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Navratnas, Maharatnas and Miniratnas

The Public Sector Enterprises are run by the Government under the Department of Public Enterprises of Ministry of Heavy Industries and Public Enterprises. The government grants the status of Navratna, Miniratna and Maharatna to Central Public Sector Enterprises based upon the profit made by these CPSEs. The Maharatna category has been the most recent one since 2009, other two have been in function since 1997.

The Maharatna Status

The Maharatna PSUs are chosen from those PSUs who holds the status of Navratnas and must be listed on the Indian stock exchange fulfilling the minimum prescribed public shareholding according to the SEBI regulations. The following conditions must be satisfied in order to get Maharatna status:

• The Average annual turnover of the PSU during the last 3 years is more than Rs. 25,000 crore.
• The Average annual net worth during the last 3 years is more than Rs. 15,000 crore.
• The Average annual net profit after tax during the last 3 years is more than Rs. 5,000 crore.
• The company should have the significant global presence or international operations.

There are 7 Maharatna CPSEs currently, namely:

1. Bharat Heavy Electricals Limited
2. Coal India Limited
3. GAIL (India) Limited
4. Indian Oil Corporation Limited
5. NTPC Limited
6. Oil & Natural Gas Corporation Limited
7. Steel Authority of India Limited

The Navratne Status

• The company must have ‘Miniratna Category – I‘ status along with a Schedule ‘A’ listing.
• It should have at least 3 ‘Excellent’ or ‘Very Good’ Memorandum of Understanding (MoU) during the last five years.
• Along with the above, it should also have a composite score of 60 or above out of possible 100 marks in the 6 selected performance parameters:-
  1. Net Profit to Net Worth (Maximum: 25)
  2. Manpower cost to cost of production or services (Maximum: 15)
  3. Gross margin as capital employed (Maximum: 15)
  4. Gross profit as Turnover (Maximum: 15)
  5. Earnings per Share (Maximum: 10)
  6. Inter-Sectoral comparison based on Net profit to net worth (Maximum: 20)
  7. There are 17 Navratna CPSEs in the country

The Miniratnas Status

• The CPSEs that have shown profits in the last continuous three years and have positive net worth can be considered eligible for grant of Miniratna status.
• Presently, there are 71 Miniratnas in total.
• The Miniratnas are divided into two categories (I and II).

Category One: The PSUs that have made profits in the previous three years or have generated a profit RS 30 crore or more in one of the preceding three years.

Category Two: The PSUs that have made profits in the preceding three years and have a positive net worth in all three preceding years.

The Disinvestment Program in India

Disinvestment of the Shares/Equity of Public Sector Enterprises

• The government of India has decided to withdraw from the Industrial sector, and in accordance with this decision, it decided to privatize the Public sector enterprises in a gradual and phased manner.
• The approach adopted by the government in this regard is to bring down its equity shares in all non-strategic Public sector enterprises to 26 percent or lower.
• For the purpose of privatization, the government has adopted route of disinvestment which involves the sale of the public sector equity to the private sector.
• In the first round of dis‑investment it was decided to (a) offer a randomly structured portfolio of shares each with notional reserve price based on a complex valuation procedure and (b) to off‑load the shares to institutional investors as a buffer between the Government and the stock market.
• Financial institutions and mutual funds were offered the opportunity to bid for the bundles. Later, the bidding process was opened up to foreign institutional investors and to the public at large with the stipulation of a certain minimum bid. Almost all the bidding so far has been done by financial institutions or mutual funds.
• There have been the inevitable controversies about the prices at which some of the initial shares were sold, even though all the disinvestment has been done through an auction process.
• The Government has decided to permit up to 49% disinvestment of equity so that the government would continue to hold 51%. A firm is legally regarded as a public sector firm in India if the Government holds more than 50% of equity. A company so classified is then subject to all the rules, regulations, procedures etc. connected with government ownership. Thus, a firm in which government ownership goes below 50% can be effectively regarded as being in the private sector even if the government has a dominant share holding.
• One criticism of this disinvestment process has been that it has essentially been seen as resource raising exercise by the government.
• A second and, perhaps, more valid criticism is that the valuation of shares is affected by the decision not to reduce government holdings to less than 51 per cent. With the continuing majority ownership of the government the disinvested public enterprises would continue to operate within the constraints of the public sector. Thus, there is a lack of clarity on future corporate plans and prospects of these enterprises. Consequently, it is expected that share bids would be lower than they would otherwise be if there was a clear announcement of eventual disinvestment of greater than 51 per cent.

