• UGI USER
  • May 20, 2024
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INDUSTRIAL SECTOR

Introduction

  • The industrial sector, also known as the secondary sector, plays a crucial role in the economy by transforming raw materials into finished goods. This sector is distinct from the primary sector, which directly uses natural resources like agriculture, mining, and the tertiary sector, which includes services like finance, education, and health.

Current Trend in the Industrial Sector

Economic Impact and MSME Contribution

  • The contribution of the Micro, Small, and Medium Enterprises (MSME) sector to the Gross Value Added (GVA) increased from 29.3% in FY18 to 30.5% in FY20 but fell to 26.8% in FY21 due to the pandemic’s economic impact.
  • MSMEs play a significant role in the manufacturing sector and are vital for achieving ambitious economic goals. For instance, Maharashtra, with its approximately 48 lakh MSMEs, aims for a substantial contribution from the manufacturing sector to reach a $5 trillion economy.

Industrial Sector’s Share in GDP

  • After independence, the industrial sector’s contribution to GDP initially showed a rising trend. However, with the service sector’s rapid growth, the industry’s share in overall GDP has seen a fluctuating trend in recent years.

Classification of Industries
Based on Raw Materials

  • Agro-Based Industries: Utilize agricultural products as raw materials. Examples include textiles (cotton, jute, silk, woolen) and industries producing sugar, edible oil.
  • Mineral-Based Industries: Use mineral ores. Examples are the steel and iron industries, heavy machinery.
  • Marine-Based Industries: Depend on sea and ocean products. Examples include seafood processing and fish oil manufacturing.
  • Forest-Based Industries: Use forest products. Examples are the paper and pulp industry, timber, and plywood industry.

Based on Size

  • Large-Scale Industries: Have substantial infrastructure and capital requirements, with fixed assets over 10 crore rupees. Examples include the cement, paper, and automobile industries.
  • Small-Scale Industries: Operate on a small or micro scale. Examples include the manufacturing of napkins, tissues, and small toys.
  • Medium-Scale Industries: Investments range between 5 to 10 crores. Examples are LED light and leather product manufacturing.
  • Cottage Industries: Small operations, often home-based. Examples include pickle and papad making.

Based on Ownership

  • Private Sector Industries: Operated by private entities. Examples include Reliance Industries and Spicejet.
  • Government Sector Industries (Public Sector Undertakings): Owned and operated by the government. Examples are BHEL and IOC.
  • Joint Sector Industries: Owned by both private groups and the state. An example is Maruti Udyog Limited.
  • Cooperative Sector Industries: Run by a collective of owners or employees. An example is Amul.

Composition of the Industrial Sector

  • The industrial sector, a cornerstone of the economy, encompasses a diverse range of sub-sectors, each contributing uniquely to the Gross Domestic Product (GDP) and employment. This sector is pivotal in shaping the economic landscape, driving innovation, and fostering sustainable development.

The primary components of the industrial sector

  • Mining and Quarrying: This sub-sector involves the extraction of minerals, ores, and other natural resources from the earth. It serves as the foundation for raw materials required by various industries.
  • Manufacturing: As the major contributor to the GDP, the manufacturing sub-sector involves the production of goods from raw materials through processes such as machining, assembling, and chemical processing. It encompasses a wide array of industries from textiles to electronics, automotive, and more.
  • Electricity, Gas, Water Supply, and Other Utility Services: This category provides essential services that underpin the functionality of homes, businesses, and industries. It includes the generation, distribution, and retail of electricity, gas, and water.
  • Construction: The construction sub-sector plays a critical role in infrastructure development, including the building of residential properties, commercial buildings, roads, bridges, and other physical structures.

Economic Impact and Recovery

  • In the fiscal year 2021-22, spurred by the recovery efforts from the COVID-19 pandemic, all sub-sectors within the industrial sector observed a significant positive growth rate. This rebound is crucial for the economy, reflecting resilience and the potential for future growth.

Notable Highlights

  • Industry Status to Sports in Mizoram: In a landmark move in 2020, Mizoram became the first state in India to accord industry status to sports, potentially transforming the sports landscape by encouraging investments and infrastructure development.

Facts and Figures from Economic Survey 2022-23

  • Contribution to GDP: The industrial sector accounts for approximately 31% of India’s GDP, marking its substantial impact on the economy between FY12 and FY21. Moreover, it provides employment to over 12.1 crore people, highlighting its role as a key employment generator.
  • Growth in Industrial Income: The growth in industrial Gross Value Added (GVA) has been in line with the overall GVA growth in the economy since FY20, indicating steady progress and contribution to the economic fabric.
  • Manufacturing GVA: Significantly, the manufacturing sub-sector, which constitutes over 50% of the industrial GVA, has witnessed an even higher growth rate compared to the overall GVA, emphasizing its pivotal role in the industrial sector.
  • FY23 Growth Trends: The Industry sector experienced modest growth of 4.1% in FY23, contrasting with the robust growth of 10.3% in FY22. This variation underscores the dynamic nature of industrial activity and its susceptibility to global and domestic economic conditions.
  • Core Industries Performance: The eight core industries, including coal, fertilizers, cement, steel, electricity, refinery products, crude oil, and natural gas, play an essential role in supplying inputs across industries. Their steady growth reflects ongoing momentum in industrial activity.
  • Production Linked Incentive (PLI) Scheme: The introduction of the PLI scheme has been instrumental in boosting both physical and digital infrastructure, alongside efforts to reduce transaction costs and enhance ease of doing business. This initiative is expected to accelerate the pace of recovery and foster sustainable industrial growth.

INDUSTRIAL POLICIES IN INDIA

  • India’s approach to industrial development has been shaped significantly through various industrial policies over the decades. These policies have aimed to create a balanced growth, prevent monopolistic practices, and ensure an equitable distribution of wealth and opportunities across sectors.

Objectives of Industrial Policy

  • Sustained Growth in Productivity: Aiming for continuous improvement in the efficiency of industries to boost economic growth.
  • Increased Employment: Focusing on creating more job opportunities within the economy to reduce unemployment.
  • Optimal Utilization of Human Resources: Leveraging India’s large and diverse workforce to maximize economic output.
  • International Competitiveness: Enhancing the global competitiveness of the Indian industrial sector to make it a significant player on the international stage.
  • Global Integration: Positioning India as a key partner in the global economy through strategic industrial growth.

Industrial Policy Resolution of 1948 (IPR-1948)

  • Introduction of Mixed Economy: It introduced a mixed economy model, incorporating both public and private sectors under a socialistic pattern of society.
  • Protection of Small-scale Industries: Priority was given to cottage and small-scale industries to protect them from competition with larger enterprises.
  • Fair Wages and Social Security: Emphasis on providing workers with fair wages and social security benefits to ensure harmonious industrial relations.
  • Infrastructure Development: Special focus on developing critical infrastructure like roads, railways, electricity, and irrigation to support industrial growth.
  • First Five-Year Plan: The first FYP (1951-56) aimed at self-sufficiency in agriculture and laying the foundation for industrial, healthcare, and educational growth.

Industries are classified into four broad categories:

  • Central Government Monopoly: Exclusive government control over critical industries like arms and ammunition, atomic energy, and rail transport.
  • Mixed Sector: Both government and private sectors were involved in key industries such as coal, iron and steel, aircraft manufacturing, shipbuilding, mineral oil, and telecommunications.
  • Controlled Private Sector: The government regulated certain industries (e.g., chemicals, sugar, automobiles) through strict oversight.
  • Private Sector: Industries not covered under the first three categories were allowed to operate freely within the private sector.

The Industries (Development and Regulation) Act, 1951

  • Introduction of License Raj: This act required businesses to obtain licenses for starting production, marking the beginning of the ‘license raj’ era.
  • Government Controls: The act established controls over licensing, allocation of raw materials, and price regulation to guide the pattern of industrial development.

