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> Policies> economic survey 2000-01
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Economic Survey 2000-2001
[Issues and priorities]
Domestic reforms
1.119 Alongwith the application of competitive pressure, Indian industry must be provided the right environment for being able to compete. With the economic policy changes that have taken place in the 1990s, along with the worldwide changes that have occurred in the economic environment, it is essential for industry to become capable of restructuring on a continuous basis. Measures to promote such restructuring include factor market reforms, an end to any remaining investment controls and provisions for progressive improvement in infrastructure services. These reforms will also help Indian industry in meeting the challenge of imports resulting from the removal of the remaining import restrictions.
1.120 These issues assume greater importance in the light of the industrial growth experience of the 1990s. The industrial policy reforms of the 1990s, opening of foreign direct investment, improvement in access to foreign technology, abolition of MRTP and the phased manufacturing programmes, had led to an expectation of sustained higher growth in industrial production. After some exuberance in the mid-1990s industrial growth has slowed down. It is likely that this has happened due to the existing rigidities in factor markets. Capital remains locked up in sick enterprises due to dilatory bankruptcy procedures. Labour mobility is hampered by the existing labour laws and land utilisations by the Urban Land Ceiling Act and rent control laws. Consequently, resources in the industrial sector have not been able to move to more productive uses, in particular towards labour using employment generating industries, that could lead to higher industrial growth on a sustained basis.
Bankruptcy law
1.121 Inclusion of modern bankruptcy provisions in the Companies Act, repeal of SICA (Sick Industrial Companies Act) and dissolution of BIFR (Board for Industrial and Financial Reconstruction) will facilitate restructuring of Indian industry. The delays currently inherent in the BIFR process that prevent quick reorganisation of sick companies, or closure when required, should be eliminated. This would benefit shareholders, lenders and labour to move to more productive pursuits, thereby promoting industrial growth.
Labour laws and procedures
1.122 The contract labour law, as it exists today, makes it impossible for genuine small-scale entrepreneurs to provide services to industry. A modern contract labour act should encourage outsourcing of services so that new employment is generated. Labour laws and procedures have reduced the incentive for organised labour to work efficiently and have made it unprofitable for organised industry to generate new jobs. Greater flexibility is essential if Indian industry is to compete with Chinese industry and generate as many new jobs as the latter has.
Urban Land Ceiling
1.123 The states need to follow the lead of the centre and repeal the Urban Land Ceiling laws.
1.124 The above three reforms will facilitate industrial restructuring and make it possible for capital and skills to move quickly out of declining industries and into rising ones.
Small scale industry reservation
1.125 Small scale industry reservation is a variant of investment control. Whereas special support policies for small and medium enterprises are found in most countries of the world, developed and developing alike, the policy of small scale industries reservation is unique to India. In view of the imminent removal of all restrictions on imports in April 2001, the time has come to give up reliance on reservation as an instrument for supporting SSI. Labour intensive industry can then exploit economies of scale and scope and thus reduce unit cost of production to those of Chinese imports. As many SSI reserved goods (like bicycles, agricultural implements, garments) are used by the bottom half of the population, dereservation will also raise the real income of the poor and generate further demand for these goods.
1.126 This reform, along with the previous three, will enable organised industry to move out of capital intensive manufacturing and enter labour intensive manufacturing, and generate new employment at a much faster pace. Its ability to compete with Chinese imports will strengthen manifold and exports of labour-intensive goods will expand.
Power reform
1.127 The pricing of power at (efficient) cost of production-cum-distribution is not just a fiscal necessity, but essential for keeping the system from collapsing. Transmission and distribution losses need to be tackled on a war footing to make efficient pricing feasible. A special task force may be needed to be set up to push power sector reforms with state Governments in an organised manner. A modern Electricity Bill has been drafted. Its adoption will help in enabling the reform of State Electricity Boards so that the public, private and cooperative sectors can compete under a sound and independent regulatory regime.
States fiscal deficit
1.128 In 1999-2000, the combined fiscal deficit of the centre and states was estimated at nearly 10 per cent of GDP, an increase of almost one percentage point from 1998-99. The revenue deficit is also threatening to reach unsustainable limits.
1.129 The RBI study on states’ finances shows that the states’ debt to GDP ratio, which had declined from 19.4 per cent in 1990-91 to 17.8 per cent in 1996-97 has jumped to 21.4 per cent in 1999-2000 (RE). It is budgeted to jump further to 22.9 per cent in 2000-01. The states’ primary deficit in 1999-2000 was about 0.7 per cent of GDP higher than in 1990-91. In contrast to the central Government guarantees, which have declined as a proportion of GDP over the decade, the guarantees provided by the states have increased by 0.6 per cent of GDP between 1995-96 and 1999-2000. The result of this fiscal deterioration is that states’ expenditure on social sectors have remained stagnant. There is little money for improving the reach and quality of education services or of public health.
Social sector reform
1.130 Till the fiscal situation is brought under control, it is unlikely that states will have more funds spending on improvement of education. Besides improving the efficiency of public expenditure, private and cooperative efforts must be harnessed for filling the growing gaps in Government provision of education. This requires a simple, non-bureaucratic policy framework for private provision of all education services. The regulatory system must be modernised to free serious educational institutions from oppressive controls while laying greater stress on detecting and punishing fraudulent operators.
1.131 Similar reforms must be made in the case of urban infrastructure services so that maximum possible private participation can be elicited. The state Governments can then divert their limited investment budget into public goods and basic infrastructure services for the poor urban and undeveloped rural areas.
1.132 States also need to repeal the World War II era rent control acts that have been major contributors to the creation of urban slums. As the rent control acts basically serve to expropriate and transfer rental accommodation from the owner to the renter, they provide a powerful disincentive for the construction of rental accommodation. In countries without such laws, the poor and lower middle class live in rented apartments. In Indian metros, they rent accommodation in slums where there are no rent control laws. This reform, along with a forfeiture law and modernisation of municipal rules and regulations, can unleash a real estate boom that will generate hundreds of thousands of jobs and move people out of slums into proper rental accommodation.
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