Economics

Theories on International Trade

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Theories on International Trade

This article deals with ‘Theories on International Trade .’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .

Introduction

  • International Economics is that branch of economics which is concerned with the exchange of goods and services between two or more countries .
  • The subject matter of International Economics includes large number of segments :-
    1. Pure Theory of Trade : It includes issues like causes for foreign trade, composition, direction and volume of trade,  exchange rate,  balance of trade and balance of payments .
    2. Policy Issues : It includes  policy issues such as free trade vs. protection, use of taxation, subsidies and dumping, currency convertibility, foreign aid, external borrowings and foreign direct investment.
    3. International Cartels and Trade Blocs .
    4. International Financial and Trade Regulatory Institutions : Most important of which are IMF, WTO  and World Bank.

Theories of International Trade

1 . Mercantilist Theory

  • It takes  an us-versus – them view of trade.
  • According to Mercantilist Theory, World Trade remains same. Hence, one country gains by damaging the other. Increase in trade of one country means loss of some other country. Hence, nation’s wealth and power are best served by increasing exports and receiving payments in gold, silver and precious metals.
  • From the 16th to 18th century, economists believed in mercantilism. One of the leading proponent of Theory of Mercantilism was Thomas Munn (Director of English East India Company) .

2 . Adam Smith’s Theory of Absolute Cost Advantage

  • Adam Smith was in favour of free trade.
  • According to Adam Smith, the basis of international trade was absolute cost advantage. Trade between two countries would be mutually beneficial when one country produces a commodity at an absolute cost advantage over the other country which in turn produces another commodity at an absolute cost advantage over the first country.
  • Example / Illustration

Take example of India and China in production of Wheat and Cloth . Suppose, one labourer in India can produce 20 units of wheat and 6 units of cloth while that in China can produce 8 units of wheat and 14 units of cloth.

Country Wheat production by one labourer Cloth production by one labourer
India 20 units 6 units
China 8 units 14 units

Hence, India has an absolute advantage in the production of wheat over China and China has an absolute advantage in the production of cloth over India. Therefore, India should specialize in the production of wheat and import cloth from China. China should specialize in the production  of cloth and import wheat from India. This kind of trade would be mutually beneficial to both India and China.

3 . Ricardo’s Theory of Comparative Cost Advantage

  • According to David Ricardo’s Theory of Comparative Cost Advantage , a country can gain from trade when it produces at relatively lower costs. It means, even when a country enjoys absolute advantage in both goods, the country would specialize in the production and export of those goods which are relatively more advantageous. Similarly, even when a country has absolute disadvantage in production of both goods, the country would specialize in production and export of the commodity in which it is relatively less disadvantageous .
  • Example / Illustration
Units of labour required to produce one unit Cloth  Wheat Domestic Exchange Ratios
USA 100 120 1 wheat =1.2 cloth
India 90 80 1 wheat=0.88 cloth

In the illustration,  India has an absolute advantage in production of both cloth and wheat.  However, India should concentrate on the production of wheat in which she enjoys a comparative cost advantage. For America the comparative cost disadvantage is lesser in cloth production. Hence America will specialize in the production of cloth and export it to India in exchange for wheat.

4 . Heckscher and Ohlin’s Factor – Proportions Theory

  • Capital-abundant country will export the capital –intensive goods. E.g. USA exporting Aeroplanes
  • Labour-Abundant Country will export labour-intensive goods. E.g. India exporting cotton  .
Theories on International Trade

Industrial Policies of India

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Last Updated: May 2023 (Industrial Policies of India)

Industrial Policies of India

This article deals with ‘Industrial Policies of India.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

‘Industrialize or perish!’ – M. Visvesvaraya

Statistics about the Manufacturing Sector

With the development of the economy, the percentage of people engaged in industry is increasing, and its contribution to the net GDP of India is increasing as well.

a . Percentage of Indians employed in Manufacturing Sector

  • In 2018, 24% of Indians were employed in the Industrial sector.

b . Contribution of Manufacturing in India’s GDP

  • Its contribution to India’s total GDP is 29% (in 2018).
Industrial Policies of India

c . Indian companies in Fortune-500

  • There are 7 Indian companies on the Fortune-500 list. These are 
Reliance Industries 155
State Bank of India 205
Indian Oil 212
ONGC 243
Rajesh Exports 348
Tata Motors 357
Bharat Petroleum 394

d . Growth Rate

  • The covid pandemic badly hit the growth rate of the industrial sector. But it has revived again and witnessed the growth of 11.8% in 2021-22.
15% 5% 0% -10% 2020-21 11.8% 2021-22 (ΑΕ)

Indian Industrial Policies – History

  • Industrialization is sine quo none for the economic development of any country. At Independence, India inherited a weak and shallow industrial base. Therefore, during the post–Independence period, the Government of India emphasized the development of a solid industrial base.
  • The Government of India has declared its Industrial policies at various times, which has changed the trajectory of the Indian economy.

Industrial Policy Resolution, 1948

It was announced in 1948.

It was decided that model of the economy would be ‘Mixed Economy’. It divided the economy into the following three lists 

Central List Important industries were here like coal, power, railways, civil aviation, ammunition, defence etc.
State List Industries of medium importance were put here – medicine, textile, cycles, 2 wheelers.
Rest industries All rest industries were left open for all private sector investment, with many having compulsory licensing provisions. 

The policy was to be reviewed after 10 years. 

Industrial Policy Resolution,1956

The government was encouraged by previous success & announced it after 8 years only. This policy structured the nature of the economy till 1991.

Main provisions of Policy

1. Reservation of Industries

A clear-cut classification was made into three schedules

Schedule A – It contains 17 areas in which the centre enjoyed a monopoly.
– Industries set up under this provision were called Public Sector Undertakings (PSUs).
– PSU included those industries as well, which were taken over between 1960 and 1980 under the nationalization drive.
Schedule B – Schedule B consists of 12 areas where the state was supposed to take up the initiative with more expansive follow-up by the private sector.
– It also included the provisions of Compulsory licensing.
– Neither state nor private sector had a monopoly in these industries.
Schedule C – Schedule C consists of all the areas not covered in Schedule A & B.
– The private sector has provisions to set up industries.
– Many of them had provision of licensing.

2. Provision of Licensing

  • All Schedule B & several Schedule C industries came under this.
  • This provision is also called LICENSE- QUOTA -PERMIT RAJ.

3. Expansion of Public Sector

  • The policy announced to expand the public sector for accelerated industrialization & growth of the economy.
  • Emphasis was on heavy industry. 

4. Regional Disparity

  • Upcoming PSUs were set up more in backward areas (although it was entirely against the ‘Theory of Industrial Location’). 

5. Emphasis on Small Industry

  • The policy was committed to promoting small-scale industries and the Khadi & Village industry.

6. Agriculture Sector

  • The agriculture sector was pledged as a priority. 

Industrial Policy of 1969

  • It was aimed at solving the shortcomings of the Industrial Policy of 1956.
  • Experts & industrialists believed that licensing was serving the opposite purpose than it was mooted. The main aim behind the ‘Licensing policy’ was socialist & nationalist feeling so that 
    1. The exploitation of resources could be done for the development of all.
    2. Price-control of goods purchased from licensed industries.
    3. Checking concentration of economic power.  
    1. Channelizing investment into the desired direction. 
  • But licensing policy wasn’t serving this purpose as  
    1. Influential industrial houses were able to procure new licenses at the expense of budding entrepreneurs. 
    2. Older & well-established business houses were capable of creating hurdles for new ones with the help of different kinds of trade practices & forcing the latter to agree to sell out & takeovers.
  • Industrial Policy of 1969 introduced the Monopolistic & Restrictive Trade Practices(MRTP) Act. The main features of the MRTP act were 
    1. It was aimed at checking & regulating trade & commercial practices of the firms and checking the monopoly & concentration of economic power.
    2. Firms with assets worth ₹ 25 crores (which was later increased to ₹50 crores in 1980 and ₹100 crores in 1985) or more were obligated to take permission from the Indian government before expansion, greenfield venture & takeover of other firms.
    3. For redressal of prohibited & restricted practices of trade, the government set up the MRTP Commission.

