Industries and Industrial Policy of India Since 1947
Most of the western countries have written their success stories of industrialization which led them to accelerated growth. When India got independence, it needed to rejuvenate its economy. It had many tasks in front of it like food security, poverty which were calling for immediate attention. The other areas of attention included industry infrastructure etc.
All these areas of development needed heavy capital investment which had been avoided by the Britishers for the last 150 years. Looking at the pros and cons of available options; India decided that the industrial sector will be the prime moving force for economic growth.
Reasons behind pre 1991 Industrial Policies
Raw materials such as steel, coal, cement etc. were limited. These raw materials were allocated among various industries. Thus, the output of industries was restricted because without restrictions, profitable Industries might produce at the cost of less profitable industries, creating a serious shortage of certain types of goods.
Also, there was a possibility that resources would be diverted towards luxury industries benefiting small sections of the society and ignoring essential industries involving large sections of the society.
As the output of the industries was limited, the demand for the output was high. Consequently, it was important to regulate the prices of the output.
Moreover, the government was a significant investor in the economy because the private sector lacked funds. The private sector develops financial capability with industrialization of the economy. However, under the British rule, India witnessed little industrialization.
Criticism
4.Control over output and prices created black market for commodities. Some good for even sold at a very high price
Movement towards liberalization
Various liberalization measures were announced under the industrial licensing policies of 1970, 1973 and 1978. Moreover, many measures were taken in the 1980s to liberalize the industry like the limit for requiring a license was enhanced. Most of the industries were exempted from licensing requirements. Regulations on the use of foreign exchange were also reduced.
Economic reforms: Liberalization Privatization and Globalisation
Liberalization
Liberalization of the economy means reduction in restrictions over business organisations in the economy. It is similar to deregulation.
The process of decreasing traits of a state economy and increasing traits of a market economy is liberalization. In India’s case the term liberalization is used to show the direction of the economic reforms–with decreasing influence of the state or the planned or the command economy and increasing influence of the free market or the capitalistic economy.
Need for deregulation
Excessive restrictions increase the cost of business and reduce the opportunity for business. For instance, license restrictions to approve capacity expansion reduce the opportunity for business. Similarly, compliance with too many laws also raises the cost of operating business.
Higher cost of functioning makes the business uncompetitive, and loss of opportunities reduces the growth of business. Growth of the private sector contributes to the overall growth of the economy. Thus, excessive restrictions hamper the growth of the economy.
It was expected that with the liberalization of the economy, many private players would enter each industry and competition among them would lead to availability of good quality products at cheap rates.
Liberalization in India
Pre 1991, liberalization attempts were made in the economy in 1966 and 1985.The first attempt was reversed in 1967. Thereafter, even stronger restrictions were imposed. The second major attempt was in 1985.The process came to a halt in 1987, though 1967 type reversal did not take place. In the 1980s, the government started reforms in the direction of liberalization.
Economic crisis
Foreign exchange shortages started emerging in 1985, and by the end of 1990, the foreign exchange reserves had reduced to the point that India could barely finance three weeks’ imports. It had to pledge gold as part of a bailout deal with the International Monetary Fund (IMF). Most of the economic reforms were forced upon India as part of the IMF bailout. In response, the government initiated the economic liberalization of 1991.
The reforms abolished the Licence Raj in most of the industries, ended public-sector monopolies in many industries, and reduced restrictions on foreign direct investment in many sectors.
Privatization
Privatization refers to a greater role of the private sector in the economy either through establishment of new businesses under private ownership or through transfer of existing businesses under the public sector to the private sector. Liberalization leads to privatization. In other words, fewer regulations facilitate growth of the private sector in the economy.
The decades of the 1980s and 1990s witnessed a rolling back of the state by the government especially in the USA and the UK. The policies through which the roll back of the state was done included deregulation, privatization and introduction of market reforms in public services. Privatization at that time was used as a process under which the state assets were transferred to the private sectors. But over a period, several meanings of the term privatization have developed.
We may see them as follows: Privatization in its purest sense and lexically means de-nationalization, i.e., transfer of the state ownership of the assets to the private sector to the tune of 100 percent. This route of privatization has been avoided by almost all democratic systems. India never ventured into any such privatization move.
The sense in which privatization has been used is the process of disinvestment all over the world. This process includes selling of the shares of the state-owned enterprises to the private sector.
All the economic policies which directly or indirectly seem to promote the expansion of the private sector, or the market (economy) have been termed by experts and the government as the process of privatization. We may cite a few examples from India – delicensing and dereservation of the industries, cuts in the subsidies, permission to foreign investment, etc. Here we may connect liberalization to privatization in India. Liberalization shows the direction of reform in India, i.e., inclination towards the dominance of markets. But how will it be achieved? Basically, privatization will be the path to reform.
Globalization
In economic terms, globalization refers to the process of integration of the domestic economy with the outside world. It refers to free movement of goods, services, investment, and technology among nations, of the world.
This globalization lasted from 1800 to almost 1930, interrupted by the great Depression and the two wars which led to retrenchment and several trade barriers were erected since early 1930s. The concept was popularized by the organization of economic Cooperation and development (OECD) in the mid-1980s again after the wars. The process of liberalization shows movement of the economy toward the market’s economy, privatization is the path/ route through which it will travel to realize the ultimate goal, i.e. globalization.
Impact of globalization
Globalization impacts every aspect of a nation such as economy, society, culture, education, family system, and state sovereignty (state sovereignty refers to the freedom of a state to manage its affairs).
At present, most of the nations of the world are engaged in integration with other countries. Such integration is facilitated either through free-trade agreements or by an international body, namely, the World Trade Organization.
Globalization facilitates large scale production and thus facilitates economies of scale. It leads to competition at the global level, which encourages innovation, adoption of best practices and exchange of learning.
Washington consensus
By the early 1980s, a new development strategy emerged. Though it was not new, it was like the old idea getting vindicated after failure of a comparatively newer idea. After the world recognized the limits of a state dominated economy, arguments in favour of the market, i.e., the private sector, was promoted emphatically. Many countries shifted their economic minimal policy just to the other extreme arguing for a minimal role of the government in the economy.
Governments of the socialist or the planned economies were urged / suggested to privatize and liberalise, to sell off state owned companies and eliminate government intervention in the economy. These governments were also suggested to take the measures which could boost the aggregate demand in the economy (macroeconomic stability measures) the broad outlines of such a development strategy were called as the Washington consensus. This term was used for the ‘economic reforms‘ followed by almost all the socialist, communist and planned developing economies during the 1980s in one form or the other– around the world during this period .
