Monday, May 31, 2010

Demand and Supply of Money

The Supply of Money
The supply of money is what gives each dollar its value. All things being equal, the greater the supply, the lesser the value.

We can make the same conclusions about shares of stock. If a company announces a 2:1 split, what happens to the price? A 2:1 split just means that the company issues one share of stock for each share in existence thus creating two shares for every one in existence. If you own 100 shares today, you will have 200 shares after the split. Does that mean you’ll immediately double the value of your holdings? No, because the share price gets cut in half. In other words, if you double the number of shares, the price falls proportionately. Microsoft is currently trading for about $35 per share and has 9.38 billion shares outstanding. What would the company be worth if they increased the number of shares by a factor of 10,000? It would be nearly worthless. As with money, the more stock certificates there are in existence, the lower the value of each share.

Money has value because of the relative availability. If money were as plentiful as grains of sand on all the world’s beaches, it would have no value. Just like shares of stock, money is similar in that it symbolizes a claim on assets. If you have a ten-dollar bill, it represents your claim to ten dollars worth of goods or services. However, if that ten-dollar bill represents such a small fraction of all bills in existence, it is virtually worthless. In a similar way, one grain of sand represents an insignificantly small portion of the beach and therefore has no value.

At any time, the Fed can count the number of dollars in existence but that is easier said than done since that depends on what we’re willing to count as money. There are four basic definitions that the Fed uses to measure the supply of money called M1, M2, M3 and L. In fact, in the Federal Reserve booklet, The Federal Reserve System, Purposes & Functions, the Fed gives the following definition of money:

"Anything that serves as a generally accepted medium of exchange, a standard of value, and a means of saving or storing purchasing power. In the United States, currency (the bulk of which is Federal Reserve notes) and funds in checking and similar accounts at depository institutions are examples of money."

While it's beyond the scope of this course to go into the various pros and cons of the different measures, they are listed here just to emphasize how difficult it is to give a precise definition of the supply of money:

       M1 is the base measurement of the money supply and includes cash in the hands of the public (currency and coins) plus demand deposits, tourist's checks from non-bank issuers, and other checkable deposits.

       M2 is equal to M1 plus savings deposits, money market accounts, overnight repurchase agreements issued by commercial banks, overnight Eurodollars, money market mutual funds, and time deposits less than $100,000.

       M3 equals M2 plus institutionally held money market funds, term repurchase agreements, term Eurodollars, and large time deposits.

       L,the fourth measure, is equal to M3 plus Treasury bills, commercial papers, banker's acceptances, and very liquid assets such as savings bonds. Almost all short-term, highly liquid assets will be included in this measure called L, which stands for liquidity.

Regardless of how it is measured, an increase in the supply of money puts more spending power in the hands of the consumers, which stimulates demand for goods and services. The Treasury must issue enough securities to provide the amount needed by the economy and the money supply is ultimately limited by the total amount of Treasury securities outstanding. 

The Demand for Money
Is there a limit on the demand for money? Could you ever have too much? While this may be the suggested meaning in the phrase demand for money it is not the way it is used by economists. When economists speak of the demand for money, they mean your desire to hold a given amount of money over a given time. There are three main reasons why people demand to hold money (1) to conduct basic transactions (2) for unexpected events, which is often called a precautionary motive, and (3) for speculation.

The first reason, transactions, refers to basic transactions. These include money for food, transportation, tolls, and other miscellaneous known transactions throughout a given time period. For example, if you typically hold an average of $100 in your wallet each week to conduct transactions, that's your transactions demand for money. Precautionary money is held for unexpected transactions such as car repairs or medical bills, although does not need to be limited to serious expenses or needs.