Types of Disinvestment Methods in India

The method is followed in India from time to time. The method involves the sale of the Public sector equity to the private sector and the public at large.

Methods of Disinvestment

There are primarily three different approaches to disinvestments (from the sellers’ i.e. Government’s perspective)

Minority Disinvestment

A minority disinvestment is one such that, at the end of it, the government retains a majority stake in the company, typically greater than 51%, thus ensuring management control.

Historically, minority stakes have been either auctioned off to institutions (financial) or offloaded to the public by way of an Offer for Sale. The present government has made a policy statement that all disinvestments would only be minority disinvestments via Public Offers.

Examples of minority sales via auctioning to institutions go back into the early and mid 90s. Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.

Majority Disinvestment

A majority disinvestment is one in which the government, post disinvestment, retains a minority stake in the company i.e. it sells off a majority stake. It is also called Strategic Disinvestment.

Historically, majority disinvestments have been typically made to strategic partners. These partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.

Again, like in the case of minority disinvestment, the stake can also be offloaded by way of an Offer for Sale, separately or in conjunction with a sale to a strategic partner.

Complete Privatisation

Complete privatisation is a form of majority disinvestment wherein 100% control of the company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and 3 hotel properties of HCI.

Disinvestment and Privatisation are often loosely used interchangeably. There is, however, a vital difference between the two. Disinvestment may or may not result in Privatisation. When the Government retains 26% of the shares carrying voting powers while selling the remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’, because with 26%, it can still stall vital decisions for which generally a special resolution (three-fourths majority) is required.

The Way Ahead: What should be the Objectives of Public Sector Enterprises Disinvestment and Restructuring?

The means of achieving these objectives involve considerations such as the injection of greater competition into the industrial economy in order to foster a healthier market structure.

Public Sector in the India Economy

What is Public Sector: A Brief Profile

The public sector in India is composed of a number of segments

The Importance/Presence of the Public Sector in the Indian Economy

Role of the Public Sector in the Indian Economy

Problems Associated with Public Sector

Public Sector Reforms in India, 1991

The Statement on Industrial Policy, of July 24, 1991, recognised the many problems that have manifested themselves in many of the public enterprises and sought to rectify these problems. It noted that many public enterprises have become a burden rather than being an asset to the Government. The statement proposed “it is time therefore that the Government adopt a new approach to public enterprises”.

1. The areas reserved for the public sector were reduced drastically from 17 to 8(and later to 6). In manufacturing, the only areas which continue to be reserved for the public sector are those related to defence, strategic concerns and petroleum. Even, here there is no bar to the Government inviting the private sector to participate.
2. Specific attention was given to the issue of industrial sickness in public enterprises and a commitment was made to refer all sick public enterprises to the Board of Industrial and Financial Reconstruction (BIFR) or similar body so that appropriate decisions could be taken on the rehabilitation of these enterprises after examination on a case by case basis.
3. A commitment was made to provide greater autonomy to remaining public enterprises through the strengthening of the MOU (Memorandum of Understanding) system and by providing greater professional expertise in the Boards of these enterprises.
4. The decision to dis‑invest equity in the public sector enterprises was also announced in the Statement on Industrial Policy.
5. To sum up, the intention behind the announcements made in the Statement of Industrial Policy was to undertake a wide ranging public sector reform. The objective was to induce greater efficiency, productivity and competitiveness in the public sector. The enterprises currently in the public sector were to be strengthened so that they are enabled to participate profitably in the new competitive environment that now exists in both the domestic and international economy. If this involves disinvestment or privatisation, it must be accomplished purposively and quickly.