Industrial Policy Resolution of 1956 (IPR-1956)

  • The Industrial Policy Resolution of 1956, guided by the P.C. Mahalanobis model, represented a pivotal moment in India’s economic planning and industrial development. Often referred to as the ‘Economic Constitution of India’ or the ‘Bible of State Capitalism’, it laid down a comprehensive framework for industrial growth and development.

Emphasis on Heavy Industries

  • IPR-1956 placed a strong emphasis on the development of heavy industries such as steel, machinery, and chemicals. This was seen as essential for achieving self-reliance and building the foundation for sustained economic growth.

Priority to Backward Regions

  • The policy aimed to address regional disparities by prioritizing industrial development in the backward regions of the country. This was intended to promote balanced regional development and prevent the concentration of industrial activity in certain areas.

Promotion of Technical and Managerial Skills

  • Recognizing the importance of skilled manpower for industrial growth, IPR-1956 proposed the establishment of Industrial Training Institutes (ITIs) and the introduction of Business Management courses in universities to enhance technical and managerial capabilities.

Recognition of Foreign Capital

  • IPR-1956 acknowledged the significance of foreign capital in the country’s development. It aimed to attract foreign investment to supplement domestic resources and technology.

Private Sector and Industrial Licensing Policy

  • The policy outlined the role of the private sector within the industrial framework of India and introduced an industrial licensing policy to regulate and direct industrial growth.

Industrial Licensing

  • Industrial licensing emerged as a crucial mechanism under IPR-1956, serving as an authorization from the government for starting an industry or certain functions within an industry.

The main objectives of industrial licensing were:

  • Directing Investment: To steer investment into industries according to plan priorities, ensuring that resources were allocated efficiently.
  • Balancing Regional Development: To regulate the location of industrial units to achieve a balanced regional development across the country.
  • With time, the Industrial Licensing Policy saw significant reforms, including the reduction of industries under licensing from 18 to 6 in 1999.

The classification of industries was simplified into three categories:

  • Schedule A: Reserved strictly for the central government (17 industries).
  • Schedule B: Open to both private and public sectors (12 industries).
  • Schedule C: Open to the private sector but subject to licensing and regulation (all other industries).

Symbolic Emphasis on Public Sector Undertakings (PSUs)

  • Prime Minister Pandit Jawaharlal Nehru highlighted the significance of PSUs, referring to them as “temples of modern India.” This underscored the role of the public sector in driving industrial development and nation-building.

Industrial Policy Statement of 1969

  • The Industrial Policy Statement of 1969 aimed to address the shortcomings of IPR-1956, particularly regarding the effectiveness of the licensing policy. It sought to align licensing more closely with socialist and nationalist goals, such as:
  • Resource Development: Ensuring the exploitation of resources for the benefit of all.
  • Price Control: Managing the prices of goods from licensed industries.
  • Economic Power: Preventing the concentration of economic power.
  • Investment Direction: Guiding investment towards desired sectors.

Introduction of the Monopolistic & Restrictive Trade Practices (MRTP) Act

  • The MRTP Act was introduced as part of the policy to regulate trade and prevent the concentration of economic power. It mandated firms with significant assets to obtain government permission for expansion or takeover activities. The MRTP Commission was established to address prohibited and restricted trade practices.

Industrial Policy Statement of 1973

  • The industrial policy statements released by the Indian government over the years represent strategic shifts in economic direction, focusing on development, modernization, and global integration. Each policy statement, from 1973 through the 1980s, reflects the prevailing economic philosophy and priorities of the time, aiming to address specific challenges and opportunities within the Indian industrial landscape.

Core Industries Identification

  • Six industries were designated as core or infrastructure industries: iron and steel, cement, coal, crude oil, oil refinery, and electricity.

Public-Private Partnership Emphasis

  • Introduced the concept of the joint sector, promoting partnerships among state and central governments and the private sector.

Foreign Exchange Regulation Act (FERA), 1973

  • Enacted to regulate the flow of foreign exchange and investments, marking a cautious approach towards foreign involvement in the economy.

Limited MNC Investment

  • Allowed multinational corporations (MNCs) to make investments in India, albeit in a restricted manner.

Reserve Lists

  • Established reserve lists for sectors where only Micro, Small, and Medium Enterprises (MSMEs) could establish industries, aiming to protect small businesses and promote local entrepreneurship.

Industrial Policy Statement of 1977

Focus on Small-Scale and Tiny Industries

  • Critiqued previous policies and emphasized the development of small-scale and tiny units, particularly in rural areas, reflecting Gandhian-Socialist economic ideals.

Public Sector Role

  • Highlighted the public sector’s role in supporting ancillary and small-scale industries through managerial and technological expertise.

Restrictions on MNCs

  • Imposed tighter controls on MNC operations in India, aiming to reduce foreign influence and protect domestic industries.

Employment and Wealth Distribution

  • Aimed to generate employment and reduce wealth concentration, highlighting social equity concerns.

Industrial Policy Statement of 1980

Public Sector Infrastructure Development

  • Entrusted the public sector with the task of developing economic infrastructure, requiring large investments and long gestation periods.

Licensing Relaxation

  • Offered licensing relaxations to a wide array of industries to spur growth and development.

Focus on Competition and Modernization

  • Encouraged domestic market competition, technological upgrades, and modernization to foster a competitive export-oriented industry and foreign investment through technology transfer.

Industrial Policy Resolution, 1985 & 1986

Foreign Investment and Technology Transfer

  • Eased restrictions on foreign investment, particularly in technology transfer, allowing foreign entities to hold up to 49% share in Indian companies.

MRTP Limit Increase

  • Increased the Monopolies and Restrictive Trade Practices (MRTP) limit to Rs 100 crore to support the growth of larger companies.

Simplification of Industrial Licensing

  • Continued to simplify the industrial licensing process, retaining it for only 64 industries, to encourage investment.

Focus on Sunrise Industries

  • Shifted focus towards emerging sectors like telecommunications, electronics, and computerization, emphasizing modernization and profit maximization, including in public sector undertakings.

Relaxation of FERA and Technology Infusion

  • Relaxed provisions of FERA and encouraged the use of foreign exchange for technology assimilation into Indian industries to meet international standards. This included promoting technology infusion in agriculture to increase production and farmer income.

The Major Features of Most of The Pre-1991 Policies

  • The economic policies in India prior to the liberalization reforms of 1991 were characterized by their protective and regulatory nature, designed to shield the nascent Indian industry from international competition and to promote self-reliance. These policies reflected India’s cautious approach towards its economic development in the post-independence era.

Protection of Local Industries

  • High Import Tariffs and Restrictions: The government implemented high import tariffs and other import restrictions to protect local industries from international competition, making imported goods more expensive and less attractive compared to domestic products.

Promotion of Import Substitution

  • Encouraging Indigenous Production: The import substitution policy was promoted to encourage the local production of goods that were previously imported, aiming to reduce dependency on foreign products and enhance domestic industrial capacity.

Regulation of Large Enterprises

  • Monopolies and Restrictive Trade Practices (MRTP) Act: Big private companies were heavily regulated under the MRTP Act to prevent monopolistic and exploitative practices.
  • Foreign Exchange Regulation Act (FERA): Foreign companies were regulated through FERA, imposing restrictions on foreign investments and operations in India.

Industrial Sector Regulation

  • Strict Licensing System: The industrial sector was subject to a strict licensing regime, requiring businesses to obtain government licenses for starting operations, expanding capacity, or diversifying their product lines, making the business environment highly bureaucratized.

Emphasis on Public Sector

  • 1956 Industrial Policy: Significantly increased the role of the public sector, reserving eighteen areas exclusively for it. While the private sector was allowed in certain areas, it was subject to licensing and could face competition from public sector undertakings.

Reservation of Critical Sectors

  • Exclusive Public Sector Domains: Critical and important sectors such as oil, power, heavy equipment, and telecom were exclusively reserved for the public sector, underscoring the government’s intent to control key areas of the economy.