You could hold additional money to take advantage of a computer sale you expect to be happening soon. The speculation motive for holding money is a battle between cash and investments. Cash, by itself, earns no interest and can therefore be expensive to hold (due to the opportunity cost of foregone interest). However, if you think stock and bond prices are relatively low, you could generate a return on your money by putting cash into these investments – that’s the speculative motive for holding money. Conversely, if interest rates are high, you will want to hold as much cash as possible.  
The Price of Money – Interest Rates
As stated at the beginning of this course, the supply and demand for any product or service is what determines its value and money is no exception. We also stated earlier that banks regulate the flow of money from lenders to borrowers. Now it's time to apply the principles of supply and demand and see how they coincide with bank operations. 

If the bank desires more funds to loan, they must increase the interest rate (raise the bid) they pay for their products, such as Certificates of Deposit. As the price goes up, cash comes in. Likewise, if they have excess cash, they have more "sellers" of cash than "buyers." In other words, they have more lenders than borrowers so will likely lower rates to give consumers the incentive to borrow and lenders the disincentive to lend. Interest rates are therefore the price that people are willing to pay for the use of money. Specifically, interest is the price of current consumption. If you want to buy something now but do not have the money, you can borrow the funds from a bank. In exchange, you must pay back the money plus interest, which means there is something in the future you will not be able to purchase. You are effectively sacrificing that future good for another good today. Lenders are willing to sacrifice consumption of goods today in exchange for consumption of a higher amount (principal plus interest) of goods in the future. Economics is all about tradeoffs. Banks simply match lenders with borrowers. 

How can we be sure there are not too many (or too few lenders) compared to the borrowers? By now you should understand that “price” acts to regulate the number of buyers and sellers. The price that regulates current consumption is the interest rate. How is that rate determined? Let's take a look at the mechanics.

If you have money to lend, you can, for example, buy a bond. You give up cash today to buy the bond. While it may sound a little confusing, if you are a buyer of a bond, you are also a seller of cash. The seller of the bond uses that cash today in exchange for giving up more cash tomorrow. The seller of the bond is therefore the buyer of cash. Now you should have a better understanding what was meant when we said supply and demand are two sides of the same coin. Suppliers of bonds are demanders of cash and vice versa.

If a lot of people want to borrow money relative to those who want to lend, then borrowers are trying to coax more cash out of the market. How do they create more sellers of cash? They do the same thing our desert tourists did when they wanted more water and raise their bid. As bond sellers raise the bid price of cash – the interest rate –more cash sellers (bond buyers) appear resulting in more cash emerging in the market.

We could have also reached the same conclusion by looking at the effects on bond prices in the markets. As the bond sellers compete for bond sales in the market, they must do so by lowering the price of bonds. Lower bond prices attract new bond buyers (sellers of cash). As bond prices fall, interest rates rise.

Remember, look at this situation as though you are either a buyer of cash or the seller of a bond. Either the price of cash goes up or the price of bonds goes down. Both result in higher interest rates.

The reverse effects obviously hold true as well. If we assume that a lot of people want to lend money relative to those who want to borrow, then we have more people willing to sell cash than those willing to buy and the interest rate should fall. We can run through the mechanics again as a quick check.

If you want to sell cash, you are effectively demanding the purchase of a bond. In order to sell cash, you must lower its price, which is the interest rate. Likewise you can view this as demanding a bond. How do you create more bond sellers? You raise the bid price of the bonds. As bond prices rise, interest rates fall.

As lenders buy bonds, they compete in the markets and drive up the price of bonds, which makes the interest rates (bond yields) fall. Therefore, if there are excess people willing to lend, interest rates will fall. In other words, there are more sellers than buyers so they must bring down their price in order to attract buyers. 

Once all buyers of cash are equally matched with sellers, the market is cleared and the interest rate is stable. Just as any product or service's price is controlled by supply and demand, money is no exception. Money is a commodity and is subject to the same economic forces that establish price.

