Trade Policy, Trade Regulation and Industrial Policies
Trade policy defines standards, goals, rules and regulations that pertain to trade relations between countries. These policies are specific to each country and are formulated by its public officials. Their aim is to boost the nation’s international trade. A country’s trade policy includes taxes imposed on import and export, inspection regulations, and tariffs and quotas.
Constituents of Trade Policy
A trade policy generally focuses on the following specifications in terms of international trade:
Tariffs: Every country has the right to impose taxes on imported and exported goods. Some nations levy heavy tariffs on imported goods to protect their local industries. High import taxes inflate the prices of imported goods in local markets, ensuring that local products are more sought after.
Trade barriers: They are state-imposed restrictions on trading a particular product or with a specific nation. Some of the most common forms of trade barriers are tariffs, duties, subsidies, embargoes and quotas.
Safety: This determinant ensures that only high-quality products are imported in the country. Public officials can lay down inspection regulations to ensure that the imported product conform to the set safety and quality standards.
Types of Trade Policy
Trade policies can assume varying dimensions and scope depending on the number of parties involved in the policy. Consider the following types of trade policies:
National trade policy: Every country formulates this policy to safeguard the best interest of its trade and citizens. This policy is always in consonance with the national foreign policy.
Bilateral trade policy: This policy is formed between two nations to regulate the trade and business relations with each other. The national trade policies of both the nations and their negotiations under the trade agreement are considered while formulating bilateral trade policy.
International trade policy: International economic organizations, such as Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO) and International Monetary Fund (IMF), define the international trade policy under their charter. The policies uphold the best interests of both developed and developing nations. The best example is the Doha Development Agenda which was formulated by the WTO.
Trade Policy and International Economy
As open market economy prevails in most developed countries, international economic organizations support free trade policies while developing nations prefer partially-shielded trade practices to protect their local industries.
Today’s era of globalization depends on sound trade policies to reflect market changes, establish free and fair trade practices and expand the possibilities for booming international trade.
The important policies, procedures and regulations governing foreign trade in India include:
- Customs Act 1962
- Customs Tariff Act 1975
- India Foreign Trade (Development and Regulation) Act (1992)
- Foreign Trade (Regulation) Rules 1993
- Foreign Trade Policy – 2009 – 14
- Foreign Trade Procedures – 2009 – 14
- Foreign Exchange Management Act 1999
The Industrial Policy plan of a country, sometimes shortened IP, is its official strategic effort to encourage the development and growth of the manufacturing sector of the economy.
At the time of independence, India had an extremely underdeveloped and unbalanced industrial structure. Industries contributed less than one sixth part of national income.
The country did have some industries like cotton textiles, jute and sugar, but there were virtually no basic, heavy and capital goods industries on which programmes of future industrialization could be based.
Whatever major industries were there, they were largely concentrated in a few areas such as Bombay. Surat, Ahmedabad. Jameshedpur, Calcutta, Delhi etc. While the rest of the country remained industrially neglected.
Thus after independence, the government of India had to undertake effective measures to increase the tempo of industrialisation. Correct regional imbalances in industrial development and rectify the distorted industrial structure through rapid development of capital goods industries.
Industrial policy is a statement which defines the role of government in industrial development. The place of the public and private sectors in industrialization of the country , the relative role of large and small industries, the role of foreign capital etc.
In brief, it is a statement of objectives to be achieved in the area of industrial development and the measures to be adopted towards achieving these objectives. The industrial policy thus formally indicates the spheres of activity of the public and the private sectors.
It lays down rules and procedures that would govern the growth and pattern of industrial activity. The industrial policy is neither fixed nor inflexible. It is amended, modified and redrafted according to the changed situations, requirements and perspectives of developments.
The major objectives of industrial policy are:
(i) Rapid Industrial Development:
The industrial policy of the Government of India is aimed at increasing the tempo of industrial development. It seeks to create a favourable investment climate for the private sector as well as mobilise resources for the investment in public sector. In its way the government seeks to promote rapid industrial development in the country.
(ii) Balanced industrial Structure:
The industrial policy is designed to correct the prevailing lopsided industrial structure. Thus, for example, before independence, India had some fairly developed consumer goods industries. But the capital goods sector was not developed at all and basic and heavy industries were by and large absent.
So the industrial policy had to be framed in such a manner that these imbalances in the industrial structure are corrected. Thus by laying emphasis on heavy industries and development of capital goods sector, industrial policy seeks to bring a balance in industrial structure.
(iii) Prevention of Concentration of Economic Power:
The industrial policy seeks to provide a framework of rules, regulations and reservation of spheres of activity for the public and the private sectors. This is aimed at reducing the monopolistic tendencies and preventing concentration of economic power in the hands of a few big industrial houses.