Industrial Policy Statement, 1973

1. Core Industries

  • The policy introduced a new classification of ‘Core Industries’. 
  • It included six industries that were of fundamental importance for developing other industries –  Iron & Steel, Cement, Coal, Crude Oil, Oil Refining & electricity. 
  • Note: At that time, there was 6 Core Industries. Now there are 8
    1. Coal  
    2. Crude Oil  
    3. Cement  
    4. Fertilizer  
    5. Electricity  
    6. Refinery Products  
    7. Natural Gas  
    8. Steel  

2. Private Companies

  • Private Companies may apply for licenses under Core industries if they aren’t covered under Schedule A.
  • They were eligible only if their total assets were above ₹20 crores.

3. Reserved List

  • Some industries were put under a reserved list in which only MSME could set up industry. 

4. Joint Sector

  • It allowed partnership between centre, states & private sector for setting up some industries.
  • The government had discretionary power to exit such ventures in future.
  • The intention was to promote the private sector with government support.

5. FERA

  • Foreign Exchange Regulation Act was introduced to regulate foreign exchange in India.
  • According to experts, it was draconian law that hampered the country’s growth.

6. Foreign Investment

  • Limited permission of foreign investment was given, with MNCs being allowed to set up subsidiaries in India.

Industrial Policy Statement, 1977

  • Political set up at the centre changed so did economic policy.
  • There was more inclination towards Gandhi -Socialistic view & anti-Indira stance.

Main Features

  • Foreign investment in unnecessary areas prohibited ( in practice, it was complete no). During this period, Coca-Cola, IBM and Chrysler were made to exit India.  
  • Emphasis was placed on village industry with a redefinition of small & cottage industry.
  • Decentralized industrialization was given attention to link masses to the process of industrialization.
  • Khadi & Village industry was to be reconstructed.
  • Serious attention was given to the level of production & prices of essential of everyday use.

Industrial Policy Resolution, 1980

The Congress party returned to power. As a result, Industrial Policy was revised in 1980. The main provisions of this policy were 

  • Foreign investment via technology transfer route was allowed.
  • MRTP limit was increased to ₹50 crores to promote the setting up of bigger industries.
  • Industrial licensing was justified.

Overall liberal attitude followed towards the expansion of private industries.

Industrial Policy Resolution of 1985 & 86

  • Industrial Policy Resolutions of 1985 & 86 were very similar in nature & latter tried to promote initiatives of the former. The main provisions of this policy were
    1. Foreign investment was further simplified & more areas were opened for foreign investment. The dominant method of foreign investment was still technology transfer, but foreign MNC can hold up to 49% in their subsidiary.
    2. MRTP limit was increased to ₹100 crores.
    3. Provision of industrial licensing was further simplified & remained for 64 industries only.
    4. A higher level of attention was given to sunrise industries such as telecommunication, computerization & electronics.
    5. The modernization & profitability aspects of PSU was emphasized.
    6. FERA regime was relaxed.
    7. Many technology missions were launched in the Agricultural sector.
  • It has to be noted that these policies were formulated when the developed world was going towards forming the World Trade Organization. 
  • These provisions were attempted at liberalizing the economy without any slogan of economic reform. The government wanted to go for the kind of economic reforms India pursued after 1991 but lacked political support. 
  • By the end of the 1980s, India was in the grip of a severe Balance of Payment crisis with higher inflation (over 17%) & a high fiscal deficit (8%). It was magnified by the Gulf war & the high prices of oil, ultimately leading to the Balance of Payment crisis, IMF bailout & 1991 LPG reforms.

New Industrial Policy (NIP) of 1991 – LPG Reforms

The situation of India leading to LPG reforms

  • India was in a severe Balance of Payment crisis in 1991. Reasons for this were several interconnected factors that were growing unfavourable for the Indian economy
    • Gulf war of 1990-91: Oil prices increased, leading to fast depletion of Indian Foreign currency reserves.
    • There was a sharp decline in private remittances from overseas Indian workers in the Middle East in the wake of the gulf war.
    • Inflation peaked at 17% & the central government’s fiscal deficit reached 8.4%.
    • By June 1991, Indian Forex declined to just 2 weeks of import coverage.
  • The financial support that India got from the IMF to fight out the Balance of Payment crisis of 1990-91 had a tag of structural readjustment as a condition to be fulfilled by the Government of India.
  • With this policy, the government kickstarted the very process of reform in the economy. That is why the policy is taken more as a process than a policy.

New Industrial Policy of 1991

Triple pillars of New Economic Policy were Liberalization, Privatization and Globalization (LPG)

LPG Reforms

1. Liberalisation

1.1 De Licensing of Industries

The number of industries put under the compulsory licensing provision (Schedule B & C) was cut down to 18 in 1991. Now only 5 industries require a license, and these are 

  1. Alcoholic Drinks
  2. Tobacco & cigar products
  3. Defence & electronics aerospace equipment
  4. Industrial Explosives including matchboxes
  5. Hazardous Chemicals* (Nitrocellulose, Hydrocyanic Acids, Phosgene & MIC)

1.2 De-reservation of Industries

Industries that were reserved for the Central government in the Industrial Policy of 1956 were cut down to 8 from 17 at that time. Presently only three sectors are reserved for central government.

Nuclear Energy The present government is seriously considering allowing the private sector to enter the management of nuclear power plants.
Nuclear research Consist of mining, use, management, fuel fabrication, export-import, waste management of radioactive material & no country allows private industry in this.
Railways Many of the functions related to railways have been allowed private entry, but still, the private sector can’t enter as a full-fledged railway service provider.

1.3 Location of industries

Industries were categorized into polluting & non-polluting & highly simple provision deciding their location was announced

Non-Polluting Such industries can be set up anywhere.
Polluting Such industries can be set up at least 25 km away from million cities.

1.4 Abolition of phased production

  • The compulsion of phased production was abolished. 
  • Now private firms can go for production of as many goods & models simultaneously as they want.

1.5 Abolition of MRTP

  • The MRTP limit of ₹ 100 cr was abolished.
  • MRTP Act was replaced by Competition Act & MRTP commission was replaced by Competition Commission of India (CCI).

2 . Privatisation

2.1 Privatizing PSUs

  • It was decided to convert the public sector companies to private sector companies by reducing Government shareholding to below 50%. E.g., Hindustan Zinc Limited.

2.2 Stopped Nationalization

  • The policy stopped the practice of nationalization. It means that the way Tata Airlines was nationalized to Indian Airlines or Banks were nationalized will not be used by the government in the future.  

2.3 More sectors opened

  • Private sector companies were allowed to operate in banking, insurance, aviation, telecom and other sectors.

3 . Globalization

3.1 Joined WTO

  • India joined the WTO regime & gradually relaxed the tariff and non-tariff barriers on the imported goods and services.

3.2 Promotion of Foreign Investment

  • Promotion of foreign investment was encouraged through both routes, i.e. Foreign Direct Investment & Foreign Portfolio Investment. 

3.3 FERA by FEMA

  • Draconian FERA was replaced with the Foreign Exchange Management Act (FEMA), which came into effect in 2000-01 with a sunset clause of two years. 

Need of New Industrial Policy

Why we need a new Industrial Policy?

  1. Technological changes like the 4th Industrial Revolution, Artificial Intelligence & Automation have changed the nature of industries.
  2. Systemic issues in the economy: Indian economy faces a large number of systemic issues such as outdated labour laws, infrastructural bottlenecks, logistic weakness etc.
  3. Changes in Demographic conditions: With an increasing number of old age people, the government needs to focus on Longevity Dividend and the Demographic Dividend.
  4. Global Changes: The world has changed, and China is losing Demographic Dividends. India needs to take drastic steps to fill the vacuum. 
  5. The Indian economy has changed drastically since 1991. The service sector is contributing the highest share to Indian GDP.  
  6. The rise of Multilateral Trade Agreements poses a threat to the Indian economy.
  7. India needs to formulate a new Industrial Policy to deal with the problem of Climate Change and comply with Paris deal obligations.

What should New Industrial Policy focus on?

  1. Technology & Innovation: Government should provide incentives for artificial intelligence, the internet of things, and robotics. 
  2. The Ease of Doing Business should be emphasized to attract MNCs in India.
  3. Infrastructure should be made world-class to end the logistic problems of the Indian economy.
  4. More focus on the skills & employability of new workers.  
  5. The focus should be on labour-intensive sectors such as textiles, leather and footwear industries etc.
  6. Sustainable and responsible industrialization to reduce carbon emissions should be emphasized.
  7. Provide easy access to capital to the MSMEs.
  8. Create global brands out of India. 
  9. Promote Innovation and R&D via Academia- industry linkages, transparent IPR regime and encouragement to Startups.