Government Approval for Business Decisions

  • Control Over Capacity Expansion and Diversification: The government maintained control over private sector business decisions, requiring approval for capacity expansion, diversification, and other significant changes, to prevent monopolistic practices.

Price Regulation

  • Government-Controlled Pricing: Prices of industrial goods, including steel and cement, were regulated by the government, aiming to stabilize prices and make essential goods affordable for the general population.

Mixed Economy Approach

  • Public and Private Sector Co-existence: While the policies emphasized a mixed economy, with both the public and private sectors playing crucial roles, there was a significant bias towards the public sector, reflecting the government’s strategy for economic development.

New Industrial Policy (NIP), 1991

Introduction

  • The New Industrial Policy of 1991 represented a paradigm shift in India’s industrial strategy, moving from a regulatory framework to one focused on development and global integration. This policy aimed to correct the structural inefficiencies that had crept into India’s industrial landscape over four decades. It marked the beginning of the LPG (Liberalization, Privatization, and Globalization) era, setting the stage for a more competitive and efficient industrial sector.

Need for New Industrial Policy, 1991

  • Increased Fiscal Deficit: The fiscal deficit had ballooned to 8.5% of GDP by 1991, necessitating significant public borrowings.
  • Balance of Payment Crisis: The balance of payments deficit had escalated, leading to a severe foreign exchange crisis.
  • Global Oil Prices: The Gulf Crisis and the Iran-Iraq war led to a spike in oil prices, exacerbating India’s economic woes.
  • Decline in Foreign Exchange Reserves: Reserves had dwindled to a mere three weeks of import cover, forcing the government to mortgage its gold reserves.
  • Inflation: The rate of inflation had surged, severely impacting the cost of essential goods.
  • Underperforming Public Sector: The public sector’s performance was not yielding the expected dividends, prompting a rethink of its role.

Objectives of the New Industrial Policy, 1991

  • Liberalization of foreign investment and reduction in government control.
  • Privatization to augment the role and scope of the private sector.
  • Globalization to integrate the Indian economy with the global market.

Key Reforms of the New Industrial Policy

Industrial De-licensing

  • Nearly all industries were freed from the requirement of obtaining industrial licenses, significantly easing the process of setting up new ventures.

De-reservation of the Public Sector

  • The policy drastically reduced the number of industries reserved exclusively for the public sector, signaling a shift towards greater private participation.

Promotion of Foreign Investment

  • FDI caps were relaxed to allow up to 51% foreign investment in certain sectors, and the Foreign Investment Promotion Board (FIPB) was established to encourage FDI.

Foreign Technology Agreements

  • Automatic approval was granted for technology agreements within specified parameters, facilitating technology transfer and collaboration.

Amendments in the MRTP Act

  • The Monopolies and Restrictive Trade Practices (MRTP) Act was amended to remove thresholds for asset holdings, encouraging investments in de-licensed sectors.

Focus on Small-Scale Industries (SSIs)

  • Although aimed at increasing competitiveness, the policy also faced criticism for not adequately supporting the development of SSIs.

Closure and Revival of Public Enterprises

  • The policy addressed the issue of sick public sector units, proposing their closure or revival based on viability assessments.

Encouragement of Non-Resident Investment

  • NRIs were allowed to make 100% equity investments in most sectors, barring a negative list.

Social Safety Net

  • The establishment of the National Renewal Fund (NRF) was announced to provide support to workers affected by the policy changes.

Demerits of the New Industrial Policy

  • Favoring capital-intensive industries over small-scale sectors.
  • Creating a market environment that benefited the wealthier sections of society.
  • Encouraging a surge in foreign and private investment, possibly at the expense of domestic industries.
  • Overlooking the critical issue of employment generation to match the growing labor force.

Public Sector Undertakings

  • Public Sector Undertakings (PSUs) are integral to India’s economic framework, playing a pivotal role in the country’s development across various sectors. These entities are owned by the government, either at the central, state, or both levels, and are categorized based on their operational autonomy and financial performance.

Classification of PSUs

Central Public Sector Enterprises (CPSEs)

  • CPSEs are companies where the direct holding of the central government or other CPSEs is 51% or more. Managed by the Ministry of Heavy Industries and Public Enterprises, CPSEs operate in agriculture, mining and exploration, manufacturing, and services sectors.

Public Sector Banks (PSBs)

  • These are banks where the majority stake is held by the government, playing a crucial role in the banking and financial sector of the country.

State-Level Public Enterprises (SLPEs)

  • Owned by state governments, SLPEs operate at the regional level across various sectors, contributing to localized economic development.

Financial Autonomy and Categories

Maharatnas, Navratnas, and Miniratnas

  • CPSEs are further classified into Maharatnas, Navratnas, and Miniratnas (Category I and II) to provide them with greater financial autonomy. This classification allows them to make significant investments without requiring explicit government approval, based on their net worth and performance metrics.

Policy of Navratnas

  • Navratna companies, recognized for their prestigious status since 1997, are granted financial autonomy to compete globally. To achieve Navratna status, a CPSE must meet specific criteria, including having a Miniratna Category- I status, excellent performance ratings, and a composite score based on performance metrics.

Policy of Miniratnas

  • Miniratna status is divided into two categories, offering varying degrees of financial autonomy based on the company’s profitability and net worth. This status allows these enterprises to make capital expenditures and form joint ventures within specified limits.
  • Category-I Miniratna: These CPSEs should have made profits in the last 3

years continuously, earned a pre-tax profit of Rs.30 crore or more in at least one of these 3 years, and should have a positive net worth, They have the financial autonomy to incur capital expenditure without government approval up to Rs.300 crore or equal to their net worth, whichever is lower.

  • Category-II Miniratna: These should have made profits in the last 3 years continuously and should have a positive net worth, They have the financial autonomy to incur capital expenditure without government approval up to Rs.150 crore or up to 50 per cent of their net worth, whichever is lower. Both the categories of Miniratnas can also enter into joint ventures and form subsidiaries in India but under some specified restrictions.
  • As of March 2022, there are 61 Category-I Miniratna CPSEs and 12 Category-II Miniratna CPSEs in India.

Policy of Maharatnas

  • The Maharatna status, introduced in 2010, represents the highest level of autonomy granted to CPSEs, allowing for substantial investment in projects. Eligibility criteria include having Navratna status, significant turnover, net worth, and profit margins, along with a global presence.
  • Criteria for granting Maharatna Status to a CPSE:
  • Having Navratna status.
  • Listed on the Indian stock exchange with minimum prescribed public shareholding as per SEBI regulations.
  • Average annual turnover of more than Rs.25,000 crore, during the last 3 years.
  • Average annual net worth of more than Rs. 15,000 crores, during the last 3 years.
  • Average annual net profit after tax of more than 5,000 crore, during the last 3 years.
  • The company should have a significant global presence or international operations.

Performance of CPSEs

  • The performance of CPSEs is evaluated not just on profitability but also on their contribution to the economy. The number of CPSEs has grown significantly since independence, with a mix of profitable and non-profitable entities. Recent policies under the Atma Nirbhar Bharat Mission emphasize the strategic presence of CPSEs in key sectors, with plans for privatization in non-strategic areas.

Disinvestment

  • Disinvestment, often interchanged with the term privatization, involves the sale of equity shares of Public Sector Enterprises (PSEs) to private sector entities. This strategic financial action aims to reduce the government’s stake in public enterprises, thereby introducing private ownership and management efficiencies. Disinvestment can lead to an infusion of private capital, technology upgradation, and improved competitiveness among PSEs.

Types of Disinvestment

  • Disinvestment activities can be broadly categorized into two types: Minority Disinvestment and Majority Disinvestment.

Minority Disinvestment

  • This type occurs when the government sells a part of its equity in a PSE but retains a majority stake, usually more than 51%, ensuring that management control stays with the government. This form of disinvestment aims to mobilize resources without relinquishing control over the enterprise. Examples include the disinvestment in companies like Power Grid Corporation of India Limited and NTPC Limited.