We should note that when people say "the" interest rate, they are generally talking about the short-term, risk-free rate on government treasuries, as there are many types of interest rates. Even within the government treasuries there are generally 90-day bills and 30-year notes with varying time frames in between. Regardless, any interest rate is the result of the current supply of money for that asset and the demand for it. What's the interest rate for credit cards? It is the price that equalizes the amount of money that banks are willing to supply for signature loans (loans that don't require collateral) and people's demand for that money. This should shed some light on consumers' willingness to spend ahead of their incomes and you hopefully now have at least a little different viewpoint if someone states that credit card rates are "outrageous." They are outrageous as a direct reflection of consumers’ insatiable appetite for spending today rather than tomorrow.

Interest rates are the tie between buyers and sellers of cash. By adjusting interest rates, we can control the incentives to buyers and sellers and therefore adjust the amount of cash available for loans. But this brings up an interesting point. Rather than regulating the amount of cash available to consumers, why doesn’t the government just print money for everybody thus making us better off? The answer, as shown in the next section, has to do with our economic forces of supply and demand.


FDI India

Policy on Foreign Direct Investment

India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require prior approval of the Government:-

1. Sectors prohibited for FDI
2. Activities/items that require an industrial license 
3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permitted

Most of the sectors fall under the automatic route for FDI. In these sectors, investment could be made without approval of the central government. The sectors that are not in the automatic route, investment requires prior approval of the Central Government. The approval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDI is not allowed. 

After the grant of approval for FDI by FIPB or for the sectors falling under automatic route, FDI could take place after taking necessary regulatory approvals from the state governments and local authorities for construction of building, water, environmental clearance, etc. 

Procedure under automatic route

FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors.

Procedure under Government Approval

FDI in activities not covered under the automatic route require prior government approval. An approval of all such proposals including composite proposals involving foreign investment/foreign technical collaboration is granted on the recommendations of Foreign Investment Promotion Board (FIPB). 

Application for all FDI cases, except Non-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Application for NRI and 100% EOU cases should be presented to SIA in Department of Industrial Policy and Promotion. 

Application can be made in Form FC-IL. Plain paper applications carrying all relevant details are also accepted. No fee is payable. The guidelines for consideration of FDI proposals by the FIPB are at Annexure-III of the Manual for FDI.

Prohibited Sectors

The extant policy does not permit FDI in the following cases:

i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

General permission of RBI under FEMA

Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. 

The companies are required to notify the concerned Regional Office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

Industrial Licensing


With progressive liberalization and deregulation of the economy, industrial license is required in very few cases. Industrial licenses are regulated under the Industries (Development and Regulation) Act 1951. At present, industrial license is required only for the following: -

1. Industries retained under compulsory licensing
2. Manufacture of items reserved for small scale sector by larger units
3. When the proposed location attracts locational restriction

The following industries require compulsory license: -

I Alcoholics drinks
II Cigarettes and tobacco products
III Electronic aerospace and defense equipment
IV Explosives
V Hazardous chemicals such as hydrocyanic acid, phosgene, isocynates and di-isocynates of hydro carbon and derivatives

Procedure for obtaining an industrial license


Industrial license is granted by the Secretariat for Industrial Assistance in Department of Industrial Policy and Promotion, Government of India. Application for industrial license is required to be submitted in Form FC-IL to Department of Industrial Policy and Promotion.

Small Scale Sector

Ministry of Agro and Rural Industries and Ministry of Small Scale industries have been merged into a single Ministry, namely, Ministry of Micro, Small and Medium Enterprises. The President under Notification dated 9th May 2007 has amended the Government of India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Ministry of Agro and Rural Industries (Krishi Evam Gramin Udyog Mantralaya) and Ministry of Small Scale Industries (Laghu Udyog Mantralaya) have been merged into  a single Ministry, namely, “MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES (SUKSHMA LAGHU AUR MADHYAM UDYAM MANTRALAYA)” 

Worldwide, the micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labour intensity of the MSME sector is much higher than that of the large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India too, the MSMEs play a pivotal role in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession.
As per available statistics (4th Census of MSME Sector), this sector employs an estimated 59.7 million persons spread over 26.1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country. 