Side Topic: National Manufacturing Policy, 2011 & NMIZ

Aim

  1. Increasing the manufacturing sector’s share in Indian GDP to 25% by 2022.
  2. Target is to create 100 million jobs.  
  3. Create National Manufacturing & Investment Zone (NMIZ)(NMIZ is an essential component of NMP, 2011).

NMIZ/National Manufacturing & Investment Zone

  • NMIZ is an ‘industrial township’ containing Special Economic Zones, Industrial Parks etc.   
  • NMIZ are given additional support by the government in the form of 
    1. Tax incentives
    2. Relaxed norms for FDI approval  
    3. Providing Rail, Road, energy etc.
    4. Relaxations in the labour laws, e.g. easier hiring-firing norms.
  • NIMZ is treated as a self-governing body under Article 243(Q-c) of the Constitution. 
  • India has 15 NMIZ like Manesar-Bawal Investment Region in Haryana etc.

Assemble in India

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Last Updated: May 2023 (Assemble in India)

Assemble in India

This article deals with ‘Assemble in India.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

  • Economic Survey (2020) points towards the fact that in just the five years 2001-2006, labour-intensive exports enabled China to create 70 million jobs for workers with just primary education.
  • But now, firms are looking for alternatives because 
    1. US-China trade war: The US has placed significant tariffs on products manufactured in China. 
    2. Increase in wages in China. 
    3. Companies have recognized the strategic vulnerability due to all supply chains concentrated in China. 

Side Note: Network Product

  • In modern production lines, the entire production is not done at a single place. Instead, different components are made at different locations and then integrated in some third place to make the final product. Such a final product is known as Network Product.
  • Take the example of the iPhone.
Assemble in India

Wild Geese Flying Model

  • The pattern of entry, rise, survival, and the relative decline of countries in the export market for Network Products follows the “wild-geese flying model”.
  • This process started with Japan which later moved to South Korea, Taiwan and China and so on. 
    1. Japanese Companies (like Sony) first started to assemble Cameras, TVs, Walkman etc. When labour costs rose, they shifted their manufacturing to South Korea. 
    2. Then South Korean Companies like Samsung and LG grew in the export of Network Products. After some time, due to cost issues, they outsourced their manufacturing to China and Taiwan.
  • Hence, Network Goods assembly will continue to move from more advanced countries to less advanced countries. (CLICK HERE)
  • Economic Survey believes that while Japan is in a declining stage, most countries, including China, have reached the inflexion point. India is at the right stage to take the place of China in the assembly of Network Products, thus providing us sufficient opportunity to grab. 
Wild Geese Flying Model

Why India should focus on Network Products and Assemble in India?

  • MNCs are moving away from China due to the trade war between China and US, along with rising wages in China. Hence, India should grab the opportunity to shift a large chunk of Assembly Lines from China to India. 
  • Network Products accounted for nearly 30 per cent of world exports in 2018. Although India has much potential, India lags in exporting Network Products. In 2018, Network Products exports accounted for 10% of India’s export basket, while these products accounted for about 50% of China, Japan, and Korea’s total national exports.
  • Economic Survey (2020) suggests that by integrating “Assemble in India for the world” into Make in India, India can raise its export market share to about 3.5% by 2025 and 6% by 2030. In the process, India would create nearly 4 crore well-paid jobs by 2025 and about 8 crores by 2030.

Reforms required

  • To attract MNCs to Assemble in India, India needs to 
    1. Reform Taxation laws
    2. Reform Labour Laws
    3. Skill training of workers and mid-level supervisors.
    4. Invest heavily in infrastructure and create world-class roads, railways and ports.
    5. Sign a large number of Free Trade Agreements so that India becomes part of Global Value Chains
  • While the short to medium-term objective is the large scale expansion of assembly activities by making use of imported parts & components, the long term objective should be giving a boost to domestic production of parts & components (and create global giants like Samsung developed in Korea and Xiaomi, Huawei etc. developed in China).

Make In India

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Make in India

Last Updated: May 2023 (Make In India)

Make In India

This article deals with ‘Make In India (MII).’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Make in India (MII)?

MII is a program started by the Government of India to make India a global hub of manufacturing, design, and innovation.

Why do we want to Make in India?

  • Remove excess of population in Agriculture to be employed in Manufacturing Sector.
  • To reap Demographic Dividend by providing jobs to the youth in the manufacturing sector.
  • Use Cheap Labour available in the country to fill the lacunae left by China, where labour wages have risen.
  • We have substantial domestic demand in India & still importing from abroad. Why not make it in India & save our foreign exchange?
  • To address issues created by the fact that India directly jumped from Agricultural to Service sector economy without first passing through low skill manufacturing economy. 

The need for a dedicated government policy to support domestic industrialization amidst foreign competition can be better appreciated from the industrialization experiences of East Asian economies such as South Korea & Taiwan in 1960-1990. These countries supported their domestic industries during their high growth phase while also ensuring healthy competition required for the industries to grow

Make In India: 5 Pillars

Make in India

1. Simplify Processes

  • Ease the regulatory framework and cut red-tapism to invest easily, and entrepreneurs can set up industries.

2. Improve Infrastructure

  • End infra bottlenecks by investing in new Industrial corridors, smart cities, roads, railways and world-class ports.

3. Focus on Sectors

  • The government has recognized 27 sectors under Make in India 2.0 (as of 2023), where 
    • India has the potential to become the global champion.
    • Which can drive double-digit growth in manufacturing.
    • Generate significant employment opportunities.
  • These include
    • Manufacturing Sectors: Capital goods, Auto, Defence & Aerospace, Biotechnology, Pharmaceuticals, Food Processing, Gems & Jewellery, New & Renewable Energy, Construction, Shipping and Railways. 
    • Service Sectors: IT, Tourism & Hospitality, Medical Tourism, Logistics, Legal Services, Educational Services etc.

4.  Open up Sectors

  • India will open new sectors for investment.

5. IPR protection

  • Protection & Promotion of Intellectual Property Rights like Patents, GI, Copyrights, Trademarks and Industrial Designs.

Initiatives in various sectors to promote Make in India

1. Production-linked incentive (PLI) scheme

  • Production Linked Incentive refers to a rebate given to producers. This rebate is calculated as a certain percentage of incremental sales by the producer. 
  • The scheme is applicable on Automobiles, Advanced Chemistry Cell (ACC) Battery, Pharma, Telecom, Food Products, Textile, Specialty Steel, White Goods (home appliances), Electronic goods and Solar Modules.
  • E.g., As a part of the PLI scheme for mobile and electronic equipment manufacturing, an incentive of 4-6% on incremental sales is given to electronic companies manufacturing mobile phones, transistors etc.
  • This scheme is in line with India’s Atmanirbhar Campaign.
  • Total of Rs. 1.45 trillion will be given in 5 years.
  • The design of the earlier PLI scheme is such is compatible with WTO as the support is not linked to exports or value-addition. 

2. Defence and Aviation Sector

  • Defence Procurement Procedure (DPP): The government will prioritise the indigenously designed, developed and manufactured (IDDM) equipment.
  • Defence Offset Norms: When the government buys defence equipment from a foreign company, foreign companies have to procure a certain percentage of components from India.

3.  Food Processing

  • The government is encouraging the opening up of new Mega Food Parks.
  • The government has started SAMPADA Scheme to promote Food Processing Industry.

4. Automobiles

  • FAME-India [Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles – India] has been started To promote the manufacturing of electric vehicles in India.

5. Renewable Energy

  • Preference is given to domestic manufacturers for purchasing equipment for Jawaharlal Nehru National Solar Mission.

6. Textiles

  • India Handloom Brand has been launched. 
  • Special Textile Package to increase jobs and machinery up-gradation has been started.

7. Leather and Shoes

  • CSIR- Central Leather Research Institute (CLRI) has started a project to build its own standards for shoe sizes. CLRI has already started an anthropometric survey for this. It will be ready by 2022. 