(iv) Balanced Regional Growth:
Industrial policy also aims at correcting regional imbalances in industrial development. It is quite well-known that some regions in the country are industrially quite advanced e.g., Maharashtra and Gujarat while others are industrially backward, like Bihar, Orissa. It is the task of industrial policy to work out programmes and policies which lead to industrial development or industrial growth.
The Industrial policy of 1948, which was the first industrial policy statement of the Government of India, was changed in 1956 in a public sector dominated industrial development policy that remained in force till 1991 with some minor modifications and amendments in 1977 and 1980. In 1991, far reaching changes were made in the 1956 industrial policy. The new Industrial Policy of July 1991 heralded the framework for industrial development at present.
INDUSTRIAL POLICY SINCE 1956
When India achieved Independence in 1947, the national consensus was in favour of rapid industrialization of the economy which was seen not only as the key to economic development but also to economic sovereignty. In the subsequent years, India’s Industrial Policy evolved through successive Industrial Policy Resolutions and Industrial Policy Statements. Specific priorities for industrial development were also laid down in the successive Five Year Plans.
Indian Constitution was adopted in January 1950, the Planning Commission was constituted in March 1950 and the Industrial (Department and Regulation) Act (IDR Act) was enacted in 1951 with the objective of empowering the Government to take necessary steps to regulate the pattern of industrial development through licensing. This paved the way for the Industrial Policy Resolution of 1956, which was the first comprehensive statement on the strategy for industrial development in India.
The Industrial Policy Resolution – 1956 classified industries into three categories. The first category comprised 17 industries (included in Schedule A of the Resolution) exclusively under the domain of the Government. These included inter alia, railways, air transport, arms and ammunition, iron and steel and atomic energy. The second category comprised 12 industries (included in Schedule B of the Resolution), which were envisaged to be progressively State
owned but private sector was expected to supplement the efforts of the State.
The third category contained all the remaining industries and it was expected that private sector would initiate development of these industries but they would remain open for the State as well
Another objective spelt out in the Industrial Policy Resolution – 1956 was the removal of regional disparities through development of regions with low industrial base Accordingly, adequate infrastructure for industrial development of such regions was duly emphasized. Given the potential to provide large-scale employment, the Resolution reiterated the Government’s
determination to provide all sorts of assistance to small and cottage industries for wider dispersal of the industrial base and more equitable distribution of income.
Industrial Policy Measures in the 1960s and 1970s
Monopolies Inquiry Commission (MIC) was set up in 1964 to review various aspects pertaining to concentration of economic power and operations of industrial licensing under the IDR Act, 1951. While emphasizing that the planned economy contributed to the growth of industry, the Report by MIC concluded that the industrial licensing system enabled big business houses to obtain disproportionately large share of licenses which had led to pre-emption and foreclosure of capacity. Subsequently, the Industrial Licensing Policy Inquiry Committee (Dutt Committee), constituted in 1967, recommended that larger industrial houses should be given licenses only for setting up industry in core and heavy investment sectors, thereby necessitating reorientation of industrial licensing policy.
In 1969, the monopolies and restrictive Trade Practices (MRTP) Act was introduced to enable the Government to effectively control concentration of economic power. The Dutt Committee had defined large business houses as those with assets of more than Rs.350 million. The MRTP Act, 1969 defined large business houses as those with assets of Rs. 200 million and above.
The new Industrial Licensing Policy of 1970 classified industries into four categories. First category, termed as ‘Core Sector’, consisted of basic, critical and strategic industries. Second category termed as ‘Heavy Investment Sector’, comprised projects involving investment of more than Rs.50 million.
The third category, the ‘Middle Sector’ consisted of projects with investment in the range of Rs.10 million to Rs.50 million. The fourth category was ‘Delicensed Sector’, in which investment was less than Rs.10 million and was exempted from licensing requirements. The industrial licensing policy of 1970 confined the role of large business houses and foreign companies to the core, heavy and export oriented sectors.
The Industrial Policy Statement – 1973
With a view to prevent excessive concentration of industrial activity in the large industrial houses, this Statement gave preference to small and medium entrepreneurs over the large houses and foreign companies in setting up of new capacity particularly in the production of mass consumption goods. New undertakings of up to Rs.10 million by way of fixed assets were exempted from licensing requirements for substantial expansion of assets. This exemption was not allowed to MRTP companies, foreign companies and existing licensed or registered undertakings having fixed assets of Rs.50 million and above.