http://msme.gov.in/
Locational restrictions
Industrial undertakings to be located within 25 kms of the standard urban area limit of 23 cities having a population of 1 million as per 1991 census require an industrial license. Industrial license even in these cases is not required if a unit is located in an area designated as an industrial area before 1991 or non-polluting industries such as electronics, computer software, printing and other specified industries.
Environmental Clearances
Entrepreneurs are required to obtain Statutory clearances, relating to Pollution Control and Environment as may be necessary, for setting up an industrial project for 31 categories of industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued by the Ministry of Environment and Forests under The Environment (Protection) Act 1986. This list includes petrochemicals complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, papers etc.,

However, if investment in the project is less than Rs.1 billion (appox. $ 22.2 million), such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries.

Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon Valley, Dahanu etc.) are guided by separate guidelines issues by the Ministry of Environment and Forests.



Industrial Policy 1991

Industrial Policy Statement- 1991
The Industrial Policy Statement of 1991 stated that “the Government will continue to pursue a sound policy framework encompassing encouragement of entrepreneurship, development of indigenous technology through investment in research and development, bringing in new technology, dismantling of the regulatory system, development of the capital markets and
increased competitiveness for the benefit of common man". It further added that "the spread of industrialization to backward areas of the country will be actively promoted through appropriate incentives, institutions and infrastructure investments”.

The objective of the Industrial Policy Statement - 1991 was to maintain sustained growth in productivity, enhance gainful employment and achieve optimal utilization of human resources, to attain international competitiveness, and to transform India into a major partner and player in the global arena. Quite clearly, the focus of the policy was to unshackle the Indian industry from
bureaucratic controls. This called for a number of far-reaching reforms:

· A substantial modification of Industry Licensing Policy was deemed necessary with a view to ease restraints on capacity creation; respond to emerging domestic and global opportunities by improving productivity. Accordingly, the Policy Statement included abolition of industrial
licensing for most industries, barring a handful of industries for reasons of security and strategic concerns, social and environmental issues. Compulsory licensing was required only in respect of 18 industries. These included, inter alia, coal and lignite, distillation and brewing of alcoholic drinks, cigars and cigarettes, drugs and pharmaceuticals, white goods, hazardous chemicals. The small scale sector continued to be reserved. Norms for setting up industries (except for industries subject to compulsory licensing) in cities with more than one million populations were further liberalised.
· Recognizing the complementarily of domestic and foreign investment, foreign direct investment was accorded a significant role in policy announcements of 1991. Foreign direct investment (FDI) up to 51 per cent foreign equity in high priority industries requiring large investments and advanced technology was permitted. Foreign equity up to 51 per cent was also allowed in trading companies primarily engaged in export activities. These important initiatives were expected to provide a boost to investment besides enabling access to high technology and marketing expertise of foreign companies.
· With a view to inject technological dynamism in the Indian industry, the Government provided automatic approval for technological agreements related to high priority industries and eased procedures for hiring of foreign technical expertise.
· Major initiatives towards restructuring of public sector units (PSUs) were initiated, in view of their low productivity, over staffing, lack of technological up gradation and low rate of return. In order to raise resources and ensure wider public participation PSUs, it was decided to offer its shareholding stake to mutual funds, financial institutions, general public and workers. Similarly, in order to revive and rehabilitate chronically sick PSUs, it was decided to refer them to the Board for Industrial and Financial Reconstruction (BIFR). The Policy also provided for greater managerial autonomy to the Boards of PSUs.
· The Industrial Policy Statement of 1991 recognized that the Government’s intervention in investment decisions of large companies through MRTP Act had proved to be deleterious for industrial growth. Accordingly, pre-entry scrutiny of investment decisions of MRTP
companies was abolished. The thrust of policy was more on controlling unfair and restrictive trade practices. The provisions restricting mergers, amalgamations and takeovers were also repealed.