Problems with the Scheme

1 . Directly Moving towards high skill model

  • India ideally should have been moving from Agrarian Economic to Low Skill Manufacturing to leverage our Demographic dividend. But MII is trying to move directly to high skill jobs from the agrarian economy. 
Issues with Make in India

2. Promoting Exports is a multifaceted process

  • Making goods in India will making goods will not increase exports. Along with manufacturing, it requires various steps such as currency undervaluation (like China), signing FTAs on a large scale etc.  

3. Weak Logistics

  • There are logistics problems in India. Indian ports cant handle huge container ships. As a result, products made in India are first sent to Colombo, Singapore etc. Trans-shipment ports. This increases the export cost and time.
  • Time to reach container to the US
    • From India (Chennai) = 28 days
    • From China = 14 days (half)
Logistics Issues in India

4. Danger from  Automation

  • A report from the Citi group claims that increased use of automation will likely lead to a renewed “onshoring” of production. 

5. Blindly copying Chinese Model

  • India shouldn’t blindly follow China success story. It might not replicate everywhere.

6. Other

  • Archaic labour laws:  The labour laws in India are quite complex. Hence, private investment in the manufacturing sector is not very attractive. 
  • The problem of Missing Middle:  There are a large number of small-sized firms and a small number of large-sized firms with a complete absence of mid-sized firms. There is a need to convert small enterprises to mid-sized firms. 

Public Sector Undertakings

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Last Updated: May 2023 (Public Sector Undertakings)

Public Sector Undertakings

This article deals with ‘Public Sector Undertakings / Enterprises.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Types of Companies owned by Government 

The Government owns three types of companies, and these are

Public Sector Undertakings

1. Departmental Undertakings

  • These are part of the ministry itself. 
  • E.g., Indian Railways (part of Railway Ministry), Indian Post (part of Postal Ministry).

2. Statutory Corporations

  • These are the government-owned companies created by an act of Parliament or state legislature. 
  • E.g., RBI (created under RBI Act), LIC (under LIC Act), SIDBI, NABARD, NHB etc.

3. Government  Companies

  • These companies are registered under the Companies Act, and Government holds more than 51% shares. 
  • E.g., Indian Oil, Coal India, GAIL, SAIL, BHEL, Public Sector banks like SBI, Punjab National Bank etc. 

Issues with Public Sector Undertakings / Enterprises

  • Since Government is the majority shareholder, there is constant political interference in board appointments and policy decisions. 
  • There is a lack of innovation, and most of them have failed to change with time. E.g., BSNL and MTNL failed to change with the introduction of 4G internet and hence suffered losses. 
  • The staff is not consumer responsive. 
  • Employee unions reduce the efficiency of employees. 
  • Most of them are overstaffed, impacting their profitability.

As a result, most of the Indian Public Sector Enterprises are loss-making.

Ratna Status of Public Sector Undertakings / Enterprises

The main issue faced by the Public Sector Enterprises is the excessive control of the Government over these companies. Ratna status gives operational flexibility to them like hiring more professionals, acquiring other companies etc., without requiring government approval for every small decision.

There are three type of Ratna Companies

1. Miniratna Companies

  • Miniratna status is given to Public Sector Enterprises which have made profits in last 3 years continuously.
  • They can invest up to Rs. 500 crore on their own.
  • E.g., National Film Development Limited, ONGC Videsh Limited, Airport Authority of India etc.  (For complete list, CLICK HERE)

2. Navratna Companies

  • Navratna companies have excellent ratings. They must have secured 60 out of 100 marks on various criteria set by the government are given Navratna status.
  • They can invest up to Rs. 1000 crore on their own.
  • E.g., HAL, NALCO etc.  (For complete list, CLICK HERE)

3. Maharatna Companies

  • Maharatna companies have a global presence and must be listed on the Indian stock exchange, with at least 25% of shares held by the public.
  • They can invest up to Rs 5,000 crore on their own.
  • There are 10 Maharatna companies 
    1. BHEL
    2. GAIL
    3. Steel Authority of India (SAIL)
    4. Bharat Petroleum
    5. Hindustan Petroleum
    6. Indian Oil Corporation
    7. ONGC
    8. NTPC
    9. Coal India Limited
    10. Power Grid Corporation of India

Merger and Consolidation of Public Sector Undertakings

  • To increase the efficiency of Public Sector Enterprises, they can be merged and consolidated.
  • Example : 
    1. BSNL and MTNL were both suffering losses and were unable to compete with Jio, Airtel etc. In 2019, both were merged by offering a Voluntary Retirement Scheme (VRS) to some employees to reduce the staff.
    2. Earlier, Government also merged Air India and Indian Airlines to rationalize the usage of its assets.

Disinvestment

When the government sells its shares from a PSU to a private company but remains the majority shareholder, it is known as Disinvestment.

Pros and Cons of Disinvestment

Pros of Disinvestment

  • Managerial efficiency: If the number of shareholders is more, they will demand more accountability. Accountability will lead to Managerial Efficiency. 
  • Raising of Resources: Government gets cash for public welfare.
  • It helps to improve governance because Government restricts itself to the core governance functions.  
  • The problem of Overstaffing can be solved because Private Management rationalises employee strength.
  • Proceeds of Disinvestment can help in reducing the Fiscal Deficit. 

Cons of Disinvestment

  • It can create Private Monopolies. 
  • It will reduce the government’s income (because the government will not get dividends). 
  • When PSUs get privatized, they are not bound to implement the reservation for SCs, STs and OBCs. Hence, such steps are detrimental to uplifting people belonging to so-called lower castes.  

Economic Survey Topic: Privatization and Wealth Creation

Privatization and wealth creation
  • There are many examples from history that can be quoted to prove that privatization/ strategic disinvestment of CPSEs will lead to gains in efficiency.  
    1. In the 1980s, UK PM Margret Thatcher started privatization of the Government companies such as British Telecom, British Airways, water and electricity companies etc. It increased the profitability of those companies.
    2. During the NDA regime of Atal Bihari Vajpayee (1998-2004), 11 Government companies were privatized, such as Hindustan Zinc, Bharat Aluminium Company Ltd. (BALCO), Maruti Suzuki, etc. After strategic disinvestment (or privatization), profitability and sales of these companies increased significantly because these companies went for Technology Up-gradation and Efficient management practices by Private professionals.
  • Adopt Singaporean Model of disinvestment: Many of the CPSEs are profitable, but their shares have generally underperformed in the market. Hence, the survey proposes the Singaporean Model of Disinvestment.
    • In 1974, Singapore Government set up a holding company named “Temasek Holdings Company” (THC) and transferred its shares of PSUs to THC. THC was manned by professionals and had complete autonomy, which carried out the process of privatization with great efficiency.
    • Economic Survey has suggested that the Indian Government should constitute a Holding Company just like Singapore, for strategic disinvestment (or privatization) drive and transfer its stake in the listed CPSEs to the Holding Company. The entity would be mandated to divest the Government stake in these CPSEs over some time. It will lend professionalism and autonomy to the disinvestment program.

Timeline of Disinvestment in India

1991 The government announced 20% disinvestment in selected PSEs.
 
1998-2000 Vajpayee Government classified PSEs into two parts
1. Strategic: arms-ammunition, railway, nuke energy etc. – No disinvestment was to be carried here. 
2. Non-strategic: those not in the above category were categorized as Non-Strategic, and disinvestment would be done in a phased manner. 

To expedite the process of disinvestment in the country, a full-fledged Ministry of Disinvestment was set up.
2005-09 Due to pressure from the coalition’s left parties,  disinvestment was virtually abandoned in any government company. Ministry of Disinvestment was dismantled into the Department of Disinvestment under Finance Ministry.
2009-2014 – UPA-2 government was formed without the support of the Left Parties. Hence, the government started the work of disinvestment again. 
– It was decided that all Government companies can be disinvested up to 49%.   
2014- present Modi Government has been carrying out the process of disinvestment at a rapid pace than seen in the case of any other previous government. Department of Disinvestment has been renamed to Department of Investment and Public Asset Management (DIPAM). Its work is divided under four major areas as: 
1. Strategic Disinvestment & Privatization
2. Minority Stake Sales
3. Asset Monetization
4. Capital Management


2021 		The government has made two categories i.e.
1. Strategic Sector (consisting Atomic Energy, Space, Defence, Transport, Telecommunication, Power, Petroleum, Coal and other minerals, Banking, Insurance and Financial Services).
2. Non-Strategic (i.e. remaining all sectors).

