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Indian Growth Industry

Chapter 9

Industry Dynamics

Since F04, the Indian economy has been moving on to a high growth path. The notable aspect of this high growth is that it is driven primarily by industry and services sector. India's industrial sector, which witnessed an average growth of around 5.5% upto 1990s, peaked in FY07. The industrial sector grew by an impressive 11% in FY07. The high growth in industrial sector has enabled the country to achieve sustainable economy growth.

This Chapter seeks to provide an insight into the dynamics of the Indian industrial sector. In this endeavour we begin by providing an analysis of the trends in Index of Industrial Production (IIP), going further to provide brief insights into the state-wise distribution of the industrial sector and Small Scale Industrial sector in India. The chapter also intends to analyse trends in investment (both domestic and foreign direct investment). A brief insight into the Public Sector Units (PSUs) and disinvestment is provided towards the end.

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9.1 Trends in Index of Industrial Production

In India, the first official attempt to compute the growth in the general level of industrial activity was made way back in 1937 through compilation of Index of Industrial Production that covered 15 industries. After 1937, base year was changed at various intervals in order to capture the changing composition of industrial production and emergence of new products and services as well as to measure the real growth of industrial sector. The latest series with 1993-94 as the base year containing 543 items came into existence on 27-May-1998.

A detail analysis of industrial production as measured by Index of Industrial Production (IIP) reveals that the industrial production grew at an average rate of 5.4% during the first three decades after the independence. The low level of growth, particularly since mid-60s upto 1980, can be largely attributed to the lack of investment demand due to the industrial licensing regime. Further, the controls on production and capacity expansion of private sector and widespread of public sector had adverse impact on efficient utilisation of resources, which was reflected in the high incremental capital output ratio (almost 6.6%) during the 1970s. Besides, a number of exogenous shocks like the devastating three-year drought of 1965-68, the downturn in the availability of foreign resources and the oil price shocks of 1973 and 1979 had adverse impact on growth of industrial production. For instance, the sharp rise in international oil prices by OPEC in response to the Yom Kippur war of October 1973 led to high inflationary pressures in the domestic economy. The inflation in fuel group rose substantially to 18.6% during FY74 as compared with 3.97% during the previous fiscal, pushing the headline inflation to 20.2% (from 10% during FY73). High raw material costs due to rising prices of fuel and several other commodities weighed down the growth in industrial production during 1973-75.

With the gradual liberalisation of industrial and foreign trade policy during 1980s, growth in industrial production witnessed substantial increase and registered an average growth of 7.8%. The substantial growth in infrastructure industries (growth in the composite index of six infrastructure industries averaged at 7.46% during FY83-FY90) also played a critical role in the growth of industrial production. Moreover, in the 1980s, sectors, such as automotive industry, cement, cotton spinning, food processing and polyester filament yarn industries experienced modernisation and expansion of production of scale. This had a positive impact on the overall manufacturing sector. Growth in manufacturing sector averaged at 7.41% during 1980s driven by food products, textile products, rubber, plastic, petroleum & coal products and basic metal & alloy industries.

In addition, there was a rise in public sector investment in infrastructure sector which gave a boost to capital goods sector. Growth in capital goods sector averaged at around 11.50% during FY82-FY90. Further, consumer durables sector witnessed a strong growth (averaged at 14.64% during FY82-FY90) thus revealing the impact of industrial and trade reforms initiated by the Government on consumption demand.

IIP continued to grow above the 8% mark in FY91, driven primarily by food products, cotton textiles, basic metal & alloy industries and machinery & equipment other than transport equipment industries which together contributed almost 61.5% of growth in IIP. High growth experienced in these sectors was further manifested in the performance of capital goods and consumer durables sector which registered an impressive growth of respectively 16.02% and 10.46% during the same period. However, high growth in industrial production witnessed during 1980s and FY91 could not be sustained during the subsequent year due to the Balance of Payments crisis (1991). This led to severe imports compression, which resulted in a decline in imports (in dollar terms) by almost 20%. The decline in imports that affected production of import-intensive industries coupled with the tightening of credit availability and subdued demand conditions owing to a decline in agriculture output (particularly food grains) and slowing down of overall economic growth had dampening impact on the industrial activity. In FY92, growth in IIP slumped to mere 0.61%, with as many as ten out of seventeen major manufacturing categories within manufacturing sector registering negative growth. This pulled down growth in manufacturing sector to -0.77%. The decline in production of various industrial sectors was further reflected in the performance of capital goods (-8.57%), intermediate goods (-2.20%) and consumer durables (-10.72%).

Post liberalisation, the manufacture of commodities that required imported inputs/components and/or commodities which could be supplied through domestic assembly (like computer hardware) witnessed substantial increase. As a result, growth in IIP picked up during FY93-FY97 and registered an average growth of 7.38%. During the same period, IIP posted its highest ever growth of 13.02% (FY96). Within manufacturing sector, food products, beverages, tobacco & related products, cotton textiles, basic chemicals & chemical products, basic metal & alloy and transport equipment & part industries witnessed substantial growth, together contributing 60% to growth in IIP. With the overall recovery in industrial activity, investment demand displayed a significant rise and had positive impact on growth in capital goods sector. At the same time, consumer durables sector grew by 13.43%.