Modes of Minority Disinvestment

  • Initial Public Offering (IPO): The company offers its shares to the public for the first time.
  • Follow-on Public Offering (FPO): Additional shares are offered by an already listed company.
  • Offer for Sale (OFS): Shares are auctioned on the stock exchange platform.
  • Institutional Placement Programme (IPP): Shares are offered to selected financial institutions.
  • Cross-holdings: One PSU purchases government stakes in another PSU.
  • CPSE Exchange Traded Fund (ETF): Government divests its stake in multiple PSUs through a single offering.

Majority Disinvestment

  • In this scenario, the government sells off its majority stake, retaining a minority position, or none at all, in the PSE. This often involves strategic partners and can lead to the privatization of the enterprise.

Modes of Majority Disinvestment

  • Strategic Sale: Sale of a major portion of government shareholding along with transfer of management control.
  • Privatization: Government divests its entire shareholding, transferring management control to a private entity.
  • Complete Privatization: 100% control of the company is transferred to a buyer, often leading to total privatization.

Purpose of Disinvestment Policy

  • Reduce the financial burden on the government by offloading stakes in sick and bankrupt PSUs.
  • Encourage private ownership and increase market discipline and competition.
  • Depoliticize essential services and make public enterprises more competitive through technology upgradation.
  • Rationalize the workforce and focus government attention on core sectors.

Importance of Disinvestment Policy in India

  • Addresses the issue of negative returns on capital employed by PSUs, transforming them from liabilities into assets.
  • Shifts government focus away from non-essential sectors, allowing private sector competitiveness.
  • Reduces fiscal deficit and enables large-scale infrastructure development through raised financial resources.
  • Enhances overall economic investment, boosting consumer spending and production.

Criticism of Disinvestment Policy

  • Seen as a short-term measure for fund-raising, with little emphasis on PSU reform.
  • Reduction in government’s dividend income post-disinvestment increases fiscal deficit concerns.
  • Fear of job losses for PSU employees and potential threats to national security, especially in strategic sectors like oil.
  • Concerns about the private sector’s focus on profit maximization, potentially undermining equitable resource distribution and inclusive growth.

Current Disinvestment Policy (2023-24)

  • The disinvestment policy, as outlined in the Union Budget for the fiscal year 2023-24, reveals the government’s strategic financial maneuvers aimed at optimizing the public sector undertakings (PSUs) portfolio. Disinvestment, the process of selling or liquidating government stakes in public sector enterprises, is pivotal in streamlining government investments in businesses.

Disinvestment Target for 2023-24

  • The government has earmarked a disinvestment target of ₹51,000 crores for the 2023-24 budget year. This figure represents a notable reduction, nearly 21%, from the previous year’s budget estimate.
  • The target is marginally higher, by just ₹1,000 crores, compared to the revised estimate of the prior year, setting it as the lowest goal in the past seven years.
  • For the 2022-23 fiscal year, the disinvestment achievements have been underwhelming, with only ₹31,106 crore realized so far. A significant portion of this, approximately ₹20,516 crore, originated from the initial public offering (IPO) of 3.5% of the government’s shares in the Life Insurance Corporation (LIC), highlighting a singular substantial contribution amidst broader target shortfalls.

Considerations for Effective Disinvestment

  • The government’s disinvestment policy is multifaceted, aiming not only at financial restructuring but also at fostering a more dynamic and efficient market economy. The goals and outcomes of disinvestment are significant for several reasons:
  • Reducing the Fiscal Deficit: By liquidating stakes in PSUs, the government can procure immediate revenues, aiding in the reduction of the national fiscal deficit.
  • Funding for Welfare and Infrastructure: The proceeds from disinvestment are often redirected towards welfare schemes and critical infrastructure projects, ensuring the broader social and economic development.
  • Focusing on Priority Areas: Disinvestment allows the government to reallocate resources and attention to sectors deemed as priorities, ensuring that efforts and investments are concentrated where they are most needed.

Challenges for Disinvestment

  • Public Trust: Ensuring transparency and fairness in the disinvestment process is paramount to maintaining public confidence in the government’s actions.
  • Proper Valuation of Companies: Accurate and fair valuation of the companies being disinvested is crucial to prevent undervaluation and ensure that the government and, by extension, the taxpayers receive a fair return on investments.
  • Fair and Free Auctioning Process: The auctioning process must be conducted in an open, fair, and competitive manner to prevent any allegations of favoritism or corruption.
  • Protection for Officials: Officials involved in the disinvestment process often face scrutiny and, in some cases, legal challenges. Providing some level of protection against unjust persecution is essential to encourage diligent and honest participation in the disinvestment process.

Special Economic Zone (SEZ)

  • Special Economic Zones (SEZs) are designated areas within countries that offer both fiscal and regulatory incentives to attract foreign and domestic investments, with the aim of boosting economic growth through increased exports, job creation, and improved infrastructure development. These zones operate under a distinct set of business and commercial laws that differ from the rest of the country, primarily to simplify the bureaucratic processes and make doing business more straightforward and attractive.

Objectives of the SEZ Act

  • Economic Activity Boost: To stimulate economic activities by providing a conducive environment for business operations.
  • Export Increase: To augment the export of goods and services.
  • Employment Generation: To create substantial employment opportunities.
  • Investment Attraction: To attract both foreign and domestic investments.
  • Infrastructure Development: To enhance infrastructure facilities, making the zones more appealing for investment.

Incentives and Facilities for SEZs

  • Duty-Free Imports and Domestic Purchases: For the creation, operation, and maintenance of SEZ units.
  • Tax Exemptions: Including income tax, minimum alternate tax, and others.
  • External Commercial Borrowings: SEZ units can borrow up to USD $500 million per year through recognized banking channels without maturity restrictions.
  • Single-Window Clearance: For approvals at both central and state levels, simplifying the administrative processes.

Benefits of Special Economic Zones

  • Boost in FDI: They attract Foreign Direct Investment.
  • Foreign Exchange Earnings: Increase the country’s foreign exchange earnings.
  • Employment Opportunities: Generate numerous job opportunities.
  • Policy Experimentation: Serve as a testing ground for new economic and business policies.
  • Export Growth: Significantly boost the country’s exports.
  • Economic Development: Contribute to the overall economic growth.

SEZs in India

  • India’s journey with SEZs began with the establishment of Asia’s first EPZ in Kandla, Gujarat, in 1965. Over the years, the SEZ landscape in India has expanded significantly:
  • Current Status: As of March 2021, 378 SEZs have been notified, with 265 operational, spread predominantly across Tamil Nadu, Telangana, Karnataka, Andhra Pradesh, and Maharashtra.
  • Historical Context: Before the SEZ Act of 2005, there were 7 Central Government SEZs and 12 State/Private Sector SEZs. Post-Act, 425 proposals for SEZ setups have been formally approved.

Challenges Facing SEZs

  • Unutilized Land: A significant amount of land designated for SEZs remains unutilized, partly due to reduced demand and the impact of the pandemic.
  • Multiple Models and Integration Issues: The existence of various economic zone models (e.g., coastal economic zones, industrial corridors) complicates the integration of different initiatives.
  • Competition from ASEAN Countries: SEZs face stiff competition from ASEAN countries, which have refined their policies to attract global investments.

Index of Industrial Production (IIP)

  • The Index of Industrial Production (IIP) is an essential statistical measure reflecting the industrial performance of a country. Compiled and published monthly by the National Statistical Office (NSO), formerly known as the Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation, the IIP provides insights into the short-term changes in the volume of production of a basket of industrial products.