The Reforms Done so far

1. De-reservation:

• In the manufacturing sector, the reserved areas for the public sector now only include defence production and mineral oils.
• In the case of mineral oils (petroleum exploration, petroleum refining, etc.), however, private investment including foreign investment is being actively invited, but on a discretionary basis.
• The other reserved areas are in respect of atomic energy, minerals related to atomic energy, coal and lignite, and railway transport. Mining of iron ore, manganese ore, chrome ore, etc., and mining of non‑ferrous metals, which was earlier reserved for the public sector was further dereserved in 1993.
• Thus, from the original list of 17 (see Annex III) now only 6 areas still remain reserved for the public sector.
• The public sector enterprises are now open to competition from new entry in all areas of manufacturing except in defence production.

Revamping of SICK PSU’s

• The Sick Industrial Companies Act (SICA) has been amended to make mandatory the referral of sick public sector enterprises to the BIFR.
• Hence, all sick (bankrupt) public sector industrial firms now have to be restructured through revival, rehabilitation, or closure if found to be unviable. Once the bankrupt public sector firms are referred to the BIFR, the government has, by necessity, to make decisions that result from the orders of this Board.
• After referral to the BIFR the Board first has to decide whether a firm has been correctly referred to them in terms of the definition of sickness (a firm is defined as sick if its net worth has been totally eroded, if it has made losses for two consecutive years and if it has been in existence for more than five years).
• Once a firm is accepted by the Board for further enquiry, the firm itself is usually asked to put forward its own proposal for a restructuring programme. If this is not found to be satisfactory an operating agency (OA) is usually appointed in order to examine its viability or otherwise.

Establishment of the National Renewal Fund.

The National Renewal Fund was established in 1992 to provide a social safety net for workers affected by industrial restructuring. As various enterprises (in both the public and private sectors) undertake a restructuring process, workers would need focused assistance for re‑training, re‑deployment, skill upgradation and other kinds of employment counselling.

The intention behind the NRF was

1. to provide compensation to workers who would be affected by industrial restructuring;
2. to assist such workers in re‑training and re‑deployment;
3. to provide resources for employment generation in areas affected by industrial restructuring. It also had provision for compensating workers who opt to take voluntary retirement from existing public sector enterprises.

Greater Autonomy to Public Enterprises

In the statement on Industrial Policy, a commitment had been made to provide greater autonomy to remaining public enterprises through the strengthening of the Memorandum of Understanding (MOU) system and by providing greater professional expertise in the boards of these enterprises.

Industrial Policy in India: Post 1991 Reforms, Period

New Industrial Policy, 1991

In the backdrop of severe Balance of Payment Crisis of 1991, the Government in continuation of the measured announced during the 1980s announced a New Industrial Policy on July 24, 1991.

The new industrial policy was a major structural break for the Indian economy. The policy has deregulated the Industrial sector in a substantial manner. The major aims of the new policy were; to carry forward the gains already made in the industrial sector; Correct the existing market distortion from the industrial sector; to provide gainful and productive employment; to attain global competitiveness.

The Government announced series of Initiative in respect of the following areas:

Abolishment of Industrial Licensing

Role of Public Sector Reduced Substantially

Entry of Foreign Firms and Investments

Other Important Liberalisation Measures

National Manufacturing Policy, 2011

The success of India’s economic story has mainly been due to service’s sector growth. Despite strong policy measures, the industrial sector (especially manufacturing) has stagnated. The maximum contribution of the sector in the overall GDP is close to 15%, which is far less than that of other emerging economies like China (whose share is close to 45%). As a result of which, India has failed to provide gainful employment to its massive labour force.