The government has decided to either shut down or privatize all the PSUs in Non-Strategic Sector.  In Strategic Sector, the government will keep at least 1 government company in a particular sector (i.e. will either merge or privatize if more than one PSU is present in one sector).


2022 		National Land Monetization Corporation was set up to monetize the surplus land holdings of Central Public Sector Enterprises (CPSEs) and other government agencies.  

Disinvestment under Modi Government

Modi Government has been continuing the process of disinvestment with more vigour than any previous government. They are using the following methods for doing disinvestment.

1 . Initial Public Offering (IPO)

  • Initial Public Offering, i.e. listing the Public Sector Enterprise (PSE) in the sharemarket to sell its shares.

2. Exchange Traded Fund (ETF)

  • Exchange Traded Fund (ETF) is a security that tracks a basket of assets such as an index fund but trades like a stock on an exchange. The CPSE-ETF tracks the CPSE Index (of PSUs included in the ETF). 
  • Present Government has used this route twice for disinvestment in PSUs
    1. In 2014, CPSE-ETF of 10 blue chip PSUs was listed on BSE and NSE.
    2. 2017 and 2018: Bharat-22, an ETF made up by backing 22 PSUs, was launched by the Government in Nov 2017 & June 2018, mobilizing ₹80,000 cr each time. 

3. Institutional Placement Program (IPP)

  • Institutional Placement Program (IPP) offer shares only to institutional investors like Mutual Funds, Insurance companies, Pension funds etc.

4. Offer for Sale (OFS)

  • In Offer for Sale (OFS), the company sells shares in the share market to institutional and retail investors.

5. Share Buyback

  • The government company itself buys the shares from the government, thereby decreasing the government shareholding.

6. Monetizing the land assets

  • Government Agencies and Public Sector Enterprises have a lot of surplus land assets. E.g., Railways has 0.51 lakh hectares of land assets lying vacant. The government is trying to monetize these assets either by selling or renting them.
  • The government has also set up National Land Monetization Corporation for this purpose.
  • Monetizing the Assets aims to start the Infrastructure Asset Monetization Cycle and create new infrastructure with the help of existing infrastructure.

7. Strategic Disinvestment

  • It means selling more than 51% of shares to private parties and transferring management control. Hence, the Government’s shareholding becomes less than 49%. E.g., the Government is trying this in the case of Air India, IDBI Bank, Pawan Hans etc.

Disinvestment Targets

Disinvestment Targets of Government of India

The proceeds of disinvestment go to the National Investment Fund (NIF), which is part of the Public Account. The government uses the NIF for subscribing to the shares being issued by the CPSE, including PSBs and public sector insurance companies, on a rights basis to ensure 51 per cent government ownership in them, Recapitalisation of public sector banks, Equity infusion in various metro projects etc.

Insolvency and Bankruptcy Code

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Last Update: May 2023 (Insolvency and Bankruptcy Code)

Insolvency and Bankruptcy Code

This article deals with ‘Insolvency and Bankruptcy Code.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Bankruptcy?

Bankruptcy is a legal status usually imposed by a Court on a firm or individual unable to meet their debt obligations. 

Drawbacks of Earlier System of Bankruptcy

  1. It takes 4.3 years to resolve insolvencies in India (compared to 0.7 years in Japan ). 
  2. Creditors recover just 25% in India compared to 93% in Japan.
  3. It was difficult to wind up an unviable company in India, and this acted as a considerable barrier for entrepreneurs (as StartUps are prone to failure).  
  4. It has inhibited the development of a vibrant corporate bond market in India.  
  5. It has led to the ‘Evergreening of loans’, which has resulted in a large NPA of Banks.  
  6. The multiplicity of Acts to deal with Insolvency like the Sick Companies Act, 1985; SARFAESI Act, etc., led to delays and corruption because of overlapping provisions.

Provisions of the Act

  • Who can Initiate Insolvency Resolution Process? – It can be initiated by 
    • Business or debtor who has defaulted on dues (but he shouldn’t be Wilful Defaulter), OR
    • Lenders and creditors to the firm. 
  • Speed will be the main essence of insolvency proceedings 
    • The 180-day limit for the Committee of Creditors’, which will have representation of all lenders in proportion to their advances, to decide one of three alternatives — liquidation of the company, sale of the company as a going concern, or restructuring of debt.  
    • They can demand 90 extra days from Adjudicating Authority in exceptional cases. 
    • If three-fourths in value of creditors cannot agree on one of the three options within the 180/270 -day period, then the liquidation process will automatically commence.
  • Such speedy winding up is achieved by creating a host of new institutions. These include:
    • During the time insolvency proceedings are going on, Insolvency Professionals will take over the management of a company, assist creditors in the collection of relevant information, and later manage the liquidation process,
    • Insolvency Professional Agencies who will examine and certify these professionals,
    • Information Utilities collect, collate, and disseminate financial information related to debtors to facilitate insolvency, liquidation & bankruptcy (NeSL (National E-Governance Services Limited) is the first Info Utility).
    • Insolvency Regulator: The Insolvency and Bankruptcy Board of India (IBBI) exercises regulatory oversight over the whole process. 
  • Insolvency Adjudicating Authority: The final decision to accept or reject the insolvency resolution plan rests with the adjudicating authority. Adjudicating Authority in these cases are 
    • Debt Recovery Tribunal (“DRT”) in individuals and unlimited liability partnership firms.  
    • National Company Law Tribunal (“NCLT”) in companies & limited liability entities.
  • The act has provisions to tackle issues of cross-border insolvency. India must enter into bilateral agreements with these countries to settle cross-country insolvency. Budget 2022 announced that IBC would be amended to deal with cross-border insolvency efficiently. 
  • The bill has the provision of personal insolvency in case the promoter of the company has given a personal guarantee against the loans taken by the company. (For Example: A personal insolvency procedure was initiated by SBI against Anil Ambani, who had given a personal guarantee for a loan of ₹1200 crore taken by his companies RCom & Reliance Infratel Limited (RITL).
  • 2018 Amendment: Earlier, Promoters and defaulters bided for their companies and repurchased them. 2018 amendment stopped promoters and defaulters from bidding for companies undergoing resolution. 
Insolvency and Bankruptcy Code

Side Topic: Pre-Packing

Insolvency and Bankruptcy Code is amended to allow the procedure of pre-packing in India. Pre-packing is a process under which a resolution is agreed upon between corporate debtor and lender before approaching the courts for bankruptcy proceedings. 

What is Pre-Packing?

  • If the matter goes to NCLT for the formal insolvency proceedings, it negatively impacts the company’s image. It affects the future clients and customers of the company. 
  • To avoid such incidents, advanced economies (like the UK and the USA use the system of PRE-PACKING, i.e. borrower company informally (discretely) negotiates a resolution plan with its lenders or buyer parties before approaching the NCLT process. 

Benefit

  • It has the benefit of quick resolution and a discreet way of completing the insolvency process without negatively impacting its brand image.

Positive effects of Insolvency and Bankruptcy Code

  1. Easy exit policies will be a significant boost for StartUp India.
  2. It will improve the rank of India on the ease of doing business index.
  3. It can help in reducing the menace of NPA.
  4. Cases in High Courts will decrease because the adjudicating authority is DRT & NCLT.

Shortcomings of Insolvency and Bankruptcy Code

  • It lacks provisions equivalent to Chapter 11 of the US bankruptcy law, which allow a voluntary appeal by a debtor to be given a chance for a turnaround that the bankruptcy court can grant, if the court finds it feasible, regardless of the creditors’ verdict.
  • IBC interacts with numerous laws. E.g. labour laws and the Industrial Disputes Act, 1947.  
  • The proposed resolution plan requires 75% in value of creditors to sign for it. It creates the risk of the minority creditors being disenfranchised.
  • Code provides a hard deadline of 180/270 days to complete the corporate insolvency process, failing which liquidation starts. Negotiating under the shadow of liquidation may lead parties not to conduct a broad enough market search for the ailing corporate debtor and will likely result in fire sales (translating into creditor under-recoveries). 
  • There is a need to increase the number of NCLT benches, IP professionals, and ICT technology for faster case proceedings.
  • Issue of Group insolvency needs to be fixed. Group insolvency means insolvency of one company of a group of companies. E.g., Tata Sons have many companies like Tata Motors, Tata Capital, TCS etc. More clarity on the issue when one or more than one company of group undergoes insolvency process. 