Industrial Policy Measures Since 1991
Since 1991, industrial policy measures and procedural simplifications have been reviewed on an ongoing basis. Presently, there are only six industries which require compulsory licensing. Similarly, there are only three industries reserved for the public sector. Some of important policy measures initiated since 1991 are set out below:
· Since 1991, promotion of foreign direct investment has been an integral part of India’s economic policy. The Government has ensured a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. FDI up to 100 per cent has also been
allowed under automatic route for most manufacturing activities in Special Economic Zones (SEZs). More recently, in 2004, the FDI limits were raised in the private banking sector (up to 74 per cent), oil exploration (up to 100 per cent), petroleum product marketing (up to 100 per cent), petroleum product pipelines (up to 100 per cent), natural gas and LNG pipelines (up to 100 per cent) and printing of scientific and technical magazines, periodicals and journals (up to 100 per cent). In 9 February 2005, the FDI ceiling in telecom sector in certain services was increased from 49 per cent to 74 per cent.
· Reservation of items of manufacture exclusively in the small scale sector has been an important tenet of industrial policy. Realizing the increased import competition with the removal of quantitative restrictions since April 2001, the Government has adopted a policy of dereservation and has pruned the list of items reserved for SSI sector gradually from 821 items as at end March 1999 to 506 items as on April 6, 2005. Further, the Union Budget 2005-06 has proposed to dereserve 108 items which were identified by Ministry of Small Scale Industries. The investment limit in plant and machinery of small scale units has been raised by the Government from time to time. To enable some of the small scale units to achieve required economies of scale, a differential investment limit has been adopted for them since October 2001. Presently, there are 41 reserved items which are allowed investment limit up to Rs.50 million instead of present limit of Rs.10 million applicable for other small scale units.
· Equity participation up to 24 per cent of the total shareholding in small scale units by other industrial undertakings has been allowed. The objective therein has been to enable the small sector to access the capital market and encourage modernization, technological upgradation,
ancillarisation, sub-contracting, etc.
· Under the framework provided by the Competition Act 2002, the Competition Commission of India was set up in 2003 so as to prevent practices having adverse impact on competition in markets.
· In an effort to mitigate regional imbalances, the Government announced a new North-East Industrial Policy in December 1997 for promoting industrialization in the North-Eastern region. This policy is applicable for the States of Arunachal Pradesh, Assam, Manipur, Meghalaya,
Mizoram, Nagaland and Tripura. The Policy has provided various concessions to industrial units in the North Eastern Region, e.g., development of industrial infrastructure, subsidies under  various schemes, excise and income-tax exemption for a period of 10 years, etc.
North Eastern Development Finance Corporation Ltd. has been designated as the nodal disbursing agency under the Scheme.
· The focus of disinvestment process of PSUs has shifted from sale of minority stakes to strategic sales. Up to December 2004, PSUs have been divested to an extent of Rs.478 billion.
· Apart from general policy measures, some industry specific measures have also been initiated. For instance, Electricity Act 2003 has been enacted which envisaged to delicense power generation and permit captive power plants. It is also intended to facilitate private sector
participation in transmission sector and provide open access to grid sector. Various policy measures have facilitated increased private sector participation in key infrastructure sectors such as, telecommunication, roads and ports. Foreign equity participation up to 100 per cent has been
allowed in construction and maintenance of roads and bridges. MRTP provisions have been relaxed to encourage private sector financing by large firms in the highway sector.

Evidently, in the process of evolution of industrial policy in India, the Government’s intervention has been extensive. Unlike many East Asian countries which used the State intervention to build strong private sector industries, India opted for the State control over key industries in the initial
phase of development. In order to promote these industries the Government not only levied high tariffs and imposed import restrictions, but also subsidized the nationalized firms, directed investment funds to them, and controlled both land use and many prices.