The term was usually seen as a corollary of promoting naked capitalism. Openness in the economies was criticised by the political parties in the opposition and the critique for being soft to the dictates of the IMF and the WB. And becoming a party to promote, neo–imperialism.
Economic Reforms in India
In 1991, India launched a process of economic reforms in response to a fiscal and balance of payment (BoP) crisis.
The reforms and the related programmes are still going on with changing emphasis and dimensions. Back in the mid-1980s, the government had taken its first steps to economic reforms. While the reforms of the 1980s witnessed rather limited nature of deregulation and partial liberalization of only a few aspects of the existing control regime, the reforms started in early 1990s were in the fields of industries, trade, investment and agriculture and were much wider and deeper. Though liberal policies were announced by the Government during the reforms of the 1980s itself with the slogan of economic reforms, it was only launched with full conviction in the early 1990s.
But the reforms of the 1980s (made voluntarily) which were under the influence of Washington consensus ideology had a crippling impact on the economy. The whole seventh plan (1985-90) promoted further relaxation of market regulations with heavy external borrowing to increase exports (as the thrust of the policy reforms). Though the thrust increased the growth rate led by higher industrial growth (riding on costly imports supported by foreign borrowings which the industries would not be able to pay back and service), it also led to a substantial increase in foreign indebtedness that played a major role in the BOP crisis of 1991.
The crisis was followed by the first gulf war (1991) which had two pronged negative impacts on the Indian foreign exchange (forex) reserves. First, the war led the oil prices to go upward forcing India to use its forex reserves in a comparatively shorter period and second, the private remittances from Indian working in the gulf region fell down fast(due to their emergency evacuation). Both the crises were induced by a single cause i.e., the gulf war. But the balance of payment crisis also reflected deeper problems of rising foreign debt, a fiscal deficit of over 8 percent of the GDP and hyperinflation (over 13 percent) situations.
Obligatory Reforms
Similar reform processes started by some other economies since the 1980s were voluntary decisions of the concerned countries. But in the case of India, it was an involuntary decision taken by the government of the time in the wake of the BOP crisis. Under the extended fund facility (EFF) programmes of the IMF, countries get external currency support from the fund to mitigate their BOP crisis, but such support has some obligatory conditionalities put on the economy to be fulfilled. The reforms (in and after 1991-92) which India carried out were neither formulated by India nor mandated by the public.
The IMF conditions put forth for India were as under:
1.Devaluation of the rupee by 22 percent (which was affected in two phases and the Indian rupee fell down from Rs 21 to RS 27 per US dollar)
2.Drastic reduction in the peak imports tariff from the prevailing level of 130 percent to 30 percent (India completed it by 2000-01 itself and now it is voluntarily cut to the level of 15 percent)
Though India was able to pay back its IMF dues in time, the structural reform of the economy was launched to fulfill the above given conditions of the IMF.
The ultimate goal of the IMF was to help India bring about equilibrium in its BOP situation in the short term and go for macroeconomic and structural adjustment so that in future the economy faces no such crisis.
Generations of Economic Reforms
First generation Reforms (1991-2000)
First generation of reforms may be seen as under:
Promotion of private sector: This included various liberalizing policy decisions, i.e., de-reservation and delicensing of the industries, abolition of the MRTP limit, abolition of the conversion of loan into shares, simplifying environmental laws for the establishment of the industries, etc.
Public sector Reforms: The steps taken to make the public sector undertakings predictable, efficient, their disinvestment (token disinvestment) their corporatization etc, were major parts of it.
External Sector Reforms: They consisted of policies like-abolishing quantitative restrictions on import, switching to the floating currency regime of exchange rate, announcing full current account convertibility, reforms in the capital account, permission to foreign investment (direct as well as indirect), promulgation of a liberal foreign Exchange management Act (the FEMA replacing the FERA) etc.
Financial Sector Reforms: Several reforms initiatives were taken up in the areas of the banking sector, capital market, insurance, mutual funds, etc.
Tax Reforms: This consisted of all the policy initiatives directed towards simplifying, broad basing, checking evasion, etc.
A major redirection was ensured by this generation of reforms in the economy- the command type of the economy moved strongly towards a market – driven economy, private sector (domestic as well as foreign) to have greater participation in the future.
Second Generation Reforms (2000-01 onwards)
The government launched this generation of the reforms in the years 2000-01. Basically, the reforms India launched in the early 1990s were not taking place as desired and a need for another set of reforms was felt by the government which were initiated with the title of the second generation of economic reforms. The reforms of this generation were not only deeper and delicate but required a higher political will power from the governments. The major components of the reforms are as given below:
Factor market reforms: It consists of dismantling of the Administered price mechanism ( APM).There were many products in the economy whose prices were fixed/regulated by the government viz petroleum, sugar fertilizer, drugs etc., Though a major section of the products under the APM were produced by the private sector, they were not sold on market principle which hindered the profitability of the manufacturers as well as the sellers and ultimately affected the expansion of the concerned industries leading to a demand- supply gap.
Under market reforms these products were to be brought into the market fold. In the petroleum segment now only kerosene oil and the LPG remain under the APM while petrol, diesel, lubricants have been phased out. Similarly, the income tax paying families don’t get sugar from the PDS on subsidies; only urea among the fertilizers remains under APM. Many drugs have also been phased out of the mechanism.
But we cannot say that the factor markets reforms (FMRs) are complete in India. It is still going on. Cutting down subsidies on essential goods is a socio- political question in India. Till markets-based purchasing power is not delivered to all the consumers. It would not be possible to complete the FMRs.
Public sector reforms: The second generation of reforms in the public sector especially emphasizes areas like greater functional autonomy, free leverage to the capital market, international tie-ups and Greenfield ventures, disinvestment.
Legal sector reforms: Though reforms in the sector were started in the first generation itself, now it was to be deepened and newer area were to be included–abolishing outdated and contradictory laws, reforms in the Indian penal code (IPC)and CrPC, labour laws company law, etc.
Reforms in the Critical Areas: The second-generation reforms also commit to suitable reforms in the infrastructure sector (i.e., power, roads, telecom), agriculture, agricultural extension, education and the healthcare, etc.,
These reforms have two segments. The first segment is similar to the FRMs, while the second segment provides a broader dimension to the reforms, viz, corporate farming, research and development in the agriculture sector (which was till now basically taken care of by the government and needs active participation of the private sector), irrigation, inclusive education and healthcare.
States Role in the Reforms: For the first time, an important role to the states was designed in the process of economic reforms. All new steps of the reforms were now to be started by the states with the centre playing a supportive role.