Source: CSO and D&B Research

In spite of a recovery in the manufacturing activity, growth in the mining & quarrying industry declined during FY93-FY97. The sector registered a negative growth of 1.91% in FY97 (the lowest growth since 1982), pulling down growth in IIP by 3.33%. Mining & quarrying sector had witnessed a considerable slowdown since mid-1980s due to a decline in capital expansion in this sector amidst fiscal constraints. Besides, the poor quality of available deposits of certain minerals such as gold, copper and metallurgical coking coal adversely impacted the growth of the industry post liberalisation. Prior to trade reforms when India had high tariff rates and severe import constraints, extracting very lean ore at a high cost was viable. However, after liberalisation and trade reforms, metal companies were allowed to import good quality ores at low tariffs. This coupled with low capacity utilisation had adversely impacted the domestic mining & quarrying industry.

During FY98-FY02, growth in mining & quarrying sector slowed down further and averaged at 2.25%. Further, the capacity expansion by domestic companies which peaked during mid-1990s led to an over-capacity situation to a certain extent during FY98-FY02. This coupled with a huge inventory build-up resulted in lower demand for new investment. A decline in domestic demand for intermediate goods, low inventory demand for capital goods and infrastructure constraints (particularly in power and transportation sector) and high interest rate regime together led to a considerable moderation in production growth across the sectors. Growth in manufacturing sector declined to 5.28% during FY98-FY02 as compared with 8.05% during FY93-FY97. Within manufacturing industries, cotton textiles, basic metal & alloy industries and transport equipment & parts industries significantly slowed down.

During FY03-FY07, industrial production begun to march on to a high growth path (shown in Fig 9.1), posting an average growth of 8.17%. An upsurge in industrial output was mainly attributed to increase in exports, relatively lower interest rates & availability of retail finance that stimulated demand for consumer goods and liberalisation in foreign direct investment (FDI) policy. On a sectoral basis, growth in manufacturing sector increased considerably driven primarily by Basic chemicals and chemical products (except products of petroleum & coal), Basic metal & alloy industries, Machinery & equipment other than transport equipment and Transport equipment & parts. These sectors together contributed more than 50% of the growth in manufacturing output.

Further, high growth in Basic metal and alloy industries as well as Machinery & equipment other than transport equipment sectors benefited capital goods sector. In recent years, the country has witnessed IT boom which has led to rising income levels. This coupled with improved availability of credit led to boom in real estate sector and automobile industry, which in turn helped to accelerate growth in consumer durables sector.

Table 9.1 : Major Contributors to Growth in Index of Industrial Production

Weight in IIP

FY98-FY02

FY03-FY07

FY03

FY04

FY05

FY06

FY07

Mining & Quarrying

10.47

4.26

6.10

10.69

7.92

5.61

1.30

5.00

Manufacturing

79.36

84.28

87.35

83.61

84.65

88.03

92.01

88.45

Electricity

10.17

11.47

6.54

5.70

7.43

6.35

6.69

6.55

Used Based Classification:

Basic Goods

35.57

28.30

28.74

29.99

27.94

23.88

29.92

32.00

Capital Goods

9.26

7.77

16.77

16.83

18.16

15.71

18.36

14.76

Intermediate Goods

26.51

29.46

19.62

17.90

24.34

19.61

8.37

27.89

Consumer Goods:

28.66

34.47

34.87

35.27

29.57

40.80

43.36

25.35

Consumer Durables

5.37

12.68

5.43

-5.85

9.00

9.38

10.32

4.31

Consumer Non Durables

23.30

19.41

30.44

48.74

19.50

30.62

32.11

21.22

Source : CSO & D&B Research

9.1.1 Major Contributors to Growth in Industrial Production

While detailed insights on various industrial sectors are provided separately in Chapter Sectoral Overview, in this chapter we seek to provide a brief insight into industries which have witnessed strong growth in last few years. A detail analysis of industrial production data reveals that some of the sectors like food & beverages, basic chemicals & chemical products, basic metal & alloy, machinery & equipments and transport equipments & parts have grown significantly in last few years and have emerged as major contributors to IIP growth.

For example, the Indian chemical industry has grown significantly since independence. During the pre-liberalisation period, protectionist measures like import substitution policy and high tariff walls played a key role in the development of the industry. In addition, between the period late 1960s to 1980s, the domestic fertiliser and pharmaceuticals industries witnessed strong growth, which in turn accelerated growth in the chemical industry in India. However, after liberalisation and trade reforms, the reduction in tariff rates exposed domestic chemical companies to competition from their international counterparts. This indeed had a positive impact on the Indian chemical industry (as Indian companies were required to undertake various initiatives like research & development, development of technological capabilities in order to increase competitiveness). During the same period, major investment plans by both Indian companies and MNCs were initiated. Besides, the shift in demand towards low cost products in the global chemical industry in last few years helped the chemical industry in India to grow further. The Indian chemical companies have benefited the most from this trend as they have developed capability to produce several basic chemicals in a cost effective manner over the years. Further, the ability to produce bulk generic chemicals at low cost has encouraged several Multi National Companies (MNCs) to invest in India. The basic chemicals & chemical products industry grew at an average rate of 8.96% during FY03-FY07 backed by domestic demand as well as rising exports of drugs & pharmaceuticals and fine chemicals.