In India, there has been a consensus for long on the role of government in providing infrastructure and maintaining stable macroeconomic policies. However, the path to be pursued toward industrial development has evolved over time. The form of government intervention in the development strategy needs to be chosen from the two alternatives: ‘Outward-looking development policies’ encourage not only free trade but also the free movement of capital, workers and enterprises. By contrast, ‘inward-looking development policies’ stress the need for one’s own style of development. India initially adopted the latter strategy.

The advocates of import substitution in India believed that we should substitute imports with domestic production of both consumer goods and sophisticated manufactured items while ensuring imposition of high tariffs and quotas on imports. In the long run, these advocates cite the benefits of greater domestic industrial diversification and the ultimate ability to export previously protected manufactured goods, as economies of scale, low labour costs, and the positive externalities of learning by doing cause domestic prices to become more competitive than world prices. However, pursuit of such a policy forced the Indian industry to have low and inferior technology. It did not expose the industry to the rigours of competition and therefore it resulted in low efficiency. The inferior technology and inefficient production practices coupled with focus on traditional sectors choked further expansion of the India industry and thereby limited its ability to expand employment opportunities. Considering these inadequacies, the reforms currently underway aim at infusing the state of the art technology, increasing domestic and external competition and diversification of the industrial base so that it can expand and create additional employment opportunities.

In retrospect, the Industrial Policy Resolutions of 1948 and 1956 reflected the desire of the Indian State to achieve self sufficiency in industrial
production. Huge investments by the State in heavy industries were designed to put the Indian industry on a higher long-term growth trajectory. With limited availability of foreign exchange, the effort of the Government was to encourage domestic production. This basic strategy guided industrialization until the mid-1980s. Till the onset of reform process in 1991, industrial
licensing played a crucial role in channeling investments, controlling entry and expansion of capacity in the Indian industrial sector. As such industrialization occurred in a protected environment, which led to various distortions. Tariffs and quantitative controls largely kept foreign competition out of the domestic market, and most Indian manufacturers looked on exports only as a residual possibility. Little attention was paid to ensure product quality, undertaking R&D for technological development and achieving economies of scale. The
industrial policy announced in 1991, however, substantially dispensed with industrial licensing and facilitated foreign investment and technology transfers, and threw open the areas hitherto reserved for the public sector. The policy focus in the recent years has been on deregulating the Indian industry, enabling industrial restructuring, allowing the industry freedom and flexibility in
responding to market forces and providing a business environment that facilitates and fosters overall industrial growth. The future growth of the Indian industry as widely believed, is crucially dependent upon improving the overall productivity of the manufacturing sector, rationalization of the duty structure, technological up gradation, the search for export markets through promotional efforts and trade agreements and creating an enabling legal environment.

Industrial Policies in India

INDUSTRIAL POLICY SINCE 1956
When India achieved Independence in 1947, the national consensus was in favour of rapid industrialization of the economy which was seen not only as the key to economic development but also to economic sovereignty. In the subsequent years, India's Industrial Policy evolved through successive  Industrial Policy Resolutions and Industrial Policy Statements. Specific
priorities for industrial development were also laid down in the successive Five Year Plans.

Building on the so-called "Bombay Plan"1 in the pre-Independence era, the first Industrial Policy Resolution announced in 1948 laid down broad contours of the strategy of industrial development. At that time the Constitution of India had not taken final shape nor was the Planning Commission constituted. Moreover, the necessary legal framework was also not put in place. Not surprisingly therefore, the Resolution was somewhat broad in its scope and direction. Yet, an important distinction was made among industries to be kept under the exclusive ownership of Government, i.e., the public sector, those reserved for private sector and the joint sector. Subsequently, the Indian Constitution was adopted in January 1950, the Planning Commission was constituted in March 1950 and the Industrial (Department and Regulation) Act (IDR Act) was enacted in 1951 with the objective of empowering the Government to take necessary steps to regulate the pattern of industrial development through licensing. This paved the way for the Industrial Policy Resolution of 1956, which was the first comprehensive statement on the strategy for industrial development in India.