Lack of employment in the manufacturing sector has put excessive pressure on the agriculture sector to provide employment, which is not possible under any economic model. The result of this is the phenomenon called “Jobless Growth”, which is specific to India.

The Government recognising this fact and in order to promote manufacturing sector launched National Manufacturing Policy on November 2011.

Objectives of the National Manufacturing Policy

Government Policy support under NMP

1. The manufacturing policy proposes to create an enabling environment for the growth of manufacturing in India.
2. The NMP envisages simplification of business regulations significantly.
3. The NMP proposes the development of the MSMEs sector. The proposal includes technological upgradations of the MSMEs; adoption of business-friendly policies; equity investments.
4. Skill Development of the youth is the most important part of the NMP.
5. Setting up of National Investment and Manufacturing Zones(NIMZ) with significant incentives like easy land acquisitions, integrated industrial township development, world-class physical infrastructure.
6. A total of 12 NMIZ have been announced so far by the government. Out of the total 12, 8 NIMZ are located in the Delhi-Mumbai Industrial Corridor. Other 4 NMIZ is planned to build in; Nagpur; Tumkur (Karnataka); Chittoor (Andhra Pradesh); Medak (Andhra Pradesh).

Make in India Program

Make in India is a campaign launched by the government of India on 25 September 2015. The aim of the Make in India program is to project India as an efficient and competitive powerhouse of global manufacturing. The program aims to convert India into “World’s Factory” by promoting and developing India as a leading manufacturing destination and a Hub for the production of manufacturing goods.

Make in India is essentially an invitation to the foreign companies to come and invest in India on the back of the Government promise to create an environment easy for doing business. But contrary to public perception, no specific concessions have been offered to foreign investors under this scheme till date.

The government since the launch of the program is trying to make India an attractive destination for global Multinationals by focussing on ease of doing business, liberal FDI regime, improving the quality of Infrastructure and Business-friendly policies.

The need for the program

1. The share of Industrial Manufacturing in India’s GDP is 14-15%, which is way below its actual potential. The program aims to increase this share to 25%.
2. India’s economic performance is a story of “Jobless Growth”. India has failed to generate jobs for his youth entering the labour force. The main reason for low job creation is that the manufacturing sector has failed to take off and still remains dismal.
3. If India failed to develop a competitive manufacturing sector now than it will be trapped in a “Middle Income Trap”, where India will not be able to grow at a higher growth rate (India will remain a middle-income country with a deficient and uncompetitive economic system).
4. No country in the World has become rich and developed without developing its Manufacturing sector. The story is true for Britain (Industrial Revolution), USA (In the 1900s), Japan (Since 1950s), East Asian Tigers (In 1970s), China (Since 1990s).
5. The employment elasticity of the manufacturing sector is highest. Manufacturing is the only sector that has the potential to create jobs at a faster rate and absorb excess labour from agriculture. A weak manufacturing sector, therefore, is a curse for the economy.
6. The service led growth as witnessed by India since 1991 reforms is not sustainable in the long run as the employment elasticity of the services sector is one of the lowest.
7. People start consuming services on a large scale once they cross a certain minimum threshold of Income. In the absence of minimum threshold income, the demand for services will stagnate in the future and the phenomenon of the service led growth will be reversed.
8. The key for India to sustain its service-led growth is to make sure that its manufacturing sector is well developed. A well-developed manufacturing sector will absorb low skilled labours from agriculture sector and employ the productively in factories. Similarly, the high skilled workers will be employed in the High-Tech End of Manufacturing like Electrical Engineering, Aerospace, Automobiles, Defence Manufacturing etc.
9. Moreover, the benefits from the programme are likely to be multiple and can address issues on economic growth and employment generation as well as fuel consumer demand.
10. Having said that, the success of the Make in India programme lies in India building capabilities to manufacture world-class products at competitive prices. In today’s dynamic world, achieving the same is far more complex as the variables which impact business are extremely fluid and require businesses to be extremely flexible and adaptive to changes in the environment and technology.