Besides chemicals industry, basic metal & alloy and machinery & equipments (other than transport equipments) have evolved as one of the key contributors to the IIP growth. The establishment of public sector companies in basic metal & alloys sector laid foundation of this industry. However, the sharp rise in the growth of basic metal & alloys industry was witnessed mainly after liberalisation which introduced various policy reforms (such as delicensing of industries, declining role of public sector companies, etc). Moreover, the rise in investment expenditure for capacity building by private sector companies as well as overall economic growth that raised demand for steel, non-ferrous metals & alloys provided an impetus to the industry. At the same time, strong growth in manufacturing activity spurred demand for machinery & equipments. For instance, the boost in automobile & auto ancillary industries led to sharp rise in demand for die-moulds and cutting tools. Besides automobile industry, robust growth in electronics, consumer durables, IT products, telecom and packaging industries has spurred demand for machinery & equipments.

The automobile industry is yet another sector which has grown at rapid pace after 1990s. This mainly came on the back of various tax reliefs provided by the Government in order to promote the sector, liberalised imports and rise in FDI. In addition, relatively lower interest rates since FY02 and increased availability of credit have stimulated demand for auto industry in India. The high growth in auto sector has further been manifested in rising industrial production of transport equipments.

Further, rising household incomes, increasing urbanization, changing lifestyles and evolution of big retail stores (supermarkets, malls, etc) has led to the sharp rise in demand for food products, especially milk-based products like processed cheese, butter and ice cream. Besides, certain Government initiatives like development of food parks, warehousing and cold chain facilities also helped to accelerate growth in the food & beverages industry.

While the above mentioned sectors witnessed high growth in recent years, sectors like Leather and leather & fur products and rubber, plastic, petroleum and coal products industries that were on high growth path upto FY02, experienced a decline in growth during FY03-07.

Box 9.1: Indian - An Emerging Global Manufacturing Hub

While the advent of the information technology revolution and business process outsourcing led to rapid growth of the services industry in India, poor infrastructure, bureaucracy and restrictive labour laws had restrained growth of the manufacturing sector for quite a long period. However, things are changing rapidly with an increasing number of Multinational Companies (MNCs) (like Huyndai, Ford Motor Co, Matsushita, Toyota, GE, Siemens, LG, Motorola and Nokia, etc) establishing their manufacturing operations in India. The advantages the country offers in terms of availability of skilled manpower at relatively low costs, the huge domestic market and significant cost reductions in logistics and inputs are expected to enable India emerge as one of the world's most attractive manufacturing destination.

Besides, Government has taken various initiatives in order to remove the infrastructure bottlenecks. These initiatives include:

  1. The introduction of several projects to improve road and port transportation; which includes the largest road networking project, The National Highway Development Programme

  2. The introduction of New Telecom Policy in 1999 which significantly reduced telecom costs

  3. The introduction of Electricity Bill which allowed the increased participation of the private sector companies in the power sector

  4. The rationalisation of corporate tax and indirect tax structure

Meanwhile, with the changing trends in the manufacturing activity, certain functions which were earlier linked to the manufacturing chain like Research & Development, marketing, customer support are being largely outsourced in order to make the operations economical. The emerging trend has benefited many companies in India.

9.2 Trends in Index of Six Infrastructure Industries

While we analyse growth trends in India's industrial production, it is essential to look into the performance of six core infrastructure industries as it has played a crucial role in the IIP growth. An analysis of data on infrastructure industries reveals that growth in the composite index of six infrastructure industries averaged at 7.84% during FY83-FY87 driven primarily by electricity, cement, crude petroleum and petroleum refinery products. The crude petroleum sector registered an average growth of 14.03%, contributing almost % to the growth in six infrastructure industries. The robust growth displayed by crude and petroleum sector was mainly due to the rapid growth of crude oil production following the discovery of Bombay High - an offshore field.

Growth in the six infrastructure industries, however, witnessed a witnessed a generally decelerating trend between the period FY88 to FY94 on account of reduction in public sector investment in infrastructure sector due to fiscal constraints. On an average, growth in the composite index of six infrastructure industries declined to 6.43% during FY88-FY92 and further to 4.26% during FY93-FY94. The impact of a decline in growth six infrastructure industries was further manifested in slowing down of industrial activities.

Growth in the infrastructure sector, however, picked up during FY96-FY97 and registered an average growth of 7.15%. An upsurge in growth of six infrastructure industries was backed by a substantial increase in production of finished steel and cement which contributed almost 48% to the growth in composite index of six infrastructure industries.

This high growth in six-infrastructure industries was, however, short lived. The composite index for six infrastructure industries posted an average growth of 5.18% during FY98-FY02. Barring petroleum refinery products, growth in all major categories in six infrastructure industries displayed moderation. The substantial decline was witnessed in crude petroleum sector due to declining production following the closure of wells in offshore fields and low reserve accretion. The sector registered an average growth of -0.5%, thus pulling down growth in the composite index of six infrastructure industries by 3.31%. Further, the Table 9.3 indicates that a decline in growth of crude petroleum sector had adverse impact on industrial production as well. It weighed down the IIP growth by 0.75%.