Key Features of IIP

  • Base Year: The current base year for the IIP is 2011-12. This is the year against which the production levels of subsequent years are compared to measure growth or decline.
  • Data Source: Data for the IIP is collected from 14 different ministries.
  • Sectoral Weights: The IIP assigns weights to three sectors: mining (14.4%), manufacturing (77.6%), and electricity (8%). The manufacturing sector, thus, carries the highest weight.
  • Use-Based Classification: In terms of use-based classification, primary goods have the highest weight in the IIP measurement.

Significance of IIP

  • Economic Indicator: The IIP serves as a lead indicator of overall economic growth, offering valuable insights into the health of the industrial sector.
  • Policy Making: It is utilized by government agencies, including the Finance Ministry and the Reserve Bank of India, for informed policy-making.
  • GVA Calculation: The IIP data is crucial for calculating the Gross Value Added (GVA) to the manufacturing sector quarterly.
  • Analysis and Forecasting: Business analysts, financial experts, and private entities use IIP for various analytical and forecasting purposes.
  • Volume Indicator: It uniquely indicates the physical volume of production across sectors.
  • GDP Projections: The data is instrumental for projecting advanced estimates of the Gross Domestic Product (GDP).

Index of Eight Core Industries

  • The Index of Eight Core Industries is another significant economic indicator, measuring the performance of eight crucial industries that form the backbone of the industrial sector.

Composition and Weights:

  • Overall Weight: These industries collectively account for 40.27% of the weight in the IIP.
  • Core Industries: The industries include refinery products (28%), electricity (19.9%), steel (17.9%), coal (10.3%), crude oil (9%), natural gas (6.9%), cement (5.4%), and fertilizers (2.6%).
  • Significance: Refinery products have the highest weight among these, reflecting their critical role in the industrial framework.

Present Trends (as of June 2022)

  • Growth Moderation: The growth in the eight core industries slowed to 12.7% in June 2022 from 18.1% in May 2022. All sectors, except crude oil, saw an uptick in production.
  • IIP Contribution: These industries significantly contribute to the overall IIP, indicating their importance in assessing the country’s industrial performance.

Quality Council of India

  • The Quality Council of India (QCI) plays a pivotal role in enhancing and promoting quality standards across various sectors of the Indian economy. Established in 1997, QCI is an autonomous body formed through a collaborative effort between the Government of India and the Indian Industry, represented by the leading industry associations – ASSOCHAM, CII, and FICCI.

Establishment and Nature

  • Founding Year: 1997
  • Nature: Autonomous body
  • QCI was set up to lead the way in fostering quality standards in Indian industries and services. Its establishment marked a significant step towards integrating quality assurance and quality management practices across various sectors.

Collaboration and Support

  • Collaborative Effort: Government of India and Indian Industry
  • Industry Representation: ASSOCHAM, CII, and FICCI
  • The collaboration between the government and major industry chambers underscores the importance of a collective approach towards promoting quality standards, reflecting a joint commitment to improving competitiveness in the domestic and international markets.

Aims and Objectives

  • National Accreditation Structures: To establish and operate national accreditation schemes for industries and services, ensuring their compliance with international standards.
  • Promotion of Quality: Through the National Quality Campaign, QCI aims to enhance quality awareness and practices among businesses, with a focus on small and medium enterprises (SMEs) that form the backbone of the Indian economy.

MSME Sector

  • Micro, Small, and Medium Enterprises (MSMEs) are pivotal to the Indian economy, engaging in manufacturing, processing, production, and preservation of goods. Recognized for their contribution to the GDP, industrial production, exports, and employment, MSMEs are integral to India’s socio-economic development. In 2020, the Government of India revised the definition of MSMEs to unify the criteria for both the manufacturing and service sectors, aiming to foster growth and streamline regulatory processes.
Category Old Capital Limit Old Turnover Limit New Capital Limit New Turnover Limit
Micro Up to 25 lakhs Up to 10 lakhs Up to 1 crore Up to 5 crores
Small Up to 5 crores Up to 2 crores Up to 10 crores Up to 50 crores
Medium Up to 10 crores Up to 5 crores Up to 50 crores Up to 250 crores

Role and Importance of MSMEs

  • Economic Contribution: MSMEs contribute approximately 30% to India’s GDP and over 40% to its industrial production.
  • Employment: Engaging over 1109.89 lakh workers, MSMEs are a significant employment generator, especially in rural and backward areas.
  • Exports: They account for more than 50% of India’s total exports.
  • Rural and Women Empowerment: With 51% of MSMEs located in rural areas and around 20.37% operated by women, they play a crucial role in empowering marginalized communities.

Committees/Commission Recommendations on MSME Sector:

Committee/Commission Recommendations/Objectives
K.V. Kamath Committee Recommend parameters for one-time restructuring of corporate loans impacted by the Covid-19 pandemic.
Formulate sector-specific resolution plans for accounts with total loan exposure of Rs.1500 crore and above.
U.K. Sinha Committee Study the problems faced by MSMEs in India.
Identify the causes of disruptions faced by MSMEs, including those resulting from demonetization and GST implementation.
Propose long-term solutions to enhance the smooth functioning and development of the MSME sector.
S.P. Gupta Committee Provide a roadmap for the development and promotion of Micro, Small, and Medium Enterprises (MSMEs).

Challenges Facing the MSME Sector

  • Credit Accessibility: MSMEs face difficulties in accessing adequate and timely credit at reasonable costs.
  • Supply Chain and Marketing: Challenges include supply to government departments, as well as issues with storage, design, packaging, and product display.
  • Global Market Access: Limited access to global markets remains a significant hurdle.
  • Infrastructure: Inadequate facilities such as power, water, and roads impede operations.
  • Regulatory Hurdles: A multiplicity of labor laws and complex compliance procedures create additional burdens.

Government Initiatives for MSME Promotion

  • Interest Subvention: A 2% interest subvention for GST-registered MSMEs on incremental credit up to ₹1 crore.
  • Procurement Policies: Mandating CPSUs to procure at least 25% from MSMEs, with 3% from women entrepreneurs.
  • Digital and Financial Support: Launch of portals like Udyami Mitra, MSME Sambandh, and MSME Samadhaan to facilitate access to credit and address delayed payments.
  • Technology Upgradation: The Credit Linked Capital Subsidy Scheme (CLCSS) for technology upgradation of MSMEs.
  • Skill Development and Market Access: Initiatives like the Revamped SFURTI and MSE-CDP aim to improve skills, market access, and competitiveness of MSMEs.
  • Innovation and Entrepreneurship: Programs like ASPIRE and the Prime Minister Employment Generation Programme encourage innovation, rural industry, and entrepreneurship.

Industrial Corridors

  • The Government of India has embarked on a monumental project to enhance its industrial infrastructure by developing various Industrial Corridor Projects under the National Industrial Corridor programme. The initiative aims to transform selected regions into futuristic industrial cities that can stand shoulder to shoulder with the leading manufacturing and investment hubs globally. These corridors are envisioned to be equipped with world-class infrastructure that will catalyze the industrial sector, fostering innovation, manufacturing excellence, job creation, and resource security.