Working Appraisal of Insolvency and Bankruptcy Code

Achievements

  • IBC Regime is working better than any other previous regime. Since the inception of the IBC in December 2016, 5,893 Corporate Insolvency Resolution Processes (CIRPs) have commenced by end-September 2022, of which 67 per cent have been closed. 
  • The time to settle insolvencies decreased to 1.6 years in 2020 (from 4.3 years). It is an improvement, but it should also be noted that in 64% of the cases where the Insolvency Process was started under the Act, the threshold of 270 days was breached (as of Feb 2023)
  • Corporate behaviour change wrt outstanding unpaid loans: Earlier, the Insolvency process used to take 4.3 years. Hence, Corporate houses used to be non-serious about paying these unpaid loans. Now, the time to solve insolvency has decreased to less than a year, and as a result, they have started repaying loans in fear of losing control over the company. 
  • Amount recovered – Shows mix trend
    • In the case of big loans like that of Bhushan Steel, banks have recovered 85%.
    • But in the case of MSME loans, the recovery rate is below 50% (but still higher than the previous recovery) 
  • Uniform and universal application: RBI has withdrawn other resolution schemes such as Strategic Debt Restructuring (SDR) Scheme, Scheme for Sustainable Structuring of Stressed Assets (S4A) etc.  
  • In Ease of Doing Business, the Rank of India wrt resolving insolvency has decreased due to these changes. 

Challenges

  • Low recovery rates: The recovery rate is meagre, with some of the insolvency processes giving haircuts of up to 90-95%.
  • Delays: The timeline for settling the cases under the act is not followed as more than 71% of the cases remains pending for more than 180 days. 
  • Staffing and infrastructure issues: NCLT is not equipped to handle the load as it operates with just half of the sanctioned strength.  
  • Need for strengthening homebuyer rights: According to a 2018 amendment to the IBC, a minimum of 100 homebuyers, or 10% of the total flat purchasers, are needed for initiating the process. However, homebuyers face practical difficulties in gathering the required number to initiate insolvency proceedings against the real estate owner.
  • Cross-Border Insolvency: IBC lacks standardized cross-border insolvency, as observed in Videocon and Jet Airways cases. 

MSME Industry

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Last Updated: May 2023 (MSME Industry)

MSME Industry

This article deals with ‘MSME Industry.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

MSME Definition

Amendment to MSME Act, 2018 

Under the Amendment to MSME Act 2006, changes have been made in the criteria of classifying Micro, Small and Medium enterprises from ‘investment in plant & machinery/equipment to ‘annual turnover’. Accordingly, Act will be amended.

Micro Enterprise Annual turnover does not exceed 5 crore rupees
Small Enterprise Annual turnover is more than 5 crore rupees to Rs 50 crore
Medium Enterprise Annual turnover is more than 50 crore rupees to Rs 250 crore.

Central Government may, by notification, vary turnover limits.

The change has been made because there was a drawback in the earlier classification system. Earlier, if the businessman wanted to expand the productivity of his enterprise and invest in machinery, the MSME tag would have been lost. Hence, Businessmen resisted investing in machinery, impacting the economy’s overall efficiency.

Previous System of MSME Classification

Previously, MSMEs were defined on the basis of investment in plant and machinery.

  Manufacturing Sector Services Sector
Micro Upto 50 lakh Upto 10 lakh
Small Between 50 lakh and 10 crore Between 10 lakh and 2 crore
Medium Between 10 crore and 30 crore Between 2 crore and 5 crore

Importance of MSME Industry

Importance of MSME Industry
  • MSMEs employ 11 crore people (after agriculture, the largest sector in India).
  • MSME sector contributes 30% to the country’s GDP. 
  • 45% of manufacturing in India is done in MSME industries. 
  • MSME constitutes 40% of Indian exports.  
  • More than 55% of MSMEs are located in rural areas. Hence, they are essential for rural development. 
  • SC/ST/OBC owns the majority of MSMEs.
  • The sector has enormous potential to address structural problems like unemployment, regional imbalances, unequal distribution of national income and wealth across the country. 

Issues faced by them

  1. Lack of access to Institutional Credit: Banks prefer to give a few large loans to big corporations instead of providing a large number of small loans to MSMEs because the administrative cost of managing small loans is high.
  2. NPAs: More than ₹80,000 crore worth of loans given to the MSME sector has turned NPA. Many MUDRA loans given to the MSME Sector without checking the credit history have also turned NPA.  
  3. Implementation of GST: GST Reforms has disrupted MSME Sector due to the following reasons 
    • Input Tax Credit: Credit is paid after a long delay. MSME sector can’t bear it and face a credit crunch due to this
    • Increased Compliance Cost.
  4. Insolvency and Bankruptcy Code Issue: Most of the MSME entities are Operational Creditors of big companies, but while the Insolvency process is going on, voting power is given only to Formal Creditors and not Operational Creditors. Hence, MSMEs don’t get back the right amount of recoveries.
  5. MSMEs can’t achieve an Economy of Scale & hence can’t compete with big industries. 
  6. MSMEs can’t invest in branding their products. 
  7. MSMEs lack access to improved technology
  8. MSME sector faces deficiencies in basic infrastructural facilities like power supply, road/rail connectivity, etc.  
  9. MSME sector has not been able to get back their markets after the disruption caused by the Covid pandemic. 

German Model of MSME – Mittelstand

  • German MSMEs Model is known as Mittelstand Model.
  • German MSMEs invest in R&D and produce high-quality products. As a result, German MSMEs export their products to western markets. This has played an important in making Germany a trade surplus economy. 
  • India can follow this model to encourage MSMEs to produce high-quality products which can be exported to foreign markets. 
German Model of MSME - Mittelstand

Scheme: Zero Defect – Zero Effect Scheme

  • Prime Minister launched it on Independence day of 2016.
  • Scheme emphasize that Indian MSMEs should manufacture goods in the country with 
    • “Zero defects”: Zero non-conformance/non-compliance.
    • “Zero effect” on the environment: Zero air pollution/liquid discharge /solid waste. 
  • It would enable the advancement of Indian industry to a position of eminence in the global marketplace through the ‘Made in India’ mark.

Schemes for MSMEs

1. Support & Outreach Initiative (SOI) for MSME Sector

  • It was started in 2018.
  • Various initiatives announced under the scheme are
    • 59 minutes Loan portal launched: MSMEs can get an easy loan ranging from ₹10 lakh to 1 crore 
    • 2 % Interest Subvention for all GST registered MSMEs.
    • Companies with turnover up to ₹500 crores must compulsorily be brought on the Trade Receivables e-Discounting System (TReDS).
    • Labour Inspector will inspect the MSME unit via computerized random allotment to prevent corruption.
    • Self Declaration of air and water pollution laws.
Support & Outreach Initiative (SOI) for MSME Sector

Side Topic: TReDS Platform

  • TReDS platform aims to solve the issue of delayed payment to the MSME sector.
  • When MSMEs sell their goods to any corporate buyer, they mostly get Trade Receivable, i.e. invoice saying that buyer will pay back after, say 4 months. But this creates an issue for MSME, which is short on funds. They need immediate cash to get their operations going. Hence, they can sell that invoices to a third party like a bank or NBFC at a discount and get immediate cash. 
TReDS
  • TReDS platform is a sort of intermediary that will check the invoice’s authenticity and upload it on its system so that Banks and NBFCs can look at the available trade receivable and place their bids to buy those trade receivables (not going into many technicalities). 
  • Presently, RBI has approved three TReDS platforms i.e.
    1. Receivables Exchange of India (RXIL):  Joint venture of SIDBI and NSE 
    2. Invoicemart
    3. Mind Online National Exchange
  • Parliament has also passed Factoring Regulation (Amendment) Act giving legal sanctity to MSMEs to use this platform.

2 . MUDRA

What MUDRA bank will do?

  • MUDRA is a Non-Banking Financial Corporation (NBFC).
  • Objective: Refinance lending to Micro-Enterprises via Scheduled Commercial Banks, Regional Rural Banks, Cooperatives, Microfinance Institutions & other NBFCs.  
  • Ownership: It is wholly owned by SIDBI.  
  • It is not the first of its kind & such institutions are already operating in many countries, with the first such institution opened in Bangladesh in 1990.