Table 9.3 : Contribution of Six Infrastructure Industries to the growth in Index of Industrial Production (IIP)

(percentage)

Weight in IIP

FY98-FY02

FY03-FY07

FY03

FY04

FY05

FY06

FY07

Composite Index

26.68

27.53

21.46

23.38

23.58

18.79

20.53

21.02

Electricity

10.17

11.47

6.54

5.70

7.43

6.35

6.69

6.55

Coal

3.22

1.80

2.35

2.58

2.38

2.41

2.70

1.69

Finished Steel

5.13

6.36

6.28

6.57

7.24

5.22

7.04

5.34

Cement

1.99

2.99

2.23

3.08

1.74

1.59

3.12

1.62

Crude Petroleum

4.17

-0.75

0.64

2.52

0.44

0.94

-2.78

2.06

Petroleum refinery products*

2.00

4.48

1.58

1.72

2.39

1.04

0.54

2.19

Source : CSO & D&B Research

Growth in six infrastructure industries recovered once again during FY03-FY07 and posted an averaged growth of 6.37%. Electricity and finished steel industries together contributed as much as 65% to the growth in six infrastructure industries. Although electricity sector accounts for one of the key contributor to the growth in infrastructure industries, growth in the electricity sector has shown some moderation, manifesting the decline in public investment.

In recent years, finished steel sector has emerged as one of the major contributor to the growth in infrastructure industries. Finished steel sector witnessed a significant rise in production after liberalisation. An upsurge in growth of finished goods sector is mainly due to various reform measures like abolition of licensing requirements for reform measures, removal of steel industry from list of industries reserved for public sector, removal of price and distribution controls, etc.

Further, the huge investments planned in the infrastructure sector both by the Government and private sector and booming construction sector have led to rise in cement output in recent years.

9.3 State-wise Distribution of Industries

The Indian Industrial sector has witnessed considerable expansion as can be concluded from the discussion in the previous section. However it is important to note here that, although the industrial sector in Indian has registered significant growth the data on state-wise distribution of industries reveals that growth in industrial sector has not spread uniformly across the country. According to the latest Annual survey of Industries (ASI) (2004-2005), out of the total 28 states and 7 union territories in India only six states viz. Maharashtra (19.74), Gujarat (13.86), Tamil Nadu (8.30), Karnataka (7.90), Jharkhand (6.46) and Andhra Pradesh (6.13) account for more than 62 percent of the net value added in the organized industrial sector. Thus these states have contributed significantly towards industrial development in India. However other states particularly some northern and north eastern states have lagged behind in the process of industrial development.

Over the years the state governments have taken many measures to provide conducive climate for industrial development. For example the state Government of Andhra Pradesh enacted Industrial Single Window Clearances Act, (effective June-22-02) for speedy processing and issue of various approvals/clearances/ permissions required for setting up of an Industrial undertaking and also to ensure creating an investment friendly environment. The robust growth of industrial sector in few states can in part be attributed to the pro-active and supportive policy regimes, development of infrastructure, labour market flexibility, enhanced factor productivity and improved availability of industrial finance.

In accordance with the Central Governments policy, State Governments have also carried out industrial policy reforms leading to reduction in the industrial licensing requirements, removal of restrictions on investment & expansion. State governments have been encouraged to compete with one another for attracting foreign investment. As a result many attractive incentives are being offered to various industries and investors. For example tax benefits fro industries setup in backward area offered by the State government of Maharashtra; several state governments have set up 'single-window clearance facilities' and 'investor escort services' to smoothen the passage of investment proposals.

The liberalised industrial climate has also facilitated easy access to foreign technology as well as foreign direct investment. The state-wise information on industrial investment (through IEM, LoI and 100% EOU) for states in India reveals that Gujarat, Maharashtra, Chhattisgarh, Andhra Pradesh are among the most favoured destination for industrial investment in the country. These states account for almost 45.5% of the proposed industrial investment in the country.

9.4 Small Scale Industrial Sector in India

Small Scale Industries form an important segment of the Indian economy not only in terms of their contribution to industrial production and exports but also in terms of employment generation and creation of an entrepreneurial base. Thus, the SSI sector in India has gained significant importance in the industrial policies. The foundation of the policy for small scale industry was laid in the Second Five Year Plan (1956). The development of Micro, Small and Medium Enterprises (MSMEs) was recognised as an effective tool to expand employment opportunities, to ensure equitable distribution of the national income and facilitate effective mobilisation of private sector resources of capital and skills. Hence, small scale sector was guarded with various protectionist measures such as reservation of items for their exclusive manufacture, access to bank credit on priority through Priority Sector Lending Programme, various tax incentives, reservation under the Government Purchase Programme and 15% price preference in purchases. Besides, the Government established the Small Industries Development Bank of India (SIDBI) in 1990, as the apex refinancing institution for small businesses. Reservation of items for exclusive manufacture in MSME sector has been one of the important policy measures for promoting this sector.

While these supportive measures benefited small scale sector to some extent, it increased dependence of small scale sector on subsidies, concessions and reservations for their survival leading to adverse impact on their productivity and efficiency. Therefore, in order to promote, strengthen and liberalise the small, tiny and village enterprises, the government of India announced the New Small Enterprises Policy on August 6, 1991. During the post liberalisation period many initiatives aimed at easing regulations and controls coupled with supportive measures like the Delayed Payment Act, schemes for ISO-9000 quality certification, the Prime Minister's Rozgar Yojana, credit guarantee scheme, cluster development initiatives etc have been undertaken. The reservation policy was relaxed gradually with an aim to provide SSI opportunities for technological upgradation, promotion of exports and economies of scale. Number of items reserved for exclusive manufacture by the SSI sector has been gradually brought down to 35 items as on 5-Feb-2008. The Micro, Small and Medium Enterprises Development (SMED) Act, 2006 was enacted providing the first-ever legal framework for recognition of the concept of "enterprise" (comprising both manufacturing and services) and integrating the three tiers of these enterprises, viz., micro, small and medium. This act has significantly broadened the definitions and coverage of the MSE sector. Further in February 2007 the Government announced a package for promotion of the SSI sector.