Fiscal consolidation: The FRBM act was passed by the centre and the fiscal responsibility Act (FRA) was followed by the states.
Greater Tax devolution to the states: There is a visible change in the central policies favouring greater fiscal leverage to the states, even the process of tax reforms takes the same dimension. Similarly, the finance commission as well as the planning commission started taking greater fiscal care of the states.
Focusing on the social sector: The social sector (especially the healthcare and education) has started getting increased attention by the government with manifold increases in the allocation
Third Generation Reforms
Announcement of the third generation of reforms was made on the margins of the launching of tenth plan (2002-07 ). This generation of reforms commits to the cause of a fully functional Panchayati Raj Institutions (PRIs) so that the benefits of the economic reforms in general, can reach the grassroots level.
Fourth Generation Reforms
Some experts coined this generation of reforms which entail a fully information technology enabled India. They hypothesized a two-way connection between the economic reforms and the Information Technology(IT)–with each one reinforcing the other.
The different generation of economic reforms in India should not be seen as the completion/ ending of the former and commencement of the later generations of reforms. Basically, all generations are going on at present simultaneously, so that the goal of reforming the economy is achieved, The various generations of reforms in India also verify the fact that reform is a continuous process which needs fine tuning in accordance with the changed situations. Reforms are not the aim of the economy but reforming the economy is the aim.
Industrial Policy since 1991
The Industrial policy 1991 was launched to attain faster economic growth through participation of the private sector. Accordingly, steps were taken towards liberalization, privatization, and globalization.
New Industrial Policy, 1991
The financial support India received from the IMF to fight out the BoP crisis of 1990–91 was having a tag of conditions to be fulfilled by India.
These IMF conditionalities required the Indian economy to go for a structural re-adjustment. As the nature and scope of the economy was moulded by the various industrial policies India followed till 1990, any desired change in the economic structure had to be induced with the help of another industrial policy.
The new industrial policy, announced by the government in 1991, had initiated a bigger process of economic reforms in the country and was motivated towards the structural re- adjustment obliged to ‘fulfill’ IMF conditionalities.
The major highlights of the policy are as follows:
The industries which were reserved for the Central Government by the IPR, 1956, were cut down to only eight. In the coming years many other industries were also opened for private sector investment. At present there are only two industries which are fully or partially reserved for the Central Government:
(i) Atomic energy and nuclear research and other related activities, i.e., mining, use management, fuel fabrication, export-import, waste management, etc., of radioactive minerals (none of the nuclear powers in the world have allowed entry of private sector players in these activities, thus no such attempts look logical in India, too).
(ii) Railways: Many of the functions related to the railways have been allowed private entry, but still the private sector cannot enter the sector as a full-fledged railway service provider. In 2020, we have announced privatization of railways.
The number of industries put under the compulsory provision of licensing (belonging to Schedules B and C as per the IPR, 1956) were cut down to only 18. Presently there are only five industries which carry the burden of compulsory licensing. (a license is required to produce the goods)
(i)Aerospace and defence related electronics
(ii)Gun powder, industrial explosives and detonating fuse
(iii)Dangerous chemicals
(iv)Tobacco, cigarette and related products
(v) Alcoholic drinks
The MRTP limit was Rs. 100 crores so that the mergers, acquisitions and takeovers of the industries could become possible. In 2002, a Competition Act was passed which replaced the MRTP Act. In place of the MRTP commission, the Competition Commission has started functioning.
Functioning as a typical closed economy, the Indian economy had never shown any good faith towards foreign capital. The new industrial policy was a path breaking step in this regard. Not only the draconian FERA was committed to be diluted, but the government went to encourage foreign investment (FI) in both its forms—direct and indirect.
The direct form of FI was called as the foreign direct investment (FDI) under which the MNCs were allowed to set up their firms in India in the different sectors varying from 26 per cent to 100 percent ownership with them—Enron and Coke being the flag-bearers. The FDI started in 1991 itself.
The indirect form of foreign investment (i.e., in the assets owned by the Indian firms in equity capital) was called the Portfolio Investment Scheme (PIS) in the country, which formally commenced in 1994.Under the PIS the Foreign Institutional Investors (FIIs) having good track record are allowed to invest in the Indian security/stock market. The FIIs need to register themselves as a stockbroker with SEBI.
The government committed in 1991 itself to replace the draconian FERA with a highly liberal FEMA, which came into effect in the year 2000–01.
The policy of nationalization started by the Government of India in the late 1960s was based on the sound logic of greater public benefit and had its origin in the idea of welfare state. It was criticized by the victims and the experts alike. In the early 1970s, the Government of India came with a new idea of it.
The major banks of the country were now fully nationalized (14 in number by that time), which had to mobilize resources for the purpose of planned development of India. The private companies which had borrowed capital from these banks (when the banks were privately owned) had to repay loans to the banks.
The government came with a novel provision for the companies which were unable to repay their loans (most of them were like it)—they could opt to convert their loan amounts into equity shares and hand them over to the banks. The private companies which opted for this route (this was a compulsory option) ultimately became a government-owned company as the banks were owned by the Government of India.
This was an indirect route to nationalize private firms. Such a compulsion which hampered the growth and development of the Indian industries was withdrawn by the government in 1991.
Special Economic Zones
A special economic zone (SEZ) is an area in which business and trade laws are different from the rest of the country. SEZs are located within a country’s national borders.
They are established with the objective of promoting exports.
The SEZ Act was passed in 2005. According to the act, SEZ units are given the following benefits:
1.Tax holidays for some period. However, the income tax benefits were neutralized by the introduction of a 20% minimum alternate tax (MAT) and the 20% dividend distribution tax (DDT) in 2011-12.
Possible implications of SEZ policy
At present, the government has already approved a large number of SEZs. Many SEZs are in the process of setting up. When all the approved SEZs will become operational, they are expected to rope in huge investment and create massive jobs, which will give a huge boost to Indian economy. New technology and managerial capabilities will be introduced in India.
Challenges with SEZz
3.The enthusiasm for SEZs waned considerably once the government imposed the minimum alternate tax and the dividend distribution tax.
Recommendations of the Baba Kalyani Committee
The Government had constituted a Group of eminent persons under the Chairmanship of Baba Kalyani, to study the Special Economic Zone (SEZ) Policy of India in 2018. The Group has recently submitted its report to the Government. The key recommendations of the Group are as under:
Reincarnation of SEZs as Employment and Economic Enclaves (3Es) and shift focus from export to economic and employment growth. For this, incentives for the manufacturing SEZs have to be based on specific parameters including demand, investment, employment and technology, value addition and inclusivity.
