India, sick units continue to exist as sick units.
This is because they are neither allowed to close down nor to bring about reduction in staff strength in order to cure their sickness. Under the Industrial Disputes Act, (sections 25 FFA and 22N) even when there is a genuine case for declaring a closure, management are unable to do so.
Indian labour is the most expensive in the world even though initially it is cheap to hire. In the initial period the wage bill is economically viable. But after a few years when a firm wishes to modernise and finds some workers are no longer needed, it cannot retrench them and thus gets sick.
Sick units in India continue to remain in existence while their capital is eroded and ultimately disappears completely. In many cases, government subsidies are poured in to cover losses.
If such units are in the private sector, they may be taken over by the Government. The only justification for not closing down the sick units is that the workers who are currently employed in those industries would be rendered unemployed.
Unemployment is the most serious problem of the country and exit policy is strongly opposed on the ground that it would further aggravate unemployment.
Paradoxically enough, there is a theoretical justification for exit policy on the ground of employment itself.
There are two different types of employment ‘relief employment and normal employment. Relief employment is that employment in which the marginal productivity of labour is below the wage. The contribution of labour in such employment is below the remuneration of labour.
On the other hand, in normal employment, the net contribution of labour is equal to or greater than the remuneration paid to labour.
When the net contribution of labour is less than the payment made to it, the resulting employment should be correctly treated as relief employment.
The difference between annual labour costs and the net annual contribution of labour is equal to the subsidy that has to be paid in order to maintain the given level of employment in the sick industry. Thus resources are used up in maintaining the given volume of employment.
Resources are also needed for creating normal employment. Therefore, if resources are used to create relief employment they are not available for the creation of normal employment that can be created with the resources obtained by giving up a given volume of relief employment.
The resources used to sustain present employment in sick industries represent a subsidy to them, while if these resources are used to set up competitive new industries they would represent investment in them.
The rationale for exit policy lies in the fact that whereas the effect of subsidy is temporary, the effect of investment on employment is permanent.
A subsidy sustains a given volume of temporary employment in a sick industry for one year. It has to be provided again in each year thereafter merely to maintain that given volume of employment. If the subsidy is withdrawn in any year, the volume of employment falls to zero.
On the other hand, investment creates a given volume of permanent employment in each year in which it is made. If in a year that much investment is stopped, new employment generation stops but the level of employment already achieved remains unchanged.
A given amount of resources may be used as either a subsidy or an investment to provide the rationale for an exit policy. The withdrawal of subsidy would result in unemployment but diversion of resources to investment would ultimately create much larger volume of employment over a period of time.
Moreover, an exit policy may also have favourable effects on general industrial investment, besides the investment resulting from the subsidy transferred resources. A sound industrial exit policy may prove to be a powerful incentive for foreign investment.
Last but not least, exit policy is also important from the stand point of globalisation of the economy. If Indian companies cannot sell assets like surplus mill hand while their competitors abroad can, this will reduce the competitiveness of Indian industry.
The financial system simply will not be able to keep pumping in fresh money to keep all the sick units alive. At a time when money is scarce, it is criminal to waste it in keeping alive units of the lowest productivity.
This approach is fundamentally inefficient in the pursuit of supposed social goals. If we keep borrowing money at commercial rates and then sink it into unproductive activities, we are bound to go bust. Restructuring aims to make our industrial units more efficient.
This, in turn, means that we must transfer our resources from sick units to new and viable ones. Employment will not suffer in the long run.
The recent finalisation of the Golden Handshake Scheme for public sector undertakings will involve a cost of Rs. 700 crores. The scheme envisages rationalisation of about 4.5 lakh employees, about a fifth of 23 lakh employees in 246 central public sector undertakings declared surplus.
The scheme is applicable to workers and executives who have attained 40 years of age or completed 10 years of service and offers terminal benefits including 45 days’ emoluments for each completed year of service or the monthly emoluments at the time of retirement multiplied by the remaining months of service before the normal date of retirement, whichever is less.
The Government set up the National Renewal Fund (NRF) with an initial Corpus of Rs. 2,500 crores to provide a ‘social safety net’ to workers affected by the impact of technological up gradation and modernisation of industrial units.
Both public and private sectors would be covered by the Fund. NRF will be of a non-statutory nature and consist of contributions from the Central Government, State governments, financial institutions, insurance companies and industrial undertakings.
This fund would provide assistance to cover the cost of retraining and redeployment of labour following technological up gradation and modernisation and would provide compensation to those affected by the restructuring of any industrial unit in the public or private sector.