Although the process of economic liberalisation has exposed the Indian Small scale industries to increasing levels of global and domestic competition, it has provided the SSI sector with attractive opportunities of accessing large markets and creating deeper linkages with the larger enterprises.

It is important to note here that, with various initiatives taken by the government the MSME sector has registered robust growth during the last few years. According to the Ministry of Micro, Small and Medium Enterprises, in recent years the MSE sector has consistently registered higher growth rate compared to the overall industrial sector. The below table summarises the growth of the MSME sector:

Table 9.4: Performance of SSI Sector in India

Years

Number of Units (in mn)

Production* (Rs bn)

Number of Employees (in mn)

Exports (US$ mn)

FY80

0.81

664.00

6.7

1.52

FY90

1.82

1,899.00

11.96

4.58

FY00

9.72

1,703.79

22.91

12.51

FY05

11.86

3,729.38

28.76

27.69

FY06

12.34

4,188.84

29.99

33.94

FY07 (P)

12.84

4,733.39

31.25

NA

Note: 1) P: Provisional

2) *: At 1993-94 Prices

Source: RBI: Handbook of Statistics on Indian Economy 2007

It can be observed from the above table that the number of MSMEs in India has grown from 0.81 mn in FY80 to about 12.84 mn in FY07. According to the Ministry of Micro, Small and Medium Enterprises estimates, during FY07 these 12.84 mn MSMEs accounted for more than 38.56% of gross value of output in the manufacturing sector and approximately 32.92% of the total exports of country. The MSME sector also plays a significant role in employment generation. This sector employed an estimated 31.25 mn persons during FY07. The Ministry of Micro, Small and Medium Enterprises also states that the labour intensity in the MSE sector is estimated to be almost 4 times higher than the large enterprises.

9.3.1 Clusters in India

One of the important steps towards development of the Small Scale Industries in India was the initiation of development approach that targeted clusters (see box 9.2) of similar industries. India has 388 documented industrial clusters, around 400 handloom clusters, about 3,000 handicraft clusters and 2,800 micro-enterprise clusters that contribute significantly to the economy, and provide employment to more than 20 million people. According to one estimate, clusters account for 77 per cent units, 72 per cent employment, 61 percent investment, 59 per cent output and 76 per cent exports of small scale industries.

The approach of development by aggregating SMEs operating in the same or related industrial sectors helps the small scale industries to capture the market opportunities that require large production quantities, take advantage of economies of scale in the purchase of inputs and marketing, etc. Thus this approach is not only more effective than the efforts of a lone enterprise but also helps to mitigate the cost burden of development initiatives on individual enterprises.

Box 9.2: Clusters: Definition and Types

The Ministry of MSME, defines Cluster as sectoral and geographical concentration of enterprises, in particular Small and Medium Enterprises (SME), faced with common opportunities and threats which can:

  1. Give rise to external economies (e.g. specialised suppliers of raw materials, components and machinery; sector specific skills etc.);

  2. Favour the emergence of specialized technical, administrative and financial services;

  3. Create a conducive ground for the development of inter-firm cooperation and specialization as well as of cooperation among public and private local institutions to promote local production, innovation and collective learning.

Clusters are broadly classified into two groups based upon the nature of its origin viz. natural and induced clusters. Most of the traditional clusters developed in India have been formed naturally based on high demand potential or availability of critical raw material or specific skills.

While the 'marble cutting' cluster at Kishangarh in Rajasthan is an example of natural cluster based on availability of raw material, the cluster of 'ready-made garments' at Indore and Mumbai are examples of demand based natural clusters. Formation of cluster can also be induced by policy initiatives, availability of proper infrastructure or existence of some industrial unit which is a large buyer. The automobile component industry at Gurgaon due to the setting up of the public sector car manufacturing unit of 'Maruti Udyog limited' and petro-chemical based industry at Vadodra due to setting up of 'Indian Petrochemical Industries Ltd', can be cited as examples of induced clusters.

Clusters can also be classified on the basis of the type of relationship amongst the cluster constituents. According to United Nations Industrial Development Organisation (UNIDO), Horizontal clusters are those which are characterised by units that process the raw material to produce and subsequently market the finished product themselves. On the other hand, a Vertical cluster is one in which the operations required in producing the finished product are divided and carried out separately by different units, most of which are essentially SMEs.

The Cluster support initiatives for development of SSI in India were strongly recommended by Abid Hussain Expert Committee on Small Enterprises (December 1995). The report stated: "Focus on clusters is the centerpiece of the new approach in an increasing public private partnership in setting up support systems for small scale enterprises. Such public-private partnership would thrive particularly in clusters of small scale enterprises...The Expert Group therefore recommends that state governments identify the existing SSI clusters and then promote new types of organisations which are joint ventures between the state governments or local authorities and business associations in these clusters.