National Investment and Manufacturing Zones (NIMZ)
The NIMZs are envisaged as integrated industrial townships with state-of-the-art infrastructure, land use on the basis of zoning, clean and energy efficient technology, necessary social infrastructure, skill development facilities etc. to promote world-class manufacturing activities. At least 30% of the total land area proposed for the NIMZ will be utilized for location of manufacturing units. The land for these zones will preferably be waste infertile land not suitable for cultivation, not in the vicinity of any ecologically fragile area and with reasonable access to basic resources.
Central government provides external physical infrastructure linkages to the NIMZs including rail, road, ports, airports and telecom, in a time-bound manner and also provides viability gap funding wherever required.
The State Government will constitute a Special Purpose Vehicle (SPV) to discharge the functions specified in the policy.
The Department for Promotion of Industry and Internal Trade (former DIPP) is the nodal agency for NIMZ.
Make In India
Make in India was launched in 2014 by the government to encourage multinational as well as domestic companies to manufacture their products in India. The initiative is set to boost entrepreneurship, not only in manufacturing but in relevant infrastructure and service sectors as well.
Objective is to focus on job creation and skill enhancement in 25 key sectors of the economy, including automobiles, aviation, biotechnology, defence manufacturing, electrical machinery, food processing, oil & gas, and pharmaceuticals, among others.
The initiative also aims at imposing high quality standards and the dimensions of sustainability.
Key policies to be followed are: Ease of doing business, getting away with archaic laws, 100 Smart Cities, disinvestment of the PSUs, skills and jobs for the youth, etc.
The initiative is based on four pillars – new processes; new infrastructure; new sectors; and new mindset.
The major steps taken by the government in this regard are as summed-up below:
(i)An interactive portal for dissemination of information and interaction with investors has been created with the objective of generating awareness about the investment opportunities and prospects of the country, to promote India as a preferred investment destination in markets overseas and to increase Indian share of global FDI.
‘Invest India’ set up as the national investment promotion and facilitation agency.
(ii) As envisaged by the National Manufacturing Policy 2011, Make in India seeks to enable the sector to contribute 25 per cent to the GDP and create 100 million additional jobs by 2022.
(iii) A number of steps to enhance the skills of workers/the unemployed in India in order to improve their employability.
(iv) In order to tap the creative potential and boost entrepreneurship in India, the Start-up India and Stand- up India campaign has been announced.
(v) An innovation promotion platform called AIM (Atal Innovation Mission) and a techno-financial, incubation and facilitation programme called SETU (Self-Employment and Talent Utilization) are being implemented to encourage innovation and start-ups in India.
(vi) For supporting the financial needs of the small and medium enterprise sector and promote start-ups and entrepreneurship, various steps taken through Make in India –
(a) The India Aspiration Fund has also been set up under the SIDBI for venture capital financing to the MSME sector.
(b) SIDBI Make in India Loan for Small Enterprises (SMILE) launched to offer quasi-equity and term- based short-term loans to Indian SMEs on liberal terms.
(c)A Micro Units Development Refinance Agency (MUDRA) Bank set up to provide development and refinance to commercial banks/NBFCs/cooperative banks for loans given to micro-units.
MUDRA follows a ‘credit-plus approach’ by also providing several other services such as – financial literacy and addressing skill gaps, information gaps, etc
Startup India Programme
The programme offers incentives to entrepreneurs to start ventures in India. The Action Plan proposes a 19-point action list which will enable setting up of incubation centres, easier patent filing, tax exemption on profits, ease of setting-up of business, a faster exit mechanism, among others.
With the intention of reducing regulatory burden on start-ups, they have been exempted from six labour laws and three environmental laws for a period of three years.
Start-ups will also be provided free legal support in filing intellectual property rights (IPR). Patent applications filed by startups will be fast tracked at lower costs.
To provide an equal platform to start-ups in government procurements, the criteria of prior experience or turnover will be exempted without any relaxation in quality standards or technical parameters.
Government will create a policy framework for setting up incubators across the country in public private partnership, build innovation centres at national institutes and set up seven new research parks.
Government to set up a Startup India Hub which will be a single-point of contact for Start-ups
Benefits of the scheme
1.It will help in the economic growth of the country.
2.It will create more employment opportunities in India.
4.It will increase the manufacturing output of the country.
Challenges
2.Tax laws need more clarifications and simplification.
3.Taxes on alternative investment funds and venture capital needs rationalization.
4.Fund set up by the government is not enough to cater the needs of all sections of the entrepreneurs; hence it becomes very difficult for the startups to mobilize funding.
IIP(Index of Industrial Production)
It is a measure of industrial performance & is compiled and released every month by CSO (Now NSO-National Statistical Office). It is a fixed weight and fixed base index. CSO revised the base year of IIP from 2004-05 to 2011-12. This series has an enlarged and more representative basket of the industrial sector.
IIP comprises 3 components of industries:
Core industry
They are eight basic industries and are the backbone of the overall economy. Their output is used by various other industries. Thus, the core industries determine the state of overall industrial development of the economy. They comprise nearly 40.27% of the weight of items included in the IIP.
Following are the industries with their respective weights in the core industry (total weight age 100%).
Comparing PMI and IIP
While PMI and IIP are both used for gauging the health of the economy, it is prudent to understand what they actually stand for.
Purchasing Managers Index (PMI)
PMI is calculated on the basis of information received on a monthly basis (with a lag of 6 weeks while IIP is released with a lag of 2 weeks) from companies on various factors that represent demand conditions. A standard questionnaire is administered to 500 private companies (PSUs are excluded) and the comprehensive score is arrived at.
5 parameters in PMI are-new orders (30%weightage), output (25%), employment (20%), supplier ‘s delivery (15%) and stock of purchases (10%).
The respondents can either give a Positive, Neutral or Negative‖ response and each response is marked as ―1, 0.5 or 0 on the scorecard respectively.
Hence, if there is unanimous positivity across all parameters, then the PMI score would be 100 (percentage) and a unanimous negative would mean 0.
While an absolute score of 50 would mean neutrality, anything above it is perceived as an improvement and less than it would mean deterioration.
Intuitively, it can be seen that the purpose of the PMI is to indicate some degree of confidence level in manufacturing-based company perspectives.
Notably, as PMI is a market sentiment tracker that compares the current month with the previous, it is season sensitive.