Schemes like the Voluntary Retirement Scheme (VRS) as also the NRF are devised to make retrenchment easier for industries and less painful for workers.
Though intended as a safety net, the Fund is so small that at the contemplated rate of Rs. 1.5 lakh per retrenched worker, it will cover the compensation claims of nearly three to four per cent of the total number of employees in the 58 sick units.
In the private sector union leaders are highly critical of the VRS. The VRS is aiding the process of pushing the entire job market towards the unorganised sector.
Even those who have accepted VRS and taken up new jobs are being forced to work on a contract basis. Thus these employees lose job security, better safety and health conditions and a good pay packet.
The consequences of such policy would be (i) expansion of unorganised sector (ii) increase of income inequality and (iii) more and more social tension.
Union leaders point out that the modus operandi used by most companies to implement the VRS does not justify the use of the word, ‘voluntary’ as most employees are forced to leave. It is not golden handshake but a kick in the back.
Workers with a bad work record or debts, those who had taken a loan and those who have stood sureties to the worker who has taken a loan are the first targets of the management. These workers can be easily persuaded to leave.
The workers in Hindustan Lever Ltd., for instance, who had taken loans, were told that they could leave without paying back the loan.
When they left, the workers who provided sureties for them were asked to pay off the loan or alternatively take the VRS option. At least 100 workers were forced to leave in this manner.
VRS can help specific industries like textiles which require modernisation regularly and rationalisation for survival. If the employers do not find it worthwhile to deploy employees who have been with a particular company for 15 to 20 years, how will the rest of the market accept them?
Moreover, the skill learnt by them becomes redundant and useless to society and he usually is compelled to take up an unskilled job later to sustain his family.
In some cases, the workers have the option of either taking VRS or face consequences on closure of the unit. Employees naturally arc forced to opt for the former.
One such example is the Bombay based Murphy India which closed down after nearly 200 out of 252 workers did not accept a VRS scheme offered by the management.
Only two categories of employees opt for voluntary retirement—those on the verge of retirement and those with considerable experience, a marketable skill and the capacity to secure another job.
Most companies want to get rid of the inefficient work force and retain only the good ones. And ironically, it is the inefficient ones who are reluctant to leave.
Lack of new jobs has led to many skilled workers leaving the cities for their native places. Sometimes these workers are re-employed in unit’s sell up in rural areas for the same jobs but on a much lower salary.
Many private firms now go out of their way to woo workers into leaving. In Bombay, employees have been offered even small gifts along with the standard VRS benefits. Some companies also help the retired workers to set up their own business or find alternative employment.
For example, in Godrej and GKW, retired employees have been made distributors or aided by the company to set up new ventures in areas related to their skills.
With domestic industrial stagnation, the golden handshake will most certainly lead to widespread under-employment.
The Government has offered tax relief on VRS in the private sector. The most important clause which was to be fulfilled is that the amount receivable on account of voluntary retirement should not exceed the amount equivalent to one and a half months’ salary for each completed year of service.
In any case, the amount under VRS should not exceed Rs. 5 lakh in each case. Any employee who has completed 10 years of service or completed 40 years of age and who is a worker or executive and not a director of a company will be eligible for tax benefits.
Captains of industry and apex trade bodies have welcomed the new industrial policy, particularly the decisions to do away with licensing for most industries, liberalisation of foreign investment and lifting of the threshold limit for MRTP.
The new industrial policy is a major step in ushering the country into a new era of development and progress. The new policy will change the structure of Indian industry. It is directed towards making Indian industry internationally competitive.
The FICCI president said, many retrograde restrictions have been either removed, or amended and conditions created for a market friendly system, which will enable India to join the international mainstream on the basis of efficiency and competitiveness.
The President of the Associated Chamber of Commerce and Industry described the policy as landmark in the opening up of the Indian economy.
He complimented the government for replacing the command and controlled economy which has been discarded all over the world with a competitive and market economy. Market is more important than Marx.
The new policy is pragmatic, bold, innovative, and growth- oriented and the onus now lies on the industry to take advantages of these changes and rise to the occasion before demanding further liberalisation.
On the other hand, the new industrial policy has come in for some sharp criticism by opposition leaders all over the country. The general reaction was that the policy was a sellout to the International Monetary Fund (IMF) and the World Bank and hit the common man.
Former Prime Minister Chandrashekhar assailed the new policy and described it as a total drift from the Gandhian path. He feared the policy would generate more unemployment.
Former Finance Minister Madhu Dandavate said that by abolising the limits on MRTP companies, the government had put the small scale sector in tight corner. This would seriously affect employment potential and poverty alleviation.