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Indian Economic Policy

Notes amended the Monopolies and Restrictive Trade Practices (MRTP) Act. This eliminated the need for
prior Government approval for new investment, capacity expansion and mergers by large firms. At
the same time, the scope of Public Sector Units (PSUs) was restricted to the provision of infrastructure
services. Complete privatization was introduced in the late 1990s, which made slow progress with
the first major successful privatisation taking place in 2001. As a result of the above changes, a separate
set of policy measures were introduced for the promotion and strengthening of Small-Scale Industries
(SSIs) in August, 1991. We find that this new policy statement was a clear re-affirmation of the
commitment of the Government towards the importance of this sector in economic growth objectives.
In this policy, Government proposed to impart more vitality and growth impetus to the sector to
enable it to contribute its mite fully to the economy, particularly in terms of growth of output,
employment and exports. In the process, the sector was substantially delicensed and investment
limits in plant and machinery were increased. On the whole, firms operating in the Indian market in
the pre-reform period (before 1991) faced barriers to entry due to Government control over private
investment. It was done through the licensing regulations, reservation of production for the public
sector and lengthy and opaque procedures for approving Foreign Direct Investment (FDI). These
were further subject to a maximum limit of 40% equity share in the business.
17.2 Small-Scale Industries in India

For defining Small-Scale Industries (SSIs), there is no single functional economic criterion. Specific
circumstances have defined the SSIs in different countries. The SSI is a relative concept and has to be
understood in the context of the stage of economic development attained and the political and social
environments existing in the country concerned. In India, SSIs were not given so much importance
during the British rule as is given today. Apparently, most countries define Small-Scale Industries or
enterprises in terms of employment levels. Generally, SSIs are taken to be those units, which employ
more than 5 but less than 50 or 100 workers. In India, investment ceilings are also used to define SSIs.
This limit in 1950 was upto Rs. 0.5 million in fixed assets employing less that 50/100 persons with or
without power. Later, from 1960 onwards, there are no conditions regarding employment but
investment limit has been raised to keep up with inflation and hence to preserve the real value of
investment limits. In 1999, the investment limit was fixed at Rs. 10 million.
Since independence, Small-Scale Industry (SSI) has been one of the major planks of India’s economic
development strategy. The key elements of India’s policy for the support of small-scale industries
have been small-scale industry reservations, fiscal concessions by way of lower excise duties,
preferential allocation of and subsidisation of bank credit, extension of business services by the
Government and preferential procurement by the Government. Thus, small-scale industry has been
sought to be protected from the competition of large companies both through reservations as well as
fiscal concessions. The rationale for protection of SSIs from the viewpoint of the SSIs is that distortions
in the capital are much more important than those in the labour market. Moreover, in the land market,
small enterprises could face greater regulatory hurdles in achieving appropriate access to land.
Similarly, the SSIs make economical use of capital and absorb abundant labour supply which
characterises an under developed economy. Recently, it is being asked if protection of SSIs still relevant.
There has been vast growth of small units over the years. In the process, the Governmental structure
for technical support of SSIs has become both obsolete and inadequate. Further, with the opening of
the economy, the reservation policy has become counter productive. In addition to this, the fiscal
concessions can also be operating so as to discourage growth into large units. Thus, a new approach
for supporting small-scale industries has to be adopted in India.
Globalisation and Small Industry Units Performance in India : Because of its significant role in
terms of output, exports and employment, SSI is important for India. There were 3.4 million small
industry units at the end of March 2002 and accounted for more than 40% of gross value of output in
the manufacturing sector, about 35% of total exports, and providing employment to over 19.2 million
people. The employment in this sector is second only to agriculture. The cumulative impact of
liberalisation and globalisation and recent developments is a remarkable transformation of the
economic environment. Now, SSIs operate in an environment where it has no option but to compete
or perish in the process. There are two ways to evaluate growth performance of small industry :

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