Classification of MSMEs
Manufacturing Sector
|
Enterprises |
Investment in Plant and Machinery |
|
Micro Enterprises |
<=25lakhs |
|
Small Enterprises |
25lakh-5crore |
|
Medium Enterprises |
5 cr-10cr |
Services Sector
|
Enterprises |
Investment in Equipments |
|
Micro |
<=10lakhs |
|
Small Enterprises |
10lakh-2crore |
|
Medium Enterprises |
2 cr-5cr |
According to the government’s new definition, businesses with revenue of as much as Rs5 crore will be called a micro enterprise, those with sales between Rs5 crore and Rs75 crore will be deemed as small and those with revenue between Rs75 crore and Rs250 crore will be classified as medium-sized enterprises.
Experts said the new norms will remove the ambiguity about investments in plant and machinery. The definition based on turnover is more rational and objective.
The Micro, Small and Medium Enterprises (MSMEs) play a very vital role in the economy—3.6 crore such units employ 8.05 crore people and contribute 37.5% to the country’s GDP. They contribute 45% to India’s exports and contribute 40% to total manufacturing sector output.
The sector has huge potential for addressing structural problems like unemployment, regional imbalances, unequal distribution of national income and wealth. Due to comparatively low capital costs and their forward backward linkages with other sectors, they are headed to play a crucial role in the success of the Make in India initiative. They are important for inclusive growth as they provide the bulk of industrial employment in the country.
The list of the problems that are faced by existing/new companies in SME sector are as under:
Government Initiatives to promote MSMEs
1.Udyami Mitra Portal – It has been launched by SIDBI to improve accessibility of credit and hand- holding services to MSMEs.
3.MSME Sambandh – The Portal will help in monitoring the implementation of the Public Procurement from MSEs by Central Public Sector Enterprises 4.A Scheme for Promoting Innovation, Rural Industry & Entrepreneurship (ASPIRE)
4.Technology Centre Systems Programme (TCSP): Under this programme, technology centres have been developed for giving technical education and support to MSMEs
U.K. Sinha committee
Government has accepted 39 suggestions by the U.K. Sinha committee appointed by RBI, including the setting up a “fund of funds” for the MSME sector.
Recommendations:
8.Doubling collateral-free loans for MSMEs to Rs 20 lakh, raising the loan limit sanctioned under Mudra to Rs 20 lakh, creating a stressed asset fund of Rs 5,000 crore and a
government-sponsored fund of funds of Rs 10,000 crore to support MSME equity.
RBI’s Restructuring Package for Small Businesses
The Reserve Bank of India’s (RBI’s) restructuring package for small businesses will help recast Rs 1 lakh crore of loans for 7 lakh eligible micro, small and medium enterprises (MSMEs).
Government e Marketplace (GeM),
The Government e Marketplace (GeM), launched in 2016, is an online market platform to facilitate procurement of goods and services by various Ministries and agencies of the Government.
Before the GeM, the government bodies used to procure goods and services based on fixed-rate contracts and tenders through the director-general for supplies and disposal (DGS&D). The GeM leverages technology to make government procurement contact-less, paperless and cashless.
Issues with the procurement process before GeM-
Decentralised Procurement- India spends an estimated 20% of GDP on public procurement and most of it was procured in a decentralized manner. But these purchases in small quantities lose the benefits of economies of scale. Also, they are vulnerable to malpractices because it is very difficult to monitor thousands of small transactions. The Small suppliers, too, find it difficult to reach buyers in other parts of the country without layers of intermediaries, pushing up their costs.
Advantages with GeM
Disinvestment and Privatization
Government classified the Public Sector Enterprises into strategic and non-strategic areas for the purpose of disinvestment.
It was decided that the Strategic Public Sector Enterprises would be those in the areas of:
1.Arms and ammunitions and the allied items of defence equipment, defence aircrafts and warships.
2.Atomic energy (except in the areas related to the generation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries);
3.Railway transport.
All other Public Sector Enterprises were to be considered non-strategic.
Token Disinvestment
Disinvestment started in India with a high political caution in a symbolic way known as the ‘token’ dis- investment (presently being called as ‘minority state sale’). The general policy was to sell the shares of the PSUs maximum up to the 49 per cent (i.e., maintaining government ownership of the companies). But in practice, shares were sold to the tune of 5–10 per cent only. This phase of disinvestment though brought some extra funds to the government (which were used to fill up the fiscal deficit considering the proceeds as the ‘capital receipts’) it could not initiate any new element to the PSUs, which could enhance their efficiency. It remained the major criticism of this type of disinvestment, and experts around the world started suggesting the government to go for it in the way that the ownership could be transferred from the government to the private sector. The other hot issue raised by the experts was related to the question of using the proceeds of disinvestment.
Disinvestment is the sale of shares of the Government to the retail public or employees or mutual funds or the FIIs. In other words, in disinvestment (divestment), there is no change in the management from public to private hands because either the government holds majority equity (51%) or even if the government holds less than 51% of equity, rest of it is sold to various individuals and institutions none of whom holds enough to take over management. It is essentially money-raising exercise with some accompanying benefits.
Strategic Disinvestment
In order to make disinvestment a process by which efficiency of the PSUs could be enhanced and the government could de-burden itself of the activities in which the private sector has developed better efficiency (so that the government could concentrate on the areas which have no attraction for the private sector such as social sector support for the poor masses), the government initiated the process of strategic disinvestment.
The government classifying the PSUs into ‘strategic’ and ‘non strategic’ announced in1999 that it will generally reduce its stake (shareholding) in the ‘nonstrategic’ public sector enterprises (PSEs) to 26 per cent or below if necessary and in the ‘strategic’ PSEs (i.e., arms and ammunition; atomic energy and related activities; and railways) it will retain its majority holding. There was a major shift in the disinvestment policy from selling small lots of shares in the profit-making PSUs (i.e., token disinvestment) to the strategic sale with change in management control both in profit and loss making enterprises.
The essence of the strategic disinvestment was—
(i) The minimum shares to be divested will be 51 per cent, and
(ii) the wholesale sale of shares will be done to a ‘strategic partner’ having international class experience and expertise in the sector.
If the Government sells a chunk of equity to a single buyer- 26% or 51% or more to whom the management is also handed over, it is called strategic sale and the buyer is called strategic partner. It is a case of privatization. The buyer is one who has presence-in- the sector and can add value to the unit.
For example, IPCL being sold to Reliance Industries Ltd(RIL) and Balco is sold to Sterlite.
Government may also sell off a unit to a strategic buyer-entire equity. Strategic buyer is one who not only buys the chunk of entire equity- in one tranche or more but also takes over management. That is the ‘strategic’ part of the sale. It is unlike disinvestment where sale of shares is unaccompanied by management control transfer. The strategic partner gives a higher price for the shares as he gets management control along with it (management premium). Also, running of the unit improves. Privatization and strategic sale are the same.