Components of Industrial Corridors

  • High-Speed Transportation Network: This includes rail and road networks designed for rapid transit, facilitating swift movement of goods and personnel across the corridor.
  • Advanced Port Facilities: Ports within these corridors are equipped with modern cargo handling equipment, ensuring efficient import and export operations.
  • Modern Airports: Airports with the latest facilities support the fast-paced movement of goods and individuals, integrating the corridors with global markets.
  • Special Economic Zones and Industrial Areas: Dedicated zones designed to attract investment and promote industrial growth with favorable policies and incentives.
  • Logistics and Transhipment Hubs: These facilities streamline the storage and distribution of goods, enhancing the efficiency of supply chains.
  • Knowledge Parks: Focused on industrial needs, these parks facilitate innovation and skill development, crucial for sustaining industrial growth.
  • Complementary Infrastructure: This includes the development of townships, real estate, and other urban infrastructure, creating a conducive living and working environment.
  • Enabling Policy Framework: Supportive policies that foster an investment-friendly climate, facilitating the seamless operation of industries within these corridors.
S.N. Industrial Corridor States Involved Funding Sources Notes
1 Delhi Mumbai Industrial Corridors (DMIC) Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh, Gujarat, Maharashtra Government of India, Japanese loans, investments by Japanese firms, Japan depository receipts issued by Indian companies A US $100 billion project
2 Amritsar Kolkata Industrial Corridor (AKIC) Punjab, Haryana, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, West Bengal – –
3 Chennai Bengaluru Industrial Corridor (CBIC) Andhra Pradesh, Karnataka, Tamil Nadu, Kerala Japan International Cooperation Agency (JICA) –
4 East Coast Economic Corridor (ECEC) with Vizag Chennai Industrial Corridor (VCIC) as Phase-1 West Bengal, Odisha, Andhra Pradesh, Tamil Nadu Asian Development Bank (ADB) The first coastal economic corridor in the country, with loans and grants worth US$ 631 million approved in September 2016 for infrastructural development
5 Bengaluru Mumbai Industrial Corridor (BMIC) Karnataka, Maharashtra Support from Britain (UK) –

Significance of Industrial Corridors in India

  • Integrating Industry with Infrastructure: They provide a symbiotic environment where industry and infrastructure coalesce, driving economic growth.
  • Decentralizing Industrial Growth: By preventing the concentration of industries in certain areas, these corridors alleviate environmental stress and promote balanced regional development.
  • Boosting Employment and Incomes: The development of corridors creates numerous job opportunities, enhancing the quality of life and reducing the need for migration.
  • Promoting Social Integration: With jobs closer to home, the social fabric is strengthened, and regional disparities are diminished.
  • Enhancing Competitiveness: The availability of world-class logistics and infrastructure increases the competitiveness of Indian products in both domestic and international markets.

Challenges Associated with Industrial Corridors

  • Land Acquisition: The process of acquiring land is fraught with difficulties due to stringent regulations, making it a significant barrier to development.
  • Technological Gaps: Certain sectors lack the necessary technological expertise, highlighting the need for higher Foreign Direct Investment (FDI) to bring in global knowledge and skills.
  • Taxation Clarity: The lack of a clear taxation regime for foreign entities creates uncertainty and may deter investment.
  • Macroeconomic Stability: A stable economic environment is essential to mitigate currency risks for foreign investors and ensure sustainable growth.
  • License and Policy Uncertainties: Instances of arbitrary policy decisions, such as the cancellation of licenses, can create an environment of uncertainty and risk.
  • Social and Environmental Concerns: The potential for significant human displacement and the conversion of fertile agricultural land into industrial zones raise ethical and sustainability concerns.
  • Rural-Urban Disparities: There’s a risk that the development of industrial corridors could exacerbate the divide between rural and urban areas in terms of development and living standards.

 National Investment and Manufacturing Zone (NIMZ)

  • The National Investment and Manufacturing Zones (NIMZs) represent a cornerstone strategy within India’s National Manufacturing Policy of 2011, aimed at propelling the country into the forefront of global manufacturing. This initiative is designed to foster industrial growth through the establishment of vast, well-equipped manufacturing zones.

Objectives and Significance

  • The establishment of NIMZs is a strategic move to transition the workforce from primary sectors (agriculture) to secondary (manufacturing) and tertiary (services) sectors, thereby ensuring socio-economic development. These zones aim to:
  • Enhance India’s manufacturing competitiveness on the global stage.
  • Attract significant domestic and foreign investments.
  • Create millions of job opportunities.
  • Promote the use of green and energy-efficient technologies.
  • Develop skilled manpower through dedicated training facilities.

Key Features and Requirements

Land and Location

  • State governments are responsible for providing suitable land parcels of at least 5000 hectares, ensuring ample space for manufacturing units and ancillary services.

Manufacturing and Infrastructure

  • A minimum of 30% of the total area is earmarked for manufacturing activities.
  • NIMZs are to be developed as integrated townships with modern infrastructure, including efficient transportation (roads, rail, airports), telecommunications, and zoning-based land use.

Governance and Financial Model

  • Special Purpose Vehicles (SPVs) are established to manage the operations and development of NIMZs, ensuring professional and focused governance.
  • The central government supports the project financially, covering up to 20% of the project cost, besides enhancing external physical infrastructure linkages in a time-bound manner.

Environmental and Social Infrastructure

  • Emphasis on lean manufacturing and energy-efficient technology to minimize environmental impact.
  • Provision of necessary social infrastructure, including housing, schools, and hospitals, to ensure a good quality of life for the workforce.
  • Skill development facilities to prepare the local population for employment opportunities within the NIMZs.

Implementation and Progress

  • Prakasam, Andhra Pradesh
  • Sangareddy, Telangana
  • Kalinganagar, Odisha

Note

  • Delhi-Mumbai Industrial Corridor (DMIC) project have also been designated as NIMZs, highlighting the strategic importance of these zones in India’s industrial and economic growth strategy.

STEEL INDUSTRY

  • The steel industry, a backbone of industrial development and economic growth, plays a pivotal role in shaping the infrastructure and overall industrial capacity of a nation. In the context of India, the steel industry’s dynamics are influenced by both global trends and domestic policies, reflecting its significance in the global steel market as well as the challenges it faces.

Indian Steel Industry

Global Standing and Domestic Consumption

  • India stands as the second-largest producer of steel in the world, trailing only behind China. It contributes approximately 6% to global steel production, which is significantly lower than China’s massive 53.8%. Despite this disparity, India’s position highlights its importance in the global steel landscape. Moreover, India ranks as the third-largest consumer of steel, accounting for 5.7% of global metal consumption, illustrating the domestic demand for steel driven by development projects and manufacturing needs.

Challenges from Global Slowdown and Trade Policies

  • The steel industry globally, including India, has encountered headwinds due to a slowdown in global demand and the rise of protectionist trade policies. Since 2015, these factors have contributed to a decline in global steel demand, prompting steel producers to look for markets to offload their products. India, with its significant consumption, became a target for such diversions, leading to challenges such as a surge in steel imports and pressures on the domestic steel industry’s competitiveness.

Major Concerns for the Indian Steel Industry

  • Surge in Steel Imports: The influx of imported steel products has been a major concern, as it affects the market share and profitability of domestic producers.
  • Domestic Industry Struggles: Factors like higher borrowing costs, elevated raw material prices, and lower productivity compared to global counterparts have put the Indian steel industry at a disadvantage.

Government Measures to Support the Industry

  • Custom Duties: Increase in custom duties by up to 5% on specific primary iron and steel products to shield domestic producers from cheap imports.
  • Anti-Dumping Duties: Imposition of anti-dumping duties on steel imports from countries like China, Malaysia, and South Korea to prevent market flooding with underpriced steel.
  • Safeguard Custom Duties: A provisional safeguard custom duty of 20% was imposed on hot-rolled flat products of steel, aimed at protecting domestic manufacturing.
  • Minimum Import Price: Establishment of a minimum import price on various steel products for a six-month period to stabilize domestic prices.
  • Export Duty Reduction: The government reduced export duty on select steel products to boost international competitiveness.

Enhancing Competitiveness

  • The Indian government’s stance suggests a delicate balance between protecting domestic interests and ensuring the availability of steel for downstream industries at competitive prices. It underscores the necessity for the Indian steel industry to adopt strategies that reduce costs, such as cutting borrowings and optimizing raw material consumption, while also improving productivity. The future of the Indian steel industry hinges on its ability to navigate global market dynamics, adopt advanced manufacturing technologies, and align with sustainable and efficient production practices.

Aluminium Industry

  • The aluminium industry is a crucial component of the global manufacturing sector, serving as a bellwether for economic trends due to its extensive use in various industries including automotive, construction, and electronics. India, being a significant player in this arena, both as a producer and a consumer, has navigated through its own set of challenges amid changing global dynamics.