How Government is supporting the Program

• Improving Ease of Doing Business and promoting use of technology;

• Opening up of new sectors for FDI, undertaking de-licensing and deregulation of the economy on a vast scale;

• Introduction of new and improved infrastructure through industrial corridors, industrial clusters and smart cities;

• Strengthening IPR infrastructure to nurture innovation; and

• Building a new mindset in government to partner industry instead of working as a regulator in Economic Growth of the country.

The Government has taken various measures for the success of Make in India ‘campaign as under:

a) Industrial Corridors

Cities/regions have been identified to be developed as investment centres in the Delhi-Mumbai Industrial Corridor in partnership with the State Governments.

(i) Ahmedabad-Dholera Investment Region, Gujarat;

(ii) Shendra-Bidkin Industrial Park city near Aurangabad, Maharashtra;

(iii) Manesar-Bawal Investment Region, Haryana;

(iv) Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan;

(v) Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh;

(vi) Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh; and

(vii) Dighi Port Industrial Area, Maharashtra.

b) Foreign Direct Investment

Liberalisation of the FDI in the majority of sectors to attract investments. Example: 100% FDI under automatic route has been permitted in construction, operation and maintenance in specified Rail Infrastructure projects; FDI in Defence liberalized from 26% to 49%. In cases of modernization of state-of-art proposals, FDI can go up to 100%; the norms for FDI in the Construction Development sector are being eased.

c) Easing of Laws, Rules and Regulations

Major changes have been proposed in various laws and rules to overcome regulatory hurdles

d) Investment Security and Stable and Conducive Government Policies

The Government is committed to chart out a new path wherein business entities are extended red carpet welcome in a spirit of active cooperation. Invest India will act as the first reference point for guiding foreign investors on all aspects of regulatory and policy issues and to assist them in obtaining regulatory clearances. The Government is closely looking into all regulatory processes with a view to making them simple and reducing the burden of compliance on investors. An Investor Facilitation Centre has been created under Invest India to provide guidance, assistance, handholding and facilitation to investor during the entire circle of the business.

What more should be done to make India an attractive destination for Global Firms?

The Sectors:

Industrial Policy in India

A brief outline of Industrial Policy.

After Independence, the Government of India adopted an approach to develop Industrial sector of India. India adopted several Industrial Policy resolution to develop the Industrial sector.

Industrial Policy Prior to 1991.

Industrial Policy Resolution, 1948.

The resolution was issued on April 6, 1948. The resolution accepted the importance of both private and public sectors for the development of the industrial sector.

The 1948 Resolution also accepted the importance of the small and cottage industries as they are suited for the utilisation of local resources and are highly labour intensive.

The 1948 Resolution divided the Industries into following four categories.

Industrial Policy Resolution, 1956.

The Policy Resolution of 1956, laid the following objectives for the growth of the Industrial sector:

1. To accelerate the rate of growth and to speed up the pace of Industrialisation.
2. To develop heavy industries and machine making industries.
3. Expansion of Public Sector.
4. To reduce disparities in Income and Wealth.
5. Development of a competitive Cooperative Sector.
6. To Prevent concentration of Business in few hands and Restriction in Creation of Monopolies.

The objectives were chosen carefully with the aim of creating employment and reducing poverty.

The 1956 Resolution further divided the Industries into three Categories.

To sum up, the 1956 Resolution, emphasised on the mutual dependence and existence of the public and private sectors. The only 4 industries in which private sector are not allowed were Arms & Ammunition, Railways, Air Transport and Atomic Energy. In all other sector, either private sector was allowed to operate freely or will provide help to the government sector as and when needed.

Industries (Development & Regulation) Act, 1951.

The Industries Act was passed by the Parliament on October 1951 to control and regulate the process of Industrial development in the country. The Acts main task was to regulate the Industrial sector.