Works

  • Refinance Micro Enterprise Loans, i.e. give money to Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Micro Finance Institutions (MFIs) etc., so that they can give money to Micro Enterprises. These institutions distribute money received from Mudra Bank to Micro-Enterprises under Mudra Yojana. 
  • 3 types of loans are given under Mudra Yojana 
    1. Shishu: loans up to 50,000      
    2. Kishor : >50,000/- up to 5 lakh 
    3. Tarun : > 5 lakh and up to 10 lakh
  • Mudra loans are collateral-free. 
Working of MUDRA Bank

3. Ubharte Sitare Program

  • It is an Alternate Investment Fund (AIF) created by EXIM Bank and SIDBI (in 2021). 
  • Objective: To finance the export-oriented MSMEs using debt or equity finance.

4. One District One Product

  • The scheme was started Commerce Ministry. 
  • Under the scheme, one unique product will be recognized from every district of India, and the Commerce Ministry will support that to increase its export. 
  • For example, Blue Pottery has been recognized from Jaipur and Pickle from Amritsar. 

5. RAMP (Raising and Accelerating MSME Performance) Scheme

It is a World Bank-supported scheme that aims to 

  1. Improve access of MSMEs to market & credit
  2. Helps in technology upgradation of MSMEs
  3. Addressing issues of delayed payments to MSMEs
  4. Greening (i.e. reducing carbon footprint) of MSMEs

6. Prime Minister Employment Generation Program  (PMEGP)

  • Under PMEGP, financial support of Rs 25 lakh is provided to the beneficiaries for the setting up of new  MSMEs.

7. Other Government Initiatives for MSME industries

7.1 No GST

  • If turnover is up to 20 lakh (10 lakh for Special Category State), then no need to REGISTER for GST

7.2 Priority Sector Lending

  • 7.5% of the bank loans should be given to MSMEs. 

7.3 Public Procurement Order

  • Every central ministry, department and PSU should procure 25% of their total purchase from the MSME sector.

7.4 Easier Registration

  • The process to simplify the registration of MSMEs. Now MSMEs can be registered using only PAN Card and Aadhaar.

7.5 SME Exchanges

  • SME exchange is dedicated to trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges.
  • BSE has named its SME platform BSESME, while NSE has named it Emerge.

7.6 SIDF

  • Small Industries Development fund (SIDF) is operated by SIDBI for the development of MSMEs.

7.7 SFURTI

  • Scheme of Fund for Regeneration of Traditional Industries aims to set up clusters of Khadi, Coir, Handicraft; & help the entrepreneurs inside them.

7.8 MSME Samadhaan

  • If a buyer (Govt organisation at Union/State) is not paying money to MSME supplier within the specified time limit. In that case, Organisation can be ordered to pay money with interest rate.

Economic Survey Topic: Nourishing Dwarfs to become Giants- Reorienting policies for MSME Growth

Companies in the Model

OURISHING DWARFS TO BECOME GIANTS

Ideally, an Infant firm (i.e. formed less than 10 years ago and employing less than 100 workers) should gradually become Large (employing more than 100 workers). But over the last seven decades, the government’s policies have stifled the growth of MSMEs in the economy, and there is a domination of Dwarfs (employing less than 100 employees, despite being in existence for more than 10 years) in the Indian economy. 

OURISHING DWARFS TO BECOME GIANTS

Issues with Dwarfs

  • Firms that can grow over time to become large are the biggest contributors to employment and productivity in the economy. In contrast, dwarfs that remain small despite becoming older remain the lowest contributors to employment and productivity in the economy.

How do government policies promote Dwarfism?

  • Labour Regulations: For example,  
    • Industrial Disputes Act (IDA), 1947 mandates firms with more than 100 employees to get permission from the government before retrenchment of employees. 
    • Employees’ Provident Fund & Miscellaneous Provisions Act, 1952 mandates that firms with more than 20 employees are required to co-contribute in insurance/pension accounts of low-salaried workers.
  • MSMEs are eligible for Priority Sector Lending, Public Procurement Quota and many other government schemes designed especially for MSMEs.

Indian policies have created a “perverse” incentive for firms to remain small. If the firms grow beyond the thresholds that these policies employ, they will not obtain the said benefits. Therefore, entrepreneurs find it optimal to start a new firm to continue availing these benefits rather than grow the firm beyond the said threshold. But then, the firm cannot benefit from economies of scale. 

Ways to promote Dwarf MSMEs to become Giants

  • Under Priority Sector Lending (PSL), banks are required to lend 7.5% of their annual loans to Micro enterprises. These norms should be tweaked to give first preference to loan applications by ‘start ups’ and ‘infants’ firms.
  • Sunset Clause for Incentives: MSME benefits should have a ‘sunset’ clause, say, after 5-7 years, the firm will no longer be able to claim it. 
  • Focus on High Employment Elastic Sectors like the manufacture of rubber and plastic products, electronic and optical products, transport equipment, machinery, basic metals and fabricated metal products, chemicals and chemical products, textiles and leather & leather products.

Ease of Doing Business

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Last Update: May 2023 (Ease of Doing Business)

Ease of Doing Business

This article deals with ‘Ease of Doing Business.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Ease of Doing Business Report?

  • Ease of Doing Business is an index released by World Bank to measure how easy or difficult it is to run a business in a given country. 
  • It ranks country based on 10 parameters like 
    1. Construction permits required.
    2. Documents required to start a firm.
    3. Provisions for enforcement of contracts.
    4. Trading across the country.
    5. Getting credit.
    6. Getting electricity connection.
    7. Ease in paying taxes. 
    8. The process to resolve insolvency.
    9. Registering new property. 
    10. Provisions for protection of minority investors.

Ranking

Ease of Doing Business

What is the government doing in this regard?

  • Labour Laws have been rationalized from 44 Union Labour laws to 4 codes to make compliance easy. 
  • The government is promoting the Self Certification Regime Promotion through steps such as Shram Suvidha Portal.
  • Insolvency and Bankruptcy Code passed for efficiently resolving insolvency.
  • FDI limits have been liberalized, and more sectors have been opened.
  • GST Reform has rationalized the indirect taxation system.
  • The government has made incorporating new companies easy.
  • Investor Facilitation Cell has been created under Invest India Program to guide, assist & handhold investors.
  • Judiciary: Commercial Courts have been set up to deal specifically with cases of commercial nature.
  • Protecting Minority Investors: India has strengthened minority investor protections by increasing the remedies available in cases of prejudicial transactions between interested parties.
  • Simplifying the process to pay statutory dues such as provident fund contributions and corporate taxes.
  • Introduction of paperless court procedures and systems including e-fling, e-payment, e-summons etc. 
  • Record of rights of lands has been digitalized. 

What more can be done?

  • Enforcement of contracts now takes longer than it did 15 years ago. (Wayout: Fast Judiciary)
  • Registering property is still difficult. (Wayout: Computerization of land records)
  • Paying taxes is still difficult in India.
  • Trading across borders is still difficult. (Wayout: Infrastructure building like ports + Computerization at Customs)
  • There is still no legislation for Land Acquisition.

Side Topic: Indian State’s Ease of Doing Business

  • Department of Industrial Promotion and Internal Trade (DIPIT) publishes this report with the help of the World Bank.
  • Latest such report was published in July 2022, and top-ranked states wrt Ease of Doing Business were 
    1. Haryana
    2. Andhra Pradesh
    3. Gujarat
    4. Karnataka
    5. Punjab

Economic Survey (2020) Topic: Overregulation and Uncertainty in India

According to Economic Survey (2021), India suffers from over-regulation. For example, the time to settle a commercial dispute in India is 1445 days compared to just 120 days in Singapore.

civilspedia.com 120 Days 1445 Days

Moreover, there is policy uncertainty in India. In such a situation, Government officials like CAG, CBI etc., create a number of rules to save themselves as these rules can be interpreted in several ways. It gives an opportunity for corruption and nepotism to the officials.

Solutions

1. Doctrine of Business Judgement Rule

  • This doctrine assumes that the company’s board of director and higher officials has taken all the decisions in good faith. Hence, officials willn’t be presumed guilty unless the contrary is proved.