Industrial Policy Resolution - 1956
The Industrial Policy Resolution - 1956 was shaped by the Mahalanobis Model of growth, which suggested that emphasis on heavy industries would lead the economy towards a long term higher growth path. The Resolution widened the scope of the public sector. The objective was to accelerate economic growth and boost the process of industrialization as a means to achieving a socialistic pattern of society. Given the scarce capital and inadequate entrepreneurial base, the Resolution accorded a predominant role to the State to assume direct responsibility for industrial development. All industries of basic and strategic importance and those in the nature of public
utility services besides those requiring large scale investment were reserved for the public sector.

The Industrial Policy Resolution - 1956 classified industries into three categories. The first category comprised 17 industries (included in Schedule A of the Resolution) exclusively under the domain of the Government. These included inter alia, railways, air transport, arms and ammunition, iron and steel and atomic energy. The second category comprised 12 industries (included in Schedule B of the Resolution), which were envisaged to be progressively State
owned but private sector was expected to supplement the efforts of the State. The third category contained all the remaining industries and it was expected that private sector would initiate development of these industries but they would remain open for the State as well. It was envisaged that the State would facilitate and encourage development of these industries in the private sector, in accordance with the programmes formulated under the Five Year Plans, by
appropriate fiscal measures and ensuring adequate infrastructure. Despite the demarcation of industries into separate categories, the Resolution was flexible enough to allow the required adjustments and modifications in the national interest.

Another objective spelt out in the Industrial Policy Resolution – 1956 was the removal of regional disparities through development of regions with low industrial base. Accordingly, adequate infrastructure for industrial development of such regions was duly emphasized. Given the potential to provide large-scale employment, the Resolution reiterated the Government’s
determination to provide all sorts of assistance to small and cottage industries for wider dispersal of the industrial base and more equitable distribution of income. The Resolution, in fact, reflected the prevalent value system of India in the early 1950s, which was centered around self sufficiency in industrial production. The Industrial Policy Resolution – 1956 was a landmark policy statement and it formed the basis of subsequent policy announcements.

Industrial Policy Measures in the 1960s and 1970s
Monopolies Inquiry Commission (MIC) was set up in 1964 to review various aspects pertaining to concentration of economic power and operations of industrial licensing under the IDR Act, 1951. While emphasizing that the planned economy contributed to the growth of industry, the Report by MIC concluded that the industrial licensing system enabled big business houses to
obtain disproportionately large share of licenses which had led to pre-emption and foreclosure of capacity. Subsequently, the Industrial Licensing Policy Inquiry Committee (Dutt Committee), constituted in 1967, recommended that larger industrial houses should be given licenses only for setting up industry in core and heavy investment sectors, thereby necessitating reorientation of
industrial licensing policy.

In 1969, the monopolies and restrictive Trade Practices (MRTP) Act was introduced to enable the Government to effectively control concentration of economic power. The Dutt Committee had defined large business houses as those with assets of more than Rs.350 million. The MRTP Act, 1969 defined large business houses as those with assets of Rs. 200 million and above. Large
industries were designated as MRTP companies and were eligible to participate in industries that were not reserved for the Government or the Small scale sector.

The new Industrial Licensing Policy of 1970 classified industries into four categories. First category, termed as ‘Core Sector’, consisted of basic, critical and strategic industries. Second category termed as ‘Heavy Investment Sector’, comprised projects involving investment of more than Rs.50 million. The third category, the ‘Middle Sector’ consisted of projects with investment in the range of Rs.10 million to Rs.50 million. The fourth category was ‘Delicensed Sector’, in which investment was less than Rs.10 million and was exempted from licensing requirements. The industrial licensing policy of 1970 confined the role of large business houses and foreign companies to the core, heavy and export oriented sectors.