Subsequently in 1996 the Ministry of Industry requested UNIDO to promote pilot projects for development of selected clusters and to assist the Ministry in formulating a national cluster development programme. Thus, a comprehensive Project, which aimed at developing sustainable capabilities at both the local and the national levels was prepared to promote SSE networking and cluster development. The initial Project had a proposed duration of four years and the initial funding for this project was provided by the Italian Ministry of Foreign Affairs. Further, the duration of this project was extended to 7 years and with the contribution from the Swiss Agency for Development and Cooperation UNIDO support was provided to the clusters of Ambur (Leather), Bangalore (Machine Tools), and Ahmedabad (Pharmaceutical). It is important to note here that the pilot projects have yielded encouraging results. For example, the Cluster Development Programme (CDP) introduced at the Cotton Knitwear cluster in Tirupur (Tamil Nadu) has been very successful. According to a report of India Brand Equity Foundation (IBEF), the turnover of this cluster has increased to US$ 3 bn in 2006 as compared to $100 mn in 1994. The exports have also increased from US$ 40 mn to about US$ 2 bn in the same period.

Along with the UNIDO initiatives, the Ministry of Small Scale Industries (SSI) had also launched the Integrated Technology Upgradation and Management Programme (UPTECH) in 1998. Initially under the UPTECH Scheme 8 projects of diverse products like tiles, bulk drugs and formulations, neem-based products, foundry and forging, fruit processing, pottery, and hydrogenated oils were undertaken. In August 2003 this programme was renamed as Small Industry Cluster Development Programme (SICDP). To begin with, the programme was primarily implemented through the specialised institutions, such as Product & Process Development Centres (PPDC), Tata Energy Research Institutes (TERI), Entrepreneurial Development Institutions like National Institute of Small Industry Extension Training (NISIET) & Entrepreneurship Development Institute of India (EDII), State level consultancy organisations like APTICO, GITCO, etc. In 2003-04, initiatives were taken to involve SISIs, the field offices of Ministry, for implementation of the programme. As a result, Cluster Development Executives (CDEs) were developed at SISIs level by providing them specialised training in the methodology of cluster development programme. Further, two more National Resource Centres (NRC) for SSI cluster development were established at NISIET, Hyderabad and EDII, Ahmedabad.

Several other institutions in India, both at the national and state level have also over the years taken up cluster development as a means to undertake socio-economic development. Besides the Central and State Governments these includes organisations like National Small Industries Corporation (NSIC), NABARD, CII, SIDBI, Textile Committee - Ministry of Textiles etc.

9.5 Trends in Investment

With liberalisation and abolition of licensing requirement for most of the industries, private sector received more autonomy in terms of making their investment decisions. This is already evident from the substantial rise in proposed investment under IEM. The proposed investment increased to Rs 5,882.71 bn in 2006 from Rs 760.10 bn in 1991. Further, the sector-wise data on investment reveals that during FY07, electrical equipments and metallurgical industries which respectively received investment worth Rs 2,345.99 bn and Rs 1,597.3 bn, were the major recipients of investments in terms of IEMs filed. These sectors together accounted for almost 69.1% of investment in terms of IEMs filed. Besides, sugar (Rs 442.03 bn), cement & gypsum production (Rs 398.52 bn) and chemicals other than fertilisers (Rs 356.03 bn) experienced considerable investment in terms of IEMs filed.

Further, liberalisation and robust growth of the Indian economy backed by strong economic fundamentals led to a sharp increase in foreign direct investment (FDI) inflows. The net FDI inflows in India surged to US$ 22.08 bn in FY07 from US$ 2.82 bn in FY97. The data on country-wise composition of FDI inflows reveals that Mauritius and the US have remained top investing countries since August 1991; accounting for almost 46% of total FDI inflows (in US$ terms) in FY07. FDI inflows from UK have also witnessed a considerable increase, thereby raising its share in total FDI inflows (in US$ terms) to around 12% in FY07 as against 10.8% in FY03.

Source: RBI

The sector-wise distribution of FDI inflows indicates that during FY03-FY05, Electrical equipments (including computer software & electronics), Transportation industry and Services sector (financial & non-financial) were major recipients of FDI. The pattern has, however, witnessed some alteration during FY06-FY07, as sectors such as Services sector, Computer software & hardware, Telecommunications and Construction activities (including roads & highways) attracted the highest FDI equity inflows. The possible reason behind the surge in FDI inflows to sectors like Construction activities and Housing & real estate could be the various deregulation measures taken by the Government, which facilitated investment into these sectors. This coupled with the robust growth witnessed in the domestic real estate sector has made this sector lucrative.

Table 9.5: Sectors Attracting Highest FDI Inflows

Sector

FY06

FY07

Rs bn

US$ mn

Rs bn

US$ mn

Services Sector (financial & non-financial)

23.99

543

210.47

4,664

Computer software & hardware

61.72

1,375

117.86

2,614

Telecommunications (radio paging, cellular mobile, basic telephone services)

27.76

624

21.55

478

Construction activities (including roads & highways)

6.67

151

44.24

985

Housing & real estate

1.71

38

21.21

467

Automobile Industry

6.30

143

12.54

276

Power

3.86

87

7.13

157

Petroleum & Natural Gas

0.64

14

4.01

89

Metallurgical Industries

65.4

147

78.66

173

Chemicals (other than fertilisers)

17.31

390

9.3

205

Total FDI Inflows

246.13

5,546

706.3

15,726

Source: Department of Industrial Policy & Promotion

Further, data on RBI's regional office-wise FDI equity inflows indicates that between the period Apr-2000 to May-08, RBI's Mumbai regional office (covers Maharashtra, Dadra & Nagar Haveli, Daman & Diu) was the major recipient of FDI equity inflows. FDI equity inflows to RBI's Mumbai regional office amounted to US$ 21.05 bn between the period Apr-2000 to May-08. In rupee terms, FDI equity inflows to RBI's Mumbai regional office stood at Rs 886.61 bn (during the period under review), which accounts for around 31.94% of total FDI equity inflows. This was followed by RBI's New Delhi regional office (covers Delhi, part of UP and Haryana) and RBI's Bangalore regional office (covers Karnataka) which received FDI equity inflows worth Rs 526.21 bn (18.95% of total FDI equity inflows) and Rs 188.12 bn (6.78% of total FDI equity inflows) respectively.