The specific objectives of the Act were:

1. Regulation of Industrial Investment and Production according to Five Year Plans.
2. Protection of small-scale enterprises from giant enterprises.
3. Prevention of Monopolies and concentration of ownership of industries in few hands.
4. Balanced Growth and Equitable development of all the regions.
5. It was also believed that the State is best suited to promote balanced growth by; channelizing investment in the most important sectors; Correlate supply and demand; eliminate competition; ensure optimum utilisation of social capital.

Major Provisions of the Act

Restrictive Provisions: It contains all measure provision to curb unfair trade practices.

Registration: The provisions make registration of industries mandatory irrespective of whether they are private or public in nature. The expansion of the existing business also required licencing and permission.

Examination and Monitoring of the Industries: After granting of license, it is the responsibility of the state to monitor the performance of the industries. If at any point in time, the industrial unit was found not up to the mark, underutilising its resources or charging excessive prices, the government could set up an enquiry against the unit.

Cancellation of the Licence: The government has the power to cancel the licence granted to the industrial unit if found, engaging in wrongful behaviour.

Reformative Provisions:

The category involved following provisions.

Direct Control by the Government: Under this provision, the government could set up an enquiry against the industrial unit and can order reform process, if it was not being run properly.

Control on Price, Distribution and Supply: The Government was empowered by the act to control and regulate the prices, supply and distribution of the goods produced.

Problems of the Excessive Restrictions imposed by the Government.

Liberalisation measures adopted in the 1980s

1. Exemption from Licensing.
2. Relaxation to MRTP Act and FERA guidelines.
3. Delicensing of large range of industries.
4. Re-endorsed of capacity: Benefits were granted under this scheme to industries who successfully achieve capacity utilisation of 90 percent.
5. Broad Banding of Industries: Under this, the government branded the industries into broad categories. For example; cars, jeeps, tractors, light and heavy commercial vehicles are branded as Four-Wheelers.
6. Promotion of Economies of scale in production processes to reduce cost by allowing firms to expand.
7. Development of Backward Areas.
8. Incentives were provided to the Exporters.
9. Promotion of Small Scale Industries by increasing their Investment limits.
10. New Industrial Policy, 1991.

Phases of Industrial Development in India

Industrialisation during the British Rule

Indian Industry had a global presence before the advent of Britishers in India. Before the advent of British in India, India accounted for a quarter of World’s Industrial output.

The exports from India consisted of manufacturers goods like cotton, silk, artistic ware, silk and woollen cloth.

The impact of British Policies and the Industrial Revolution led to the decay of Indian handicraft industry. Post-Industrial revolution in Britain, machine-made goods starting flooding into the Indian markets.

The decline of traditional handicraft was not followed by the rise of modern Industrialisation in India due to the British policy of encouraging the imports of British made goods and exports of raw materials from India.

The First Phase (1950-1965): Industrial Sector at the Time of Independence

The main features of the Indian Industrial sector on the eve of the Independence were:

1. There were majority of consumer goods industries vis-à-vis producer goods/capital goods industries resulting in lopsided industrial development. The ratio of consumer goods industries to producer good/capital goods industry was 62:38 during the early 1950s.
2. The Industrial sector was extremely underdeveloped with very weak infrastructure.
3. The lack of government support to the industrial sector was considered as an important cause of underdevelopment.
4. The structure and concentration of ownership of the industries were in few hands.
5. Technical and Managerial skills were in short supply.

As a result of these shortcomings, the national leadership reached on a consensus that economic sovereignty and economic independence lay in the rapid industrialisation including the development of Industrial Infrastructure.

The First Five-year Plan did not envisage any large-scale programs for industrialisation. The plan rather made an attempt to give a practical shape to the Indian economy by providing for the development of both private and public sector. A number of industries were set up in the public sector. Important among those were Hindustan Shipyard, Hindustan Tools, Integral Coach Factory etc.

The Second Five-Year plan accorded highest priority to Industrialisation. The plan was based on famous Mahalanobis Model. Mahalanobis model set out the task of establishing basic and capital goods industries on a large scale to create a strong base for the industrial development. The plan includes substantial investment in the Iron and Steel, Coal, Heavy engineering, Machine building, Heavy Chemicals and Cement Industries of basic importance.