As mentioned above, disinvestment can be for less than 50% stake sale in which case the company remains a government company.
The advantages with strategic sale (privatization) are that it gets investment. The strategic partner with management control will invest further for diversification and technological improvement; market perception will improve as it is no longer a government company; and shareholder value will increase. With the improvement of the functioning of the company, workers’ protection will also be guaranteed.
The transfer of shares by Government may not necessarily be such that more than 51% of the total equity goes to the Strategic Partner for the transfer of management to take place. In the case of PSUs, in order that the company no longer has the character of a government company, the transfer of shares involves bringing down Government’s shareholding below 51%. In fact, it must be remembered that Companies Act, 1956 only defines a ‘Government Company’, which in common parlance, is a company in which the Government holds more that 51%. PSU is not defined in the Act.
Once the Government’s shareholding goes below 51%, it ceases to be a government company and hence, it requires changes in the Articles of As- sociation of the company especially in relation to the Presidential directives etc.
The Strategic Partner, after the transaction, may hold less percentage of shares than the Government but the control of management would be with him. For instance, if in a PSU the shareholding of Government is 51% and the balance is dispersed in public holdings, then Government may go in for a 25% strategic sale and pass on management control, though the Government would post-transfer have a larger share holding (26%) than the Strategic Partner (25%). It may be noted here that the number 26% has a special significance in Company Law as to get a special resolution passed, one requires at least ¾ majority in a general meeting. Therefore, the 26% block acts as a check. Special resolutions are required under law in case of certain critical decisions by the company such as reduction of capital, alteration in Articles of Association and Memorandum of Association, winding up of the company, issue of share with variation of rights of special classes of shareholders etc. In case of strategic sale of PSUs, Government typically has affirmative rights on several issues, which are much wider in scope than what is provided in Company Law for special resolutions. In fact, the Agreements can be structured such that these rights are exercisable even when Government holding goes below 26%. The other critical number one encounters in Company Law are 10% shareholding, below which one loses voting rights unless specially provided.
Disinvestment in India is seen connected to three major interrelated areas, namely:
(i) A tool of public sector reforms
(ii)A part of the economic reforms started in mid- 1991. It has to be done as a complementary part of the ‘de-reservation of industries. The de-reservation of industries had allowed the private sector to enter the areas hitherto reserved for the central Government. It means in the coming times in the unreserved areas the PSUs were going to face the international class competitiveness posed by the new private companies. To face the challenges, the existing PSUs needed new kinds of technological, managerial and market- ing strategies (similar to the private companies). For all such preparations there was a requirement of huge capital. The government thought to partly fund the required capital out of the proceeds of disinvestment of the PSUs. In this way disinvestment should be viewed in India as a way of increasing investment in the divested PSUs.
(iii) Initially motivated by the need to raise resources for budgetary allocations. (Right since 1991 when disinvestment began, governments have been using the disinvestment proceeds to manage fiscal deficits in the budget at least up to 2000-01. From 2000-01 to 2002-03 some of the proceeds went for some social sector reforms or for labour security. After 2003, India established a national investment fund to which the proceeds of divestment automatically flow).
The approach towards public sector reforms in India has been much more cautious than that of the other developing countries. India did not follow the radical solution to it—under which outright privatization of commercially viable PSUs is done and the unviable ones are completely closed. There was an emphasis on increasing functional autonomy of public sector organisations to improve their efficiency in the 1980s in India as part of the public sector reforms. The government started the process of disinvestment in 1991 itself. The financial year 1999–2000 saw a serious attempt by the government to make disinvestment a political process to expedite the process of disinvestment in the country—first a Disinvestment Department and later a full-fledged Ministry of Disinvestment was set up. The UPA government dismantled the Ministry of Disinvestment and brought the Department of Disinvestment to take care of the matter, working under the Ministry of Finance.
The Department of Disinvestment has been renamed as Department of Investment and Public Asset Management (DIPAM) by the government.
Aim of the renamed department is proper management of Central government’s investments in equity and also its disinvestment proceeds in central public sector undertakings (PSUs).
DIPAM will work under the Union Finance Ministry.
Functions:
Current Disinvestment Policy
The current policy of disinvestment followed by the government is as given below:
(i) Minority stake sale (the policy of November 2009 continues):
(ii) Strategic Disinvestment i.e., selling 50 per cent or more shares of the PSUs(announced in February 2016):
Advantages of Disinvestment (Privatization)
In many areas,e.g., the telecom sector, the end of the public sector monopoly brought relief to consumers by way of more choices, and cheaper and better quality of products and services. Competition made them perform better as outlined above.
11.It would bring more competition into various private sectors thus dramatically improving the quality of service for the customer through the PSU having to compete in a competitive private market.
12.. Helps to promote broader share ownership for the citizens of India and also helps in the development of the capital market in India.
Criticism of Divestment
While the advantages are convincing, the criticism is not to be dismissed with.
3.PSEs contribute by way of dividends and profits and thus are important sources of public finance.
11.It may lead to retrenchment of workers who will be deprived of the means of their livelihood.
Proceeds of Disinvestment: Debate Concerning the Use
In the very next year of disinvestment, there started a debate in the country concerning the suitable use of the proceeds of disinvestment (i.e., accruing to the government out of the sale of the shares in the PSUs).
The debate has by now evolved to a certain stage coming off basically in three phases:
Phase I: This phase could be considered from 1991– 2000 in which whatever money the governments received out of disinvestment were used for fulfilling the budgetary requirements (better say bridging the gap of fiscal deficit).
Phase II: This phase which has a very short span (2000–03) saw two new developments.
First, the government started a practice of using the proceeds not only for fulfilling the need of fiscal deficit but used the money for some other good purposes, such as reinvestment in the PSEs, prepayment of public debt and in the social sector. Second, by the early 2000–01 a broad consensus emerged on the issue of the proposal by the then Finance Minister. The proposal regarding the use of the proceeds of disinvestment was as given below:
Some portions of the disinvestment proceeds should be used:
(i) in the divested PSU itself for upgrading purposes
(ii) in the turn-around of the other PSUs.
(iii)in the public debt repayment/prepayment
(iv)in the social infrastructure (education, healthcare, etc.)
(v) in the rehabilitation of the labour-force (of the divested PSUs) and
(vi) in fulfilling the budgetary requirements.
Phase III: Two major developments of this phase are as given below:
(a) The proceeds from disinvestment will be channelized into the NIF, which is to be maintained outside the Consolidated Fund of India.