2. Doctrine of Minimum Government and Maximum Governance

  • Government should reduce the number of regulatory bodies and rationalize the obsolete statutes.

3. Rationalize the Tribunals

  • Government should rationalize the number of Tribunals. In this regard, the government is already working on explaining the number of tribunals. The government has abolished tribunals such as the Film Certification Appellate Tribunal and various tribunals under the Customs Act, Patents Act, Airport Authority of India Act etc. 

4. TORA 

  • Government should implement the Transparency of Rules Act (i.e. TORA), under which all the organizations will have to publish the rules and regulations on their websites. Any rule not published on the website will not be applicable. 

Startups

by

Last Update: May 2023 (Startups in India)

Startups

This article deals with ‘Start ups.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Start Up?

A start up should satisfy the following conditions

  • Enterprise should be registered under the Companies Act or Partnership Act or Limited Liability Partnership Act.
  • From the date of registration, 10 years must not have been passed.
  • The total annual turnover should not be more than Rs 100 crores in any year. 
Startups

Why do we need Start ups?

  • To reap the demographic dividend, India needs new companies.
  • Instead of training and educating people to seek jobs, the government wants to create an environment where people can create jobs.  
  • In the era of LPG, the government can’t create enough jobs. The private sector has to come forward. Startups can help in creating those jobs.
  • India has to correct its proportion of persons involved in different sectors by increasing percentage of people engaged in manufacturing & service sector and decreasing persons in Agricultural sector. This objective can’t be achieved by relying just on the traditional companies of big business houses.

Side Topic: Unicorn Club

  • Unicorn Start ups are those StartUps whose valuation is more than $1 billion. 
  • There are 80 Unicorn Startups in India as of 2022, including Swiggy, Paytm, Byjus, Unadadamy, CRED, etc.

Startup Trends in India

According to Economic Survey (2023) 

  1. States with the largest number of Startups are – 1. Maharashtra, 2. Karnataka, 3. Delhi, 4. UP and 5. Haryana 
  2. Sectors in which Startups are coming up are – 1. IT Services, 2. Healthcare, 3. Education, 4. Professional Services and 5. Food Beverages. 

Factors affecting new firm registration/startup in a given area are 

  1. Physical infrastructure: It includes basic physical infrastructure such as roads, electricity, water, etc., and proximity to large population centres.
  2. Social Infrastructure: It includes education level identified through the proportion of the literate population and number of colleges.
  3. Government policies: It includes labour and taxation laws, subsidies provided in the form of cheap electricity, easier acquisition of land etc. 

What government is doing in this regard?

1 . StartUp India

  • Startup profits to be tax-free for 3 years.  
  • Compliance regime based on self-certification for labour and environmental laws. 
  • Setting up StartUp India hub to create a single point of contact for the entire Startup ecosystem.
  • Easy exit policy for StartUps within 90 days. 
  • The government will try to link Industry & Academia so that both can work in synergy. 
  • Rs. 10,000 crores ‘Fund of Funds’ to promote Startups.  
  • Liberalised Fast-track mechanism for startup patent applications with 80% cost rebate.
  • Encouraging Startups to participate in public procurement by easing norms of minimum turnover. 
  • Mobile apps and portals to register StartUps in a day.
  • Public-private partnership (PPP) model for new incubators.
  • Government to promote core innovation programmes in 5 lakh schools across the country.

Overall, Start-up India will turn Indian youths from job seekers into job creators. The initiative aspires to give India wings to fly above the sky.

2. Stand Up India

  • The StandUp India scheme has been started to promote entrepreneurship among the Scheduled Caste/Scheduled Tribes (SC/ST) and Women entrepreneurs.
  • Under the provisions of the scheme, approximately 1.25 lakh branches of Indian banks have been mandated to provide a loan worth Rs. 10 lakh to Rs. 1 crore without collateral to one Dalit or Adivasi member and one woman each for setting up greenfield enterprise in the non-farm sector.

3. Governance Reforms

  • The government has reduced the plethora of regulatory procedures involved in creating StartUps. 
  • Bankruptcy laws have been amended according to world best practices to provide easy & safe exit. StartUp business is precarious, and even in Silicon Valley, 1 out of 10 StartUp is successful.

4. Groom Entrepreneurship via Schemes

  • More “Incubation centres” have been set up.  
  • Scheme for Promoting Innovation and Rural Entrepreneurs (ASPIRE): To promote StartUps in rural and agriculture-based industries.

5. Encouraging innovation

  • Under Niti Ayog: Atal Innovation Mission (AIM), Self Employment & Talent Utilisation (SETU) etc., have been started.
  • Start-Ups Intellectual Property Protection (SIPP) scheme: Creates awareness about intellectual property and encourages Startups to go towards creativity and innovation. 
  • Uchhattar Avishkar Yojana: The government of India spends ₹ 250 crore/annum for fostering high-quality research among IIT students. 
  • Smart India Hackathon: Event organized by the Ministry of Education. College students are asked to solve the challenge faced by the public sector, industries or NGOs. 

6. Help to make Capital  available

  • The government encourages more Venture Capitalists & Angel Investors to invest in India by making the regulatory environment conducive.

7. Faster Judiciary

  • The government has created separate commercial courts have been established.

Critical Analysis –  Potential of Startups in Extensive Job Growth

Favour Points are many as discussed above

  • After finishing studies, many entrepreneurs who would have been looking towards the government to get jobs are now creating jobs and opening their own companies due to Startup India. 
  • It also helps to stop the Brain Drain.
  • Examples of Startups giving Jobs 
    1. Startups like OLA have provided jobs to thousands of youth as Taxi Operators apart from Tech Experts managing Logistics. 
    2. Flipkart has created many jobs in Logistics, even in Tier 2 & 3 cities. 

Critical Part

  • Most of the Startups are in IT Sector. Hence, Startups are technology and skill intensive. These Startups value skill rather than mass employment. So one particular Startup can’t lead to the creation of many jobs.  
  • Government should encourage Startups in diverse sectors like 
    1. Low Skill Manufacturing Sector: Apparel and shoes are employment-intensive and employ women.
    2. Agro Business Startups: Food processing by making contracts with farmers 
  • Startups are located in limited areas geographically like Bangalore, Delhi, Mumbai etc. Government should incentivize Startups in Remote regions like North East leveraging ICT and cheap labour. North East can be used to create Server Farms of Technology Companies due to cold climate (Tech Companies locate their Server Farms in cooler areas).
  • It has led to the rise of the Gig Economy with no job security.

Challenges with StartUps

Issues with StartUps
  • Failure Prone: Even in Silicon Valley, just 1 out of 10 Startups succeed. 
  • Access to Funding: If Startups take funding from Venture Capitalists or Angel investors, the stake of the original entrepreneur is diluted, and Investors start to interfere in decision-making processes. 
  • Foreign ownership: Almost all prominent Indian StartUps like Ola, Flipkart, PayTM etc., are now presently owned by foreign companies and financial institutions like Softbank, Tencent, Alibaba, Walmart etc. 
  • Flipping: Indian startups are involved in flipping ownership. Flipping refers to the complete transfer of ownership, IPR etc., of an Indian company to a foreign entity. This process is predominantly undertaken to relocate to countries with more lenient tax and legal regulations, such as UAE or Singapore, and to access more affordable financing options.
  • Fake Start ups: Established companies are promoting sister entities as Startups to avail benefits of the Startup Scheme. 
  • Overvaluation: Most Startups are overvalued. 
  • Startups concentrated in e-Commerce Aggregation: Most StartUps are concentrated in the e-commerce aggregation sector (Zomato, Flipkart etc.), whereas India needs more Startups in Agriculture, Manufacturing, Healthcare and Education.
  • Bubble Creation: According to analysts, India is witnessing a bubble similar to the heady dot-com rush of 1999-2000 in Silicon Valley with too much money chasing too few ideas.  
  • Issue of Corporate Governance in Startups: There are issues wrt Corporate Governance in the StartUps exemplified case where Flipkart Co-founder Binny Bansal was accused of sexual harassment with the company’s women employees. 
  • Criticism of Startups by Raghuram Rajan: Raghuram Rajan believes that ‘there is no FREE LUNCH in the economy. When companies give free products or cashback to the consumer, it is ultimately paid by the government through tax holidays & subsidies given to that company.