The state-wise distribution of FDI inflows corroborates the high economic growth witnessed by these states.

9.6 Public Sector Undertakings (PSUs) and Disinvestment

After independence, India was facing challenges like income inequalities, high unemployment rate and regional imbalances in economic development, etc. Besides, India at that time was predominantly an agrarian economy with a weak industrial base, low level of savings, inadequate investments and infrastructure facilities. In view of this kind of socio-economic set up, the policy makers adopted planned economic development policies, placing Public Sector at the center - to achieve self-reliant economic growth. The foundation of Public Sector Enterprises was laid by Industrial Policy Resolution of 1948 which envisaged development of core sector through the public enterprises. Considering the scarcity of capital and weak industrial base, the Industrial Policy Resolution of 1956 further emphasised on the development of PSEs. In short, the establishment of PSEs were meant to correct the regional imbalances, generate employment and expand the industrial base. Although in the initial years, PSEs were to be set up in core sectors, later on they were extended to a wide range of manufacturing activities including engineering, heavy machinery & machine tools, fertilisers, textiles, pharmaceuticals, petro-chemicals as well as services like telecommunication, tourism, warehousing, etc. The number of CPSEs has increased significantly from 5 on the eve of First Five Year Plan (01-Apr-51) to almost 247 (out of which 217 enterprises were in operation and 30 enterprises were under construction) as on 31-March-2007. In addition there exist a number of state level public enterprises (SLPEs) such as the state electricity boards.

However the public sector in India was characterised by poor project planning, over capitalisation, over staffing, excessive overheads (due to many social responsibilities), leading to under performance by many of the PSEs. Growing competition in the products market coupled with lack of proper pricing policy (which implies that prices of public sector goods/services had risen at a slower rate than the overall prices in the economy over the long run) had adverse impact on the financial position of PSEs. During the beginning of the current decade as much as 110 CPSEs incurred losses out of the total 234 operating units.

Hence, in order to improve the performance of the CPSEs, the Government took various measures. The concept of Memorandum of Understanding (MOU) was introduced by the Government to ensure clarity in the functioning of CPSEs, and proper balance between accountability and autonomy for enhancing efficiency. However, further deterioration in the financial position of many PSEs coupled with mounting fiscal deficit (since the early 1990s), led the central Government to gradually move towards disinvestment in PSEs (See Box 9.3). The Government also initiated measures for restructuring/ revival of CPSEs like revival through the process of BIFR, financial restructuring, formation of joint venture by introduction of partners capable of providing technical, financial and marketing inputs and organisational restructuring and manpower rationalisation through approved voluntary retirement scheme. With an aim to entrust greater financial and operational authority to the CPSEs the scheme of Navratna and Miniratna was introduced in July and October 1997. Under this scheme CPSEs which had comparative advantage and potential to become global players were declared as Navratna or Miniratna and the Board of Directors of these were delegated greater authority in terms of incurring capital expenditure, formation of joint ventures/subsidiaries etc. Subsequently, the Board of Directors of other profit making CPSEs were also entrusted with greater powers. Nonetheless, professionalization of Boards of Directors of these was made mandatory to ensure that the enhanced powers were used prudently. The Government of India has over the years taken many steps such as provision of outside professionals in the form of part-time non-official Directors, restricting the number of Government nominated Directors to one sixth of the actual strength of the Board subject to a maximum of two etc. to professionalise the boards of the CPSEs.

Further the Board for Reconstruction of Public Sector Enterprises (BRPSE) was established in December 2004 to advise the Government on revival of sick and loss-making enterprises. These measures taken by the Government has led to increase in efficiency and performanceof the CPSEs. The below table summarises the performance of CPSEs during the last few years:

Table 9.6: Performance of CPSEs

(Rs. bn)

Particulars

FY01

FY02

FY03

FY04

FY05

FY06

FY07

No. of Operating CPSEs

234

231

226

230

227

226

217

Turnover

4582.37

4787.31

5728.33

6307.04

7443.07

8372.95

9644.10

Net Profits

156.53

259.78

323.44

529.85

649.63

695.36

815.50

Profit of profit making CPSEs

284.94

364.32

433.16

616.06

744.33

763.82

897.73

Loss of loss incurring CPSEs

128.41

104.54

109.72

85.22

93.56

68.45

82.23

Profit making CPSEs (No.)

123

120

119

139

138

160

156

Source: Ministry of MSME

It can be noted from the above table that the net profits of the CPSEs have registered an annual average growth of around 33% between FY03-FY07. Also the percentage of loss making CPSEs in the total operating units has reduced to almost 27% in FY07 from as high as 47% in FY01. The total loss of loss incurring CPSEs has reduced to Rs. 82.2 bn in FY06 from Rs. 128.41 bn in FY01.