The Industrial Policy Statement -1977
This Statement emphasized decentralization of industrial sector with increased role for small scale, tiny and cottage industries. It also provided for close interaction between industrial and agricultural sectors. Highest priority was accorded to power generation and transmission.
Industrial Policy Statement -1980
The industrial Policy Statement of 1980 placed accent on promotion of competition in the domestic market, technological upgradatrion and modernization of industries. Some of the socio-economic objectives spelt out in the Statement were i) optimum utilisation of installed capacity, ii) higher productivity, iii) higher employment levels, iv) removal of regional disparities, v) strengthening of agricultural base, vi) promotion of export oriented industries and vi) consumer protection against high prices and poor quality.
Industrial policy since 1991
The objective of the Industrial Policy Statement – 1991 was to maintain sustained growth in productivity, enhance gainful employment and achieve optimal utilization of human resources, to attain international competitiveness, and to transform India into a major partner and player in the global arena. Quite clearly, the focus of the policy was to unshackle the Indian industry from bureaucratic controls. This called for a number of far-reaching reforms :
The Industrial Policy Statement of 1991 recognized that the Government’s intervention in investment decisions of large companies through MRTP Act had proved to be deleterious for industrial growth. Accordingly, pre-entry scrutiny of investment decisions of MRTP companies was abolished. The thrust of policy was more on controlling unfair and restrictive trade practices. The provisions restricting mergers, amalgamations and takeovers were also repealed.
Industrial Policy Measures Since 1991
Since 1991, industrial policy measures and procedural simplifications have been reviewed on an ongoing basis. Presently, there are only six industries which require compulsory licensing. Similarly, there are only three industries reserved for the public sector. Some of important policy measures initiated since 1991 are set out below:
- Since 1991, promotion of foreign direct investment has been an integral part of India’s economic policy. The Government has ensured a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. FDI up to 100 per cent has also been allowed under automatic route for most manufacturing activities in Special Economic Zones (SEZs). More recently, in 2004, the FDI limits were raised in the private banking sector (up to 74 per cent), oil exploration (up to 100 per cent), petroleum product marketing (up to 100 per cent), petroleum product pipelines (up to 100 per cent), natural gas and LNG pipelines (up to 100 per cent) and printing of scientific and technical magazines, periodicals and journals (up to 100 per cent). In February 2005, the FDI ceiling in telecom sector in certain services was increased from 49 per cent to 74 per cent. Currently it is 100 percent.
- Reservation of items of manufacture exclusively in the small scale sector has been an important tenet of industrial policy. Realizing the increased import competition with the removal of quantitative restrictions since April 2001, the Government has adopted a policy of dereservation and has pruned the list of items reserved for SSI sector gradually from 821 items as at end March 1999 to 506 items as on April 6, 2005. Further, the Union Budget 2005-06 has proposed to dereserve 108 items which were identified by Ministry of Small Scale Industries.The investment limit in plant and machinery of small scale units has been raised by the Government from time to time. To enable some of the small scale units to achieve required economies of scale, adifferential investment limit has been adopted for them since October Presently, there are 41 reserved items which are allowed investment limit up to Rs.50 million instead of present limit of Rs.10 million applicable for other small scale units.
- Equity participation up to 24 per cent of the total shareholding in small scale units by other industrial undertakings has been allowed. The objective therein has been to enable the small sector to access the capital market and encourage modernization, technological upgradation, ancillarisation, sub-contracting, etc.
- Under the framework provided by the Competition Act 2002, the Competition Commission of India was set up in 2003 so as to prevent practices having adverse impact on competition in markets.
- In an effort to mitigate regional imbalances, the Government announced a new North-East Industrial Policy in December 1997 for promoting industrialization in the North-Eastern region. This policy is applicable for the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura. The Policy has provided various concessions to industrial units in the North Eastern Region, e.g., development of industrial infrastructure, subsidies under various schemes, excise and income-tax exemption for a period of 10 years, etc. North Eastern Development Finance Corporation Ltd. has been designated as the nodal disbursing agency under the Scheme.
- The focus of disinvestment process of PSUs has shifted from sale of minority stakes to strategic sales. Up to December 2004, PSUs have been divested to an extent of Rs.478 billion.
- Apart from general policy measures, some industry specific measures have also been initiated. For instance, Electricity Act 2003 has been enacted which envisaged to delicense power generation and permit captive power plants. It is also intended to facilitate private sector participation in transmission sector and provide open access to grid sector. Various policy measures have facilitated increased private sector participation in key infrastructure sectors such as, telecommunication, roads and ports. Foreign equity participation up to 100 per cent has been allowed in construction and maintenance of roads and bridges. MRTP provisions have been relaxed to encourage private sector financing by large firms in the highway sector.