(b) The Fund will be professionally managed, to provide sustainable returns without depleting the corpus, by selected Public Sector Mutual Funds eg. UTI Asset Management Company Ltd.
(c) 75 percent of the annual income of the Fund will be used to finance selected social sector schemes, which promote education, health and employment. The residual 25 per cent of the annual income of the Fund will be used to meet the capital investment requirements of profitable and revivable PSUs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification.
(d) The income from the NIF investments was utilized on selected social sector schemes, namely the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), Accelerated Irrigation Benefits Programme (AIBP), Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY), Accelerated Power Development and Reform Programme, Indira Awas Yojana and National Rural Employment Guarantee Scheme (NREGS).
Draft e-Commerce Policy
The government has released the draft national e-commerce policy. The National e-Commerce Policy aims to create a framework for achieving holistic growth of the e-commerce sector alongwith existing policies of Make in India and Digital India.
Need for an e-Commerce policy
Data Ownership: In the age of e-Commerce, companies control large amounts of customer data. The questions related to control of an individual over his own data or government accessing the data of its citizens, need to be answered.
Rapid growth of e commerce: The Indian B2C e-commerce market was valued at $38.5 bn in 2017 and is estimated to rise to $200 bn in 2026, while B2B e-commerce was estimated to be around $300 bn.
Presence of multiple regulators: The specific issues in e-Commerce are the subject matter of different statutes – Information Technology Act 2000, Competition Act 2002, Consumer Protection Act 1986 etc. – and involves multiple government departments. Hence, a national e-commerce policy would consolidate the various norms and regulations to cover all stakeholders.
Other regulatory issues: Government is finding existing regulations inadequate to deal with issues thrown up by the digital economy. For instance, authorities cannot impose ‘custom duty’ on digital transactions. Regulators find it difficult to hold entities responsible that have physical presence abroad.
Consumer Protection: A strong regulatory regime would address the issues of frauds in online sale and protect the interest of consumers.
Digital Infrastructure: There is a lack of requisite connectivity required for e-Commerce & digital literacy in many parts of the country. New e-Commerce policy will address such structural issues.
Inequality in opportunity among businesses: Enterprises with deep pockets indulge in large scale discounts online, even selling at a loss, which has threatened the existence of small businesses. A policy is needed to provide a level-playing field to all stakeholders, including consumers, MSMEs & start-ups.
International Trade Outlook: A new policy will preempt any possible obligations on e-commerce imposed by WTO. Creating binding obligations, like permanent moratorium on imposing customs duties on electronic transmissions, would lead to loss in revenue of developing countries like India.
Strategy proposed in the Draft Policy
Data: The policy acknowledges the importance of data as a ‘national asset’/ ‘societal common’ and seeks to establish a legal & technological framework to restrict cross-border flow of data generated in India. It calls for creating domestic standards for devices which are used to store, process and access data to increase interoperability, enhance data security and prevent violation of privacy.
Restrictions on Cross border flow of Data: Stricter restrictions are sought to be brought in through the draft policy on the cross-border flow of data generated by users in India, including ecommerce platforms, social media, search engines etc. Data collected or processed in India, even if stored abroad, cannot be shared with other business entities outside India, even with the customer consent. Such data cannot be made available to a foreign government, without the prior permission of Indian authorities and immediate access to all such data is to be given to Indian authorities upon request. These restrictions seek to exercise sovereignty over data.
Establishment of Data Authority: As per the draft policy, a data authority shall be set up along with a suitable framework for sharing of community data that serves ‘larger public interest’.
Infrastructure Development: It recommends providing ‘infrastructure status’ to supporting digital infrastructure like data centres, server farms for data storage, towers, optical wires etc. Designated implementing agencies should establish requisite physical infrastructure (like power supply, internet connectivity etc.). Also, domestic alternatives to foreign-based clouds and email facilities should be promoted.
FDI Policy: The policy aims to clearly demarcate between a marketplace model & an inventory-based model and seeks to encourage FDI in the ‘marketplace’ model alone (not inventory based model).
Small enterprises and start-ups: small firms and start-ups attempting to enter the digital sector can be given ‘infant-industry’ status.
Registering in India: All ecommerce sites/apps which are available for download in India must have a registered business entities in India. This is important for ensuring compliance with extant laws and regulations.
Content Liability: Online platforms and social media (‘intermediaries’) must bear the responsibility & liability to ensure genuineness of any information posted on their websites.
Regulatory Issues: Issues related to e-Commerce fall under the ambit of different Ministries, Departments as well as State Governments while also being the subject matter of different statutes. The Standing Group of Secretaries on e-commerce (SGoS) shall give recommendations to ensure that the policy keeps pace with the digital environment.
Stimulating the Domestic Digital Economy: It intends to increase use of internet in day-to-day governance and economy. It also suggests creation of industrial standards for smart devices and IoT equipment; minimizing procedures and documentation etc.
Export Promotion Through E-Commerce: The transaction procedures must be simplified to increase competitiveness of e-commerce exports.
Anti-counterfeiting measures are also suggested, including trademark protection, seller details being made available on the marketplace etc.
Issues with the new policy
Treating an individual’s data as a collective property and national asset that the government holds in trust for its citizens implies that the government does not trust its citizens to make the right choices about their personal data. This is in contradiction with the recommendations of the Justice Srikrishna committee and SC’s decision in its right to privacy judgement.
Many Indian companies use the facilities of cloud-based storages and solutions like Amazon Web Services (AWS). Mandating these companies to store in locally will affect their operational cost and efficiency.
WTO Members Pushing for New e-Commerce Rules
E-commerce has become a huge component of the global economy. A WTO report put the total value of e-commerce in 2016 at $27.7 trillion, of which nearly $24 trillion was business to business transactions.
Impatient with a lack of World Trade Organization rules on the explosive growth of E-commerce, 76 members, including the United States, China, the European Union and Japan agreed to start negotiating a new framework. Recently, China also signalled conditional support for the E-Commerce initiative but said it should also take into account the needs of developing countries
Opposite Views
India’s stand: India did not join the initiative as it believes that the WTO should finish off the stalled but development oriented ‘Doha Round’ of talks before moving into new areas.
Developed Countries view: The global trade rulebook is rapidly becoming outdated and needs to keep up or become obsolete.