The Industrial Policy Statement - 1973
With a view to prevent excessive concentration of industrial activity in the large industrial houses, this Statement gave preference to small and medium entrepreneurs over the large houses and foreign companies in setting up of new capacity particularly in the production of mass consumption goods. New undertakings of up to Rs.10 million by way of fixed assets were exempted from licensing requirements for substantial expansion of assets. This exemption was
not allowed to MRTP companies, foreign companies and existing licensed or registered undertakings having fixed assets of Rs.50 million and above.

The Industrial Policy Statement -1977
This Statement emphasized decentralization of industrial sector with increased role for small scale, tiny and cottage industries. It also provided for close interaction between industrial and agricultural sectors. Highest priority was accorded to power generation and transmission. It expanded the list of items reserved for exclusive production in the small scale sector from 180 to
more than 500. For the first time, within the small scale sector, a tiny unit was defined as a unit with investment in machinery and equipment up to Rs.0.1 million and situated in towns or villages with a population of less than 50,000 (as per 1971 census). Basic goods, capital goods, high technology industries important for development of small scale and agriculture sectors were clearly delineated for large scale sector. It was also stated that foreign companies that diluted their foreign equity up to 40 per cent under Foreign Exchange Regulation Act (FERA) 1973 were to be treated at par with the Indian companies. The Policy Statement of 1977 also issued a list of industries where no foreign collaboration of financial or technical nature was allowed as
indigenous technology was already available. Fully owned foreign companies were allowed only in highly export oriented sectors or sophisticated technology areas. For all approved foreign investments, companies were completely free to repatriate capital and remit profits, dividends, royalties, etc. Further, in order to ensure balanced regional development, it was decided not to issue fresh licenses for setting up new industrial units within certain limits of large
metropolitan cities (more than 1 million population) and urban areas (more than 0.5 million population).

Industrial Policy Statement -1980
The industrial Policy Statement of 1980 placed accent on promotion of competition in the domestic market, technological up gradation and modernization of industries. Some of the socio-economic objectives spelt out in the Statement were i) optimum utilization of installed capacity, ii) higher productivity, iii) higher employment levels, iv) removal of regional disparities, v) strengthening of agricultural base, vi) promotion of export oriented industries and vi) consumer protection against high prices and poor quality.

Policy measures were announced to revive the efficiency of public sector undertakings (PSUs) by developing the management cadres in functional fields’ viz., operations, finance, marketing and information system. An automatic expansion of capacity up to five per cent per annum was allowed, particularly in the core sector and in industries with long-term export potential. Special incentives were granted to industrial units which were engaged in industrial processes and technologies aiming at optimum utilization of energy and the exploitation of alternative sources of energy. In order to boost the development of small scale industries, the investment limit was raised to Rs.2 million in small scale units and Rs.2.5 million in ancillary units. In the case of
tiny units, investment limit was raised to Rs.0.2 million.

Industrial Policy Measures during the 1980s
Policy measures initiated in the first three decades since Independence facilitated the establishment of basic industries and building up of a broad based infrastructure in the country. The Seventh Five Year Plan (1985-1900), recognized the need for consolidation of these strengths and initiating policy measures to prepare the Indian industry to respond effectively to emerging challenges. A number of measures were initiated towards technological and managerial modernization to improve productivity, quality and to reduce cost of production. The public sector was freed from a number of constraints and was provided with greater autonomy. There was some progress in the process of deregulation during the 1980s. In 1988, all industries, excepting 26 industries specified in the negative list, were exempted from licensing. The
exemption was, however, subject to investment and locational limitations. The automotive industry, cement, cotton spinning, food processing and polyester filament yarn industries witnessed modernization and expanded scales of production during the 1980s.

With a view to promote industrialization of backward areas in the country, the Government of India announced in June, 1988 the Growth Centre Scheme under which 71 Growth Centers were proposed to be set up throughout the country. Growth centers were to be endowed with basic infrastructure facilities such as power, water, telecommunications and banking to enable them
to attract industries.