India’s Aluminium Industry

Global Positioning

  • India holds a notable position in the global aluminium market, ranking second in production and third in consumption, trailing China in both categories. With an annual production of about 4.5 million tonnes (MT) compared to China’s 22 MT, and a consumption of 3.8 MT against China’s 23 MT and the USA’s 5.5 MT, India’s aluminium industry is a key player on the international stage.

Challenges Facing the Indian Aluminium Industry

Decline in World Aluminium Prices

  • Between 2011 and 2015, world aluminium prices experienced a significant drop of 41%, a trend that adversely impacted the Indian aluminium industry. This decline in prices, coupled with a global economic slowdown, exacerbated the industry’s challenges.

Increase in Imports

  • Concurrent with falling prices, India saw a substantial rise in aluminium imports, from 40% to 57% of total demand, reflecting the industry’s increasing reliance on imported aluminium amid competitive global markets.

Overcapacity and Underutilization

  • The global market has seen a surge in capacity, primarily driven by China. In India, despite a notable increase in capacity since 2015-16, the utilization rates have not mirrored this growth. Utilization plummeted from nearly 100% up to 2013-14 to about 50% by late 2018, attributed largely to the fall in global prices and the industry’s struggle to compete on cost with international prices remaining lower than the cost of production within India.

High Cost of Production

  • The cost of production in India has been progressively climbing, making it challenging to compete with international prices, which have largely remained static. This discrepancy poses a significant barrier to the Indian aluminium industry’s competitiveness on the global stage.

Future Outlook and Strategic Considerations

Market Price Cyclicity

  • Global aluminium prices, like those of other metals, exhibit cyclical patterns, making it challenging to predict future price movements. However, the industry remains optimistic that a rebound in global industrial growth could eventually lead to an uptick in aluminium prices, offering relief to producers.

Policy and Industry Dynamics

  • The Indian government has been cautious in adjusting customs duties on aluminium imports, mindful of the potential impact on the competitiveness of downstream industries such as power, transport, and construction. This reflects a broader strategic approach to balancing the needs of the primary aluminium producers with those of industries reliant on aluminium as a key input.

Navigating Challenges

  • Innovation and Efficiency: Emphasizing technological innovation and operational efficiency can help reduce production costs, making Indian aluminium more competitive globally.
  • Value-added Products: Focusing on the production of high-value-added aluminium products can enhance profitability and reduce vulnerability to global price fluctuations.
  • Sustainability: Adopting sustainable and environmentally friendly production methods can offer a competitive edge in a market increasingly focused on green manufacturing practices.
  • Strategic Alliances: Building strategic partnerships and alliances with other countries and companies can help mitigate risks associated with global market fluctuations.

Apparel and Footwear Sectors

  • The apparel and footwear sectors present significant opportunities for India to harness its demographic dividend, create formal and productive jobs, and achieve broader social transformation. These industries are not only pivotal for economic growth and exports but also for empowering a major part of the workforce, especially women. However, the journey towards realizing their full potential is laden with challenges that need to be addressed promptly.

Economic Growth and Export Potential

Apparel and Footwear as Catalysts for Growth

  • The apparel and leather & footwear sectors have demonstrated impressive growth rates, with apparel exports growing at an annual rate of over 20% and leather and footwear exports at more than 25%. Despite these achievements, India has lagged behind its East Asian counterparts, especially in the leather sector. This underperformance highlights the need for strategic measures to enhance competitiveness and market share.

Harnessing the Window of Opportunity

  • As China vacates its dominant position in these sectors, countries like Bangladesh, Vietnam, and Indonesia are quickly filling the gap. India faces a narrowing window of opportunity to assert itself in the global apparel and footwear markets. Immediate action is required to capitalize on this historic chance for economic advancement.

Social Transformation Through Employment

Job Creation and Women Empowerment

The apparel and footwear industries are among the most labor-intensive, offering vast opportunities for employment, particularly for women. According to the World Bank, rapid growth in these sectors could generate around 500,000 additional direct jobs annually, contributing significantly to women’s empowerment and social transformation.

Challenges to Competitiveness

Logistics and Efficiency

  • Compared to its competitors, India faces higher costs and longer times in logistics, from production to export destinations. Improving logistics efficiency is crucial for enhancing the competitiveness of the Indian apparel and footwear industries.

Labour Regulations

  • While labor costs present an advantage for India, rigid labor regulations hinder its full utilization. Issues such as mandatory overtime pay rates and restrictions on part-time work limit flexibility and operational efficiency. Moreover, the small size of most Indian firms in these sectors, with a significant percentage employing less than 50 workers, contrasts sharply with the larger firm sizes in countries like China, Bangladesh, and Vietnam.

Tax and Tariff Policies

  • Current tax and tariff policies create distortions that undermine India’s export competitiveness. The higher duty on raw materials compared to finished products and unfavorable tariff structures in major export markets are significant barriers.

Market Access and Tariffs

  • Indian exports face higher tariffs in key markets such as the US and EU compared to competitors who benefit from duty-free or reduced-tariff access. These disadvantages in export markets need to be addressed through strategic trade agreements and negotiations.

Specific Challenges in Leather & Footwear

  • Despite having a large cattle population, India’s share in global cattle hide exports is low and declining, reflecting an underutilization of available natural resources. This represents a lost comparative advantage that could enhance the leather and footwear sector’s growth.

FDI Policy Measures Pertaining to Industrial Sector

  • Foreign Direct Investment (FDI) policy measures are crucial for the growth and development of the industrial sector in any country. These policies determine the ease and extent to which foreign entities can invest in domestic industries. India, aiming to boost its industrial sector and enhance economic growth, has implemented several FDI policy measures. These measures are designed to attract foreign investment by providing a clear, stable, and favorable investment climate.

FDI Policy Framework

100% FDI under the Automatic Route

  • India permits 100% FDI under the automatic route in several key sectors, which means that foreign investors can invest in these sectors without requiring prior approval from the Indian government. The sectors include:
  • Manufacturing
  • Oil and gas
  • Greenfield airports
  • Construction
  • Railway infrastructure

FDI in Other Sectors

  • In sectors not covered under the 100% automatic route, FDI is still allowed but up to certain thresholds, typically 26% or 49%. This policy ensures that certain strategic or sensitive sectors remain under partial domestic control while still benefiting from foreign investment.

FDI Inflows and Sectoral Impact

  • India has witnessed significant FDI inflows, reaching an all-time high of USD 84,835 million in FY 21-22. This represents a substantial increase from the previous fiscal year, indicating growing investor confidence in the Indian market.
  • The manufacturing sector, in particular, saw a 76% increase in FDI inflow, amounting to USD 21.34 billion in FY 2021-22.
  • The top five FDI sourcing nations are Singapore, the USA, Mauritius, the Netherlands, and Switzerland, highlighting the global interest in India’s industrial sector.
  • The sectors that received the highest FDI include Computer Software & Hardware, Services Sector, Automobile Industry, Trading, and Construction (Infrastructure) Activities.
  • Karnataka, Maharashtra, Delhi, Tamil Nadu, and Haryana are the top destination states, benefiting the most from these investments.

Special FDI Policies for Specific Sectors

  • Petroleum & Natural Gas: FDI is permitted up to 100% under the automatic route in cases of strategic disinvestment of a PSU.
  • Telecom Sector: Similarly, 100% FDI is allowed under the automatic route, reflecting the government’s intent to boost infrastructure in this critical sector.

Measures to Improve FDI Processing

  • Amendment of SOP: The Standard Operating Procedure has been revised to enhance the ease of processing FDI proposals, aimed at making the investment process more streamlined and investor-friendly.
  • FDI Monitoring Cell: Established to follow up with applicants and investors, this cell works to expedite FDI proposals and identify potential hurdles, ensuring a smoother investment process.
  • Inter-Ministerial Committee (IMC): Chaired by the Secretary of the Department for Promotion of Industries and Internal Trade (DPIIT), the IMC takes decisive actions on delayed proposals and those escalated by Administrative Ministries/Departments, demonstrating a committed effort to resolving issues in FDI proposals efficiently.