The Third Plan followed the strategy of the Second plan by establishing basic capital and producer good industries with the special emphasis on machine building industries. As a result, the second and the third plan placed great emphasis on building up the capital goods industries. Most of the capital good industries are built under the Public Sector.

The First Three-Five Year Plans are important because their aim was to build a strong Industrial base in India. This first phase of Industrial development in India laid the foundation for strong Industrial Phase.

As a result, the first Three Plans witnessed a strong acceleration in the growth rate of the Industrial production. The period witnessed an increase in growth rate from 5.7% to 7.2% and ultimately 9.0% in the first, second and third plans respectively.

The most important observation of the period was that the rate of growth of capital good industry considered as the backbone of modern industrialisation grew at 9.8%, 13.1% and 19% during the first, second and third plan respectively.

Source: Government of India, Handbook of Industrial Statistics

The Second Phase (1965-1980): The Period of Industrial Deceleration

The first three five-year plans mostly focused on the development of the Capital Good sector. As a result, the consumer goods sector was left neglected. The consumer goods sector also known as wage good sector is considered to be the backbone of the rural economy and its complete neglect had resulted in fall in the growth rate of industrial

production as well as of the overall economy.

Note4Student 

The Wage Good Model: Prominent Economist like, C N Vakil and P R Brahmananda advocated Wage Good model for the development of the Indian economy and Industrialisation. Vakil and Brahamanda differed from the Mahalanobis strategy as they believe “At the low level of consumption (this was the situation in India) the productivity of the workers depends on how much they consumed. According to them, if people were undernourished, they will lose their productivity and become less efficient, at this juncture it is necessary to feed them to increase their productivity. But this is not true for all consumer good; so they differentiated between Wage Good (whose consumption increase worker productivity) and Non-Wage Good (whose consumption did not).

To sum up, Wage Good model says; worker’s productivity depends on not on whether they use machines to produce goods but also on the consumption of wage goods like, food, cloth and other basics. Therefore, the first step towards development is to mechanize agriculture and raise food production; once this objective is reached, one should go for Mahalanobis strategy of Heavy Industrialisation.

Anyway, Vakil and Bharmananda strategies were ignored and India launched heavy Industrialisation in the Second plan without mechanising agriculture. The result was failure of Mahalanobis Strategy and by 1965-66 India was hit by a severe food shortage crisis. Finally, in the wake of the crisis, the government adopted Bharamananda strategy of mechanizing agriculture sector and engineered green revolution.

The period between 1965 to 1975 was marked by a sharp fall in the industrial growth rate. The rate of growth fell from 9.0% during the third plan to a mere 4.1% during the period of 1965-75. The growth rate fell to 5.3% in 1965-66, 0.6% in 1966-67, then recovering a little in the succeeding years.

Source: Ministry of Commerce, GOI.

Source: Ministry of Commerce, GOI.

The deceleration it the growth rate is evident during the fourth and fifth plan. The industrial growth rate fell from 5.6% in the year 1971-72 to 0.8% in the year 1973-74. At the end of the fifth plan in 1979-80, the industrial growth rate fell to negative 1.6%.

The period of 1965-80 is also marked as the period of structural retrogression, where the growth rate of the capital good sector and basic industries also fell.

Causes of Deceleration and Retrogression.

Phase Three (1980-1991): Industrial Recovery

The period of the 1980s can be considered as the period of the Industrial recovery. The period saw a revival in the industrial growth rates. The period witnessed an industrial growth rate of more than 6 percent during the sixth plan and 8.5 percent during the seventh plan. The period was also marked by a significant recovery in the manufacturing and capital good sector. The most important observation from the revival of industrial sector was that the revival is closely associated with the increase in the productivity of Indian Industries.

Source: Ministry of Commerce, GOI.