Box 9.3: Disinvestment of CPSEs in India

Disinvestment in select PSEs has emerged as an important step towards restructuring of PSEs. The industrial policy statement of July 24, 1991, stated that In order to raise resources and encourage wider public participation, a part of the government's shareholding in the public sector would be offered to mutual funds, financial institutions, general public and workers. The Government policy on disinvestment has evolved over the last decade and has been generally announced through the Budget. Minority shareholding of Central Government in 30 CPSEs was sold in bundles to select financial institutions (LIC, GIC, UTI) in 1991-92. Subsequently, individuals, NRIs and registered FIIs were included in the category of eligible buyers for equity of CPSEs. The shares of some CPSEs have been listed on the Indian stock exchanges. It is also important to note here that in the process of disinvestment as much as 45 CPSEs have been listed on the Indian stock exchanges of India. Market capitalization of all listed CPSEs as a percentage of market capitalization of BSE was 18.35 per cent as on March 31, 2007. Sale of equity through GDR route was allowed since FY97. PSUs such as VSNL, MTNL, GAIL has accessed the GDR market to raise funds.

According to the Department of Disinvestment the disinvestment transactions in India can be classified into five main categories:

Transactions involving the sale of minority shareholding of the Government, subject to the residual equity of the Government remaining at least 51 per cent.

i) Sale of a block of shares in one CPSE to another CPSE.

ii) Sale of a large block of shares in a CPSE (including subsidiary of a CPSE) along with transfer of management control to a strategic partner identified through a process of competitive bidding. This was termed as strategic sale.

iii)Slump sale of 2 hotel units of HCI and other disinvestment transactions during 1999-00 to 2005-06.

iv) Sale of all or part of Government's residual shareholding in disinvested CPSEs/companies either through a public offering or private placement - viz. CMC, IBP, IPCL, MUL and ICI.

The Government has also classified the CPSEs as strategic and non-strategic areas for the purpose of disinvestment. The strategic CPSEs are ones functioning in the areas of:

(a) Arms and ammunition and the allied items of defence equipment, defence aircrafts and warships;

(b) 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);

(c) Railway transport.

All other CPSEs were considered to be non-strategic and it was decided that for these CPSES Government's shareholding should be brought down to 26 per cent, however it would not be automatic and the manner and pace of doing so would be decided on a case-by-case basis. With the formation of UPA government in 2004, the disinvestment policy was changed to certain extent. The following is an extract from the National Common Minimum Programme (NCMP) which outlines the Governments policy regarding Disinvestment:

The UPA Government is committed to a strong and effective public sector whose social objectives are met by its commercial functioning. But for this, there is need for selectivity and a strategic focus. The UPA is pledged to devolve full managerial and commercial autonomy to successful, profit-making companies operating in a competitive environment. Generally profit-making companies will not be privatized..... The UPA will retain existing navratna companies in the public sector while these companies raise resources from the capital market. While every effort will be made to modernize and restructure sick public sector companies and revive sick industry, chronically loss making companies will either be sold-off, or closed, after all workers have got their legitimate dues and compensation......

The below table summarises the divestment transaction carried out in India.

SUMMARY OF DISINVESTMENT : 1991-92 TO JULY 2007

Year

Transactions

FY92

Minority shares sold in Dec, 1991 and Feb, 1992 by auction method in bundles of "very good", "good" and "average" companies

FY93

Shares sold separately for each company by auction method.

FY94

Equity of 6 companies sold by auction method but proceeds received in 94-95.

FY95

Shares sold by auction method.

FY96

Shares sold by auction method.

FY97

VSNL sold equity through GDR route

FY98

MTNL sold equity through GDR route

FY99

VSNL sold equity through GDR route; Domestic offerings of CONCOR and GAIL; Cross purchase by 3 Oil sector companies i.e. GAIL, ONGC and IOC.

FY00

GAIL sold equity through GDR route; Domestic offering of VSNL; capital reduction and dividend from BALCO; Strategic sale of MFIL.

FY01

Sale of KRL, CPCL and BRPL to CPSEs; Strategic sale of BALCO and LJMC.

FY02

Strategic sale of CMC, HTL, VSNL, IBP, PPL, hotel properties of ITDC and HCI, slump sale of Hotel Centaur Juhu Beach, Mumbai and leasing of Ashok Bangalore; Special dividend from VSNL, STC and MMTC; sale of shares to VSNL employees.

FY03

Strategic sale of HZL, IPCL, hotel properties of ITDC, slump sale of Centaur Hotel Mumbai Airport, Mumbai; Premium for renunciation of rights issue in favour of SMC ; Put Option of MFIL; Sale of shares to employees of HZL and CMC.

FY04

Strategic sale of JCL; Call Option of HZL; Offer for Sale of MUL, IBP, IPCL, CMC, DCI, GAIL and ONGC; Sale of shares of ICI Ltd.

FY05

Offer for Sale of NTPC and spill over of ONGC; sale of shares to IPCL employees.

FY06

Sale of MUL shares to Indian public sector financial institutions & banks and employees

FY07

-

FY08 (Apr 07-Jul07)

Sale of MUL shares to public sector financial institutions, public sector banks and Indian mutual funds.

Source: Disinvestment commission

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