National Policy for Software Products
The Union Cabinet has recently approved a national policy on software products which aims to position India as a Software Product nation and create 35 lakh jobs by 2025. An initial outlay of Rs.1500 Crore is involved, divided into Software Product Development Fund (SPDF) and Research & Innovation fund, to implement the programmes/schemes envisaged under this policy over the period of 7 years
Need of a New Policy
On the other hand, import of Software Products is estimated to be nearly 10 billion USD, so as such India is a net importer of software products at present.
Five Missions of the Policy
Minimum Operating Price
MOP is the price consisting of landing price, operational cost and reasonable profit margin and below the MOP no product should be sold in the market.
The traders’ body has alleged that e-commerce companies and brands in collusion with banks, by charging much lower price (through deep discounts) than the actual market value is depriving the government of GST and other revenue.
In an effort to create a level playing field for online and offline retailers, the Confederation of All India Traders (CAIT) has written to government seeking implementation of a “minimum operating price” (MOP)
Other measures recommended by CAIT are:
Sugar Industry
The Union cabinet recently approved the creation of a buffer stock of 4mt of sugar. The buffer stock will be created for one year from August 1, 2019, to July 31, 2020, for which the government would be reimbursing the carrying cost of about ₹ 1,674 crore to participating sugar mills.
The reimbursement under the scheme would be met on quarterly basis to sugar mills which would be directly credited into farmers’ account on behalf of mills against cane price dues and subsequent balance, if any, would be credited to the mill’s account.
The step is aimed at increasing wholesale prices of sugar and improving cash flow to sugar mills, which in turn will help mill owners to clear the dues of farmers. Since the 2019-20 marketing year is likely to commence with huge carryover/opening stock, building a sugar buffer stock will help maintain demand-supply balance and to stabilize sugar prices.
The cabinet also approved a proposal on the fair and remunerative price (FRP) of sugar cane payable by sugar mills for the 2019-20 sugar season, at the same rate as was offered in 2018-19.
Sugar industry in India
India is the largest producer of sugar including traditional cane sugar sweeteners, khandsari and Gur equivalent followed by Brazil.
Sugarcane provides raw material for the second largest agro-based industry after textile.
Broadly there are two distinct agro-climatic regions of sugarcane cultivation in India, viz., tropical and subtropical.
Sugarcane Pricing mechanism in India
There are mainly two prices for sugarcane
Fair and Remunerative Price (FRP): It is the cane price announced by the Central Government on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP) after consulting the State Governments and associations of sugar industry.
State Advised Prices (SAP): Citing differences in cost of production, productivity levels and also as a result of pressure from farmers’ groups, some states declare state specific sugarcane prices called State Advised Prices (SAP), usually higher than the FRP.
This dual sugarcane pricing distorts sugarcane and sugar economy and leads to cane price arrears. High SAPs without any linkage with the output price becomes unviable. Industry association recommends to remove the system of SAP; in case states announce SAP, such price differential should be borne by the state governments.
Shifting trend of sugar industry to peninsular India
Apart from Uttar Pradesh, in recent years many peninsular states like Maharashtra, Karnataka, Tamil Nadu etc. have emerged as major producer of sugar which has also caused sugar mill industries to shift to peninsular India.
The reasons for this shift are better conditions available for cultivation in the peninsular part like longer crushing period, adequate rainfall, higher recovery rates, higher sucrose content than northern India, easier transportation access due to port areas, higher yields etc.
Challenges faced by Sugar Industry in India
Low level of productivity of sugarcane: Due to inadequate irrigation facilities and untimely supply of quality seed material. Average rate of recovery in India is less than ten per cent which is quite low as compared to other major sugar producing countries.
Inefficient govt policies: More problems of sugar industry are the result of the Government policy regarding to the policies on the cane prices, control of price of sugar, etc.
Seasonal nature: The sugar industry has a seasonal character and the crushing season normally varies between 4 and 7 months in a year leaving the mill and the workers idle for almost half of the year
Problem of By-products: An important problem of sugar industry is the utilization of byproducts specially bagasse and molasses. The industry faces problems in disposing these by-products especially under pollution control devices.
High cost of production of Sugar: The inefficiency in production in sugar mills, low yield, the high price of sugarcane and the heavy excise duties levied by the Government – these are responsible for the high cost of production of sugar in India.
Obsolete and old machinery: Majority of the machines which are currently in use in sugar mills across India, mainly in states like Bihar and Uttar Pradesh, are obsolete and old.
Small and uneconomic size of mills: Most of the sugar mills in India are of small size with a capacity of 1,000 to 1,500 tonnes per day. This makes large scale production uneconomic. Many of the mills are economically not viable.
Uncompetitive in global markets: The FRP (Fair and Remunerative Price) is decided by the central government every year at the beginning of sowing cycle; which is the minimum price the sugar-mill has to pay to the farmers for procuring sugarcane.
Furthermore, some state governments also announce SAP and, in that case, the mills have to pay FRP or SAP (State Advised Price), whichever is higher. Internationally, the FRP/SAP declared by the Indian government for sugarcane is very high compared to other major producers in the world. Brazil has linked the sugarcane prices in line with global sugar prices. The sugar price is market driven and is governed by domestic and global demand-supply dynamics.
The recommendation of the Rangarajan committee to determine the sugarcane price as a percentage of the sugar price and realisation of its by-products has not been implemented by the sugar producing states, which makes Indian sugar uncompetitive in the international market. Furthermore, the rising inventory level coupled with virtually no export (because of relatively lower international prices) has resulted in sluggish price trend.
India has been regularly producing more sugar than the demand. Similarly, global sugar production during last five years has also exceeded the total requirement in the world. The surplus stock has not only impacted the sales realisation and squeezed the operating spread of sugar mills but also forced closure of small and medium-sized mills and consolidation in some geographies.
Declining trend of sugar prices and consistent increase in the FRP declared by the government have resulted in moderation in operating margins of sugar mills and delay in payment to farmers for sugarcane procured by the sugar manufacturers.
Recommendations of Rangarajan Committee on the Regulation of Sugar Sector in India:
Steps taken by Government to support Sugar Industry
Ethanol Blended Programme (EBP): It seeks to achieve blending of Ethanol with petrol with a view to reduce pollution, conserve foreign exchange and increase value addition in the sugar industry enabling the mill owners to clear cane price arrears of farmers. The Central Government has scaled up blending targets from 5% to 10% under the EBP.
National Policy on Biofuels, 2018: Under this policy sugarcane juice has been allowed for production of ethanol.
Scheme for Extending Financial Assistance to Sugar Undertakings (SEFASU-2014): It envisages interest free loans by bank as additional working capital to sugar mills, for clearance of cane price arrears of previous sugar seasons and timely settlement of cane price of current sugar season to sugarcane farmers.