Causes of Industrial Recovery

Phase Four (Post Reform Period)

The year 1991 ushered a new era of economic liberalisation. India took major liberalisation decision to improve the performance of the industrial sector.

1. Abolishment of the Industrial Licensing.
2. Simplification of the procedures and regulatory requirement to start a business.
3. Reduction in the sector exclusively reserved for the Public sector.
4. Disinvestment of the selected Public-sector undertakings.
5. Foreign investors were allowed to invest in the Indian firms.
6. Liberalisation of the trade and exchange rate policies.
7. Rationalisation and massive reduction in the structure of Customs Duties.
8. Reduction in the excise duties.
9. Reduction in the Income and Corporate taxes to promote Business.

To analyse the impact of these reforms measures on the industrial growth, it is better to divide the period into two.

The period of the 1990s

1. The average annual growth rate of the industry which was close to 8% in the post-reform period fell to 6% in the 1990s.
2. The growth rate in the Eighth Plan was 7.3 percent which was same as the targeted growth rate.
3. The growth rate in the Ninth Plan was 6.0 percent which was significantly less than the targeted rate of 8.2 percent.
4. Further, the sector witnessed its worst ever performance in the last few years of the Ninth plan with growth collapsing to just 2 percent.

Source: Ministry of Commerce, GOI.

Causes of Slow Industrial Performance.

The Period since 2002-03:

The period since the new millennium witnessed a sharp recovery and revival of the industrial sector. The tenth and eleventh plan witnessed a high growth rate of industrial production.

The rate of growth of the industrial sector was 5 percent during the initial years of the Tenth Plan. The growth picked in the following years and reached 7% in 2003-04, 8% in 2004-05 and 11% in 2006-07. For the plan as a whole, the growth rate was 8.2 percent.

Source: Ministry of Commerce, GOI.

The growth in the Tenth plan was mainly driven by the manufacturing sector. The significant acceleration in the capital good sector was the significant contributor to the overall economic growth.

During the Eleventh Plan, the industrial growth witnessed a considerable degree of fluctuations. After growing at more than 8 percent, the growth collapsed to 2.8 percent in the year 2008-09. The main reason for the collapse was the Global Financial crisis that hit the World in the year 2008.

The industrial growth started recovering in the year 2009-10 and touched a high of 10 percent. The industrial growth after some setbacks again recovered in the year 2010-11 to reach 8.2 percent.

Source: Ministry of Commerce, GOI.

The period post-2011 till now.

The period starting from 2011-12 saw a severe slowdown in the industrial growth and production. The slowdown during the period is due too.

1. Weak Demand for exports from the Developed Western Countries due to Global Financial Crisis.
2. The slowdown in the Domestic Demand.
3. High Interest in India maintained by the RBI, due to persistently high Inflation.
4. The slowdown in the Private Investment by the private sector due to weak returns on the investments.
5. Rising NPAs of the Public-Sector banks has led to weak credit and lending offered by them.
6. Failure of past projects of the private sector.
7. Government reluctance to increase Public investment due to the stand of maintaining a low fiscal deficit.
8. Uncertain Global Recovery.
9. European Debt Crisis.
10. The slowdown in the prices of commodities in International Commodity markets mainly due to weak Chinese growth. The weakness in the prices has hit the Indian agriculture sector where prices of the Agriculture commodities has remained low, leading to collapse of income in the rural areas.

Source: Ministry of Commerce, GOI.

The annual growth rate of IIP has been decelerating post-2011. The IIP fell from 8.2% in 2010-11 to 2.9% in 21011-12. The IIP further fell to 1.1% in 2012-13, negative 0.1 percent in 2013-14 and 2.8% in 2014-15.

Trends of Plan-Wise Industrial Growth Rate.

Source: Ministry of Commerce, GOI.

I wish to place my gratitude towards RK Sahoo Sir and Pritam Kumar Sir who have always reviewed my answers and given valuable feedbacks.
PS -I thought of thanking them in the ” reply ” section but it was not working.