Labour Law Reforms

  • The budget also highlights significant labour law reforms encapsulated in the consolidation of labour regulations into four major labour codes. These codes aim to simplify and modernize labour laws, ensuring protection and rights for workers while providing flexibility to employers.

Constitutional and Judicial Provisions

  • Labour regulation in India encompasses a wide range of rights and protections, such as the right to work, anti-discrimination measures, prohibition of child labour, and social security. These are supported by constitutional provisions and judicial interpretations aimed at ensuring fair and just working conditions for all workers.

Legislative Provisions

  • The government’s consolidation of labour laws into four codes – the Code of Wages, 2019, Industrial Relations Code, 2020, Social Security Code, 2020, and Occupational Safety, Health and Working Conditions Code, 2020 – represents a significant overhaul aimed at streamlining and modernizing labour regulations. These codes cover a broad spectrum of labour-related issues, from wages and industrial relations to social security and occupational safety, aiming to create a more equitable and efficient labour market.

Significance of Labour Codes

Universalization of Minimum Wages and Timely Payment

  • The new labor codes propose the universalization of the right to minimum wages and timely payment of wages to all workers, including those in the unorganized sector. This is a monumental step towards ensuring that all workers, irrespective of their employment status or sector, are guaranteed a basic standard of living through the receipt of a minimum wage. Additionally, the timely payment of wages is crucial in providing financial security and stability to workers, allowing them to plan and meet their financial obligations without undue stress.

National Floor Wage and Regional Disparity

  • The introduction of a National Floor Wage is designed to address the significant regional disparities in minimum wages across different states. By setting a baseline wage, it ensures that no state sets its minimum wage below this floor, thus promoting a more equitable wage structure across the country. This could lead to an upliftment of wage standards in regions that traditionally offered lower wages, contributing to reducing income inequality.

Formalization through Appointment Letters

  • Mandating the provision of appointment letters for all workers is a step towards the formalization of employment relationships. This formal acknowledgment of employment not only provides workers with legal proof of their job but also brings them under the purview of various labor laws from which they were previously excluded due to the informal nature of their employment. Formalization can lead to better job security, access to social security benefits, and a structured grievance redressal mechanism.

Occupational Safety, Health, and Welfare Measures

  • Extending the Occupational Safety and Health Code to include even small establishments engaged in hazardous work, without the threshold of ten workers, underscores the importance of worker safety across all scales of operations. This broadened coverage ensures that more workers have access to safe working conditions. The portability of welfare benefits for migrant workers, alongside social security schemes for gig and platform workers, marks a significant expansion of social protection measures, catering to the evolving nature of work and the mobility of the workforce.

Gender Equality and Night Shifts for Women

  • Allowing women to work night shifts with appropriate safeguards challenges traditional gender norms and opens up more opportunities for women in the workforce. This move towards gender equality can contribute to economic growth by utilizing the full potential of the labor force.

Simplification and Consolidation of Laws

  • The consolidation of numerous complex labor laws into a more streamlined framework aims to reduce the compliance burden on employers while making the regulations easier for workers to understand. This simplification is expected to improve the enforcement of labor laws and facilitate better compliance, thereby protecting workers’ rights more effectively.

Issues and Challenges

Implementation Delays and State-Level Variations

  • The dual responsibility of the Centre and states in framing and implementing laws creates a complex regulatory environment, leading to delays and inconsistencies in application across different regions. This fragmentation can undermine the objectives of the labor codes, necessitating a coordinated approach for uniform implementation.

Potential Dilution of Labor Rights

  • Critics argue that certain provisions, such as those allowing companies with fewer than 300 workers to introduce arbitrary service conditions, may dilute labor rights and weaken job security for workers. There is also concern that the emphasis on increasing the income capacity of informal workers might inadvertently lead to inflation or “starvation wages” due to inadequate attention to wage control mechanisms.

Exclusion and Lack of Social Protection

  • The requirement for Aadhaar registration for social security benefits could exclude those without Aadhaar cards from accessing these benefits, exacerbating the vulnerability of already marginalized workers. Moreover, the perceived failure to provide adequate social protection to informal sector workers, including migrant and home-based workers, highlights significant gaps in the codes’ coverage.

Way Forward

  • To fully realize the benefits of the labor codes, comprehensive and coordinated efforts are needed from all stakeholders. This includes the timely preparation and notification of laws by states and UTs, strengthening enforcement mechanisms, and the establishment of a professional labor administration service. Additionally, addressing the concerns raised by labor organizations and ensuring that the implementation of these codes does not compromise the rights and welfare of workers are crucial steps towards achieving the dual goals of economic growth and social justice.

 

UPSC PREVIOUS YEAR QUESTION (PRELIMS)

 

1.  Consider the investments in the following assets: (2023)

1.  Brand recognition
2.  Inventory
3.  Intellectual property
4.  Mailing list of clients

How many of the above are considered intangible investments?

(a) Only one
(b) Only two
(c) Only three
(d) All four

2.  Consider the following heavy industries: (2023)

1.  Fertilizer plants
2.  Oil refineries
3.  Steel plants

Green hydrogen is expected to play a significant role in decarbonizing how many of the above industries?

(a) Only one
(b) Only two
(c) All three
(d) None

3.  Consider the following statements with reference to India : (2023)

1.  According to the ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the ‘medium enterprises’ are those with investments in plant and machinery between `15 crore and `25 crore.
2.  All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

4.   With reference to India, consider the following statements: (2021)

1.  Retail investors through Demat accounts can invest in Treasury Bills and Government of India Debt Bonds in the primary market.
2.  The “Negotiated Dealing System-Ordering Matching” is a government securities trading platform of the Reserve Bank of India.
3.  The “Central Depository Services Ltd” is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.

5.  Which of the statements given above is/are correct?

(a) 1 only
(b) 1 and 2
(c) 3 only
(d) 2 and

6.  With reference to ‘The Quality Council of India (QCI), consider the following statements: (2017)

1.  QCI was set up jointly by the Government of India and the Indian Industry.
2.  The Chairman of QCI is appointed by the Prime Minister on the recommendations of the industry to the Government.

Which of the above statements is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

7.  In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight? (2015)

(a) Coal production
(b) Electricity generation
(c) Fertilizer production
(d) Steel production

8.  Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs)? (2011)

1.  The Government intends to use the revenue earned from the disinvestment mainly to pay back the external debt.
2.  The Government no longer intends to retain the management control of the CPSEs

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

9.  In India, in the overall Index of Industrial Production, the Indices of Eight Core Industries have a combined weight of 37.90%. Which of the following are among those Eight Core Industries? (2012)

1.  Cement
2.  Fertilizers
3.  Natural gas
4.  Refinery products
5.  Textiles

Select the correct answer using the codes given below:

(a) 1 and 5 only
(b) 2, 3, and 4 only
(c) 1, 2, 3 and 4 only
(d) 1, 2, 3, 4 and 5

10.  What does S & P 500 relate to? (2008)

(a) Supercomputer
(b) A new technique in e-business
(c) A new technique in bridge building
(d) An index of stocks of large companies

11.  “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP) in the postreform period” Give reasons. How far are the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017)

12.  Examine the impact of liberalization on companies owned by Indians. Are theycompeting with the MNCs satisfactorily? Discuss. (2013)

13.  “Industrial growth rate has lagged behind in the overall growth of Gross- Domestic Product (GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate? (2017)

14.  There is a clear acknowledgement that Special Economic Zones (SEZs) are atool for industrial development, manufacturing and exports. Recognising this potential, the whole instrumentality of SEZs requires augmentation. Discussthe issue plaguing the success of SEZs with respect to taxation, governinglaws and administration. (2015)